[Analytical Perspectives]
[Crosscutting Programs]
[7. Credit and Insurance]
[From the U.S. Government Printing Office, www.gpo.gov]
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7. CREDIT AND INSURANCE
The Federal Government offers direct loans and loan guarantees to
support a wide range of activities including housing, education,
business and community development, and exports. At the end of 2007,
there were $260 billion in Federal direct loans outstanding and $1,202
billion in loan guarantees. Through its insurance programs, the Federal
Government insures bank, thrift, and credit union deposits, guarantees
private defined-benefit pensions, and insures against some other risks
such as natural disasters.
The Federal Government also permits certain privately owned companies,
called Government-Sponsored Enterprises (GSEs), to operate under Federal
charters for the purpose of enhancing credit availability for targeted
sectors. GSEs increase liquidity by guaranteeing and securitizing loans,
as well as by providing direct loans. In return for advancing certain
social goals and possibly improving economic efficiency, GSEs enjoy
various privileges, such as possible borrowing from Treasury at
Treasury's discretion, exemption from State and local income taxation,
and favorable regulatory treatments of their securities. These
privileges may leave observers with the impression that GSE securities
are risk-free. GSEs, however, are not part of the Federal Government,
and GSE securities are not federally guaranteed. By law, GSE securities
carry a disclaimer of any U.S. obligation.
This chapter discusses the roles of these diverse programs and
assesses their effectiveness and efficiency.
The first section emphasizes the roles of Federal credit and
insurance programs in addressing market imperfections that may
prevent the private market from efficiently providing credit
and insurance. Although the continued evolution and deepening
of financial markets may have in part corrected many of the
imperfections, Federal programs can still play a significant
role in the areas where market imperfections remain serious
and at the times when some adverse events disrupt the smooth
functioning of the market.
The second section interprets the results of the Program
Assessment Rating Tool (PART) for credit and insurance
programs in relation to their distinguishing features.
The third section presents a special topic--the structure of
financial regulation which can influence financial
institutions' competitiveness and ability to innovate.
The fourth section discusses individual credit programs and
GSEs intended to support four sectors: housing, education,
business and community development, and exports. The
discussion focuses on program objectives, recent developments,
performance, and future plans for each program.
In a similar format, the final section reviews Federal
deposit insurance, pension guarantees, disaster insurance, and
insurance against terrorism and other security-related risks.
I. FEDERAL PROGRAMS IN CHANGING FINANCIAL MARKETS
The Federal Role
In most cases, private lending and insurance companies efficiently
meet economic demands by allocating resources to their most productive
uses. Market imperfections, however, can cause inadequate provision of
credit or insurance in some sectors. Federal credit and insurance
programs improve economic efficiency if they effectively fill the gaps
created by market imperfections. On the other hand, Federal credit and
insurance programs that do not effectively address market imperfections
can be unnecessary, or can even be counter-productive--they may simply
do what the private sector would have done in their absence, or
interfere with what the private sector would have done better. Federal
credit and insurance programs also help disadvantaged groups. This role
alone, however, may not be enough to justify credit and insurance
programs; for helping disadvantaged groups, direct subsidies are
generally more effective and less distortionary.
Relevant market imperfections include insufficient information,
limited ability to secure resources, insufficient competition, and
externalities. Although these imperfections can cause inefficiencies,
the presence of a market imperfection does not mean that Government
intervention will always be effective. To be effective, a credit or
insurance program should be carefully designed to reduce inefficiencies
in the targeted area without causing inefficiencies elsewhere.
Insufficient Information. Financial intermediaries may fail to
allocate credit to the most deserving borrowers if there is little
objective information about some of the borrowers. Some groups of
borrowers, such as start-up businesses and some families, have limited
incomes and credit histories. Many creditworthy borrowers belonging to
these groups may fail to obtain credit or be forced to pay excessively
high interest. For very irregular events, such as natural and man-made
disasters, there may not be sufficient information to estimate the
probability and magnitude of the loss. This pricing difficulty may
prevent insurers from covering those risks at reasonable premiums.
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Limited Ability to Secure Resources. The ability of private entities
to absorb losses is more limited than that of the Federal Government,
which has general taxing authority. For some events potentially
involving a very large loss concentrated in a short time period,
therefore, Government insurance commanding more resources can be more
reliable. Such events include massive bank failures and some natural and
man-made disasters that can threaten the solvency of private insurers.
Insufficient Competition. Competition can be insufficient in some
markets because of barriers to entry or economies of scale. Insufficient
competition may result in unduly high prices of credit and insurance in
those markets.
Externalities. Decisions at the individual level are not socially
optimal when individuals do not capture the full benefit (positive
externalities) or bear the full cost (negative externalities) of their
activities. Education, for example, generates positive externalities
because the general public benefits from the high productivity and good
citizenship of a well-educated person. Without Government intervention,
people will engage less than socially optimal in activities that
generate positive externalities and more in activities that generate
negative externalities.
Financial Market Developments
Financial markets have become much more efficient through
technological advances and financial services deregulation. By
facilitating the gathering and processing of information and lowering
transaction costs, technological advances have significantly contributed
to improving the screening of credit and insurance applicants, enhancing
liquidity, refining risk management, and spurring competition.
Deregulation has increased competition and prompted efficiency-improving
consolidation by removing geographic and industry barriers.
These changes have reduced market imperfections. The private market
now has more information and better technology to process it; it has
better means to secure resources; and it is more competitive. As a
result, the private market is more willing and able to serve a portion
of the population traditionally targeted by Federal programs. The
benefits of technological advances and deregulation, however, have been
uneven across sectors and populations. To remain effective, therefore,
Federal credit and insurance programs should focus more narrowly on
those sectors that have been less affected by financial evolution and
those populations that still have difficulty in obtaining credit or
insurance from private lenders. The Federal Government should also pay
more attention to new challenges introduced by financial evolution and
other economic developments. Even those changes that are beneficial
overall often bring new risks and challenges.
The role for the Federal government in addressing the information
problem has diminished steadily over the years. Nowadays, lenders and
insurers have easy access to large databases, powerful computing
devices, and sophisticated analytical models. This advancement in
communication and information processing technology enables lenders to
evaluate risk more objectively and accurately. As a result, most
borrowers can easily obtain credit at a fair interest rate reflecting
their risk. The improvement, however, may be uneven across sectors.
Credit scoring (an automated process that converts relevant borrower
characteristics into a numerical score indicating creditworthiness), for
example, is considered as a breakthrough in borrower screening. While
credit scoring is widely applied to home mortgages and consumer loans,
it is applied to a limited extent for small business loans and
agricultural loans due to the difficulty of standardizing unique
characteristics of small businesses and farmers. It is also possible
that banking consolidation adversely affects those borrowers with unique
characteristics; small, local banks could serve those borrowers better
if they had more borrower-specific information gained through long-term
relations. With technological advances such as computer simulation,
pricing catastrophe risks has become easier, but it remains much more
difficult than pricing more regular events such as automobile accidents.
It is still difficult for insurers to estimate with confidence the
probability of a major natural disaster occurring. The difficulty may be
greater for man-made disasters that lack scientific bases.
Financial evolution has also improved private insurers' ability to
deal with catastrophic losses. Using financial derivatives such as
options, swaps, and futures, private entities can manage and share
various types of risk such as price risk, interest rate risk, credit
risk, and even catastrophe-related risk. An insurer can distribute the
risk of a natural or man-made catastrophe among a large number of
investors through catastrophe-related derivatives. However, the market
for catastrophe-related derivatives is still small, and it has not
eliminated the difficulty of absorbing catastrophic losses yet.
Insufficient competition is much less likely to justify Federal
involvement than was the case only a few years ago due to financial
deregulation and improved communication and financing technology.
Financial deregulation removed geographic and industry barriers to
competition. As a result, major financial holding companies offer both
banking and insurance products nationwide. Internet-based financial
services have further lowered the cost of financial transactions and
reduced the importance of physical location. These developments have
been especially beneficial to small and geographically isolated
customers who could not afford to bear large transactions costs and
otherwise had limited access to financial services. In addition, there
are more financing alternatives for both commercial and individual
borrowers that used to rely heavily on banks. Venture capital, for
example, has become a much more important financing source for small
businesses. Finance companies have also become a prominent player both
in business and consumer financing.
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Problems related to externalities may persist because the price
mechanisms that drive the private market by definition ignore the value
of externalities. Externalities, however, are a general market failure,
rather than a financial market failure. Thus, credit and insurance
programs are not necessarily the best means to address externalities,
and their effectiveness should be compared with other forms of
Government intervention, such as tax incentives and grants. In
particular, if a credit program was initially intended to address
multiple problems, including externalities, and those other problems
have been alleviated, there may be a better way to address any remaining
externalities.
Overall, the financial market has become more efficient and stable.
Financial evolution and other economic developments, however, are often
accompanied by new risks, as evidenced by the current difficulties
resulting from the rapid expansion of subprime mortgages. Subprime
mortgages are a product of several innovations, such as consumer credit
scoring, securitization, and credit ratings on securities. Properly
used, subprime mortgages are a beneficial tool helping disadvantaged
families to become homeowners. Misjudgments and some imperfections in
financing techniques appear to have led to overextension of subprime
mortgages. For example, while securitization facilitates the funding of
mortgages, it also reduces mortgage originators' incentives to screen
borrowers carefully because securitized loans are off their balance
sheets. Investors having relied on credit ratings appear to have been
misguided by high ratings on some complex mortgage-backed securities
that with the benefit of hindsight were too optimistic. Few financial
models are perfect. In addition, rating agencies' incentives to protect
investors may have been attenuated by the fees they collect from
security issuers. These developments suggest that Federal agencies need
to be vigilant to identify and manage new risks to the economy and to
the Budget, arising from financial evolution.
Recent financial market instability presents both opportunities and
challenges to Federal programs. Market disruptions have reduced private
liquidity and credit availability temporarily. In this situation,
Federal programs can produce larger net benefits. GSEs may inject more
liquidity into the financial market, and credit programs may accommodate
more deserving borrowers who are having difficulties in obtaining credit
in the private market. Challenges include identifying the areas where
the true needs are (e.g., identifying deserving borrowers), selecting
the most effective tools, avoiding distortion of private sector credit
markets, and avoiding excessive burden on taxpayers. To ensure
significant net benefits, these issues need to be addressed effectively.
II. PERFORMANCE OF CREDIT AND INSURANCE PROGRAMS
The Program Assessment Rating Tool (PART) has rated 38 credit programs
and nine insurance programs. The PART evaluates programs in four areas
(program purpose and design, strategic planning, program management, and
program results) and assigns a numerical score (0 to 100) to each
category. The overall rating (effective, moderately effective, adequate,
ineffective, or results not demonstrated) is determined based on the
numerical scores and the availability of reliable data.
The ratings for credit and insurance programs are clustered around the
middle; 77 percent of credit and insurance programs (compared with 59
percent for other programs) are rated ``adequate'' or ``moderately
effective,'' while only 11 percent (18 percent for other programs) are
rated ``effective.'' These results suggest that most credit and
insurance programs meet basic standards, but need to improve.
SUMMARY OF PART SCORES
----------------------------------------------------------------------------------------------------------------
Purpose
and Strategic Program Program
Design Planning Management Results
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Credit and Insurance Programs
Average.......................................................... 80.0 76.9 85.8 55.7
Standard Deviation............................................... 19.4 23.4 18.1 19.0
All Others Excluding Credit and Insurance Programs
Average.......................................................... 87.6 75.8 83.0 48.9
Standard Deviation............................................... 18.2 24.3 17.7 26.4
----------------------------------------------------------------------------------------------------------------
Some key features distinguish credit and insurance programs from other
programs. Credit and insurance programs are intended to address
imperfections in financial markets. They also face various risks, such
as uncertain default rates and erratic claim rates. Interpreting PART
results in relation to these features should help to identify
fundamental problems and to devise effective solutions.
Program Purpose and Design. To be effective, credit and insurance
programs should serve those who deserve to be served but are left out by
the private market due to market imperfections. Extending credit to
those who are not creditworthy, for example, would result in economic
inefficiencies and large budget costs. Lending to those who can obtain
credit at a reasonable rate in the private market would be unnecessary
and
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might interfere with the market mechanism. To achieve intended outcomes
without causing unintended consequences, therefore, credit and insurance
programs need to be carefully designed; they should target the intended
beneficiaries, and all parties in the transaction should face the
correct incentives.
The PART indicates that most credit and insurance programs have clear
purposes (not necessarily economically justifiable purposes) and address
specific needs. Many credit and insurance programs, however, fail to
score high in program design. Some are duplicative of other federal
programs or private sources, and some offer inadequate incentive
structures.
Strategic Planning. Financial markets have been evolving to serve
target populations of Federal programs better and increasingly apply
advanced technologies to risk assessments. Credit and insurance programs
need to adapt to these new developments quickly. Falling behind, Federal
programs can be left with many beneficiaries that do not really need
Government help and with those that may pose greater risk.
In subcategories of strategic planning, while most credit and
insurance programs effectively execute short-term strategies, they are
less effective in pursuing long-term goals which may be more critical in
adapting to new developments. Other weaknesses are found in conducting
stringent performance evaluation and tying budgets to performance
outcomes.
Program Management. Risk management is a critical element of credit
and insurance programs. Cash flows are uncertain both for credit and
insurance programs. Default rates and claim rates can turn out to be
significantly different than expected. Credit programs also face
prepayment and interest rate risks. These risks must be carefully
managed to ensure the program cost stays within a reasonable range.
Credit and insurance programs show strengths in basic financial and
accounting practices, such as spending funds for intended purposes and
controlling routine costs. However, some weaknesses are found in areas
that are more critical for effective risk management, such as collecting
timely information and using sophisticated financial tools.
Program Results. It is generally more difficult to measure the
outcomes of Federal programs pursuing various social goals than those of
private entities seeking profits. Unlike profits, social outcomes are
difficult to quantify and often interrelated. Credit and insurance
programs face an additional difficulty of estimating the program cost
accurately. Since the outcome must be weighed against the cost, an
underestimation or an overestimation of the cost would make the program
appear unduly effective or ineffective. Thus, results for credit and
insurance programs need to be interpreted in conjunction with the
accuracy of cost estimation.
Program results, the most important category of performance, are
generally weak for credit and insurance programs despite a higher
average score than that of other programs. Many credit and insurance
programs have difficulty in achieving performance goals and lack
objective evidences of program effectiveness. These problems may partly
result from the difficulty of measuring net outcomes. With reliable
outcome measures, it should be easier to set achievable goals and
demonstrate effectiveness.
III. STRUCTURE OF FINANCIAL REGULATION
Several groups including government, industry, and academic
institutions have expressed concerns about the competitiveness of U.S.
capital markets in the global financial system, and that financial
regulations and the regulatory structure in the United States have
become overly burdensome and complex. Recommendations have been made to
streamline the U.S. regulatory structure, while acknowledging that a
strong regulatory regime is critical to maintaining market confidence
and the U.S. financial markets' preeminence. The analysis below reviews
the regulatory systems used in foreign countries, in comparison to the
system currently in place in the United States.
U.S. Financial Services Oversight
Financial regulators are responsible for supervising financial
institutions and financial transactions. Their domain encompasses banks
and other depository institutions, insurance companies, securities
firms, pension funds, finance companies, and other entities.
Historically, regulators specialized in one of three financial service
categories: banking, insurance, or securities.
The United States maintains a functionally separated regulatory
system, with oversight responsibility divided among: five Federal
banking regulators; two Federal securities/futures regulators; State-
level insurance and other regulators; and self-regulatory organizations
(non-governmental). The table below illustrates the multiple regulators
of each type of financial services provider. The table shows that some
providers can have up to five different levels of supervision in the
United States.
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New Trends in Regulation
Outside the United States, countries have made recent changes to move
toward a single, consolidated financial regulator having regulatory
authority across all areas of financial services. These countries
include the United Kingdom, Japan, Germany, and South Korea. Other
countries have consolidated supervision of two or more financial sectors
such as banking and insurance under one regulator, including Australia,
Canada, and the Netherlands. Finally, countries that separate regulation
of banking, insurance, and securities markets, including Hong Kong,
France, and Italy, typically have only one regulator for each of those
sectors. The United States has a separated system of regulation, with
multiple regulators for each financial sector.
In an effort to provide more efficient and effective oversight of
evolving markets, countries that have historically used a three- or
multiple-pronged regulatory system are moving to consolidate regulation
into one or two entities having the statutory power to supervise at
least two of the three main types of financial intermediaries. This
regulator is known as an ``integrated'' regulator; the regulatory system
may be referred to as an integrated system.
The main drivers of this consolidation include:
The need to better supervise the growing complexity and
importance of financial conglomerates and the blurring
distinctions among banking, securities, and insurance
products, as well as the associated systematic risk;
The desire to maximize economies of scale and scope in
regulatory efforts; and
The need to address poor communication between and lack of
cooperation among existing regulatory agencies.
Examples of integrated systems are found in Australia, Canada, the
Netherlands, and Switzerland. The systems in Australia and the
Netherlands provide examples of the ``Twin Peaks'' model, which
separates prudential from market-conduct regulation. In this model, the
prudential regulator oversees systemic risk and the solvency of major
financial institutions. \1\ For example, a prudential regulator would
ensure that deposit-taking institutions are able to meet their financial
obligations by regulating and overseeing bank reserve ratios and inter-
bank lending rates. The market-conduct regulator oversees institutional
conduct with respect to markets and shareholders. A market-conduct
regulator would ensure the accuracy of financial filings and investigate
market manipulation, insider trading, and customer fraud.
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\1\ In the case of the Netherlands, the central bank has this
responsibility.
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REGULATORS OF FINANCIAL INSTITUTIONS
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Safety/Soundness Consumer
Charter and License Examination Protection Market Oversight
----------------------------------------------------------------------------------------------------------------
National Banks................. OCC OCC FRB and OCC SEC and CFTC
----------------------------------------------------------------------------------------------------------------
State Member Banks............. States FRB and States FRB and States SEC and CFTC
----------------------------------------------------------------------------------------------------------------
Insured Federal Savings OTS OTS FRB and OTS SEC and CFTC
Associations.
----------------------------------------------------------------------------------------------------------------
Insured State Savings States OTS and States FRB, OTS and SEC and CFTC
Associations. States
----------------------------------------------------------------------------------------------------------------
FDIC-insured State Nonmember States FDIC and States FRB, FDIC and SEC and CFTC
Banks. States
----------------------------------------------------------------------------------------------------------------
Federal Credit Unions.......... NCUA NCUA FRB and NCUA SEC and CFTC
----------------------------------------------------------------------------------------------------------------
State Credit Unions............ States NCUA and States FRB, FTC and N/A
States
----------------------------------------------------------------------------------------------------------------
Bank Holding Companies......... FRB FRB FRB and FTC SEC, CFTC and FRB
----------------------------------------------------------------------------------------------------------------
Thrift Holding Companies....... OTS OTS OTS and FTC SEC, CFTC and OTS
----------------------------------------------------------------------------------------------------------------
Consolidated Investment Banks.. SEC SEC SEC SEC, CFTC, SROs
----------------------------------------------------------------------------------------------------------------
Broker-Dealers................. SEC SEC SEC, FTC and SEC and SROs
States
----------------------------------------------------------------------------------------------------------------
Futures Commission Merchants... CFTC and SROs CFTC CFTC and DOJ CFTC and SROs
----------------------------------------------------------------------------------------------------------------
Hedge Funds.................... None None DOJ and States SEC, CFTC and FRB
----------------------------------------------------------------------------------------------------------------
Credit Rating Agencies......... SEC SEC N/A N/A
----------------------------------------------------------------------------------------------------------------
Treasury Securities Primary FRB and Treasury FRB N/A FRB and Treasury
Dealers.
----------------------------------------------------------------------------------------------------------------
Insurance Companies............ States States States SEC, CFTC and
States
----------------------------------------------------------------------------------------------------------------
Mortgage Companies............. States States FRB and States SEC and CFTC
----------------------------------------------------------------------------------------------------------------
Mortgage Brokers............... States States FRB and States N/A
----------------------------------------------------------------------------------------------------------------
OCC--Office of the Comptroller of the Currency OTS--Office of Thrift Supervision
FRB--Federal Reserve Board and Regional Banks FDIC--Federal Deposit Insurance Corporation
NCUA--National Credit Union Administration States--State Financial Regulatory Commissions
FTC--Federal Trade Commission SEC--Securities and Exchange Commission
CFTC--Commodity Futures Trading Commission DOJ--U.S. Department of Justice
SROs--Self-Regulatory Organizations (e.g. Financial Industry Regulatory Authority, National Futures Association)
The most extreme form of an integrated system, the ``unified''
regulatory system, is also gaining in popularity. Of the top 15
international financial centers (non-U.S.), almost half are overseen by
a single regulator of all banking, insurance, and securities firms,
nation-wide. \2\ These include centers in Denmark, Germany, Japan,
Singapore, South Korea, Sweden, and the United Kingdom. In addition,
Switzerland approved legislation on June 22, 2007 to create a unified
financial services regulator from its current integrated system, taking
effect in 2009.
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\2\ In some cases, such as Germany, a single, unified regulator has
the predominant regulatory and supervisory authority over all sectors,
and shares some supervisory authority with state-level regulators and
the central bank. The role of the central bank varies among countries
surveyed; in Singapore, for example, regulatory and supervisory
responsibilities pertaining to all sectors have been merged into the
central bank.
---------------------------------------------------------------------------
Conclusion
The U.S. approach to financial regulation is an outlier in the global
financial system. The few countries that do have a similar, functionally
divided system have significantly fewer regulators. Three-quarters of
countries with the largest financial centers have consolidated their
regulatory systems, with almost half maintaining a unified regulator for
all sectors of the financial services industry. The Administration is
conducting an in-depth review of the Nation's regulatory system and
looks forward to advancing the dialogue this year.
[[Page 75]]
IV. CREDIT IN FOUR SECTORS
Housing Credit Programs and GSEs
Through housing credit programs, the Federal Government promotes
homeownership and housing among various target groups, including low-
income people, minorities, veterans, and rural residents. A primary
function of the housing GSEs is to increase liquidity in the mortgage
market.
Federal Housing Administration
In June 2002, the President issued America's Homeownership Challenge
to increase the number of first-time minority homeowners by 5.5 million
through 2010. During the five years since the goal was announced, nearly
3.2 million minority families have become first-time homeowners. Through
2007, the Department of Housing and Urban Development's (HUD's) Federal
Housing Administration (FHA) helped more than 664,000 of these first-
time minority homebuyers through its loan insurance programs. FHA
mortgage insurance guarantees mortgage loans that provide access to
homeownership for people who lack the traditional financial resources or
credit history to qualify for a home mortgage in the conventional
marketplace. In 2007, FHA insured purchase and refinance mortgages for
more than 532,000 households. Among purchase mortgages, over 79 percent
were for first-time homebuyers and 30 percent were for minority buyers.
FHA also insured over 107,000 home equity conversion mortgages for
elderly homeowners.
While FHA has been a primary facilitator of mortgage credit for first-
time and minority buyers since the 1930s, its loan volume fell
precipitously from 2002 through 2006. This is due in part to lower
interest rates that made uninsured mortgages affordable for more
families. Moreover, private lenders--aided by automated underwriting
tools that allow them to measure risks more accurately--expanded lending
to people who previously would have had no option but FHA, those with
too few resources to pay for large downpayments, and/or who had credit
histories that the private sector considered too risky. The development
of new products and underwriting approaches has allowed private lenders
to offer loans to more homebuyers. While this is a positive development
when the private sector properly assesses risks and offers fair terms,
some borrowers have ended up paying too much, receiving unfair terms, or
taking on excessive debts.
As private lenders expanded their underwriting to cover more
borrowers, FHA's business changed. First, the percentage of FHA-insured
mortgages with initial loan-to-value (LTV) ratios of 95 percent or
higher increased substantially, from 62.7 percent in 1995 to 79 percent
in 2007. Second, the percentage of FHA loans with downpayment assistance
from seller-financed nonprofit organizations grew rapidly, from 0.3
percent in 1998 to nearly 23 percent in 2007. Recent studies show that
these loans are considerably more risky than those made to borrowers who
receive downpayment assistance from other sources.
The FHA single-family mortgage program was assessed in 2005 using the
PART. The assessment found that the program was meeting its statutory
objective to serve underserved borrowers while maintaining an adequate
capital reserve. However, the program lacked quantifiable annual and
long-term performance goals that would measure FHA's ability to achieve
its statutory mission. In addition, both the PART and subsequent reports
by the Government Accountability Office and the Inspector General noted
that the program's credit model does not accurately predict losses to
the FHA insurance funds and that, despite FHA efforts to deter fraud in
the program, HUD has not demonstrated that those steps have reduced such
fraud. Due to weak housing market conditions today, FHA will record an
upward re-estimate in the cost of its Mutual Mortgage Insurance Fund
programs of $4.6 billion in 2008. Cumulatively, FHA has recorded net
upward re-estimates of $19.7 billion since 1992.
In response to PART findings, FHA measured its 2007 performance
against new goals, such as the percentage of FHA Single Family loans for
first-time and minority homeowners, and exceeded its goals. FHA also
improved the accuracy of its annual actuarial review claim and
prepayment estimates. In 2008, it will continue to develop performance
goals for fraud detection and prevention.
Response to Mortgage Market Challenges
FHA plays a valuable role in providing home financing options that
augment those available in the conventional market. As discussed in the
section on deposit insurance, conventional credit standards have
tightened in recent months. Private mortgage insurers have raised
underwriting standards, reducing the availability of financing options.
In addition, there are a large number of borrowers who hold adjustable
rate mortgages and face the risk of foreclosure due to large increases
in mortgage payments after an interest-rate reset. An estimated 1.8
million subprime mortgages for owner-occupied homes are scheduled to
reset in 2008 and 2009.
FHA is addressing both of these challenges. The FHA guarantee
encourages lending to borrowers who may face increased difficulty in
obtaining conventional financing. For borrowers who face difficulty
making their mortgages payments, re-financing under an FHA-insured loan
can offer a path that keeps them in their homes and avoids costly
foreclosures. To broaden the use of this re-financing, the
Administration announced the FHASecure program in August 2007. This
program broadens the population eligible to use FHA. Beyond borrowers
who are current, it also allows credit-worthy borrowers who have fallen
behind on their mortgages
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due to interest rate resets to refinance into FHA. Since the
announcement of FHASecure and as of January 2008, approximately 44,000
borrowers have successfully refinanced their conventional mortgages into
FHA. While these actions help the mortgage market in the short-term, FHA
needs permanent changes to allow guarantees on a wider variety of
financing options and the flexibility to respond to future changes in
the mortgage and housing markets.
Proposals for Program Reform
In order to enable FHA to fulfill its mission in today's changing
marketplace, the Administration has proposed legislation that will give
FHA the ability to respond to current challenges to homeownership among
its traditional target borrowers: low and moderate-income first-time
homebuyers. FHA has already taken steps, within its current authority,
to streamline its documentation requirements and remove impediments to
its use by lenders and buyers. However, additional reforms will enable
it to expand homeownership opportunities to its target borrowers on an
actuarially sound basis.
To remove two large barriers to homeownership--having limited savings
for a downpayment or impaired credit--the Administration again proposes
new FHA options. These options will replace the current flat premium-
rate structure with one that varies with the risk of default, as
indicated by the borrower's downpayment percentage and credit history.
This will create more opportunities for potential homeowners who may
face limited mortgage options. For example, first-time buyers with a
strong credit record but little savings could finance a higher percent
of the purchase than FHA currently allows. Alternatively, a borrower
with a poor credit history but who has accumulated savings for a larger
downpayment could qualify for more favorable terms with FHA than are
available in the conventional market.
Such a flexible premium structure is a way to more fairly price the
FHA guarantee to individual borrowers. It creates incentives (lower
premium payments) for borrowers to take steps to improve their credit or
save more for a downpayment. At the same time it eliminates the current
incentive for higher-risk borrowers to use FHA because they are
undercharged relative to the risk they pose. FHA proposes to base its
mortgage insurance premiums upon a borrower's consumer credit score from
the three major credit repositories (using the Fair-Isaac and Company
(FICO) formula), and on the amount of downpayment. Mortgage insurance
premiums will be based on FHA's historical experience with similar
borrowers. This change will decrease premiums for many of FHA's
traditional borrowers, thereby increasing their access to homeownership.
This price structure has many advantages. First, FHA will reflect a
loan's risk via the mortgage insurance premium, not through a higher
interest rate as done in the subprime market. With mortgage insurance
through FHA, borrowers will pay a market rate of interest, and, as a
result, will incur lower monthly payments and lower total costs than if
they paid a higher mortgage interest rate throughout the life of the
loan. Second, by using this pricing structure, FHA will promote price
transparency. Each borrower will know why they are paying the premium
that they are being charged and will know how to lower their borrowing
costs--i.e., by raising their FICO score or their downpayment. Third,
risk-based pricing will allow FHA to review the performance of its
programs annually in conjunction with the preparation of its credit
subsidy estimates and adjust its premiums as necessary to assure the
financial soundness of the Mutual Mortgage Insurance Fund.
The Administration also proposes to increase the FHA single-family
loan limit in high-cost areas to the conforming mortgage limit (from
$362,790 to $417,000). This will enable FHA to offer its insurance in
some areas that experienced rapid house price appreciation between 2001
and 2006, and where FHA is no longer a viable option because of overly-
restrictive loan limits. There are areas of the country, including many
major cities in California, where FHA used to provide significant
support to first-time and minority homebuyers, but where it can do very
little to help them now. This proposed loan-limit increase will also
allow FHA to offer insurance to a more geographically diverse portfolio.
A reformed FHA will adhere to sound management practices that include
a new framework of standards and incentives tied to principles of good
credit program management. Further, the proposed reforms will better
enable FHA to better meet its objective of serving first-time and low-
income home buyers--about 280,000 first-time homebuyers in 2009
including about 80,000 minority families--by managing its risks more
effectively.
VA Housing Program
The Department of Veterans Affairs (VA) assists veterans, members of
the Selected Reserve, and active duty personnel to purchase homes as
recognition of their service to the Nation. The program substitutes the
Federal guarantee for the borrower's down payment. In 2007, VA provided
$24.2 billion in guarantees to assist 129,261 borrowers.
Since the main purpose of this program is to help veterans, lending
terms are more favorable than loans without a VA guarantee. In
particular, VA guarantees zero downpayment loans. VA provided 84,858
zero downpayment loans in 2007.
To help veterans retain their homes and avoid the expense and damage
to their credit resulting from foreclosure, VA intervenes aggressively
to reduce the likelihood of foreclosures when loans are referred to VA
after missing three payments. VA's successful actions resulted in 57
percent of such delinquent loans avoiding foreclosure in 2007.
Rural Housing Service
The U.S. Department of Agriculture's Rural Housing Service (RHS)
offers direct and guaranteed loans and grants to help very low- to
moderate-income rural resi
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dents buy and maintain adequate, affordable housing. The single-family
guaranteed loan program guarantees up to 90 percent of a private loan
for low to moderate-income (115 percent of median income or less) rural
residents. In 2007, nearly $4.8 billion in assistance was provided by
RHS for homeownership loans and loan guarantees; $3.6 billion in
guarantees went to more than 35,000 households, of which 32 percent went
to very low and low-income families (with income 80 percent or less than
median area income).
Historically, RHS has offered both direct and guaranteed homeownership
loans. However, the direction of Rural Development's single-family
housing mortgage assistance over the last two decades has been towards
guaranteed loans. The single family housing guaranteed loan program was
newly authorized in 1990 at $100 million and has grown into a $3 billion
plus guaranteed loan program annually, equaling that of the Veterans
Affairs (VA) guaranteed housing loan program. Meanwhile the single-
family direct loan program has been stagnant at approximately a $1-
billion loan level. Consequently, the Administration is proposing that
Rural Development focus solely on guaranteed loans for single-family
housing.
This policy was initially proposed in 2008 because it was consistent
with the other Federal homeownership programs. In fact, there are no
Federal single family direct loan home ownership programs for urban
areas. While some rural areas remain isolated from broad credit
availability, these areas are shrinking as broadband internet access and
correspondent lending grow. Therefore, relying on the private banking
industry to provide this service, with a guarantee from the Federal
government, is a more efficient way to deliver that assistance.
The 2009 Budget also re-proposes an increase in the single family
housing guarantee fee on new purchase loans to 3 percent from 2 percent.
This change allows the loans to be less costly for the Government
without a significant additional burden to the borrowers, given that
they can finance the fee as part of the loan. The guarantee fee for
refinance loans remains 0.5 percent. The fee proposal on purchase loans
will allow funding in 2009 to be $4.8 billion, an increase of over $600
million above 2008.
The budget also supports $300 million in RHS guaranteed loans for
multifamily housing construction loans for 2009. This level of support
can be achieved at a more efficient cost through the removal of the
subsidized interest authorization and the fee component of the program
as part of the 2009 request. No funds are requested for the direct rural
rental housing program or the farm labor housing program because fixing
the current portfolio is the first priority.
Government-Sponsored Enterprises in the Mortgage Market
Homeownership has long been recognized as an important part of the
American economy and part of the American dream. However, it has not
always been within reach for the average American. During the Great
Depression, housing markets were in turmoil. A typical mortgage required
a downpayment of around 50 percent and a balloon payment of principal
within a few years. Limitations in financial and communication
technology and restrictions on financial institutions made it difficult
for surplus funds in one part of the country to be shifted to other
parts of the country to finance residential housing. Starting in 1932,
the Congress responded by creating a series of entities and programs
that together promoted the development of long-term, amortizing
mortgages and facilitated the movement of capital to support housing
finance.
A key element of this response was the creation of the Federal Housing
Administration in 1934. Another element was the establishment of several
entities designed to develop secondary mortgage markets and to
facilitate the movement of capital into housing finance. These entities
were chartered by the Congress with public missions and endowed with
certain benefits that give them competitive advantages when compared
with fully private companies.
The Federal Home Loan Bank System, created in 1932, is comprised of
twelve individual banks with shared liabilities. Together they lend
money to financial institutions--mainly banks and thrifts--that are
involved in mortgage financing to varying degrees, and they also finance
some mortgages on their own balance sheets. The Federal National
Mortgage Association, or Fannie Mae, created in 1938, and the Federal
Home Loan Mortgage Corporation, or Freddie Mac, created in 1970, were
established to support the stability and liquidity of a secondary market
for residential mortgage loans. Fannie Mae's and Freddie Mac's public
missions were later broadened to promote affordable housing. Together
these three GSEs currently are involved, in one form or another, with
nearly one half of the $11-plus trillion residential mortgages
outstanding in the U.S. today. Their share of outstanding residential
mortgage debt peaked at 54 percent in 2003, after which management and
internal control problems started to surface at Fannie Mae and Freddie
Mac and originations of subprime and non-traditional mortgages led to a
surge of private-label MBS.
As with other financial institutions, the Congress has also
established regulatory regimes to ensure the safety and soundness of the
housing GSEs. The Office of Federal Housing Enterprise Oversight
(OFHEO), established in 1992 as an independent agency within the
Department of Housing and Urban Development, oversees the safety and
soundness of Fannie Mae and Freddie Mac while HUD is responsible for
mission oversight. The Federal Housing Finance Board (FHFB), established
in 1989, oversees the Federal Home Loan Bank System. Numerous government
and other reports have pointed to various shortcomings with the current
regulatory structure and authorities for the housing GSEs. The
Administration is proposing to strengthen this structure and regulatory
authorities and combine OFHEO, HUD's regulatory responsibilities for
mission
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oversight, and FHFB to create a new regulator to oversee all these GSEs.
Mission
The mission of the housing GSEs is to support certain aspects of the
U.S. mortgage market. Fannie Mae and Freddie Mac's mission is to promote
affordable housing, and provide liquidity and stability to the secondary
mortgage market. Currently, they engage in two major lines of business.
1. Credit Guarantee Business--Fannie Mae and Freddie Mac guarantee
the timely payment of principal and interest on mortgage-backed
securities (MBS). They create MBS by either buying and pooling whole
mortgages or by entering into swap arrangements with mortgage
originators. Over time these MBS held by the public have averaged
about one-quarter of the U.S. mortgage market, and they totaled $3.5
trillion as of November 30, 2007.
2. Mortgage Investment Business--Fannie Mae and Freddie Mac manage
retained mortgage portfolios composed of their own MBS, MBS issued
by others, and individual, whole mortgages. As of November 30, 2007,
these retained mortgages totaled $1.4 trillion. Given Fannie Mae's
and Freddie Mac's serious accounting, internal control, risk
management, and systems problems, the growth of these portfolios has
been temporarily constrained through agreements with OFHEO.
The mission of the Federal Home Loan Bank System is broadly defined as
promoting housing finance, and the System also has specific requirements
to support affordable housing. The Federal Home Loan Banks have not
grown mortgage asset portfolios as large as Fannie Mae or Freddie Mac.
Their principal business remains secured lending to regulated depository
institutions and insurance companies engaged in residential mortgage
finance to varying degrees.
Risks That GSEs Face and Cause
Like other financial institutions, the GSEs face a full range of
risks, including market risk, credit risk, and operational risk. In
recent years several of the Federal Home Loan Banks and Fannie Mae have
faced serious market risks due to inadequate hedging. Fannie Mae and
Freddie Mac have faced serious operational risk. As a result of earnings
manipulation, poor accounting systems, lack of proper controls, lack of
proper risk management, and misapplication of accounting principles,
earnings at Fannie Mae were misstated by $6.3 billion through June of
2004, and at Freddie Mac by $5.0 billion through December of 2002. The
housing market downturn in the last year has increased significantly the
credit risk faced by Fannie Mae and Freddie Mac.
The GSEs also pose risks to the financial system and overall economy.
Systemic risk is the risk that unanticipated problems at a financial
institution or group of institutions could lead to problems more widely
in the financial system or economy--the risk that a small problem could
multiply to a point where it could jeopardize the country's economic
well-being. The particular systemic risk posed by the GSEs is the risk
that a miscalculation, failure of controls, or other unexpected event at
one company could unsettle not only the mortgage and mortgage finance
markets but also other vital parts of the financial system and economy.
To understand this risk, one must understand the interdependencies among
the GSEs and other market participants in the financial system and the
lack of market discipline imposed on the GSEs because investors perceive
that the GSEs are implicitly backed by the U.S. Government.
The GSEs are among the largest borrowers in the world. As of September
2007 their combined debt and guaranteed MBS totaled $6.0 trillion,
higher than the total publicly held debt of the United States. The
investors in GSE debt include thousands of banks, institutional
investors such as insurance companies, pension funds, and foreign
governments, and millions of individuals through mutual funds and 401k
investments. Based on the prices paid by these investors, they act as if
the Federal Government guarantees GSE debt. In fact, there is no such
guarantee or Federal backing of GSE debt.
Because investors act as if there is an ``implicit guarantee'' by the
Federal Government to back GSE debt, investors on average lend their
money to the GSEs at interest rates roughly 30 to 40 basis points less
($300-$400 less per year for every $100,000 borrowed) than to other
highly rated privately held companies. In addition, investors do not
demand the same financial disclosures as for other privately owned
companies. Fannie Mae filed quarterly financial reports for each of the
first three quarters of the year in November 2007, the first quarterly
financial statements in more than three years, and has not filed a
timely annual report (10-K) with the Securities and Exchange Commission
(SEC) for nearly four years. Freddie Mac still has never registered with
the SEC as it agreed to in 2002. It has issued quarterly reports during
2007, but they were all tardy. Yet there has been no significant impact
on the pricing of GSE debt securities. In past years, the lack of market
discipline facilitated the growth of the GSE asset portfolios, thereby
increasing systemic risk.
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Retained Asset Portfolios Achieve Little for the GSEs' Housing Mission
Fannie Mae and Freddie Mac have used their funding cost advantage to
amass large retained asset portfolios. Together these GSEs have $1.5
trillion in debt outstanding, almost entirely for the purpose of funding
these portfolios. From 1990 through 2006, the GSEs' competitive funding
advantage enabled them to increase their portfolios of mortgage assets
more than ten-fold, which far exceeds the growth of the overall mortgage
market. Due to the size of and risks associated with the portfolios, the
Administration is proposing that the new regulatory structure empower
the regulator to address and mitigate these risks.
As chart 7-2 shows, 51 percent of Fannie Mae and Freddie Mac's
combined retained mortgage portfolios at the end of 2006 was comprised
of holdings of their own guaranteed MBS, which could easily be sold.
The function of these portfolio holdings is largely to increase
profits, not facilitate affordable housing. In 1992, the Congress
broadened Fannie Mae and Freddie Mac's mission to include providing
liquidity for mortgages that served low-and moderate-income borrowers
and those living in underserved areas. To measure this performance, the
Congress mandated that HUD establish three affordable housing goal
targets that Fannie Mae and Freddie Mac must meet each year. HUD has
also implemented home purchase subgoals to encourage homeownership
opportunities for first-time homeowners and minority homeowners. Given
that Fannie Mae and Freddie Mac have a mission to help more families
achieve homeownership as well as to expand rental opportunities, their
retained portfolios should be largely tied to that mission. However,
currently only about 30 percent of Fannie Mae and Freddie Mac's retained
portfolio holdings would be eligible to qualify for any of the
affordable housing goals. About half of the MBS issued by others and
whole loans held by the GSEs qualify toward their affordable housing
goals but none of their holdings of their own MBS contribute toward
meeting the goals because loans backing the MBS are already counted.
Their performance under the housing goals over time indicate that Fannie
Mae and Freddie Mac should be doing more to help mission-targeted
families achieve homeownership or acquire affordable rental housing.
Debt Issuance Subject to Treasury Approval
Fannie Mae and Freddie Mac fund their portfolios by issuing debt, and
the U.S. Department of the Treasury has the statutory responsibility to
review and approve these GSEs' debt-issuances. The Treasury Department
also has debt approval over the Federal Home Loan Banks. Treasury is
developing a more formalized approach to their debt approval authority.
As part of that approach, Treasury is developing new debt approval
procedures to enhance the clarity, transparency, standardization, and
documentation of the debt approval process for Fannie Mae, Freddie Mac
and the Federal Home Loan Banks.
Recent Mortgage Market Conditions Highlight Needed Reforms
In early August 2007, there was a precipitous drop in the liquidity of
subprime, nontraditional, and prime
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jumbo mortgages. Faced with sharp increases in the delinquency and
default rates of subprime and nontraditional loans in 2006 and 2007, as
well as flat or declining home prices in much of the country, secondary
market investors reassessed the risk of non-GSE MBS backed by those
loans, which had previously been mispriced. The illiquidity of non-GSE
MBS reduced the industry's capacity to securitize newly-originated
subprime and jumbo loans, although some lenders continued to originate
jumbo mortgages for portfolio. Freddie Mac and, to a lesser degree,
Fannie Mae also incurred losses on investments in non-GSE MBS.
The three housing GSEs have continued to perform their missions during
the recent market disruption. In the third quarter of 2007, Fannie Mae
and Freddie Mac supported the liquidity of the secondary market by
engaging in $343 billion of new business. The Federal Home Loan Banks
increased their secured lending to mortgage lenders by $184 billion in
that quarter. As Chart 7-3, shows, the combined activity of Fannie Mae
and Freddie Mac as a share of single-family mortgage originations rose
to 60 percent in the third quarter, whereas the Federal Home Loan Bank
System's share increased to 32 percent. Those increases in market share
highlight the need for a strong regulator.
The risks of the GSEs' large portfolios are exacerbated because they
are not required to hold cushions of capital against potential losses
comparable to the capital requirements for other large financial
institutions. Where commercial banks that are part of a financial
holding company must hold a 5 percent capital-to-total assets cushion,
Fannie Mae and Freddie Mac's requirement (before the 30% surcharge
imposed by OFHEO for operational weakness) is half that, whereas the
Federal Home Loan Banks' is 4 percent. The risk-based capital
requirements for the GSEs also differ dramatically from those applicable
to commercial banks. This highlights an important shortcoming of the
statutory framework governing Federal oversight of the GSEs. The minimum
capital and risk-based capital rules for the GSEs were written into law
in 1992. Much has changed since then with regard to financial risk
analysis, risk modeling, and capital requirements for comparable
financial institutions. The reforms proposed by the Administration would
repeal the statutory risk-based capital stress test, and would provide
the new GSE regulator with the authority and flexibility to establish
through regulation new risk-based capital requirements for the GSEs to
help ensure that they operate with sufficient capital and reserves to
support the risks that arise in the operations and management of each
enterprise. A world-class regulator needs the flexibility and authority
to change both the risk-based and minimum capital requirements without
undue restriction in response to changing conditions.
The substantial increase in mortgage delinquencies and foreclosures in
recent months serves as a reminder that mortgage lending involves credit
risk. Fannie Mae and Freddie Mac are exposed to significant default risk
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on the mortgages they hold in portfolio or that back the MBS they
guarantee. The GSEs' asset portfolios pose other substantial risks as
well. Mortgage portfolios carry considerable interest-rate and pre-
payment risk. This risk can be mitigated--for example, through purchase
of interest-rate hedges--but the GSEs protect themselves against only
some of the interest rate risk of their portfolios. Moreover, hedges are
imperfect because predicting interest-rate movements and mortgage
refinancing activity is difficult. As GSE asset portfolios have grown in
size, the GSEs' participation in the market for hedging instruments has
become dominant enough to cause interest rate spikes in the event that a
GSE needs to make large and sudden adjustments to its hedging position.
Further, Freddie Mac and, to a lesser extent, Fannie Mae hold large
amounts of non-GSE MBS, which pose significant risks. Many of these
securities are backed by subprime loans, and market values have declined
as concerns about those loans have risen. Increased defaults and
concerns about future defaults have led to significant losses at both of
those GSEs in the last half of 2007, and led to new preferred stock
issues raising $16 billion to shore up capital.
New Activities and Technological Development Require Oversight
Over the last decade, Fannie Mae and Freddie Mac have begun engaging
in a wide range of new activities that were not anticipated when their
charters were written. To address these changes, HUD developed a new
activity review initiative under its general regulatory authority. HUD
has reviewed a number of business initiatives at Fannie Mae and Freddie
Mac, including international activities; partnership offices; senior
housing; skilled nursing facilities; employer assisted housing plans;
third party real-estate-owned programs; Commercial Mortgage-Backed
Securities (CMBS); Asset-Backed Securities (ABS); multifamily variable-
rate bond certificates; whole loan REMICs; and patenting programs. HUD
imposed limitations on some activities and concluded that other
activities were not authorized. For example, HUD's review of the GSEs'
Commercial MBS programs resulted in OFHEO seeking Freddie Mac's
divestiture of certain CMBS holdings, and HUD ordered Fannie Mae to end
its third party Real-Estate-Owned program based on its review.
HUD completed a Financial Activities Review in late 2007. The review
provided a baseline of information on Fannie Mae's and Freddie Mac's
business and program activities and examined specific transactions to
determine if these are consistent with the GSEs' charter authorities.
HUD expects to issue its review results to the GSEs during the second
quarter of fiscal year 2008.
Because of their enormous presence in the secondary market, Fannie Mae
and Freddie Mac are able to exert significant influence in the primary
mortgage market. First, their unparalleled size in the residential
mortgage market gives the GSEs a unique level of access to market
information. The applicability of that information to the management of
mortgage risk gives them a competitive edge in the development of new
technology that can change relationships between primary market
participants as well as the distribution of economic returns between the
primary and secondary markets. Second, their funding advantage enables
the GSEs to borrow at reduced rates in order to make investments in new
areas at below-market prices, thus discouraging competition while
gaining experience in those areas.
Through the development and delivery of new technology to the industry
and by leveraging their funding advantage, there is potential for the
GSEs to expand their business beyond the limitations of their Charter
Acts, which prohibits both Fannie Mae and Freddie Mac from originating
mortgages. Loan origination is the central function of the primary
mortgage market, and the GSEs' charter acts clearly restrict them to the
secondary mortgage market. However, technological advancements have
blurred the line that defines where the primary market ends and the
secondary market begins. A new level of clarity is required to establish
the permissible activities under the Enterprises' charter acts,
including the development of intellectual property.
New Regulatory Authority
The Administration continues to support broad reform of the GSE
supervisory system. In particular, the Administration supports
establishing a new regulator for all three of the housing GSEs that
would combine safety and soundness authority with oversight of their
respective housing missions. The new regulator must have enhanced powers
comparable to those of other world-class financial regulators,
including, among others, the ability to put a GSE into receivership
should it fail, authority to establish and adjust appropriate capital
standards, and new product approval authority. A new regulator must also
have clear authority to address the size of and mitigate the risks posed
by the GSEs' retained portfolios. Finally, a new regulatory structure
must ensure that the GSEs are adhering to their affordable housing
mission.
Education Credit Programs
The Federal Government guarantees loans through intermediary agencies
and makes direct loans to students to encourage postsecondary education
enrollment. The Student Loan Marketing Association (Sallie Mae), created
in 1972 as a GSE to develop the secondary market for guaranteed student
loans, was privatized in 2004.
The Department of Education helps finance student loans through two
major programs: the Federal Family Education Loan (FFEL) program and the
William D. Ford Federal Direct Student Loan (Direct Loan) program.
Eligible institutions of higher education may participate in one or both
programs. Loans are available to students regardless of income. However,
borrowers with low family incomes are eligible for loans with addi
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tional interest subsidies. For low-income borrowers, the Federal
Government subsidizes loan interest costs while borrowers are in school,
during a six-month grace period after graduation, and during certain
deferment periods.
The FFEL program provides loans through an administrative structure
involving over 3,600 lenders, 35 State and private guaranty agencies,
and over 5,000 participating schools. In the FFEL program, banks and
other eligible lenders loan private capital to students and parents,
guaranty agencies insure the loans, and the Federal Government reinsures
the loans against borrower default. Lenders bear five percent of the
default risk on all new loans, and the Federal Government is responsible
for the remainder. The Department also makes administrative payments to
guaranty agencies and, at certain times, pays interest subsidies on
behalf of borrowers to lenders.
The William D. Ford Direct Student Loan program was authorized by the
Student Loan Reform Act of 1993. Under the Direct Loan program, the
Federal Government provides loan capital directly to nearly 1,100
schools, which then disburse loan funds to students. The program offers
a variety of flexible repayment plans including income-contingent
repayment, under which annual repayment amounts vary based on the income
of the borrower and payments can be made over 25 years with any residual
balances forgiven.
In 2007, the President signed the College Cost Reduction and Access
Act (CCRAA) into law. The CCRAA enacted broad programmatic reforms that
will save $22 billion through 2012 by reducing lender and guaranty
agency subsidies that had been higher than necessary to ensure that
loans are available to students in this profitable and competitive
market. Stemming from proposals included in the President's 2008 Budget,
the CCRAA reduced interest subsidies and default reinsurance paid to
FFEL lenders; reduced fees paid to guaranty agencies; and required the
Department of Education to conduct an auction pilot for the PLUS loan
program, which primarily makes loans to parents to finance their child's
education. As implementation of these complex provisions continues, the
Administration will closely monitor the student loan marketplace to
ensure it continues to be robust and efficient, and that students have
access to loans from a variety of lenders. The savings from the CCRAA
were used to offset the costs of providing several student and borrower
benefits, including: (1) a historic increase in the Pell Grant program;
(2) a reduction in student loan interest rates for subsidized loans from
6.8 percent to 3.4 percent over four years (reverting back to 6.8
percent thereafter), and (3) increased flexibility in how borrowers
repay their loans.
Business and Rural Development Credit Programs and GSEs
The Federal Government guarantees small business loans to promote
entrepreneurship. The Government also offers direct loans and loan
guarantees to farmers who may have difficulty obtaining credit elsewhere
and to rural communities that need to develop and maintain
infrastructure. Two GSEs, the Farm Credit System and the Federal
Agricultural Mortgage Corporation, increase liquidity in the
agricultural lending market.
Small Business Administration
The Small Business Administration (SBA) helps entrepreneurs start,
sustain, and grow small businesses. As a ``gap lender`` SBA works to
supplement market lending and provide access to credit where private
lenders are reluctant to do so without a Government guarantee.
Additionally, SBA helps home and business-owners, as well as renters,
cover the uninsured costs of recovery from disasters through its direct
loan program.
The 2009 Budget requests $657 million, including administrative funds,
for SBA to leverage more than $29 billion in financing for small
businesses and disaster victims. The 7(a) General Business Loan program
will support $17.5 billion in guaranteed loans while the 504 Certified
Development Company program will support $7.5 billion in guaranteed
loans for fixed-asset financing. SBA will supplement the capital of
Small Business Investment Companies (SBICs) with $3 billion in long-
term, guaranteed loans for venture capital investments in small
businesses. At the end of 2007, the outstanding balance of business
loans totaled $85 billion.
During the past few years, SBA has implemented several initiatives to
streamline and improve operations by increasingly delegating
responsibilities to lenders and centralizing operations while managing
and mitigating risk. In 2003, SBA implemented a state-of-the-art Lender
Loan Monitoring System (LLMS) to evaluate individual SBA lenders by
tracking the expected risk of SBA guaranteed loans in their portfolios
relative to expected performance of those loans.
In response to the challenges experienced in making and disbursing
loans resulting from the 2005 Gulf Coast hurricanes, SBA has made a
number of improvements, including implementing a case-manager system for
processing loan applications and new metrics to track performance. By
summer 2008, SBA expects to implement an Internet-based loan application
system that will facilitate the collection of data from disaster victims
and speed processing.
The Budget builds on these efforts by investing in core technology
systems and human capital efforts. Increased funding is requested for
the Loan Management and Accounting System (LMAS), a modern system to
replace an aged mainframe system and ensure adequate stewardship over a
loan portfolio that has grown 59 percent since 2001. Funds are also
requested for a training initiative focused on core competencies and
other important information technology investments.
The Budget also proposes to build upon the success of the zero-subsidy
7(a) program by making the Microloan program self-financing through
modest increases in the interest rate paid by program intermediaries.
The Administration is also proposing authorizing legislation to enable
the secondary market guar
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antee (SMG) program to charge nominal fees on lenders seeking to pool
loans; fees are expected to be less than or comparable to fees in other
secondary market programs and will help stabilize the program from the
need to make frequent administrative changes.
USDA Rural Infrastructure and Business Development Programs
USDA provides grants, loans, and loan guarantees to communities for
constructing facilities such as health-care clinics, day-care centers,
and water systems. Direct loans are available at lower interest rates
for the poorest communities. These programs have very low default rates.
The cost associated with them is due primarily to subsidized interest
rates that are below the prevailing Treasury rates.
The program level for the Water and Wastewater (W&W) treatment
facility loan and grant program in the 2009 President's Budget is $1.6
billion. These funds are available to communities of 10,000 or fewer
residents. No change is proposed to the poverty rate for this program in
2009. The Community Facility Program is targeted to rural communities
with fewer than 20,000 residents. It will have a program level of $512
million in 2009.
USDA also provides grants, direct loans, and loan guarantees to assist
rural businesses, cooperatives, nonprofits, and farmers in creating new
community infrastructures (i.e. educational networks or healthcare
coops), and to diversify the rural economy and employment opportunities.
In 2009, USDA proposes to provide $730 million in loan guarantees and
direct loans to entities that serve communities of 50,000 or less
through the Business and Industry guaranteed loan program and
Intermediary Relending program. These loans are structured to save/
create jobs and stabilize fluctuating rural economies. A recently
implemented performance assessment tool will be used to calculate their
impact on income growth in local, state, and national economies.
The President's Farm Bill proposal includes $1.5 billion in support
for Rural Development programs over 10 years. Of this, $0.5 billion will
go to enhance rural infrastructures, alleviating program backlogs, and
$0.1 billion to support rural critical access hospitals. The other $0.9
billion will promote renewable energy activities, providing support to
businesses and farmers who would like to produce renewable energy and
increase their energy efficiencies.
Electric and Telecommunications Loans
USDA's Rural Utilities Service (RUS) programs provide loans for rural
electrification, telecommunications, distance learning, telemedicine,
and broadband, and also provide grants for distance learning and
telemedicine (DLT).
The Budget includes $4.1 billion in direct electric loans for
distribution, transmission, and improvements to existing generation
facilities, $690 million in direct telecommunications loans, $298
million in broadband loans, and $20 million in DLT grants.
Since generation has been deregulated and has become a more commercial
operation, the Administration supports using the commercial market for
construction of new generation facilities. While the Administration has
established a loan rate methodology for new non-nuclear generation
facilities, the Administration has not proposed a loan level or
requested funding needed to subsidize such loans. A loan level will be
considered once Congress enacts legislation to authorize a fee on such
loans and allows RUS to implement existing authority for recertification
of the rural status of areas served by its borrowers.
The Budget includes a proposal to replace the 100 percent guaranteed
electric and telecommunications loans that are financed through the
Federal Financing Bank (FFB) with loans made directly through the
Treasury. The proposed new direct loan program would improve the
operations of USDA's rural utility loans by simplifying the Government's
processes while providing the same benefits and flexibilities for the
borrowers.
Loans to Farmers
The Farm Service Agency (FSA) assists low-income family farmers in
starting and maintaining viable farming operations. Emphasis is placed
on aiding beginning and socially disadvantaged farmers. FSA offers
operating loans and ownership loans, both of which may be either direct
or guaranteed loans. Operating loans provide credit to farmers and
ranchers for annual production expenses and purchases of livestock,
machinery, and equipment. Farm ownership loans assist producers in
acquiring and developing their farming or ranching operations. As a
condition of eligibility for direct loans, borrowers must be unable to
obtain private credit at reasonable rates and terms. As FSA is the
``lender of last resort,'' default rates on FSA direct loans are
generally higher than those on private-sector loans. FSA-guaranteed farm
loans are made to more creditworthy borrowers who have access to private
credit markets. Because the private loan originators must retain 10
percent of the risk, they exercise care in examining the repayment
ability of borrowers. The Administration's recent farm bill proposal
includes policies to improve credit assistance for farm borrowers, with
particular emphasis to beginning and socially disadvantaged farmers.
Specifically, the Administration proposes to double assistance targeted
to beginning and socially disadvantaged farmers for the direct operating
loan program and reduce the interest rate for downpayment assistance to
beginning farmers. Finally, because the cost of production is high for
many farmers desiring to enter into farming, the farm bill includes
increased loan levels for direct loan programs.
In 2007, FSA provided loans and loan guarantees to approximately
27,000 family farmers totaling $3.1 billion. The number of loans
provided by these programs has fluctuated over the past several years.
The average size for farm ownership loans has been increasing. The
majority of assistance provided in the oper
[[Page 84]]
ating loan program is to existing FSA farm borrowers. In the farm
ownership program, new customers receive the bulk of the benefits
furnished. The demand for FSA direct and guaranteed loans continues to
be high due to low crop/livestock prices and some regional production
problems. In 2009, FSA proposes to make $3.4 billion in direct and
guaranteed loans through discretionary programs.
In 2005, to further improve program effectiveness, FSA conducted an
in-depth review of its direct loan portfolio to assess program
performance, including the effectiveness of targeted assistance and the
ability of borrowers to graduate to private credit. The results of this
review will assist FSA in improving the delivery of its services and the
economic viability of farmers and ranchers. FSA is currently evaluating
the feasibility of obtaining a similar independent review of the
guaranteed loan program. In addition, FSA recently implemented a web-
based system to track loan applications. The Direct Loan System (DLS)
replaces the loan making components of other automated systems. A loan
servicing DLS module is currently under development. FSA successfully
completed a comprehensive review of all farm loan program regulations,
handbooks, and information collections. This streamlining initiative was
one of the most aggressive efforts to enhance both the direct and
guaranteed programs in the program's 60-year history. This initiative
will reduce the burden for both applicants and the Agency, resulting in
an improvement in loan processing efficiencies.
The Farm Credit System and Farmer Mac
The Farm Credit System (FCS or System) and the Federal Agricultural
Mortgage Corporation (FarmerMac) are Government-Sponsored Enterprises
(GSEs) that enhance credit availability for the agricultural sector. The
FCS provides production, equipment, and mortgage lending to farmers and
ranchers, aquatic producers, their cooperatives, related businesses, and
rural homeowners, while Farmer Mac provides a secondary market for
agricultural real estate and rural housing mortgages.
The Farm Credit System
The financial condition of the System's banks and associations remains
sound. The ratio of capital to assets decreased to 14.8 percent as of
September 30, 2007 from 15.7 percent as of September 30, 2006, as asset
growth outpaced capital growth. As of September 30, 2007, capital
consisted of $2.5 billion in restricted capital held by the Farm Credit
System Insurance Corporation (FCSIC) and $24.0 billion of unrestricted
capital--a record level. Non-performing loans decreased, and earnings
increased, resulting from growth in the loan portfolio and higher
earnings on assets. Non-performing loans as a percentage of total loans
outstanding fell to .43 percent as of September 30, 2007 compared to .50
percent a year earlier. Assets have grown at a 10.8 percent annual rate
over the past five years, while the number of FCS institutions has
decreased due to consolidation. As of September 30, 2007, the System
consisted of five banks and 95 associations compared with seven banks
and 104 associations in September 2002. As of September 30, 2007, 98 of
the 100 FCS banks and associations had one of the top two examination
ratings (1 or 2 in a 1-5 scale), while two FCS institutions had a 3
rating.
The FCSIC ensures the timely payment of principal and interest on FCS
obligations on which the System banks are jointly and severally liable.
FCSIC manages the Insurance Fund, which supplements the System's capital
and the joint and several liability of the System banks. At September
30, 2007, the assets in Insurance Fund totaled $2.519 billion. Of that
amount $40 million was allocated to the Allocated Insurance Reserve
Accounts (AIRAs). At September 30, 2007, the Insurance Fund as a
percentage of adjusted insured debt was 1.71 percent in the unallocated
Insurance Fund and 1.74 percent including the AIRAs. This was below the
statutory Secure Base amount of 2 percent. During 2007 growth in System
debt has outpaced the capitalization of the Insurance Fund that occurs
through investment earnings and premiums.
Over the 12-month period ending September 30, 2007, the System's loans
outstanding grew by $19.2 billion, or 16.6 percent, while over the past
five years they grew by $47.2 billion, or 53.6 percent. As required by
law, borrowers are also stockholder owners of System banks and
associations. As of September 30, 2007, the System had 472,925
stockholders. Loans to young, beginning, and small farmers and ranchers
represented 11.7, 19.4, and 27.7 percent, respectively, of the total
dollar volume of farm loans outstanding at the end of 2006. The
percentage of loans to beginning farmers in 2006 remained the same as
the percentage of loans in 2005, while percentages to young and small
farmers were slightly lower. Young, beginning, and small farmers are not
mutually exclusive groups and, thus, cannot be added across categories.
Providing credit and related services to young, beginning, and small
farmers and ranchers is a legislative mandate for the System.
The System, while continuing to record strong earnings and capital
growth, remains exposed to a variety of risks associated with its
portfolio concentration on agriculture and rural America. While this
sector is currently healthy, it is subject to risk due to rapidly rising
farm real estate prices, volatile commodity prices and input costs,
uncertainty regarding changes in government farm policy and trade
agreements, weather-related catastrophes, animal and plant diseases, and
off-farm employment opportunities.
Farmer Mac
Farmer Mac was established in 1988 as a Federally chartered
instrumentality and institution of the System to facilitate a secondary
market for farm real estate and rural housing loans. The Farm Credit
System Reform Act of 1996 expanded Farmer Mac's role from a guarantor of
securities backed by loan pools to a direct purchaser of mortgages,
enabling it to form pools
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to securitize. This change increased Farmer Mac's ability to provide
liquidity to agricultural mortgage lenders.
Farmer Mac continues to meet core capital and regulatory risk-based
capital requirements. Farmer Mac's total program activity (loans
purchased and guaranteed, AgVantage bond assets, and real estate owned)
as of September 30, 2007, totaled $8.4 billion. That volume represents
an increase of 19 percent from program activity at September 30, 2006.
Of total program activity, $2 billion were on-balance sheet loans and
agricultural mortgage-backed securities, and $6.3 billion were off-
balance sheet obligations. Total assets were $5.4 billion at the close
of the third quarter, with nonprogram investments accounting for $3.3
billion of those assets. Farmer Mac's net loss for first three quarters
of 2007 was $6.3 million, a significant change from the same period in
2006 during which net income was $22 million.
The currently reported year-to-date loss amount is primarily the
result of fluctuations in the market value of financial derivatives and
trading assets that are now recognized in the income statement and is
not the result of negative developments in its operations or cash flows.
This change was instituted in November 2006, when Farmer Mac opted to
change its accounting methods to remove the impact of accounting for
derivatives as hedges against interest rate movements. Farmer Mac has
stated that it does not expect the accounting change to impact its
ability to carry out its business plans or have any effect on its
business model.
International Credit Programs
Seven Federal agencies--the Department of Agriculture (USDA), the
Department of Defense, the Department of State, the Department of the
Treasury, the Agency for International Development (USAID), the Export-
Import Bank, and the Overseas Private Investment Corporation (OPIC)--
provide direct loans, loan guarantees, and insurance to a variety of
foreign private and sovereign borrowers. These programs are intended to
level the playing field for U.S. exporters, deliver robust support for
U.S. manufactured goods, stabilize international financial markets, and
promote sustainable development.
Leveling the Playing Field
Federal export credit programs counter subsidies that foreign
governments, largely in Europe and Japan, provide their exporters,
usually through export credit agencies (ECAs). The U.S. Government has
worked since the 1970's to constrain official credit support through a
multilateral agreement in the Organization for Economic Cooperation and
Development (OECD). This agreement has significantly constrained direct
interest rate subsidies and tied-aid grants. Further negotiations
resulted in a multilateral agreement that standardized the fees for
sovereign lending across all ECAs beginning in April 1999. Fees for non-
sovereign lending, however, continue to vary widely across ECAs and
markets, thereby providing implicit subsidies.
The Export-Import Bank attempts to ``level the playing field''
strategically and to fill gaps in the availability of private export
credit. The Export-Import Bank provides export credits, in the form of
direct loans or loan guarantees, to U.S. exporters who meet basic
eligibility criteria and who request the Bank's assistance. USDA's
Export Credit Guarantee Programs (also known as GSM programs) similarly
help to level the playing field. Like programs of other agricultural
exporting nations, GSM programs guarantee payment from countries and
entities that want to import U.S. agricultural products but cannot
easily obtain credit.
Stabilizing International Financial Markets
In today's global economy, the health and prosperity of the American
economy depend importantly on the stability of the global financial
system and the economic health of our major trading partners. The United
States can contribute to orderly exchange arrangements and a stable
system of exchange rates through the International Monetary Fund and
through financial support provided by the Exchange Stabilization Fund
(ESF).
The ESF may provide ``bridge loans'' to other countries in times of
short-term liquidity problems and financial crises. A loan or credit may
not be made for more than six months in any 12-month period unless the
President gives the Congress a written statement that unique or
emergency circumstances require the loan or credit be for more than six
months.
Using Credit to Promote Sustainable
Development
Credit is an important tool in U.S. bilateral assistance to promote
sustainable development. USAID's Development Credit Authority (DCA)
allows USAID to use a variety of credit tools to support its development
activities abroad. DCA provides non-sovereign loan guarantees in
targeted cases where credit serves more effectively than traditional
grant mechanisms to achieve sustainable development. DCA is intended to
mobilize host country private capital to finance sustainable development
in line with USAID's strategic objectives. Through the use of partial
loan guarantees and risk sharing with the private sector, DCA stimulates
private-sector lending for financially viable development projects,
thereby leveraging host-country capital and strengthening sub-national
capital markets in the developing world. While there is clear demand for
DCA's facilities in some emerging economies, the utilization rate for
these facilities is still very low.
OPIC also supports a mix of development, employment, and export goals
by promoting U.S. direct investment in developing countries. OPIC
pursues these goals through political risk insurance, direct loans, and
guarantee products, which provide finance, as well as associated skills
and technology transfers. These programs are intended to create more
efficient financial markets, eventually encouraging the private sector
to supplant OPIC finance in developing countries. OPIC has also created
a number of investment funds that provide eq
[[Page 86]]
uity to local companies with strong development potential.
Ongoing Coordination
International credit programs are coordinated through two groups to
ensure consistency in policy design and credit implementation. The Trade
Promotion Coordinating Committee (TPCC) works within the Administration
to develop a National Export Strategy to make the delivery of trade
promotion support more effective and convenient for U.S. exporters.
The Interagency Country Risk Assessment System (ICRAS) standardizes
the way in which most agencies budget for the cost associated with the
risk of international lending. The cost of lending by the agencies is
governed by proprietary U.S. Government ratings, which correspond to a
set of default estimates over a given maturity. The methodology
establishes assumptions about default risks in international lending
using averages of international sovereign bond market data. The strength
of this method is its link to the market and an annual update that
adjusts the default estimates to reflect the most recent risks observed
in the market.
Promoting Economic Growth and Poverty Reduction through Debt
Sustainability
The Enhanced Heavily Indebted Poorest Countries (HIPC) Initiative
reduces the debt of some of the poorest countries with unsustainable
debt burdens that are committed to economic reform and poverty
reduction. Under the HIPC process, the debt of most countries is
restructured before being completely forgiven. While not considered part
of HIPC relief, a restructuring is often a precursor to HIPC relief. The
2009 President's Budget uses an improved methodology for estimating the
long term cost to the Federal Government of HIPC debt restructuring. The
revised methodology more accurately reflects a country's
creditworthiness after a restructuring given the likelihood of receiving
100 percent debt reduction in the future.
Self-Sufficient Export-Import Bank
The Budget estimates that the Bank's export credit support will total
$14 billion, and will be funded entirely by receipts collected from the
Bank's customers. The Bank estimates it will collect $164 million in
2009 in excess of expected losses on transactions authorized in 2009 and
prior years. These amounts will be used to: (1) cover the estimated
costs for that portion of new authorizations where fees are insufficient
to cover expected losses; and (2) to cover administrative expenses.
V. INSURANCE PROGRAMS
Deposit Insurance
Federal deposit insurance promotes stability in the U.S. financial
system. Prior to the establishment of Federal deposit insurance,
failures of some depository institutions often caused depositors to lose
confidence in the banking system and rush to withdraw deposits. Such
sudden withdrawals caused serious disruption to the economy. In 1933, in
the midst of the Depression, the system of Federal deposit insurance was
established to protect small depositors and prevent bank failures from
causing widespread disruption in financial markets.
Since its creation, the system has undergone a series of reforms, most
recently in 2006. The Federal Deposit Insurance Reform Act of 2005
allows the FDIC to better manage the Deposit Insurance Fund. For
example, the Act authorizes the FDIC to charge premiums for deposit
insurance on a risk-adjusted basis regardless of the level of the FDIC's
reserves against its insured deposits, and ensures that all financial
institutions pay premiums for Federal insurance on their insured
deposits. The FDIC completed implementation of these reforms during
2007.
The FDIC insures deposits in banks and savings associations (thrifts).
The National Credit Union Administration (NCUA) insures deposits
(shares) in most credit unions (certain credit unions are privately
insured). FDIC and NCUA insure deposits up to $100,000 per account.
Under the Federal Deposit Insurance Reform Act of 2005, the deposit
insurance ceiling for retirement accounts was increased to $250,000. In
addition, beginning in 2010, and every five years thereafter, FDIC and
NCUA will have the authority to increase deposit insurance coverage
limits for retirement and non-retirement accounts based on inflation if
the Boards of the FDIC and NCUA determine such an increase is warranted.
As of September 30, 2007, FDIC insured $4.24 trillion of deposits at
8,560 commercial banks and thrifts, and NCUA insured $556 billion of
deposits (shares) at 8,163 credit unions.
Current Industry Conditions
Significant challenges have confronted the financial sector throughout
the second half of calendar year 2007. Although to date the challenges
have not caused a large number of failures of insured depository
institutions, the outlook for the industry remains uncertain as of the
beginning of 2008. During the summer of 2007, a slowdown in the U.S.
housing market began to trigger concerns. Rising defaults on
``subprime'' loans led to markdowns on the value of debt securities
backed by these loans. These securities had been packaged by financial
institutions and sold to investors around the world. Uncertainty about
the value of these complex financial instruments and lack of
transparency about who held them led to a much lower appetite for risk
and a clear preference for the most liquid and safe
[[Page 87]]
investments. This reassessment of risk caused widespread volatility in
financial markets. \3\
---------------------------------------------------------------------------
\3\ For a much more detailed discussion of the problems in credit
markets during 2007 and their implications, please see Chapter 2 of the
2008 Economic Report of the President.
---------------------------------------------------------------------------
Many depository institutions entered this period of market uncertainty
with strong profitability and a significant capital cushion. The period
from 2004-2006 was one of record growth and profitability for many banks
and thrifts, and this previous strong performance has to date provided a
cushion. As of September 2007, total risk-based capital ratios in the
industry averaged 12.75 percent, versus a minimum required level of 8
percent. Depository institutions are also insulated by the fact that
many had sold their mortgages--and hence their risk exposure--to the
secondary market. In addition, many of the subprime mortgages losing
value were originated by state-chartered mortgage companies rather than
depository institutions. Thus the risk has been spread beyond the core
banking system subject to Federal deposit insurance.
In the current market environment, institutions with a significant
presence in structuring and trading mortgage-backed securities
(especially the major investment banks) have recorded losses on their
portfolios of mortgage-backed securities, as well as lost the fees
earned in repackaging and reselling these loans. In the 3rd and 4th
quarters of calendar year 2007, major investment banks recorded nearly
$70 billion in writedowns due to losses on investments linked to
subprime mortgages and structured credit products. While the Federal
Government has no direct risk exposure from investment bank losses, many
banks and other firms have also encountered difficulty raising cash
through the short-term corporate debt markets.
Due to the increasing consolidation of the U.S. banking industry in
recent years, the largest institutions have accounted for a growing
share of total assets--whereas in 1984 depository institutions with over
$10 billion in assets accounted for 42 percent of total assets in the
industry, by 2004 the share of those institutions had risen to 73
percent. This consolidation, combined with the fact that many of the
larger institutions with significant market and trading presence are
those most affected by the current market conditions, has increased the
potential risks of a major failure that could put a significant strain
on the resources of the Federal deposit insurance funds.
Administration and Regulatory Responses
The financial regulators and the Administration have taken a number of
steps to address the underlying problems in the credit and mortgage
markets. The President's Working Group on Financial Markets (including
the Treasury Department, the Federal Reserve Board, the Securities and
Exchange Commission and the Commodity Futures Trading Commission) has
the responsibility to examine the recent uncertainty in credit markets
and work to ensure that market integrity and efficiency are not
compromised. In regard to mortgage markets, in addition to the
Administration proposals for modernization of the Federal Housing
Administration and reform of the oversight of the housing GSEs
(mentioned earlier in this chapter) the Administration has partnered
with the private sector to assemble a group of lenders, loan servicers,
mortgage counselors, and investors (the HOPE NOW Alliance) to identify
troubled borrowers and help them refinance or modify their mortgages, so
more families can stay in their homes. The HOPE NOW Alliance consists of
four counseling organizations, 21 mortgage servicers and lenders
(comprising 65 percent of the U.S. market for mortgage servicing and
almost 85 percent of the subprime servicing market), three investor
groups (including the American Securitization Forum, which represents
over 370 members), and 10 trade associations. These efforts should
reduce foreclosure rates and support the continued flow of capital to
mortgage markets.
To aid this effort, during December 2007 Congress passed the Mortgage
Forgiveness Debt Relief Act of 2007, an Administration proposal that for
the next few years (through 2010) will allow borrowers to obtain relief
from taxes on writedowns of loan principal during a refinancing. The
Administration has also proposed to allow state and local governments to
temporarily broaden their tax-exempt bond programs to include mortgage
refinancings.
The Federal banking regulators (Federal Reserve, Office of the
Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),
and FDIC) have been closely monitoring banks' core capital levels as
well as their potential susceptibility to market disruptions. During
2007, the regulators jointly issued final guidance addressing non-
traditional and subprime mortgage practices, as well as guidance
encouraging their institutions to proactively aid borrowers to refinance
subprime mortgages.
The Federal Reserve and other Federal banking regulators have been
developing new regulations to improve disclosure of mortgage and credit
card terms, restrain certain practices in mortgage lending, and address
unfair and deceptive lending practices more broadly. Complementing these
efforts, this year HUD will also propose clearer disclosure of mortgage
lending and home purchase closing costs, as mandated by the Real Estate
Settlement Procedures Act. The draft text of the regulations on credit
cards and mortgage lending were released for public comment in 2007, and
the regulators will likely finalize these regulations during 2008.
Recent Performance of the Federal Deposit Insurance Funds
From July 2004 through January 2007, the performance of the Federal
deposit insurance program was strong. No banks or thrifts failed during
this period--the longest interlude without a failure in the 73-year
history of the FDIC. However, there has been a deterioration of
conditions in the industry since summer 2007. As of September 30, 2007,
the FDIC classified 65 institutions with $18.5 billion in assets as
``problem institutions'' (institutions with the highest risk ratings), a
[[Page 88]]
level of problem assets more than four times higher than the comparable
statistics from September 2006. The largest institution to fail since
the early 1990s, NetBank (a Georgia thrift with $2.5 billion in assets)
was placed in FDIC receivership in September 2007, and overall three
institutions failed during 2007.
At the end of September 2007, the Deposit Insurance Fund reserve ratio
(ratio of insurance reserves to insured deposits) stood at 1.22
percent--$1.2 billion below the level that would meet the target reserve
ratio. Taking the redemption of credits into consideration, along with
continued growth in insured deposits and a higher rate of potential
failures given current conditions in the industry, the Budget projects
that the FDIC will collect approximately $4.7 billion in new revenue
from premiums during 2008 and 2009 combined.
The National Credit Union Share Insurance Fund, the Federal fund for
credit unions that is analogous to the Deposit Insurance Fund for banks
and thrifts, ended September 2007 with assets of $7.4 billion and an
equity ratio of 1.31 percent, topping the NCUA-set target ratio of 1.30
percent. Over the past five years, the Share Insurance Fund's equity
ratio has gradually risen from about 1.27 percent, reflecting few losses
due to failures in the credit union industry. Recent market volatility,
however, may increase observed losses in the credit union industry. The
number of problem institutions reported by the NCUA has steadily risen
during 2007, and the Share Insurance Fund has set aside more than $57
million to cover potential insurance losses from January through
November 2007, versus only $2.5 million in loss expenses for all of
calendar year 2006.
Basel II: Transition to a New Bank Capital
Regime
A major regulatory initiative is currently underway in the banking
sector, which is likely to have a significant impact on the banking
sector as a whole and, by extension, on the Federal deposit insurance
system. The Federal banking regulators are implementing an international
agreement called the Revised Framework for the International Convergence
of Capital Measurement and Capital Standards (``Basel II'').
Since equity capital serves as a cushion against potential losses,
banks with riskier asset portfolios should hold more equity capital. The
original Basel Capital Accord (Basel I) adopted in 1989 is an
international accord among financial regulators establishing a uniform
capital standard for banks across nations. Under Basel I, bank assets
are grouped into a small number of broad risk categories. A bank's
regulatory capital requirement is tied to the amount of its asset
holdings in each risk category.
During 2007, the Federal banking regulators completed issuance of the
rules implementing the Basel II advanced approach, the first half of the
US effort to implement the Revised Basel Capital Accord. In the final
Basel II advanced rule, U.S. regulators require the ten or so largest
banks (including those that have major international operations, complex
financial structures and expertise) to use an advanced internal ratings-
based approach to calculate their credit risk capital requirements. The
Basel II rulemaking allows for greater sensitivity to risk in the
portfolios these banks hold. Rather than grouping assets into broad risk
categories, capital requirements are tied to banks' internal assessments
of the likelihood and severity of default losses from the assets they
hold. The rules are also intended to allow capital requirements to more
accurately account for the benefits or risk-mitigation activities
undertaken by banks. The rulemaking also requires banks to hold capital
to cover operational risk, which is not covered under the existing
(Basel I) requirements.
Implementation of the Basel II standard in Europe began during 2007.
Implementation of the U.S. Basel II rulemaking will begin with a
``parallel run'' on April 1, 2008 and formally go into effect for the
first of three transitional years on January 1, 2009. This delay has led
to concerns about a competitive imbalance between U.S. and foreign
banks. There are also concerns about competitive imbalance between U.S.
banks, and for that reason, regulators are expected to allow banks other
than the ten largest U.S. banks to be able to choose between adopting
the ``Basel II advanced'' approach, the current ``Basel I'' system, and
an alternative ``Basel II standardized'' approach.
The ``Basel II standardized'' approach is intended to be more risk-
sensitive than Basel I, but easier to implement than the advanced Basel
II approach. The ``standardized'' approach is intended to be broadly
based upon a system proposed by the Basel committee that provides
additional risk-sensitivity through use of external credit ratings, and
internal risk measures for some types of assets (i.e., loan-to-value
ratios for mortgages). This alternative approach would allow banks to
potentially lower their capital requirements and provide small- and mid-
sized banks a means to stay competitive with the larger Basel II banks.
The regulators are working to develop the standardized approach and are
expected to release the draft text for public comment during 2008.
Pension Guarantees
The Pension Benefit Guaranty Corporation (PBGC) insures pension
benefits of workers and retirees in covered defined-benefit pension
plans sponsored by private-sector employers. PBGC pays benefits, up to a
guaranteed level, when a company with an underfunded pension plan meets
the legal criteria to transfer its obligations to the pension insurance
program. PBGC's claims exposure is the amount by which qualified
benefits exceed assets in insured plans. In the near term, the risk of
loss stems from financially distressed firms with underfunded plans. In
the longer term, loss exposure results from the possibility that healthy
firms become distressed and well-funded plans become underfunded due to
inadequate contributions, poor investment results, or increased
liabilities.
PBGC monitors companies with underfunded plans and acts to protect the
interests of the pension insur
[[Page 89]]
ance program's stakeholders where possible. Under its Early Warning
Program, PBGC works with companies to strengthen plan funding or
otherwise protect the insurance program from avoidable losses. However,
PBGC's authority to prevent undue risks to the insurance program is
limited.
LARGEST TEN CLAIMS AGAINST THE PBGC'S SINGLE-EMPLOYER INSURANCE PROGRAM, 1975-2006
----------------------------------------------------------------------------------------------------------------
Percent of
Fiscal Years of Total
Top 10 Firms Plan Terminations Claims (by firm) Claims
(1975-2005)
----------------------------------------------------------------------------------------------------------------
1. United Airlines....................................... 2005 $7,484,348,482 22.90%
2. Bethlehem Steel....................................... 2003 3,654,380,116 11.20%
3. US Airways............................................ 2003, 2005 2,690,222,805 8.20%
4. LTV Steel*............................................ 2002, 2003, 2004 2,136,698,831 6.50%
5. National Steel........................................ 2003 1,275,628,286 3.90%
6. Pan American Air...................................... 1991, 1992 841,082,434 2.60%
7. Weirton Steel......................................... 2004 690,181,783 2.10%
8. Trans World Airlines.................................. 2001 668,377,106 2.00%
9. Kaiser Aluminum....................................... 2004 600,009,879 1.80%
10. Kemper Insurance.................................... 2005 568,417,151 1.70%
---------------------------------------------------
Top 10 Total................................................ .................. 20,609,346,871 63.20%
All Other Total............................................. .................. 12,017,433,400 36.80%
---------------------------------------------------
TOTAL....................................................... .................. $32,626,780,271 100.00%
----------------------------------------------------------------------------------------------------------------
Sources: PBGC Fiscal Year Closing File (9/30/07), PBGC Case Administration System, and PBGC Participant System
(PRISM).
Due to rounding, percentages may not add up to 100 percent.
Data in this table have been calculated on a firm basis and include all plans of each firm.
Values and distributions are subject to change as PBGC completes its reviews and establishes termination dates.
* Does not include 1986 termination of a Republic Steel plan sponsored by LTV.
As a result of a flawed pension funding system and exposure to losses
from financially troubled plan sponsors, PBGC's single-employer program
incurred substantial losses from underfunded plan terminations in 2001
through 2006. The table below shows the ten largest plan termination
losses in PBGC's history. Nine of the ten have come since 2001.
The program's deficit at 2007 year-end stood at $13.1 billion,
compared to a $9.7 billion surplus at 2000 year-end. This is actually a
$5 billion improvement from 2006. PBGC's operating results are subject
to significant fluctuation from year to year, depending on the severity
of losses from plan terminations, changes in the interest factors used
to discount future benefit payments, investment performance, general
economic conditions and other factors such as changes in law. While the
improvement may give the impression that PBGC's financial condition has
improved, in fact its long-term loss exposure and flawed funding system
continue to threaten its financial sustainability. \4\
---------------------------------------------------------------------------
\4\ In addition, the airline relief provisions in the Pension
Protection Act of 2006, which resulted in large plans previously
classified as probable terminations being changed to the reasonably
possible classification in 2006, likely postponed rather than eliminated
losses, as it is likely that the airlines will eventually relapse and
present a claim to the PBGC. If PBGC's deficit were calculated without
regard to PPA airline provisions, PBGC estimates that its net deficit
shown in this report would be approximately $8 billion higher (assuming
2006 underfunding levels for the specific airline plans remained
constant).
---------------------------------------------------------------------------
In February 2005 the Administration proposed comprehensive reforms to
address structural flaws in the statutory plan funding requirements and
in the design of the insurance program. The proposal sought to
strengthen funding for workers' defined-benefit pensions; provide more
accurate information about pension liabilities and plan underfunding;
and enable PBGC to meet its obligations to participants in terminated
pension plans. Many of the President's reforms were incorporated into
the Deficit Reduction Act (DRA) of 2005, enacted in February 2006, and
the Pension Protection Act of 2006 (PPA), enacted in August 2006. This
legislation made significant structural changes to the retirement
system, but did not fully address the long-term challenges facing PBGC.
While the PBGC has sufficient liquidity to meet its obligations for a
number of years, neither the single-employer nor multiemployer program
has the resources to satisfy fully the agency's long-term obligations to
plan participants.
Further reforms are needed to address the current $14 billion gap
between PBGC's liabilities and its assets. The Budget proposes to give
PBGC's Board the authority to raise premiums to produce the revenue
necessary to meet expected future claims and retire PBGC's deficit over
ten years. The current rate-setting mechanism is inflexible and does not
allow the PBGC to respond to changing conditions in the defined benefit
plan universe, in the financial markets in which pension plans invest,
or in its own financial condition.
Under this proposal, PBGC's Board would have the flexibility to make a
broad range of changes to pre
[[Page 90]]
miums in an effort to improve PBGC's financial condition and safeguard
the future benefits of American workers. The Administration is committed
to restoring the solvency of the pension insurance system and avoiding a
future taxpayer bailout.
Disaster Insurance
Flood Insurance
The Federal Government provides flood insurance through the National
Flood Insurance Program (NFIP), which is administered by the Federal
Emergency Management Agency of the Department of Homeland Security
(DHS). Flood insurance is available to homeowners and businesses in
communities that have adopted and enforced appropriate flood plain
management measures. Coverage is limited to buildings and their
contents. By the end of 2007, the program had over 5.5 million policies
in more than 20,200 communities with over $1 trillion of insurance in
force.
Prior to the creation of the program in 1968, many factors made it
cost prohibitive for private insurance companies alone to make
affordable flood insurance available. In response, the NFIP was
established to make affordable insurance coverage widely available. The
NFIP requires building standards and other mitigation efforts to reduce
losses, and operates a flood hazard mapping program to quantify the
geographic risk of flooding. These efforts have made substantial
progress. However, structures built prior to flood mapping and NFIP
floodplain management requirements, which make up 26 percent of the
total policies in force, pay less than fully actuarial rates.
DHS is using three strategies to increase the number of flood
insurance policies in force: lender compliance, program simplification,
and expanded marketing. DHS is educating financial regulators about the
mandatory flood insurance requirement for properties that are located in
floodplains and have mortgages from federally regulated lenders. These
strategies have resulted in policy growth of over 3 percent in 2007 with
an increase of more than 180,000 policies.
DHS also has a multi-pronged strategy for reducing future flood
damage. The NFIP offers flood mitigation assistance grants to assist
flood victims to rebuild to current building codes, including base flood
elevations, thereby reducing future flood damage costs. In addition, two
grant programs targeted toward repetitive and severe repetitive loss
properties not only help owners of high-risk property, but also reduce
the disproportionate drain on the National Flood Insurance Fund these
properties cause through acquisition, relocation, or elevation. DHS is
working to ensure that all of the flood mitigation grant programs are
closely integrated, resulting in better coordination and communication
with State and local governments. Further, through the Community Rating
System, DHS adjusts premium rates to encourage community and State
mitigation activities beyond those required by the NFIP. These efforts,
in addition to the minimum NFIP requirements for floodplain management,
save over $1 billion annually in avoided flood damages.
The program's reserve account, which is a cash fund, has sometimes had
expenses greater than its revenue, forcing the NFIP to borrow funds from
the Treasury in order to meet claims obligations. However, since the
program began in 1968 and until 2005, the program has continued to repay
all borrowed funds with interest. However, hurricanes Katrina, Rita, and
Wilma generated more flood insurance claims than the cumulative number
of claims from 1968 to 2004. These three storms resulted in over 234,000
claims with total claims payments expected to be approximately $20
billion. As a result, the Administration and the Congress have increased
the borrowing authority to $20.8 billion to date in order to make
certain that all claims could be paid.
The catastrophic nature of the 2005 hurricane season has also
triggered an examination of the program, and the Administration is
working with the Congress to improve the program, based on the following
principles: protecting the NFIP's integrity by covering existing
commitments; phasing out subsidized premiums in order to charge fair and
actuarially sound premiums; increasing program participation incentives
and improving enforcement of mandatory participation in the program;
increasing risk awareness by educating property owners; and reducing
future risks by implementing and enhancing mitigation measures. Although
flood insurance reform was not achieved in 2007, the Administration
looks forward to continuing to work with the Congress to enact program
reforms that further mitigate the impact of flood damages and losses.
Crop Insurance
Subsidized Federal crop insurance administered by USDA's Risk
Management Agency (RMA) assists farmers in managing yield and revenue
shortfalls due to bad weather or other natural disasters. The program is
a cooperative effort between the Federal Government and the private
insurance industry. Private insurance companies sell and service crop
insurance policies. These companies rely on reinsurance provided by the
Federal Government and also by the commercial reinsurance market to
manage their individual risk portfolio. The Federal Government
reimburses private companies for a portion of the administrative
expenses associated with providing crop insurance and reinsures the
private companies for excess insurance losses on all policies. The
Federal Government also subsidizes premiums for farmers.
The 2009 Budget reflects the Administration's Farm Bill proposals,
which include specific proposals for Crop Insurance. These include
allowing farmers to purchase supplemental insurance that would cover
their deductible in the event of a county-wide loss, reducing the
expected loss ratio to 1.00 from 1.075, allowing the private insurance
companies access to their data mining information, allow the Standard
Reinsurance Agreement to be renegotiated once every 3 years, along with
[[Page 91]]
a continuation of a series of crop insurance reforms that have been
proposed in the past that will increase program participation and at the
same time control program costs.
The 2009 Budget also includes language to open up authorized purposes
under the mandatory R&D funds provided by Agriculture Risk Protection
Act of 2000 (ARPA). Expansion of authorized uses will include data
mining activities, the Common Information Management System (CIMS), and
other IT cost related to reducing fraud waste and abuse and IT
modernization.
In addition, the 2009 Budget includes a proposal to implement a
participation fee in the Federal crop insurance program. The
participation fee would be charged to insurance companies participating
in the Federal crop insurance program; based on a rate of about one-
third cent per dollar of premium sold, the fee is expected to be
sufficient to generate about $15 million annually beginning in 2010. The
existing IT system is nearing the end of its useful life and recent
years have seen increases in ``down-time'' resulting from system
failures. New plans of insurance such as revenue and livestock insurance
have greatly increased the size and complexity of the crop insurance
program. These changes place a greater burden on the aging IT system
resulting in increased IT maintenance costs and limit RMA's ability to
comply with Congressional mandates pertaining to data reconciliation
with the Farm Service Agency. The participation fee will help alleviate
these problems.
There are various types of insurance programs. The most basic type of
coverage is catastrophic coverage (CAT), which compensates the farmer
for losses in excess of 50 percent of the individual's average yield at
55 percent of the expected market price. The CAT premium is entirely
subsidized, and farmers pay only an administrative fee. Higher levels of
coverage, called buy-up coverage, are also available. A premium is
charged for buy-up coverage. The premium is determined by the level of
coverage selected and varies from crop to crop and county to county. For
the ten principal crops, which accounted for about 80 percent of total
liability in 2007, the most recent data show that over 79 percent of
eligible acres participated in the crop insurance program.
RMA offers both yield and revenue-based insurance products. Revenue
insurance programs protect against loss of revenue stemming from low
prices, poor yields, or a combination of both. These programs extend
traditional multi-peril or yield crop insurance by adding price
variability to production history.
RMA is continuously trying to develop new products or expand existing
products in order to cover more types of crops. Two new Group Risk
Protection risk management tools for pasture, rangeland and forage (PRF)
protection were approved for the 2007 crop year. These innovative pilot
programs are based on vegetation greenness and rainfall indices and were
developed to provide livestock producers the ability to purchase
insurance protection for losses of forage produced for grazing or
harvested for hay. The pilots proved to be more popular than anticipated
and both programs are being expanded to new areas for the 2008 crop
year. Also new for the 2008 crop year is the Biotech Yield Endorsement
(BYE) for non-irrigated corn. The BYE is being pilot tested in four
states and will provide producers a premium rate reduction if they plant
non-irrigated corn that is intended to be harvested for grain and has
three specific biotech traits. The premium reduction is based on data
showing that non-irrigated corn containing these specific traits has a
lower risk of yield loss than non-traited corn. RMA continues to pursue
a number of avenues to increase program participation among underserved
States and commodities by working on declining yield issues and looking
at discount programs for good experienced producers who pose less risk.
For more information and additional crop insurance program details,
please reference RMA's web site: (www.rma.usda.gov).
Insurance Against Security-Related Risks
Terrorism Risk Insurance
On November 26, 2002, President Bush signed into law the Terrorism
Risk Insurance Act (TRIA) of 2002 (P.L. 107-297), which was intended to
help stabilize the insurance industry during a time of significant
transition that followed the terrorist attacks of September 11, 2001.
The Act established a temporary, three-year Federal program that
provided a system of shared public and private compensation for insured
commercial property and casualty losses arising from acts of foreign
terrorism (as defined by the Act). In 2005, Congress passed a two-year
extension (P.L.109-144), that narrowed the Government's role by
increasing private sector retentions, reducing lines of insurance
covered by the program, and adding an event trigger amount for Federal
payments. In December 2007, Congress passed a seven-year extension
(P.L.110-318). The 2007 extension of TRIA added a requirement for
commercial property and casualty insurance companies to offer insurance
for losses from domestic as well as foreign acts of terrorism. The 2007
extension maintains for all seven extension years an insurer deductible
of 20 percent of the prior year's direct earned premiums, an insurer co-
payment of 15 percent of insured losses above the deductible, and a $100
million event trigger amount for Federal payments. The 2007 extension
changes mandatory recoupment provisions, requiring Treasury to collect
133 percent of the Federal payments made under the program, and
accelerates time horizons for recoupment of any payments made before
September 30, 2017.
The President's Working Group on Financial Markets (PWG) reported in
September 2006 that the Terrorism Risk Insurance Program had achieved
its goals of supporting the insurance industry post September 11, 2001.
In terms of insurance availability, the PWG and successive industry
analyses found record take-up rates
[[Page 92]]
in 2006 of nearly 60 percent, compared with 27 percent in 2002. In
addition, the PWG found significant improvements in affordability
demonstrated by median terrorism insurance premiums falling from $37,700
in 2005 to $16,750 in 2006. These trends are also present in high risk
commercial areas like New York City. Furthermore, the estimated $450
billion in industry-wide surplus currently held by property and casualty
insurers exceeds pre-September 2001 levels.
The Administration believes that TRIA should not be a permanent
program, that private sector retentions under it should be increased,
and that over time, the private market is the best provider of
reinsurance. Over the coming year the Administration will examine
possible changes to current law that could further develop the private
terrorism reinsurance market.
The Budget, for the first time, includes the estimated Federal cost of
providing terrorism risk insurance, reflecting the 2007 TRIA extension.
The growth in the private insurance market for this coverage provides
data in the form of insurance premiums that show how private insurers
estimate the likelihood of attack and price their projected losses.
Using this market driven data, the Government can project annual outlays
and recoupment under TRIA. These estimates represent the weighted
average of TRIA payments over a full range of scenarios, most of which
include no terrorist attacks (and therefore no TRIA payments), and some
of which include terrorist attacks of varying magnitudes. The Budget
projections, however, are in no way an official forecast of future
attacks.
On this basis, the Budget projects the 2007 TRIA extension will have a
net deficit impact (spending less receipts from premium surcharges) of
$1.78 billion over the 2009-2013 period and $3.85 billion over the 2009-
2018 period.
Airline War Risk Insurance
After the September 11, 2001 attacks, private insurers cancelled
third-party liability war risk coverage for airlines and dramatically
increased the cost of other war risk insurance. In addition to a number
of short term responses, the Congress also passed the Homeland Security
Act of 2002 (P.L. 107-296). Among other provisions, this Act required
the Secretary to provide additional war risk insurance coverage for hull
losses and passenger liability to air carriers insured for third-party
war risk liability as of June 19, 2002. The Department of Transportation
Appropriations Act for 2008 (P.L. 110-161) further extended the
requirement to provide insurance coverage through August 31, 2008.
Acting on behalf of the Secretary, the FAA has made available insurance
coverage for (i) hull losses at agreed value; (ii) death, injury, or
property loss liability to passengers or crew, the limit being the same
as that of the air carrier's commercial coverage before September 11,
2001; and (iii) third party liability, the limit generally being twice
that of such coverage. The Secretary is also authorized to limit an air
carrier's third party liability to $100 million, when the Secretary
certifies that the loss is from an act of terrorism.
This program provides airlines with financial protection from war risk
occurrences, and thus allows airlines to meet the basic requirement for
adequate hull loss and liability coverage found in most aircraft
mortgage covenants, leases and in government regulation. Without such
coverage, many airlines might be grounded. Currently, aviation war risk
insurance coverage is generally available from private insurers, but
premiums are significantly higher in the private market. Also, private
insurance coverage for occurrences involving weapons of mass destruction
is more limited.
Currently 75 air carriers are insured by Department of Transportation.
Coverage for individual carriers ranges from $80 million to $4 billion
per carrier, with the median insurance coverage at approximately $1.8
billion per occurrence. Premiums collected by the Government for these
policies are deposited into the Aviation Insurance Revolving Fund. In
2007, the Fund earned approximately $170 million in premiums for
insurance provided by DOT, and it is anticipated that an additional $157
million in premiums will be earned in 2008. At the end of 2007, the
balance in the Aviation Insurance Revolving Fund available for payment
of future claims was $951 million. Although no claims have been paid by
the Fund since 2001, the balance in the Fund would be inadequate to meet
either the coverage limits of the largest policies in force ($4 billion)
or to meet a series of large claims in succession. The Federal
Government would pay any claims by the airlines that exceed the balance
in the Aviation Insurance Revolving Fund.
Aviation insurance program authority expires on March 30, 2008. The
Administration does not support a straight extension of this program and
instead favors a return to private sector mechanisms for managing risk.
As part of the Federal Aviation Administration (FAA) reauthorization,
the Administration has proposed reforms that would gradually transition
airlines from government provided insurance to privately provided
insurance. Current law caps the premium rates that FAA may charge.
Continuation of insurance coverage, if any, should allow FAA to set
deductible levels as the first step in moving airlines to the private
insurance market and reducing the indirect subsidy that the government
currently provides. The Administration is committed to working with the
Congress to reform this program, and to ensure that air carriers more
equitably share in the risks associated with this program.
[[Page 93]]
Table 7-1. ESTIMATED FUTURE COST OF OUTSTANDING FEDERAL CREDIT PROGRAMS
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Outstanding Future Costs of Outstanding Future Costs of
Program 2006 2006 2007 2007
Outstanding \1\ Outstanding \1\
----------------------------------------------------------------------------------------------------------------
Direct Loans: \2\
Federal Student Loans....................... 116 16 124 15
Farm Service Agency (excl. CCC), Rural 43 10 44 10
Development, Rural Housing.................
Rural Utilities Service and Rural Telephone 38 2 40 1
Bank.......................................
Housing and Urban Development............... 11 3 10 3
P.L. 480.................................... 8 4 8 4
Disaster Assistance......................... 7 2 10 2
Export-Import Bank.......................... 7 2 6 2
Agency for International Development........ 7 3 6 2
Commodity Credit Corporation................ 2 1 1 ...............
VA Mortgage................................. 1 ............... 1 -1
Other Direct Loan Programs.................. 12 4 11 5
-----------------------------------------------------------------
Total Direct Loans........................ 251 47 260 44
-----------------------------------------------------------------
Guaranteed Loans: \2\
Federal Student Loans....................... 325 52 363 51
FHA-Mutual Mortgage Insurance Fund.......... 317 3 322 7
VA Mortgage................................. 211 3 232 4
FHA-General and Special Risk Insurance Fund. 98 1 108 ...............
Small Business \3\.......................... 67 2 72 2
Export-Import Bank.......................... 36 2 39 1
Farm Service Agency (excl. CCC), Rural 31 ............... 32 ...............
Development, Rural Housing.................
International Assistance.................... 22 2 22 2
Commodity Credit Corporation................ 3 ............... 3 ...............
Maritime Administration..................... 3 ............... 3 ...............
[[Page 94]]
Government National Mortgage Association .............. * .............. *
(GNMA) \3\.................................
Other Guaranteed Loan Programs.............. 7 1 6 2
-----------------------------------------------------------------
Total Guaranteed Loans.................... 1,120 66 1,202 69
-----------------------------------------------------------------
Total Federal Credit.......................... 1,371 113 1,461 113
----------------------------------------------------------------------------------------------------------------
* Less than $500 million.
\1\ Direct loan future costs are the financing account allowance for subsidy cost and the liquidating account
allowance for estimated uncollectible principal and interest. Loan guarantee future costs are estimated
liabilities for loan guarantees.
\2\ Excludes loans and guarantees by deposit insurance agencies and programs not included under credit reform,
such as CCC commodity price supports. Defaulted guaranteed loans which become loans receivable are accounted
for as direct loans.
\3\ Certain SBA data are excluded from the totals because they are secondary guarantees on SBA's own guaranteed
loans. GNMA data are excluded from the totals because they are secondary guarantees on loans guaranteed by
FHA, VA and RHS.
[[Page 95]]
Table 7-2. REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED BETWEEN 1992-2007 \1\
(Budget authority and outlays, in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Program 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
DIRECT LOANS:
Agriculture:
Agriculture Credit Insurance Fund......... -31 23 ....... 331 -656 921 10 -701 -147 -2 -14 -251
Farm Storage Facility Loans............... ....... ....... ....... ....... ....... -1 -7 -8 7 -1 ....... 51
Apple Loans............................... ....... ....... ....... ....... ....... -2 1 ....... * * * *
Emergency Boll Weevil Loan................ ....... ....... ....... ....... ....... ....... 1 * * 3 ....... *
Distance Learning and Telemedicine........ ....... ....... ....... ....... ....... 1 -1 -1 1 7 1 3
Rural Electrification and 84 ....... -39 ....... -17 -42 101 265 143 -197 -108 -36
Telecommunications Loans.................
Rural Telephone Bank...................... 10 ....... -9 ....... -1 ....... -3 -7 -6 -17 -48 -22
Rural Housing Insurance Fund.............. -73 ....... 71 ....... 19 -29 -435 -64 -200 109 ....... 4
Rural Economic Development Loans.......... 1 ....... -1 * ....... -1 -1 ....... -2 * -3 3
Rural Development Loan Program............ ....... ....... -6 ....... ....... -1 -3 ....... -3 -2 -7 *
Rural Community Advancement Program \2\... 8 ....... 5 ....... 37 3 -1 -84 -34 -73 -77 -8
P.L. 480.................................. -1 ....... ....... ....... -23 65 -348 33 -43 -239 -26 44
P.L. 480 Title I Food for Progress Credits ....... ....... ....... ....... ....... ....... -112 -44 ....... ....... ....... .......
Commerce:
Fisheries Finance......................... ....... ....... ....... ....... -19 -1 -3 ....... 1 -15 -12 11
Defense:
Military Housing Improvement Fund......... ....... ....... ....... ....... ....... ....... ....... ....... * -4 -1 -8
Education:
Federal Direct Student Loan Program: \3\
Volume Reestimate....................... ....... ....... 22 ....... -6 ....... 43 ....... ....... ....... ....... .......
Other Technical Reestimate.............. -83 172 -383 -2,158 560 ....... 3,678 1,999 855 2,827 2,674 408
College Housing and Academic Facilities ....... ....... ....... ....... -1 ....... ....... ....... ....... ....... * *
Loans....................................
Historically Black Colleges and ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... 11 -16
Universities.............................
Homeland Security:
Disaster Assistance....................... ....... ....... ....... 47 36 -7 -6 * 4 * * *
Interior:
Bureau of Reclamation Loans............... ....... ....... ....... 3 3 -9 -14 ....... 17 1 1 5
Bureau of Indian Affairs Direct Loans..... ....... ....... 1 5 -1 -1 2 * * * 1 -1
Assistance to American Samoa.............. ....... ....... ....... ....... ....... ....... ....... * * ....... 2 -1
Transportation:
High Priority Corridor Loans.............. ....... -3 ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
Alameda Corridor Loan..................... ....... ....... ....... -58 ....... ....... ....... -12 ....... ....... ....... .......
Transportation Infrastructure Finance and ....... ....... ....... ....... 18 ....... ....... ....... 3 -11 7 11
Innovation...............................
Railroad Rehabilitation and Improvement ....... ....... ....... ....... ....... ....... ....... -5 -14 -11 -1 15
Program..................................
Treasury:
Community Development Financial ....... ....... ....... 1 ....... ....... * -1 * -1 1 *
Institutions Fund........................
Veterans Affairs:
Veterans Housing Benefit Program Fund..... -72 465 -111 -52 -107 -697 17 -178 987 -44 -76 -402
Native American Veteran Housing........... ....... ....... ....... ....... ....... ....... -3 * * * 1 1
Vocational Rehabilitation Loans........... ....... ....... ....... ....... ....... ....... * * * -1 1 -1
Environmental Protection Agency:
Abatement, Control and Compliance......... ....... ....... ....... ....... 3 -1 * -3 * * * *
International Assistance Programs:
Foreign Military Financing................ 13 4 1 152 -166 119 -397 -64 -41 -7 -6 -30
U.S. Agency for International Development:
Micro and Small Enterprise Development.. ....... ....... ....... ....... ....... * ....... * ....... ....... ....... .......
Overseas Private Investment Corporation:
OPIC Direct Loans....................... ....... ....... ....... ....... ....... ....... -4 -21 3 -7 72 31
Debt Reduction............................ ....... ....... ....... 36 -4 ....... * -47 -104 54 -3 .......
Small Business Administration:
Business Loans............................ ....... ....... ....... ....... 1 -2 1 25 ....... -16 -4 4
Disaster Loans............................ ....... -193 246 -398 -282 -14 266 589 196 61 258 -109
Other Independent Agencies:
Export-Import Bank Direct Loans........... ....... ....... ....... -177 157 117 -640 -305 111 -257 -227 -120
Federal Communications Commission......... ....... 4,592 980 -1,501 -804 92 346 380 732 -24 11 .......
LOAN GUARANTEES:
Agriculture:
Agriculture Credit Insurance Fund......... -51 96 ....... -31 205 40 -36 -33 -22 -162 20 -36
Agriculture Resource Conservation ....... ....... ....... ....... 2 ....... 1 -1 * * ....... .......
Demonstration............................
Commodity Credit Corporation Export 343 ....... ....... ....... -1,410 ....... -13 -230 -205 -366 -232 -225
Guarantees...............................
Rural Development Insurance Fund.......... -3 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... .......
[[Page 96]]
Rural Housing Insurance Fund.............. -10 ....... 109 ....... 152 -56 32 50 66 44 ....... -19
Rural Community Advancement Program \2\... -10 ....... 41 ....... 63 17 91 15 29 -64 -16 -10
Renewable Energy.......................... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... * *
Commerce:
Fisheries Finance......................... ....... -2 ....... ....... -3 -1 3 * 1 * 1 *
Emergency Steel Guaranteed Loans.......... ....... ....... ....... ....... ....... ....... 50 * 3 -75 -13 1
Emergency Oil and Gas Guaranteed Loans.... ....... ....... ....... ....... * * * * * -1 * *
Defense:
Military Housing Improvement Fund......... ....... ....... ....... ....... ....... ....... ....... -3 -1 -3 -5 -1
Defense Export Loan Guarantee............. ....... ....... ....... ....... ....... ....... ....... ....... -5 ....... ....... .......
Arms Initiative Guaranteed Loan Program... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... 20
Education:
Federal Family Education Loan Program: \3\
Volume Reestimate......................... 99 ....... -13 -60 -42 ....... 277 ....... ....... ....... ....... .......
Other Technical Reestimate................ ....... ....... -140 667 -3,484 ....... -2,483 -3,278 1,348 6,837 -3,399 -189
Health and Human Services:
Heath Center Loan Guarantees.............. ....... ....... ....... 3 ....... * * ....... 1 * * -1
Health Education Assistance Loans......... ....... ....... ....... ....... ....... ....... -5 -37 -33 -18 -20 *
Housing and Urban Development:
Indian Housing Loan Guarantee............. ....... ....... ....... ....... -6 * -1 * -3 -1 * -5
Title VI Indian Guarantees................ ....... ....... ....... ....... ....... ....... -1 1 4 * -4 -3
Community Development Loan Guarantees..... ....... ....... ....... ....... ....... ....... ....... 19 -10 -2 4 1
FHA-Mutual Mortgage Insurance............. -340 ....... 3,789 ....... 2,413 -1,308 1,100 5,947 1,979 2,842 636 3,923
FHA-General and Special Risk.............. -25 743 79 ....... -217 -403 77 352 507 238 -1,254 -362
Interior:
Bureau of Indian Affairs Guaranteed Loans. 31 ....... ....... ....... -14 -1 -2 -2 * 15 5 -30
Transportation:
Maritime Guaranteed Loans (Title XI)...... ....... ....... -71 30 -15 187 27 -16 4 -76 -11 -51
Minority Business Resource Center......... ....... ....... ....... ....... ....... 1 ....... * * ....... * *
Treasury:
Air Transportation Stabilization Program.. ....... ....... ....... ....... ....... ....... 113 -199 292 -109 -95 .......
Veterans Affairs:
Veterans Housing Benefit Fund Program..... -706 38 492 229 -770 -163 -184 -1,515 -462 -842 -525 183
International Assistance Programs:
U.S. Agency for International Development:
Development Credit Authority............ ....... ....... ....... ....... ....... -1 ....... 1 -3 -2 2 11
Micro and Small Enterprise Development.. ....... ....... ....... ....... ....... ....... ....... 2 -2 ....... -3 *
Urban and Environmental Credit.......... ....... -14 ....... ....... ....... -4 -15 48 -2 -5 -11 -22
Assistance to the New Independent States ....... ....... ....... ....... ....... -34 ....... ....... ....... ....... ....... .......
of the Former Soviet Union.............
Loan Guarantees to Israel............... ....... ....... ....... ....... ....... ....... ....... -76 -111 188 34 -16
Loan Guarantees to Egypt................ ....... ....... ....... ....... ....... ....... ....... ....... ....... 7 14 -12
Overseas Private Investment Corporation:
OPIC Guaranteed Loans................... ....... ....... ....... ....... ....... 5 77 60 -212 -21 -149 -268
Small Business Administration:
Business Loans............................ -16 -279 -545 -235 -528 -226 304 1,750 1,034 -390 -268 -140
Other Independent Agencies:
Export-Import Bank Guarantees............. ....... ....... ....... -191 -1,520 -417 -2,042 -1,133 -655 -1,164 -579 -174
-----------------------------------------------------------------------------------------------------------
Total....................................... -832 5,642 4,518 -3,357 -6,427 -1,854 -142 3,468 6,008 9,003 -3,441 2,161
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Less than $500,000.
\1\Excludes interest on reestimates. Additional information on credit reform subsidy rates is contained in the Federal Credit Supplement.
\2\Includes Rural Water and Waste Disposal, Rural Community Facilities, and Rural Business and Industry programs.
\3\Volume reestimates in mandatory programs represent a change in volume of loans disbursed in the prior years.
[[Page 97]]
Table 7-3. DIRECT LOAN SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2007-2009
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007 Actual 2008 Enacted 2009 Proposed
--------------------------------------------------------------------------------------------
Agency and Program Subsidy Subsidy Subsidy
Subsidy budget Loan Subsidy budget Loan Subsidy budget Loan
rate \1\ authority levels rate \1\ authority levels rate \1\ authority levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture:
Agricultural Credit Insurance Fund Program Account....... 9.32 92 985 9.28 88 948 9.37 88 944
Farm Storage Facility Loans Program Account.............. 0.38 1 174 1.01 2 153 6.11 9 153
Rural Community Advancement Program \2\.................. 9.09 132 1,451 ........ ......... ........ ........ ......... ........
Rural Electrification and Telecommunications Loans -0.67 -29 4,267 -0.57 -41 7,284 -2.05 -98 4,790
Program Account.........................................
Distance Learning, Telemedicine, and Broadband Program... 1.98 5 283 2.15 12 523 3.90 12 298
Rural Water and Waste Disposal Program Account........... ........ ......... ........ 6.81 70 1,025 3.77 48 1,269
Rural Community Facilities Program Account............... ........ ......... ........ 5.55 22 404 5.72 17 302
Rural Housing Assistance Grants.......................... 47.82 1 2 ........ ......... ........ ........ ......... ........
Farm Labor Program Account............................... 47.95 16 33 43.26 13 31 ........ ......... ........
Multifamily Housing Revitalization Program Account....... ........ ......... ........ 46.39 6 14 ........ ......... ........
Rural Housing Insurance Fund Program Account............. 13.42 181 1,354 11.85 156 1,313 12.93 6 38
Rural Development Loan Fund Program Account.............. 44.07 15 34 42.89 14 34 41.85 14 34
Rural Economic Development Loans Program Account......... 21.84 6 26 22.59 7 33 ........ ......... ........
Commerce:
Fisheries Finance Program Account........................ -8.02 -4 48 -3.72 -4 90 -12.78 -1 8
Defense--Military:
Defense Family Housing Improvement Fund.................. 14.57 59 406 23.86 109 457 43.50 47 107
Education:
College Housing and Academic Facilities Loans Program 65.22 304 467 ........ ......... ........ 16.31 10 61
Account.................................................
TEACH Grant Program Account.............................. ........ ......... ........ 13.03 7 57 13.05 14 105
Loans for Short-Term Training Program Account............ ........ ......... ........ ........ ......... ........ -0.27 ......... 46
Federal Direct Student Loan Program Program Account...... 1.37 258 18,850 0.76 169 19,891 1.13 250 21,048
Homeland Security:
Disaster Assistance Direct Loan Program Account.......... ........ ......... ........ 1.73 ......... 25 1.04 ......... 25
Housing and Urban Development:
FHA-Mutual Mortgage Insurance Program Account............ ........ ......... 3 ........ ......... 50 ........ ......... 50
State:
Repatriation Loans Program Account....................... 60.14 1 1 60.22 1 1 59.77 1 1
Transportation:
Federal-aid Highways..................................... 3.92 30 766 10.00 232 2,320 10.00 100 998
Railroad Rehabilitation and Improvement Program.......... ........ ......... 103 ........ ......... 600 ........ ......... 600
Treasury:
Community Development Financial Institutions Fund Program 37.47 ......... 1 37.52 3 8 37.88 1 2
Account.................................................
Veterans Affairs:
Housing Program Account.................................. 5.08 6 122 0.55 2 337 -0.16 ......... 328
Native American Veteran Housing Loan Program Account..... -13.46 -1 8 -14.48 -2 12 -10.07 -1 13
General Operating Expenses............................... 2.00 ......... 3 2.16 ......... 3 1.93 ......... 3
International Assistance Programs:
Debt Restructuring....................................... ........ 31 ........ ........ 107 ........ ........ 34 ........
Overseas Private Investment Corporation Program Account.. 4.42 13 291 3.22 11 342 2.34 11 450
Small Business Administration:
Disaster Loans Program Account........................... 17.73 267 1,506 16.27 156 959 14.92 158 1,061
Business Loans Program Account........................... 10.21 2 19 10.12 2 20 ........ ......... 25
Export-Import Bank of the United States:
Export-Import Bank Loans Program Account................. ........ ......... ........ 33.01 17 50 33.01 17 50
--------------------------------------------------------------------------------------------
Total.................................................. N/A 1,386 31,203 N/A 1,159 36,984 N/A 737 32,809
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
\2\ 2007 data include Rural Water and Waste Disposal and Rural Community Facilities loan programs.
N/A = Not applicable.
[[Page 98]]
Table 7-4. LOAN GUARANTEE SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2007-2009
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007 Actual 2008 Enacted 2009 Proposed
--------------------------------------------------------------------------------------------
Agency and Program Subsidy Subsidy Subsidy
Subsidy budget Loan Subsidy budget Loan Subsidy budget Loan
rate \1\ authority levels rate \1\ authority levels rate \1\ authority levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture:
Agricultural Credit Insurance Fund Program Account....... 2.58 56 2,155 2.58 67 2,607 2.61 65 2,497
Commodity Credit Corporation Export Loans Program Account 2.92 39 1,334 2.33 53 2,274 0.96 26 2,675
Rural Community Advancement Program \2\.................. 4.09 45 1,090 ........ ......... ........ ........ ......... ........
Rural Water and Waste Disposal Program Account........... ........ ......... ........ -0.82 -1 75 -0.82 -1 75
Rural Community Facilities Program Account............... ........ ......... ........ 3.68 8 210 3.08 6 210
Rural Housing Insurance Fund Program Account............. 1.37 51 3,754 1.37 84 6,141 0.30 16 5,149
Rural Business Program Account........................... ........ ......... ........ 4.33 63 1,463 4.35 30 700
Renewable Energy Program Account......................... 6.49 4 57 9.69 18 184 ........ ......... ........
Education:
Loans for Short-Term Training Program Account............ ........ ......... ........ ........ ......... ........ 1.02 3 316
Federal Family Education Loan Program Account............ 6.29 6,850 108,873 1.07 1,077 100,559 2.21 2,407 109,117
Energy:
Title 17 Innovative Technology Loan Guarantee Program.... ........ ......... ........ ........ 90 600 ........ ......... 2,220
Health and Human Services:
Health Resources and Services............................ 3.42 1 28 3.41 ......... 8 ........ ......... ........
Housing and Urban Development:
Indian Housing Loan Guarantee Fund Program Account....... 2.35 5 235 2.42 9 367 2.52 11 420
Native Hawaiian Housing Loan Guarantee Fund Program 2.35 1 43 2.42 1 41 2.52 1 41
Account.................................................
Native American Housing Block Grant...................... 11.99 1 12 12.12 2 17 12.34 2 17
Community Development Loan Guarantees Program Account.... 2.17 4 201 2.25 5 200 ........ ......... ........
FHA-Mutual Mortgage Insurance Program Account............ -0.37 -209 56,519 -0.51 -368 72,172 -0.49 -749 151,280
FHA-General and Special Risk Program Account............. -2.46 -813 32,927 -1.76 -693 39,346 -2.20 -143 6,530
Interior:
Indian Guaranteed Loan Program Account................... 6.45 6 87 6.53 6 86 7.73 7 85
Transportation:
Minority Business Resource Center Program................ 1.82 ......... 3 2.03 ......... 18 1.86 ......... 18
Federal-aid Highways..................................... ........ ......... ........ 10.00 20 200 10.00 20 200
Railroad Rehabilitation and Improvement Program.......... ........ ......... ........ ........ ......... 100 ........ ......... 100
Maritime Guaranteed Loan (Title XI) Program Account...... ........ ......... ........ 4.35 5 115 ........ ......... ........
Veterans Affairs:
Housing Program Account.................................. -0.36 -87 24,186 -0.34 -120 35,197 -0.66 -236 35,817
International Assistance Programs:
Loan Guarantees to Israel Program Account................ ........ ......... ........ ........ ......... 700 ........ ......... 700
Development Credit Authority Program Account............. 1.99 7 350 6.00 21 348 3.05 15 475
Overseas Private Investment Corporation Program Account.. -0.59 -8 1,333 -1.75 -23 1,338 -0.84 -11 1,400
Small Business Administration:
Business Loans Program Account........................... ........ ......... 20,506 ........ ......... 28,000 -0.01 -5 28,000
Export-Import Bank of the United States:
Export-Import Bank Loans Program Account................. -0.15 -18 12,569 -1.74 -238 13,710 -1.79 -248 13,807
--------------------------------------------------------------------------------------------
Total.................................................. N/A 5,935 266,262 N/A 86 306,076 N/A 1,216 361,849
--------------------------------------------------------------------------------------------
ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENTS
GNMA:
Guarantees of Mortgage-backed Securities Loan Guarantee -0.21 -193 85,071 -0.21 -163 77,400 -0.21 -163 77,400
Program Account.........................................
SBA:
Secondary Market Guarantee Program....................... ........ ......... 3,678 ........ ......... 12,000 ........ ......... 12,000
--------------------------------------------------------------------------------------------
Total, secondary guaranteed loan commitments........... N/A -193 88,749 N/A -163 89,400 N/A -163 89,400
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
\2\ 2007 data include Rural Water and Waste Disposal, Rural Community Facilities, and Rural Business and Industry loan guarantee programs.
N/A = Not applicable.
[[Page 99]]
Table 7-5. SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
(In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Estimate
-------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Direct Loans:
Obligations............................. 37.1 39.1 43.7 45.4 42.0 56.3 57.8 42.5 44.7 39.9
Disbursements........................... 35.5 37.1 39.6 39.7 38.7 50.6 46.6 41.7 42.1 40.5
New subsidy budget authority............ -0.4 0.3 * 0.7 0.4 2.1 4.7 1.7 5.3 0.7
Reestimated subsidy budget authority \1\ -4.4 -1.8 0.5 2.9 2.6 3.8 3.1 3.4 -0.6 .........
Total subsidy budget authority.......... -4.8 -1.5 0.5 3.5 3.0 6.0 7.8 5.1 4.7 0.7
Loan Guarantees:
Commitments \2\......................... 192.6 256.4 303.7 345.9 300.6 248.5 280.7 266.5 306.1 361.9
Lender disbursements \2\................ 180.8 212.9 271.4 331.3 279.9 221.6 256.0 251.2 270.3 340.6
New subsidy budget authority............ 3.6 2.3 2.9 3.8 7.3 10.1 17.2 5.7 -2.6 1.1
Reestimated subsidy budget authority \1\ 0.3 -7.1 -2.4 -3.5 2.0 3.5 7.0 -6.8 3.6 .........
Total subsidy budget authority.......... 3.9 -4.8 0.5 0.3 9.3 13.6 24.2 -1.1 1.0 1.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Less than $50 million.
\1\ Includes interest on reestimate.
\2\ To avoid double-counting, totals exclude GNMA secondary guarantees of loans that are guaranteed by FHA, VA, and RHS, and SBA's guarantee of 7(a)
loans sold in the secondary market.
[[Page 100]]
Table 7-6. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
----------------------------------------------------------------------------------------------------------------
In millions of dollars As a percentage of
------------------------------ outstanding loans \1\
Agency and Program -----------------------------
2007 2008 2009 2007 2008 2009
Actual Estimate Estimate Actual Estimate Estimate
----------------------------------------------------------------------------------------------------------------
DIRECT LOAN WRITEOFFS
Agriculture:
Agricultural Credit Insurance Fund................ 98 70 70 1.55 1.13 1.15
Rural Community Facility.......................... 1 ........ ........ 0.05 ........ ........
Rural Electrification and Telecommunications Loans 1 ........ ........ 0.00 ........ ........
Rural Business Investment Program................. 14 4 4 22.95 8.51 10.26
Rural Housing Insurance Fund...................... 168 97 100 0.68 0.40 0.42
Rural Development Loan Fund....................... 1 1 1 0.06 0.06 0.07
Commerce:
Economic Development Revolving Fund............... 1 ........ ........ 16.67 ........ ........
Education:
Student Financial Assistance...................... 14 13 13 4.40 4.21 4.33
Perkins Loan Assets............................... ........ ........ 54 ........ ........ 1.46
Housing and Urban Development:
Revolving Fund (Liquidating Programs)............. 1 1 1 16.67 25.00 50.00
Guarantees of Mortgage-backed Securities.......... 1 12 13 12.50 85.71 56.52
Interior:
Revolving Fund for Loans.......................... 3 1 1 21.43 10.00 12.50
Treasury:
Community Development Financial Institutions Fund. 1 ........ ........ 1.54 ........ ........
Veterans Affairs:
Veterans Housing Benefit Program.................. 40 78 49 4.72 10.68 6.51
International Assistance Programs:
Debt Restructuring................................ ........ 29 ........ ........ 12.89 ........
Overseas Private Investment Corporation........... 2 15 15 0.26 1.73 1.48
Small Business Administration:
Disaster Loans.................................... 107 136 157 1.34 1.51 1.81
Business Loans.................................... 7 5 4 4.05 3.27 2.96
Other Independent Agencies:
Debt Reduction (Export-Import Bank)............... 7 65 ........ 2.33 24.62 ........
Export-Import Bank................................ 16 10 10 0.28 0.26 0.32
Spectrum Auction Program.......................... 1 172 111 0.25 59.11 74.00
Tennessee Valley Authority Fund................... 1 1 1 1.89 1.79 1.67
-----------------------------------------------------------
Total, direct loan writeoffs.................... 485 710 604 0.21 0.30 0.25
-----------------------------------------------------------
GUARANTEED LOAN TERMINATIONS FOR DEFAULT
Agriculture:
Agricultural Credit Insurance Fund................ 8 48 48 0.08 0.46 0.42
Commodity Credit Corporation Export Loans......... 16 26 17 0.50 0.67 0.35
Rural Business and Industry Loans................. 95 112 132 2.52 2.98 3.35
Rural Community Facility Loans.................... 4 4 4 0.66 0.54 0.45
Rural Housing Insurance Fund...................... 239 271 312 1.46 1.46 1.49
Defense--Military:
Procurement of Ammunition, Army................... 15 ........ ........ 125.00 ........ ........
Family Housing Improvement Fund................... ........ 7 7 ........ 1.43 1.46
Education:
Loans for Short-Term Training..................... ........ ........ 3 ........ ........ 3.85
Federal Family Education Loans.................... 7,416 7,004 7,924 2.16 1.83 1.88
Energy:
Title 17 Innovative Technology Guarantees......... ........ 1 3 ........ 0.67 0.39
Health and Human Services:
Health Education Assistance Loans................. 18 19 19 1.44 1.78 2.04
Health Center Loan Guarantees..................... ........ 1 ........ ........ 1.64 ........
Housing and Urban Development:
Indian Housing Loan Guarantee..................... 1 1 1 0.21 0.13 0.09
Native American Housing Block Grant............... ........ 2 2 ........ 2.15 1.98
FHA-Mutual Mortgage Insurance..................... 5,152 8,476 10,290 1.61 2.52 2.56
FHA-General and Special Risk Insurance............ 1,009 1,737 2,176 0.98 1.56 1.89
[[Page 101]]
Interior:
Indian Guaranteed Loans........................... 2 2 3 0.60 0.56 0.84
Veterans Affairs:
Veterans Housing Benefit Program.................. 855 1,881 1,806 0.39 0.77 0.66
International Assistance Programs:
Micro and Small Enterprise Development............ 1 1 1 14.29 25.00 50.00
Urban and Environmental Credit Program............ 3 5 5 1.53 1.15 1.32
Housing and Other Credit Guaranty Programs........ 15 7 12 14.29 25.00 50.00
Development Credit Authority...................... 3 2 2 1.31 0.66 0.51
Overseas Private Investment Corporation........... 172 100 150 4.01 2.08 2.79
Small Business Administration:
Business Loans.................................... 1,083 1,254 1,620 1.56 1.70 2.04
Other Independent Agencies:
Export-Import Bank................................ 237 225 225 0.64 0.57 0.54
-----------------------------------------------------------
Total, guaranteed loan terminations for default. 16,344 21,186 24,762 1.03 1.25 1.33
-----------------------------------------------------------
Total, direct loan writeoffs and guaranteed loan 16,829 21,896 25,366 0.93 1.14 1.20
terminations...................................
===========================================================
ADDENDUM: WRITEOFFS OF DEFAULTED GUARANTEED LOANS
THAT RESULT IN LOANS RECEIVABLE
Agriculture:
Agricultural Credit Insurance Fund................ 5 7 7 9.80 11.67 10.94
Education:
Federal Family Education Loan..................... 1,091 1,228 1,308 5.38 5.71 6.05
Housing and Urban Development:
FHA-Mutual Mortgage Insurance..................... ........ 20 4 ........ 0.74 0.16
FHA-General and Special Risk Insurance............ 299 27 22 8.42 0.66 0.41
Interior:
Indian Guaranteed Loans........................... 6 2 ........ 60.00 33.33 ........
International Assistance Programs:
Overseas Private Investment Corporation........... 22 13 20 18.97 12.15 11.76
Small Business Administration:
Business loans.................................... 546 279 279 13.75 6.88 6.66
-----------------------------------------------------------
Total, writeoffs of loans receivable............ 1,969 1,576 1,640 6.30 4.86 4.83
----------------------------------------------------------------------------------------------------------------
\1\ Average of loans outstanding for the year.
[[Page 102]]
Table 7-7. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS \1\
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
2007 2008 2009
Agency and Program Actual Actual Estimate
----------------------------------------------------------------------------------------------------------------
DIRECT LOAN OBLIGATIONS
Agriculture:
Agricultural Credit Insurance Fund Direct Loan Financing Account......... 910 899 944
Commerce:
Fisheries Finance Direct Loan Financing Account.......................... 48 90 8
Education:
Historically Black College and University Capital Financing Direct Loan 216 .......... 100
Financing Account.......................................................
Loans for Short-Term Training Direct Loan Financing Account.............. .......... .......... 46
Homeland Security:
Disaster Assistance Direct Loan Financing Account........................ 25 25 25
Housing and Urban Development:
FHA-General and Special Risk Direct Loan Financing Account............... 50 50 50
FHA-Mutual Mortgage Insurance Direct Loan Financing Account.............. 50 50 50
State:
Repatriation Loans Financing Account..................................... 1 1 1
Transportation:
Railroad Rehabilitation and Improvement Direct Loan Financing Account.... .......... .......... 600
Treasury:
Community Development Financial Institutions Fund Direct Loan Financing 8 16 6
Account.................................................................
Veterans Affairs:
Vocational Rehabilitation Direct Loan Financing Account.................. 2 3 3
Small Business Administration:
Business Direct Loan Financing Account................................... 19 20 25
------------------------------------
Total, limitations on direct loan obligations.......................... 1,329 1,154 1,858
------------------------------------
LOAN GUARANTEE COMMITMENTS
Agriculture:
Agricultural Credit Insurance Fund Guaranteed Loan Financing Account..... 2,153 2,526 2,497
Education:
Loans for Short-Term Training Guaranteed Loan Financing Account.......... .......... .......... 316
Energy:
Title 17 Innovative Technology Guaranteed Loan Financing Account......... 4,000 .......... 38,500
Housing and Urban Development:
Indian Housing Loan Guarantee Fund Financing Account..................... 251 367 350
Title VI Indian Federal Guarantees Financing Account..................... 18 12 17
Native Hawaiian Housing Loan Guarantee Fund Financing Account............ 36 41 ...........
Community Development Loan Guarantees Financing Account.................. 131 200 ...........
FHA-General and Special Risk Guaranteed Loan Financing Account........... 45,000 45,000 35,000
FHA-Mutual Mortgage Insurance Guaranteed Loan Financing Account.......... 185,000 185,000 185,000
Interior:
Indian Guaranteed Loan Financing Account................................. 87 86 85
Transportation:
Minority Business Resource Center Guaranteed Loan Financing Account...... 18 18 18
RRIF Guaranteed Loan Financing Account................................... .......... .......... 100
International Assistance Programs:
Development Credit Authority Guaranteed Loan Financing Account........... 700 700 700
Small Business Administration:
Business Guaranteed Loan Financing Account............................... 20,506 28,000 28,000
------------------------------------
Total, limitations on loan guarantee commitments....................... 257,900 261,950 290,583
====================================
ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS
Housing and Urban Development:
Guarantees of Mortgage-backed Securities Financing Account............... 200,000 200,000 200,000
Small Business Administration:
Secondary Market Guarantees.............................................. 12,000 12,000 12,000
------------------------------------
Total, limitations on secondary guaranteed loan commitments............ 212,000 212,000 212,000
----------------------------------------------------------------------------------------------------------------
\1\ Data represent loan level limitations enacted or proposed to be enacted in appropriation acts. For
information on actual and estimated loan levels supportable by new subsidy budget authority requested, see
Tables 7-3 and 7-4.
[[Page 103]]
Table 7-8. FACE VALUE OF GOVERNMENT-SPONSORED LENDING \1\
(In billions of dollars)
------------------------------------------------------------------------
Outstanding
-----------------
2006 2007
------------------------------------------------------------------------
Government Sponsored Enterprises
Fannie Mae \2\........................................ 2,528 N/A
Freddie Mac \3\....................................... 1,543 N/A
Federal Home Loan Banks............................... 621 824
Farm Credit System.................................... 105 111
------------------------------------------------------------------------
Total................................................. 4,797 N/A
------------------------------------------------------------------------
N/A = Not available.
\1\ Net of purchases of federally guaranteed loans.
\2\ 2007 financial data for Fannie Mae are not presented here because
Fannie Mae audited financial results for 2007 have not been released.
\3\ 2007 financial data for Freddie Mac are not presented here because
Freddie Mac audited financial results for 2007 have not been released.
[[Page 104]]
Table 7-9. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(GSEs) \1\
(In millions of dollars)
------------------------------------------------------------------------
Enterprise 2007
------------------------------------------------------------------------
LENDING
Federal National Mortgage Association: \2\
Portfolio programs:
Net change.............................................. N/A
Outstandings............................................ N/A
Mortgage-backed securities:
Net change.............................................. N/A
Outstandings............................................ N/A
Federal Home Loan Mortgage Corporation: \3\
Portfolio programs:
Net change.............................................. N/A
Outstandings............................................ N/A
Mortgage-backed securities:
Net change.............................................. N/A
Outstandings............................................ N/A
Farm Credit System:
Agricultural credit bank:
Net change.............................................. 1,712
Outstandings............................................ 30,475
Farm credit banks:
Net change.............................................. 4,764
Outstandings............................................ 80,949
Federal Agricultural Mortgage Corporation:
Net change.............................................. 1,303
Outstandings............................................ 8,362
Federal Home Loan Banks: \4\
Net change................................................ 173,108
Outstandings.............................................. 916,963
Less guaranteed loans purchased by:
Federal National Mortgage Association: \2\
Net change.............................................. N/A
Outstandings............................................ N/A
Other:
Net change.............................................. N/A
Outstandings............................................ N/A
BORROWING
Federal National Mortgage Association: \2\
Portfolio programs:
Net change.............................................. N/A
Outstandings............................................ N/A
Mortgage-backed securities:
Net change.............................................. N/A
Outstandings............................................ N/A
Federal Home Loan Mortgage Corporation: \3\
Portfolio programs:
Net change.............................................. N/A
Outstandings............................................ N/A
Mortgage-backed securities:
Net change.............................................. N/A
Outstandings............................................ N/A
Farm Credit System:
Agricultural credit bank:
Net change.............................................. 1,889
Outstandings............................................ 34,736
Farm credit banks:
Net change.............................................. 5,828
Outstandings............................................ 100,204
Federal Agricultural Mortgage Corporation:
Net change.............................................. 490
Outstandings............................................ 5,044
Federal Home Loan Banks: \4\
Net change................................................ 192,621
Outstandings.............................................. 1,136,660
[[Page 105]]
DEDUCTIONS \5\
Less borrowing from other GSEs:
Net change................................................ N/A
Outstandings.............................................. N/A
Less purchase of Federal debt securities:
Net change................................................ N/A
Outstandings.............................................. N/A
Federal National Mortgage Association:
Net change................................................ N/A
Outstandings.............................................. N/A
Other:
Net change................................................ N/A
Outstandings.............................................. N/A
------------------------------------------------------------------------
N/A = Not available.
\1\ The estimates of borrowing and lending were developed by the GSEs
based on certain assumptions that are subject to periodic review and
revision and do not represent official GSE forecasts of future
activity, nor are they reviewed by the President. The data for all
years include programs of mortgage-backed securities. In cases where a
GSE owns securities issued by the same GSE, including mortgage-backed
securities, the borrowing and lending data for that GSE are adjusted
to remove double-counting.
\2\ Financial data for Fannie Mae are not presented here because audited
financial results for 2007 have not been released.
\3\ Financial data for Freddie Mac are not presented here because
audited financial statements for 2007 have not been released.
\4\ The net change in borrowings is derived from the difference in
borrowings between 2007 and the Federal Home Loan Banks' audited
financial statements of 2006.
\5\ Totals and subtotals have not been calculated because a substantial
portion of the total is unavailable as described above.