Multifamily Housing Finance: Funding FHA's Subsidized Credit
Programs (01-FEB-02, GAO-02-323R).
To help build and rehabilitate multifamily rental housing, the
Federal Housing Administration (FHA) provide lenders with
mortgage insurance, or guarantees, for multifamily loans. In
fiscal year 2001, FHA provided guarantees for all multifamily
projects--regardless of program--on a first-come, first-served
basis until the total budget authority for the multifamily
programs was exhausted. FHA had obligated $81 million of the $101
million of its credit subsidy budget authority for the fiscal
year by April 2001 and suspended issuing commitments for
additional loans. FHA obligated most of its fiscal year 2001
subsidy budget authority by April 2001 because of unexpectedly
high demand--five times FHA's estimate--for mortgage insurance
under the Section 221(d)(3) Program which is limited to nonprofit
developers and cooperatives and has a higher subsidy rate than
other programs. FHA has since taken steps to avoid this situation
in the future. When most of the fiscal year 2001 credit subsidy
budget authority was obligated, FHA placed several multifamily
projects on a waiting list until funding became available. Most
of these projects were funded using the remaining budget
authority and credit subsidy from projects approved earlier that
were later terminated or required less subsidy than expected.
According to FHA officials, the agency estimates the total dollar
amount of mortgages it expects to insure each year on the basis
of the last year's levels. These estimates are then adjusted for
inflation, the capacity of the field offices to process loan
applications, and any changes or proposed changes to the
programs. GAO found that the estimation process and types of data
used to calculate the fiscal year 2002 credit subsidy rates for
these programs were reasonable and complied with existing
guidance from the Office of Management and Budget and federal
accounting standards. The fiscal year 2002 credit subsidy rate
calculations reflect several changes from the fiscal year 2001
calculations, including an annual premium increase for the
Section 221(d)(4) Program, an anticipated increase in the use of
the note sales program to dispose of acquired 221(d)(3) loans,
and a change in the mix of loans included in the estimation
process for the Section 241(a) Program.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-323R
ACCNO: A02728
TITLE: Multifamily Housing Finance: Funding FHA's Subsidized
Credit Programs
DATE: 02/01/2002
SUBJECT: Budget authority
Housing construction
Mortgage protection insurance
Rental housing
Subsidies
Budget obligations
Housing programs
HUD General and Special Risk Insurance
Fund
FHA Section 221(d)(3) Program
FHA Section 221(d)(4) Program
FHA Section 241(a) Program
FHA Section 232 Health Care and Nursing
Homes Program
FHA Section 242 Hospital Program
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GAO-02-323R
United States General Accounting Office Washington, DC 20548
February 1, 2002
The Honorable Marge Roukema
Chairwoman, Subcommittee on Housing and
Community Opportunity
House of Representatives
Subject: Multifamily Housing Finance: Funding FHA's Subsidized Credit
Programs
Dear Madam Chairwoman:
To facilitate the construction and rehabilitation of multifamily rental
housing, several programs administered by the Federal Housing Administration
(FHA) provide lenders with mortgage insurance, or guarantees, for
multifamily loans. To cover the costs of some of these programs (credit
subsidy costs), Congress provides budget authority as part of FHA's budget
each fiscal year.1 FHA estimates the subsidy cost of each program by
calculating a credit subsidy rate that takes into account factors such as
fees, defaults, and recoveries. FHA then applies this subsidy rate to the
total dollar amount of mortgages the agency anticipates insuring under each
program to estimate the total subsidy cost. Although the agency's programs
are aimed at different types of projects, a single budget account covers all
the programs. In fiscal year 2001, as in earlier years, FHA provided
guarantees for all multifamily projects-regardless of program-on a
first-come, first-served basis until the total budget authority for the
multifamily programs was exhausted. FHA had obligated approximately $81
million of the $101 million of its credit subsidy budget authority for the
fiscal year by April 2001 and suspended issuing commitments for additional
loans under the multifamily
2
programs requiring credit subsidy. For fiscal year 2002, FHA made some
adjustments to the credit subsidy rates for certain multifamily programs.
In response to your request, we (1) identified the reasons the subsidy
budget authority was used earlier than expected and assessed the impact of
FHA's suspension of its insurance programs on projects needing credit
subsidy, (2) described how FHA estimates the dollar amount of the mortgages
it anticipates
1The credit subsidy cost is the net present value of the estimated long-term
costs to the federal
government of extending or guaranteeing credit, calculated over the life of
the loan and excluding
administrative costs. Budget authority is the authority provided by law to
enter into financial
obligations that will result in immediate or future outlays involving
federal funds. The Federal Credit
Reform Act of 1990 (Pub. L. No. 101-508) requires that the budget authority
for the credit subsidy cost
be available before FHA guarantees any loans.
2Field offices could continue issuing FHA firm commitments for projects,
conditioned upon the future
availability of credit subsidy budget authority. On June 4, 2001, FHA
discontinued authorizing
commitments requiring credit subsidy.
insuring, (3) assessed the reasonableness of the methodology FHA used in
estimating fiscal year 2002 credit subsidy rates, and (4) described the
reasons for the revisions to these rates for fiscal year 2002. We focused on
programs administered under Sections 221(d)(3), 221(d)(4), and 241(a) of the
National Housing Act because they were initially expected to require more
subsidy budget authority than other programs in fiscal year 2001.
Summary
The primary reason FHA obligated most of its fiscal year 2001 subsidy budget
authority by April 2001 was the unexpectedly high demand-five times FHA's
3
estimate-for mortgage insurance under the 221(d)(3) program. Because this
program, which is limited to nonprofit developers and cooperatives, has a
higher subsidy rate than other programs, the increased demand caused FHA to
obligate its subsidy budget authority more quickly than it would have for
other less costly programs. According to FHA officials, some of the
unanticipated demand for the 221(d)(3) program occurred because developers
that were essentially for-profit entities were partnering with nonprofits to
participate in the program-developers that should have participated in FHA's
221(d)(4) program, which has a lower credit subsidy rate and is designed to
serve for-profit entities. FHA has since taken action designed to insure
that this situation does not happen in the future. When most of the fiscal
year 2001 credit subsidy budget authority was obligated, FHA placed a number
of multifamily projects on a waiting list until funding became available.
Most of these projects were funded using the remaining budget authority and
credit subsidy from projects approved earlier that were later terminated or
required less subsidy than expected, according to FHA.
According to FHA officials, the agency estimates the total dollar amount of
mortgages it expects to insure each year under its multifamily insurance
programs on the basis of the last year's levels. These estimates are then
adjusted for inflation, the capacity of the field offices to process loan
applications, and any changes or proposed changes to the programs. The
estimated total amounts of insured loans often differ from actual levels,
reflecting both the difficulty of estimating future mortgage activity and
the fact that FHA approves loans on a first-come, first-served basis.
As part of our review of the methodology used to calculate the fiscal year
2002 credit subsidy rates for the 221(d)(4), 221(d)(3), and 241(a) programs,
we assessed the cash flow model used to calculate the subsidy rates, tested
underlying historical data for key cash flow assumptions,4 and assessed the
reasonableness of key cash flow assumption values. We found that the
estimation process and types of data used to calculate the fiscal year 2002
credit subsidy rates for these programs were reasonable
3In 3 of the last 8 fiscal years, FHA obligated the credit subsidy budget
authority for loan guarantees earlier than expected.
4The key cash flow assumptions are the assumptions that have the greatest
impact on the credit subsidy estimate.
and complied with existing guidance from the Office of Management and Budget
(OMB) and federal accounting standards.
The fiscal year 2002 credit subsidy rate calculations for these programs
reflect a number of changes from the fiscal year 2001 calculations. These
changes include an annual premium increase for the 221(d)(4) program, an
anticipated increase in the use of the note sales program to dispose of
acquired 221(d)(3) loans, and a change in the mix of loans included in the
estimation process for the 241(a) program. According to FHA officials, FHA
is currently analyzing the potential impact that various changes in economic
conditions and program design have had on loan performance and the methods
FHA should use to estimate subsidy rates. Additional changes to future
subsidy rate estimates may result from these analyses.
Background
FHA offers multifamily mortgage insurance to facilitate the construction and
substantial rehabilitation of multifamily rental housing, including
for-profit, nonprofit, and cooperative projects. Nonprofit and cooperative
sponsors apply for insured mortgages under Section 221(d)(3) of the National
Housing Act; for-profit developers apply under Section 221(d)(4), the
largest of FHA's multifamily insurance programs. The third program, Section
241(a), provides supplemental loan guarantees for repairs, additions, and
improvements to multifamily rental housing and health care facilities that
already have FHA-insured or HUD-held mortgages.
The programs do not lend money directly; instead, they insure loans made by
FHA-approved private lenders. Loans insured under the 221(d)(3) and
221(d)(4) programs are unique in the industry because they combine
construction and permanent financing. They also have the benefit of offering
a fixed interest rate over the long term (up to 40 years). The terms of the
221(d)(3) program are somewhat more favorable than those of its for-profit
counterpart, permitting a maximum insured loan of up to the lesser of 100
percent of the project's replacement cost or 95 percent of net income for
debt servicing. For the 221(d)(4) program, the maximum insured loan is
limited to the lesser of 90 percent of replacement cost or the amount that
can be serviced by 90 percent of net income. Borrowers negotiate interest
rates with lenders.
Supplemental guarantees under the 241(a) program are designed to extend the
economic life of projects, keeping the projects competitive, and to finance
the replacement of obsolete equipment. The loans may not exceed 90 percent
of the estimated value of the improvements and additions.
The Federal Credit Reform Act (FCRA) of 1990 requires agencies to estimate
the long-term cost to the government of extending or guaranteeing credit
(the subsidy cost). Agencies calculate these costs by multiplying the
expected dollar amount of
loans by that program's credit subsidy rate.5 When FHA obligates funds to
insure a loan, this rate is used to determine the subsidy cost of insuring
it. New FHA multifamily housing loan insurance obligations can only be made
to the extent budget authority to cover the cost is provided in
appropriation acts.
The primary federal accounting standard for credit programs6 generally
mirrors guidelines for how agencies estimate credit subsidy rates under FCRA
and OMB guidance, including OMB Circular A-11, Preparation and Submission of
Budget Estimates, and OMB Circular A-34, Instructions on Budget Execution.
Therefore, the subsidy cost included in FHA's financial statements should be
based on the same data and process used to calculate subsidy costs for the
agency's budget. Because the financial statements are subject to audit, this
mirroring helps provide integrity to the budget estimates, as long as
consistency is maintained between the processes used to estimate subsidy
costs for both the budget and financial statements. Further guidance on
estimating subsidy rates is provided in Technical Release 3, Preparing and
Auditing Direct Loan and Loan Guarantee Subsidies under the Federal Credit
7
Reform Act (Technical Releases).
Unexpected Demand for the 221(d)(3) Program Led to the Early Depletion of
Multifamily Subsidies, Delaying New Lending
By April 2001, FHA had obligated $81 million of its $101 million fiscal year
2001 subsidy budget authority for projects funded under the General and
Special Risk Insurance Program Account,8 primarily because of unexpectedly
high demand for its nonprofit program, Section 221(d)(3).9 According to FHA
officials, some of this demand consisted of loan applications from entities
that should have been considered under FHA's Section 221(d)(4) program,
which has a lower credit subsidy rate and is intended for for-profit
entities. When FHA obligated most of its fiscal year 2001 budget authority,
it placed a number of multifamily projects on a waiting list.
FHA Obligated its Budget Authority Early for Multifamily Programs Because of
a
In fiscal year 2001, FHA insured five times the dollar amount of mortgages
it had expected for the 221(d)(3) program-roughly $250 million, compared
with the $49 million estimate. Because the 221(d)(3) program had a 17.22
percent subsidy rate,
5The credit subsidy rate is the government's estimated long-term cost,
excluding administrative costs,
as a percentage of the amount of loans disbursed or guaranteed. The rate is
calculated on a net
present value basis over the life of the loans guaranteed in a given fiscal
year.
6The Federal Accounting Standards Advisory Board developed the primary
accounting standard for
credit programs, Statement of Federal Financial Accounting Standards Number
2, Accounting for
Direct Loans and Loan Guarantees.
7The Federal Accounting Standards Advisory Board's Accounting and Policy
Committee issued
Technical Release 3 in July 1999.
8FHA offers a range of insurance programs under this account, including
multifamily, hospitals, and
specialized single-family programs.
9Of the $81 million, $12 million was used to insure loans left in the
pipeline from fiscal year 2000.
FHA obligated $43 million, or about 40 percent of its subsidy budget
authority, to insure $250 million in loans. FHA had estimated that it would
use less than 10 percent of its subsidy budget authority for this program.
In comparison, the 221(d)(4) program had a significantly lower subsidy rate
of 3.35 percent, allowing FHA to insure about five times the amount of
mortgages it insured under the 221(d)(3) program using a similar amount of
subsidy budget authority (fig. 1).
Figure 1: FHA's Estimated and Actual Obligations for 241(a), 221(d)(3), and
221(d)(4) Programs in Fiscal Year 2001
Source: HUD.
FHA has traditionally approved multifamily projects for all insurance
programs on a first-come, first-served basis. FHA officials explained that
they do not want to be placed in the position of judging whether projects
insured under one program should be funded before projects insured under a
different program or to choose between projects within a program. The
conference committee report on HUD's fiscal year 2002 appropriation
legislation10 specifies the level of credit subsidy budget authority
10H.R. Conf. Rep. No. 107-272 at 112 (2001).
the conferees expect each of FHA's subsidized multifamily insurance programs
to use during fiscal year 2002. FHA officials say they are planning to
operate under the report's specifications, which require the agency to
obligate funds according to the specified limits. Under this allocation,
high demand for one program would not affect the availability of credit
subsidy budget authority for other programs. FHA officials stated they plan
to seek the flexibility to make adjustments on a program-by-program basis,
depending on actual demand.
The unanticipated increase in demand for the 221(d)(3) program was fueled in
part by loan applications from nonprofit borrowers that, according to FHA,
lacked the recommended experience, working capital, or both. These
organizations depended on for-profit entities to provide the lacking
resources or capacity. During a July 2001 congressional hearing, the FHA
commissioner testified that some of these projects should have been treated
as having for-profit sponsors. These projects, therefore, would not have
qualified for mortgage insurance under the 221(d)(3) program, which is
limited to nonprofit entities.
Specifically, in February 2001 an FHA review of 18 of 24 loans insured
during fiscal year 2001 under the 221(d)(3) program found that nonprofit
entities with little experience in real estate development and low levels of
capital were receiving insured loans. It reviewed the available
documentation for these projects and questioned the eligibility of almost
half. In nearly all of the cases it reviewed, FHA found that field office
staff had not done any type of formal review. FHA officials attributed this
problem in part to staff in field offices who lacked experience with the
221(d)(3) program. The FHA reviewer recommended that FHA develop more
specific guidelines for determining eligibility.
FHA took a number of actions to ensure that only eligible entities received
funding under the program. In February 2001, FHA required its field staff to
provide headquarters with information on the eligibility of all 221(d)(3)
applications. On March 2, 2001, FHA required approval from headquarters
before field offices could issue firm commitments. In May 2001, FHA issued a
directive requiring field staff to review the relevant program handbook and
guidance. However, FHA officials say they have no basis for taking action
against the developers of approved projects that should have been treated as
for-profit, since the relationship between the for-profit and nonprofit
entities was identified in the applications submitted to FHA field offices.
Depletion of Funding for Multifamily Programs Delayed or Halted Pending
Projects
When FHA obligated most of its fiscal year 2001 budget authority, it placed
a number of multifamily projects on a waiting list known as the "queue." 11
Between April 2001 and September 2001, it placed 48 projects on the queue.
Of these projects, 31 (65
11The queue is a chronological listing of requests for credit subsidy and is
maintained until more subsidy budget authority becomes available.
percent) received funding before the end of the fiscal year, 3 were
terminated, and 14 remained on the queue at the end of the fiscal year. Of
the 14 projects that remained on the queue, 10 were 221(d)(4) projects,
nearly all of which were approved in fiscal year 2002.12 Four projects that
continued to require credit subsidy were also carried over to fiscal year
2002. FHA is in the process of approving credit subsidy requests for three,
and the field office is awaiting the developer's acceptance of the higher
annual premium before requesting credit subsidy for the fourth project,
according to FHA.
According to industry officials, the suspension of FHA's subsidized
insurance programs affected their ability to finance certain projects. One
industry official said that his company had applied for FHA backing for
large projects but had either abandoned the projects or was seeking
financing elsewhere. Another official noted that alternate financing is
difficult to obtain for high-risk projects and, in some instances, an
FHA-insured mortgage is the only source of capital for such projects. This
official noted that FHA has become the "insurer of last resort" for such
projects. According to industry officials, project sponsors may expend as
much as $400,000 and spend months of preparation time to complete forms,
develop exhibits, and meet other requirements.
Several of the top originators of FHA loans expressed an unwillingness to
begin processing loans for the FHA programs requiring subsidy because of the
most recent suspension and the possibility of future suspensions. Industry
officials told us that developers have an especially hard time dealing with
the "on-again, off-again" nature of the multifamily insurance programs. The
officials added that, because of uncertainty about FHA financing, some
developers may not seek FHA mortgage insurance in the future.
FHA Uses Prior Lending Levels to Estimate Its Future Needs
The process of preparing the federal budget requires that FHA submit
estimates of the dollar amount of mortgages it anticipates insuring for the
multifamily programs 2 years in advance. According to FHA officials, the
estimates are based on the actual amount of loans insured during the most
recent fiscal year and are adjusted for inflation and other factors, such as
planned or proposed changes to the programs and the field staff's capacity
to process loan applications. In 1999, for example, FHA officials said that
the agency generated the estimated dollar amount of mortgages it expected to
insure in fiscal year 2001, taking into account the impact of a fully
implemented Multifamily Accelerated Processing (MAP).13 However, the
estimated dollar amount of 221(d)(3) mortgages it expected to insure in
fiscal year 2001 was the same as the actual amount of mortgages it insured
under the program 2 years earlier,
12Section 221(d)(4) projects approved in fiscal year 2002 do not require
credit subsidy. According to
FHA officials, FHA has committed to insure 97 projects under this program
between October 1, 2001
and January 24, 2002.
13MAP is a standardized system that is intended to permit lenders to process
loan applications quickly
and uniformly.
in fiscal year 1999. We could not verify the process used for estimating the
dollar amount of mortgages FHA expects to insure.
Estimates of the dollar amount of mortgages FHA expects to insure for each
multifamily program should be viewed with caution. Industry representatives
and FHA officials noted that forecasting the dollar amount of mortgages
expected in a given year is difficult at best, largely because of the role
of interest rates, which can significantly influence demand for credit and
are often volatile. The forecasting difficulties are compounded by the
narrow focus and small volumes of some of the programs and the need to make
estimates so far in advance. Regardless, FHA programs operate on a demand
basis-that is, loans are approved on a first-come, first-served basis. As a
result, the estimated and actual dollar amounts FHA insures often diverge
widely (fig. 2). In some years, FHA insures more loans for a particular
program than it had estimated for the budget; in other years, it insures
fewer. For example, in each of the last 4 years the actual amount of
mortgages FHA insured under the 221(d)(4) program differed from the estimate
by at least 25 percent.
Figure 2: Estimated and Actual Dollar Amount of Mortgages Insured for the
221(d)(3), 221(d)(4), and the 241(a) Programs, Fiscal Years 1997-2001
Source: HUD.
FHA's Process for Estimating Credit Subsidy Rates for Fiscal Year 2002 Was
Reasonable
FHA calculated the credit subsidy rates included in the fiscal year 2002
president's budget using a cash flow model with numerous cash flow
assumptions about future loan performance. These cash flow assumptions were
related to premium receipts, claim payments when loans default, and
recoveries on claims over the life of the loan guarantees to be obligated
during fiscal year 2002. Cash flow assumptions were based on historical loan
performance dating as far back as the 1960s and, in some cases, on
management's informed opinion.14 As part of our review, we assessed the cash
flow model, tested underlying historical data for key cash flow assumptions,
and assessed the reasonableness of key cash flow assumption values. Based on
our analysis, we found that the estimation process and types of data used to
calculate the fiscal year 2002 credit subsidy rates for the 221(d)(4),
221(d)(3), and 241(a) programs were reasonable and complied with existing
OMB guidance and federal accounting standards. In addition, FHA used the
same cash flow model and key cash flow assumptions for its financial
statement credit subsidy estimates. These credit subsidy estimates and their
supporting data were audited by FHA's independent public accountants as part
of the fiscal year 2000 financial statement audit and were determined to be
reasonable.15
Various Changes in Program Design and Estimation Methodology Affected
Subsidy Rates for the Fiscal Year 2002 President's Budget
For each year's president's budget, agencies submit subsidy rates that
represent current expectations of future loan performance. These rates can
vary significantly from year to year, especially as programs or the
methodology used to estimate subsidy rates change. The estimated subsidy
rates in the fiscal year 2002 president's budget for the 221(d)(4) and
221(d)(3) programs were lower than they were the year before, while the
subsidy rate for the 241(a) program was higher.
The rate for the 221(d)(4) program decreased from 3.35 percent in fiscal
year 2001 to negative 0.14 percent in the fiscal year 2002 president's
budget.16 This decrease was caused primarily by a 30 basis point17 increase
to the annual premium. Because the annual premium increase resulted in a
negative subsidy for the program, credit availability for 221(d)(4) loan
guarantees will not be constrained by available budget authority.
The 221(d)(3) program's subsidy rate decreased from 17.22 percent in fiscal
year 2001 to 10.30 percent in the fiscal year 2002 president's budget,
primarily because of an increase in estimated recoveries on defaulted loans.
According to FHA officials, estimated recoveries increased due to an
expected resurgence of FHA's note sales program, which generally results in
higher recovery rates than FHA's other recovery methods. The subsidy rate
for the 221(d)(3) program in the fiscal year 2002 president's budget
reflects management's intention to sell all 221(d)(3) defaulted loan
guarantees through the note sales program.
14Informed opinion refers to the judgment of agency staff or others who make
subsidy estimates based
on their programmatic knowledge, experience, or both. Informed opinion is
considered an acceptable
approach under Technical Release 3 when adequate historical data do not
exist.
15Since the president's budget is generally prepared 2 years in advance,
credit program cost estimates
for the fiscal year 2000 financial statements and fiscal year 2002
president's budget were prepared
during approximately the same time period and should be based on the same
data.
16A negative subsidy occurs when the subsidy costs are less than zero-that
is, the present value of
cash inflows to the government exceeds the present value of cash outflows.
17A basis point equals .01 of 1 percent.
The 241(a) program's subsidy rate increased from 22.08 percent in fiscal
year 2001 to 29.31 percent in the fiscal year 2002 president's budget,
primarily because of a change in the mix of loans used to estimate future
claim payments. The 241(a) program provides supplemental loan guarantees to
borrowers for both multifamily rental housing and health care facilities.
The historical loan performance of the program's two types of borrowers
differs significantly. According to FHA officials, for the fiscal year 2002
president's budget, loan guarantees associated with the better-performing
241(a) health care borrowers were budgeted primarily with the Section 232
Health Care and Nursing Homes Program and the Section 242 Hospital Program.
As a result, the multifamily rental housing loan guarantees, which cost more
than those for health care, were no longer offset by the stronger loan
performance of the health care facilities loan guarantees. This change
increased the estimated defaults for the remaining 241(a) loan guarantees.
After submitting the fiscal year 2002 president's budget, FHA officials
decided to increase the annual premium associated with other multifamily
programs, including the 221(d)(3) and 241(a) programs, also by 30 basis
points. Since the increase in the annual premium is a change in contract
terms, FCRA and OMB guidance allows for subsidy rates to be revised.
Accordingly, FHA will commit loan guarantees during fiscal year 2002 at
subsidy rates that are lower than those reflected in the president's budget.
As a result, FHA will be able to make more loan guarantees with the budget
authority provided by Congress.
According to FHA officials, FHA is currently analyzing the potential impact
that various other changes in economic conditions and program design,
including the Tax Reform Act of 198618 and changes in underwriting
standards, may have had on loan performance and methods FHA should use to
estimate subsidy rates. Additional changes to future subsidy rate estimates
may result from these analyses.
Agency Comments
We provided a draft of this correspondence to the Department of Housing and
Urban Development (HUD) for its review and comment. We received written
comments and technical suggestions on the draft correspondence from the
Federal Housing commissioner and his staff. The commissioner agreed with the
report's findings about the reasonableness of the fiscal year 2002 credit
subsidy rates for FHA's multifamily programs. Where appropriate, we also
incorporated technical suggestions made by HUD.
18The Tax Reform Act of 1986, Pub. L. No. 99-514, made the tax treatment of
rental housing less favorable. Provisions directly affecting real estate
include changes in tax rates, capital gains rates, depreciation, and
limitations on the deduction of losses and interest paid on funds borrowed
to invest in real estate. Certain provisions of the act were retroactive in
that they affected the tax treatment of existing investments.
Scope and Methodology
To identify the factors that led FHA to suspend its subsidized multifamily
insurance programs and the impact on loan activity, we interviewed FHA
officials. We also interviewed several mortgage bankers and industry
association officials to identify the impact on the participants when the
credit subsidy was suspended. In addition, we reviewed and analyzed the
waiting list or "queue" that was generated when most of the credit subsidy
budget authority was obligated earlier than expected in order to identify
the types of programs, the dollar amounts requested, and the number of
projects that were waiting for credit subsidy. We also reviewed FHA
mortgagee letters, budget information, and HUD program information.
To describe how FHA estimates the expected loan levels for certain
multifamily insurance programs and FHA's process for approving requests for
credit subsidy, we interviewed FHA program officials and OMB personnel.
To determine the reasonableness of the methodology used to calculate the
credit subsidy rates submitted with the fiscal year 2002 president's budget
for the 221(d)(4), 221(d)(3), and 241(a) programs, we assessed the process
used to estimate credit subsidy rates, the cash flow model, and key cash
flow assumptions used to estimate the credit subsidy rates. Specifically, we
discussed the overall estimation process with FHA officials. We used work
performed as part of FHA's annual financial statement audit after verifying
that the same cash flow model and key cash flow assumptions were used to
calculate the budget and financial statement estimates. We reviewed the work
of the outside auditor that related to the estimated costs of FHA's credit
programs as a part of the fiscal year 2000 financial statement audit based
on criteria set forth in Technical Release 3 and Statement of Auditing
Standards Number 57, Auditing Accounting Estimates. The outside auditor's
procedures included, among other things, (1) assessing the cash flow model
for mathematical accuracy, (2) testing historical data used as a basis for
cash flow assumptions to determine that it was relevant and reliable, (3)
verifying the process used to accumulate historical data and calculate cash
flow assumptions, and (4) assessing the reasonableness of key cash flow
assumption values. Since FHA's outside auditor assessed the reasonableness
of key cash flow assumptions related to the multifamily programs that were
the most material to FHA's financial statements, which did not include the
221(d)(3) program, we performed similar procedures on the 221(d)(3) program
based on the same criteria. We also compared the process and types of data
FHA used to estimate the credit subsidy rates to applicable OMB guidance,
including OMB Circulars A-11 and A-34.
We discussed the causes of changes in subsidy rates from the fiscal year
2001 and the fiscal year 2002 president's budgets with FHA officials. We
obtained documentation for assumption values that differed between the two
president's budgets. Using FHA's cash flow model and cash flow assumptions,
we verified the explanations of changes in subsidy rates provided by FHA
officials.
We conducted our work in Washington, D.C. between September 2001 and January
2002 in accordance with generally accepted government auditing standards.
As agreed with your office, unless you publicly release its contents
earlier, we plan no further distribution of this letter until 30 days from
its issuance date. At that time, we will send copies of this letter to the
secretary of HUD and the director of OMB. We will make copies available to
others on request. The report will also be available on the General
Accounting Office's (GAO) home page at http://www.gao.gov.
If you have any questions regarding this letter, please contact me; Mathew
Scire,
assistant director, at 202-512-8678; or Dan Blair, assistant director at
202-512-9401.
This assignment was conducted under the direction of Sharon Pickup. Key
contributors to this assignment were Marcia Carlsen, Emily Chalmers, Joe
Hunter, Irv
McMasters, and LaSonya Roberts.
Sincerely yours,
Thomas J. McCool
Managing Director, Financial Markets and
Community Investment
(250054)
*** End of document. ***