Housing Finance: Options to Help Prevent Suspensions of FHA and  
RHS Loan Guarantee Programs (15-MAR-05, GAO-05-227).		 
                                                                 
In fiscal year 2004, the Department of Housing and Urban	 
Development's Federal Housing Administration (FHA) and the	 
Department of Agriculture's Rural Housing Service (RHS) 	 
guaranteed approximately $136 billion in mortgages for		 
single-family homes, multifamily rental housing, and healthcare  
facilities under a variety of programs. In past years, both	 
agencies have occasionally had to suspend the issuance of	 
guarantees under some programs when they exhausted the dollar	 
amounts of their commitment authority (which serves as a limit on
the volume of new loans that an agency can guarantee) or credit  
subsidy budget authority (the authority to cover the long-term	 
costs--known as credit subsidy costs--of extending these	 
guarantees) before the end of a fiscal year. These suspensions	 
can be disruptive to homebuyers, developers, and lenders. GAO was
asked to determine (1) how often and why FHA and RHS have	 
suspended their loan guarantee programs over the last decade, (2)
how these agencies manage and notify Congress of the rate at	 
which the authorities for these programs will be exhausted, and  
(3) options Congress and the agencies could exercise to help	 
prevent future suspensions and the potential implications of	 
these options.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-227 					        
    ACCNO:   A19356						        
  TITLE:     Housing Finance: Options to Help Prevent Suspensions of  
FHA and RHS Loan Guarantee Programs				 
     DATE:   03/15/2005 
  SUBJECT:   Budget authority					 
	     Congressional oversight				 
	     Future budget projections				 
	     Government guaranteed loans			 
	     Mortgage loans					 
	     Housing programs					 
	     Mortgage programs					 
	     Budget obligations 				 
	     Housing						 
	     Subsidies						 
	     Lending institutions				 
	     Cooperative Management Housing Insurance		 
	     Fund						 
                                                                 
	     General Insurance Fund				 
	     Mutual Mortgage Insurance Fund			 
	     Rural Housing Insurance Fund			 
	     Special Risk Insurance Fund			 

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GAO-05-227

United States Government Accountability Office

GAO	Report to the Chairman, Subcommittee on Housing and Community
Opportunity,

Committee on Financial Services, House of Representatives

March 2005

HOUSING FINANCE

Options to Help Prevent Suspensions of FHA and RHS Loan Guarantee Programs

                                       a

GAO-05-227

[IMG]

March 2005

HOUSING FINANCE

Options to Help Prevent Suspensions of FHA and RHS Loan Guarantee Programs

What GAO Found

On 10 occasions since 1994, FHA and RHS have suspended the issuance of
loan guarantees after exhausting the commitment authority or credit
subsidy budget authority for certain programs before the end of a fiscal
year. Specifically, FHA suspended several programs six times and RHS
suspended one program four times. The resources budgeted for these
programs have not always been adequate to keep them operating for a full
fiscal year due partly to difficulties in estimating demand for loan
guarantees-a difficulty compounded by the process of preparing the budget
request to Congress, which requires that the agencies forecast demand
nearly 2 years in advance.

FHA and RHS both manage their programs on a first-come, first-served
basis, a factor limiting their ability to control the rate at which they
use commitment authority and obligate budget authority. However, the
agencies have different requirements and approaches for estimating the
rate at which they will exhaust these authorities and notifying Congress.
For example, unlike RHS, FHA is statutorily required to notify Congress
when it has used 75 percent of its commitment authority and when it
estimates that it will exhaust this authority before the end of a fiscal
year. GAO's analysis indicates that FHA's basic approach for making
estimates-applying utilization rates experienced up until the time of the
analysis to the remainder of the fiscal year-does not always accurately
forecast whether the agency will exhaust its commitment authority.
However, FHA officials and federal budget experts said that more complex
methods would not necessarily produce better estimates.

Through discussions with federal agency and mortgage industry officials,
GAO identified several options that Congress, FHA, and RHS could exercise
to help prevent future suspensions; however, the options would also have
budgetary impacts (such as increasing the budget deficit), make oversight
of the programs more difficult, or impose additional administrative
burdens on the agencies. For example, Congress could require FHA to
provide more frequent notifications about the percentage of commitment
authority the agency has used and expand this requirement to include
obligations of credit subsidy budget authority. This option, which could
also be applied to RHS, could give Congress additional and more timely
information to consider whether to provide supplemental appropriations
before the end of a fiscal year. Other options for Congress include (1)
authorizing FHA to use revenues generated by some of its loan guarantee
programs to cover any shortfalls in budget authority for others and (2)
providing "advance funding"-budget authority made available in an
appropriation act for the current fiscal year that comes from a subsequent
year's appropriation-for FHA and RHS program credit subsidy costs.
Further, FHA and RHS can continue to use or be given additional
administrative tools-such as transferring budget authority-to help delay
or prevent program suspensions.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief

Background

Difficulties in Estimating Demand Underlie FHA and RHS's 10 Suspensions of
Loan Guarantee Programs Since 1994

FHA and RHS Manage Their Programs in a Similar Manner but Estimate and
Notify Congress of the Rate at Which They Will Exhaust Commitment and
Budget Authority Differently

Congress, FHA, and RHS Could Exercise Options to Help Prevent Suspensions,
but Options Would Have Other Implications

Agency Comments 1 4 6

10

16

24 30

Appendixes

                          Appendix I: Appendix II: Appendix III: Appendix IV:

Appendix V:

Scope and Methodology

FHA and RHS Loan Guarantee Processes

Applicability of Options to Past Program Suspensions

Comments from the Department of Housing and Urban Development

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

33 35 39

41

43 43 43

Tables    Table 1: Summary of FHA and RHS Suspensions, Fiscal Years     
                                     1994-2004                             11 
          Table 2: Actual and Straight-Line Estimated Commitment Authority 
                       Utilization under FHA's GI/SRI Account, Fiscal Year 
                                        2003                               21 
          Table 3: Actual and Straight-Line Estimated Commitment Authority 
                       Utilization under FHA's GI/SRI Account, Fiscal Year 
                                        2004                               22 
            Table 4: Applicability of Options to Past Program Suspensions, 
                               Fiscal Years 2000-2004                      40 

Figures Figure 1: Major FHA and RHS Single-Family and Multifamily Loan
Guarantee Programs, as of Fiscal Year 2004 7 Figure 2: Amount of
Commitment Authority Enacted and Used for RHS's Section 502 Program,
Fiscal Years 1999-2004 15

Contents

Figure 3: Loan Guarantee Process for FHA Single-Family

Programs 35 Figure 4: Loan Guarantee Process for FHA Multifamily

Programs 36 Figure 5: Loan Guarantee Process for RHS Section 502 Program
37 Figure 6: Loan Guarantee Process for RHS Section 538 Program 38

Abbreviations

CA commitment authority
CBO Congressional Budget Office
CMHI Cooperative Management Housing Insurance
CSBA credit subsidy budget authority
FHA Federal Housing Administration
GI General Insurance
HUD Department of Housing and Urban Development
MMI Mutual Mortgage Insurance
OMB Office of Management and Budget
RHIF Rural Housing Insurance fund
RHS Rural Housing Service
SRI Special Risk Insurance
USDA United States Department of Agriculture

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separately.

A

United States Government Accountability Office Washington, D.C. 20548

March 15, 2005

The Honorable Robert W. Ney

Chairman

Subcommittee on Housing and Community Opportunity Committee on Financial
Services House of Representatives

Dear Mr. Chairman:

The Department of Housing and Urban Development's (HUD) Federal Housing
Administration (FHA) and the Department of Agriculture's (USDA) Rural
Housing Service (RHS) administer loan guarantee programs aimed at
expanding access to mortgage financing for single-family homes and
facilitating the construction, purchase, and rehabilitation of multifamily
rental housing and healthcare facilities.1 These programs do not lend
money directly to borrowers; instead, the federal government guarantees
loans made by FHA-or RHS-approved lenders. Both agencies have periodically
had to suspend the issuance of guarantees under some of these programs
when they exhausted the programs' budgets before the end of a fiscal year.
For example, in fiscal year 2001 FHA had to suspend its Section 221(d)(3)
loan guarantee program for nonprofit multifamily housing developers
because of unexpectedly high demand.2 These suspensions can be disruptive
to homebuyers, developers, and lenders because they can delay, complicate,
or result in the cancellation of important financial transactions.

FHA has four funds with which it guarantees mortgages. As of September 30,
2004, the four funds had guaranteed loans with a total estimated unpaid
principal balance of almost $513 billion. For budget and accounting
purposes, these funds are grouped into two accounts-the Mutual Mortgage
Insurance and Cooperative Management Housing

1A loan guarantee is a commitment by the federal government to pay part or
all of a loan's principal and interest to a lender if the borrower
defaults. In contrast to RHS, FHA uses the term "mortgage insurance"
instead of "loan guarantee." Because "insurance" and "guarantee" have the
same meaning in the context of our review, we use the term "guarantee"
throughout this report.

2See GAO, Multifamily Housing Finance: Funding FHA's Subsidized Credit
Programs, GAO-02-323R (Washington, D.C.: Feb. 1, 2002).

Insurance (MMI/CMHI) account and the General Insurance and Special Risk
Insurance (GI/SRI) account. The MMI/CMHI account supports FHA's largest
single-family mortgage insurance program and a minor multifamily program.
In contrast, the GI/SRI account supports a wide range of loan guarantee
programs, including programs for healthcare facilities as well as
multifamily and single-family housing. RHS has one fund-the Rural Housing
Insurance fund (RHIF)-and a corresponding budget account under which it
guarantees mortgages for one single-family program (Section 502) and one
multifamily program (Section 538). As of September 30, 2004, this fund had
guaranteed loans with a total estimated unpaid principal balance of almost
$14 billion.

FHA and RHS loan guarantee programs are discretionary programs that
operate within constraints established through the congressional
appropriations process. In developing their annual budgets, the agencies
must estimate the amount of "commitment authority" and, when applicable,
credit subsidy budget authority required for their loan guarantee program
accounts. Commitment authority serves as a limit on the total dollar
volume of new loans that an agency can guarantee.3 Credit subsidy budget
authority is the authority to incur financial obligations to cover the
long-term costs, known as credit subsidy costs, of extending these
guarantees.4 Credit subsidy costs can be negative (i.e., the present value
of cash inflows exceeds the present value of cash outflows) or positive
(i.e., the present value of cash inflows is less than the present value of
cash outflows).

3Although "commitment authority" is not a standard budgetary term, we are
using it for ease of presentation.

4The 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. The credit subsidy costs of each program are determined by
calculating a credit subsidy rate that takes into account factors such as
fees, defaults, and recoveries and applying this rate to the total dollar
amount of loans the agency anticipates guaranteeing. Budget authority is
the authority provided by law to enter into financial obligations that
will result in immediate or future outlays involving federal funds. Before
an agency guarantees any loans, the Federal Credit Reform Act of 1990
(codified at 2 U.S.C. S: 661 - 661f) requires that an appropriation act
provide in advance either (1) new budget authority to cover the credit
subsidy costs or (2) a limitation on the use of funds that are otherwise
available; or for authority to otherwise be provided in an appropriation
act (2 U.S.C. S: 661c(b)).

The Office of Management and Budget (OMB) reviews the agencies' estimates
of loan commitment authority and credit subsidy budget authority before
they are finalized and included in the President's Budget request to
Congress. When FHA exhausts the commitment authority for either of its
accounts, it must suspend issuance of additional loan guarantees for all
programs under that account until Congress provides additional authority.
For FHA's programs with a positive subsidy cost, the amount of credit
subsidy budget authority Congress appropriates also limits the dollar
volume of new loans the agencies may guarantee.5 For example, $5 million
in credit subsidy budget authority would cover the credit subsidy costs
for up to $50 million in loan guarantees for a program with a 10 percent
credit subsidy rate. RHS's programs-both of which currently have positive
subsidy costs-are limited by the amount of credit subsidy budget authority
they receive.6 When FHA or RHS exhausts the budget authority for its
programs with positive credit subsidy costs, the agency must suspend
issuance of additional loan guarantees under those programs until Congress
appropriates additional budget authority.

You requested that we review issues surrounding suspensions of FHA and RHS
loan guarantee programs, including ways to prevent future suspensions.
Accordingly, the objectives of our review were to determine (1) since
fiscal year 1994 how often and why FHA and RHS have suspended the issuance
of loan guarantees due to the exhaustion of commitment authority or credit
subsidy budget authority before the end of a fiscal year; (2) how FHA and
RHS manage, and notify Congress of, the rate at which they use commitment
authority and obligate credit subsidy budget authority; and (3) options
Congress, FHA, and RHS could exercise to help prevent future suspensions
of loan guarantee programs and the potential implications of these
options.

To meet these objectives, we reviewed laws, regulations, and guidance
governing FHA's and RHS's loan guarantee programs. We reviewed information
pertaining to the agencies' suspensions of loan guarantee

5Only programs with positive subsidy costs require credit subsidy budget
authority.

6For both RHS programs, the commitment authority limit is the amount of
credit subsidy budget authority divided by the credit subsidy rate. RHS
manages the programs on the basis of credit subsidy budget authority. The
Secretary of Agriculture has limited authority to transfer budget
authority from one program to another, including RHS's loan guarantee
programs (7 U.S.C. S: 2257). Such transfers provide RHS with additional
appropriated funds to cover the credit subsidy costs of additional loan
guarantees, and also proportionally increase the commitment authority
limit.

programs from fiscal years 1994 through 2004. We also performed a detailed
analysis of FHA monthly budget and accounting data for fiscal years 2003
and 2004. We assessed the reliability of these data and found them
sufficiently reliable for the purposes of our report. In addition, we
interviewed officials from FHA and RHS headquarters, OMB, the
Congressional Budget Office (CBO), and housing industry groups. We
conducted our work in Washington, D.C., from January 2004 through January
2005 in accordance with generally accepted government auditing standards.
Our scope and methodology are discussed in greater detail in appendix I.

Results in Brief	On 10 occasions since 1994, FHA and RHS have suspended
the issuance of loan guarantees under certain programs due to the
exhaustion of commitment authority or credit subsidy budget authority
before the end of a fiscal year. FHA suspended the programs under its
General Insurance and Special Risk Insurance account three times due to
the exhaustion of credit subsidy budget authority and three times due to
the exhaustion of commitment authority-most recently in January 2004.
Similarly, RHS suspended its Section 502 loan guarantee program for
single-family homes four times due to exhaustion of credit subsidy budget
authority-most recently in August 2004. The resources budgeted for these
programs have not always reflected the amounts required to keep them
operating for a full fiscal year due partly to difficulties in estimating
the demand for loan guarantee programs. These difficulties include the
need to make budget estimates nearly 2 years in advance and fluctuations
in mortgage interest rates that lead to unanticipated changes in the
demand for loan guarantees. In addition, the agencies' appropriations do
not always reflect estimates of program demand because of resource
constraints and competing priorities within the federal budget.

FHA and RHS manage their loan guarantee programs in a similar manner but
have different requirements and approaches for estimating and notifying
Congress of the rates at which they use commitment authority and obligate
budget authority. FHA and RHS basically manage their loan guarantee
programs on a first-come, first-served basis, a factor limiting both
agencies' ability to control the rate at which they use commitment
authority and obligate credit subsidy budget authority. FHA is statutorily
required to estimate, at least monthly, the rate at which it will use
commitment authority for the remainder of any fiscal year and notify
Congress (1) if an estimate indicates that the agency will exhaust its
commitment authority before the end of a fiscal year or (2) when 75

percent of the authority has been used. FHA has recently complied with the
75 percent notification requirement but could not provide us with
documentation of notifications prior to fiscal year 2003. Since the
beginning of fiscal year 2004, FHA has also prepared daily estimates of
commitment authority use and determined that none of the estimates
indicated that it would exhaust its commitment authority before the end of
a fiscal year. Our analysis indicates that FHA's basic approach for making
estimates-applying utilization rates experienced up until the time of the
analysis to the remainder of the fiscal year-does not always accurately
forecast whether the agency will exhaust its commitment authority.
However, FHA officials and federal budget experts said that more complex
methods would not necessarily produce better estimates. FHA is not
required to and does not estimate obligation rates for credit subsidy
budget authority, but monitors its obligations on a daily basis. Although
not subject to the same requirements as FHA, RHS estimates the rate at
which it will obligate credit subsidy budget authority for its Section 502
and Section 538 programs and in recent years has notified Congress when
the agency's estimates indicated that the Section 502 program would
deplete its budget authority before the end of the fiscal year. Because
RHS's estimation process for the Section 502 program is less formulaic and
more reliant on staff judgment than FHA's, we could not replicate this
approach to assess it.

Congress, FHA, and RHS could take several actions to help prevent the
agencies' loan guarantee programs from exhausting commitment authority or
credit subsidy budget authority before the end of a fiscal year, but some
of these actions would have budgetary impacts (such as increasing the
budget deficit), make oversight of the programs more difficult, or impose
additional administrative burdens on the agencies. For example, Congress
could

o 	require FHA to provide more frequent notifications about the percentage
of commitment authority the agency has used and expand this requirement to
include obligations of credit subsidy budget authority. This option, which
could also be applied to RHS, could give Congress additional and more
timely information to consider whether to provide supplemental
appropriations before the end of a fiscal year.

o 	make FHA's commitment authority limit higher, thereby reducing the
potential for program suspensions due to the exhaustion of this authority.

o 	combine the multifamily programs under FHA's General Insurance and
Special Risk Insurance account for credit subsidy purposes, which, unless
current credit subsidy rates and levels of program activity changed
dramatically, would result in a single negative subsidy rate and thus
eliminate the need for annual appropriations of credit subsidy budget
authority. In addition, to maintain its current level of oversight,
Congress would need to ensure that HUD continued providing the estimated
cost of, and number of guarantees under, individual programs in its annual
budget requests.

o 	authorize FHA to use negative subsidies generated by its General
Insurance and Special Risk Insurance account programs as funding to cover
any shortfalls in credit subsidy budget authority in its programs with
positive credit subsidies, as proposed in legislation in 2001.

o 	provide "advance funding"-budget authority made available in an
appropriations act for the current fiscal year that comes from a
subsequent year's appropriation-for FHA and RHS credit subsidy costs.

Finally, FHA and RHS can continue to use or can be given additional
administrative tools-such as transferring budget authority-to help delay
or prevent program suspensions.

We are not making any recommendations in this report.

In written comments on a draft of this report, HUD agreed with our
findings but cited specific difficulties with some of the options. USDA
also agreed with our findings and provided technical comments, which we
incorporated into this report as appropriate.

Background	FHA and RHS operate a variety of loan guarantee programs,
organized under three budget accounts, that support the financing of
single-family and multifamily housing, as well as healthcare facilities
(see fig. 1). The guarantees substantially reduce the financial risk for
lenders in the event that borrowers default, thereby allowing lenders to
make loans available to more borrowers. FHA and RHS loan guarantees for
multifamily properties are often combined with other financing sources,
such as low-income housing tax credits and tax-exempt bonds issued by
states and localities.

Figure 1: Major FHA and RHS Single-Family and Multifamily Loan Guarantee
Programs, as of Fiscal Year 2004

Sources: HUD and USDA.

FHA is the federal government's principal provider of mortgage loan
guarantees and operates numerous loan guarantee programs. In fiscal year
2004, FHA guaranteed over $107 billion in loans under the MMI/CMHI
account, the vast majority of which occurred within the 203(b) program.
The 203(b) program provides loan guarantees for the purchase or

refinancing of single-family homes.7 The other program in the MMI/CMHI
account is the Section 213 program, which guarantees mortgage loans to
facilitate the construction, substantial rehabilitation, and purchase of
cooperative housing projects. Because both programs currently have
negative subsidy costs, neither requires credit subsidy budget authority.
The MMI/CMHI account received $185 billion in commitment authority in
fiscal year 2004. FHA's GI/SRI account, which received $29 billion in
commitment authority in fiscal year 2004, supports an array of programs.
These include programs that facilitate the development, construction,
rehabilitation, purchase, and refinancing of multifamily apartments and
healthcare facilities. For example, the 221(d)(4) program-FHA's largest
multifamily program-guarantees loans to for-profit developers of
multifamily apartments, and the 221(d)(3) program guarantees loans to
nonprofit developers.8 The GI/SRI account also includes several
specialized single-family programs, such as the 203(k) (rehabilitation
mortgage), Section 234 (condominiums), Title I (property improvement and
manufactured housing), and Section 255 (home equity conversion mortgage)
programs. In contrast to the MMI/CMHI account, several of the programs in
the GI/SRI account have positive subsidy costs, which require credit
subsidy budget authority. In fiscal year 2004, four GI/SRI account
programs-Section 221(d)(3), Section 241, Multifamily Operating Loss, and
Title I Property Improvement-received $15 million in credit subsidy budget
authority.9

7HUD defines a single-family home as one containing from one to four
living units. The 203(b) program and several other FHA single-family
programs are open to borrowers of all income levels. However, because of
its low down payment requirements (3 percent of a home's purchase price
under the 203(b) program), FHA plays a major role in providing guarantees
on loans to low-income families and first-time homebuyers.

8The other major multifamily programs under the GI/SRI account are Section
220 (construction or rehabilitation of rental housing for urban renewal
and concentrated areas), Section 223(f) (refinancing or acquisition of
existing rental housing), Section 232 (construction or substantial
rehabilitation of nursing homes, intermediate care, board and care, and
assisted living facilities), Section 232/223(f) (refinancing or
acquisition of existing nursing homes, intermediate care, board and care,
and assisted living facilities), and 241(a) (financing for repairs,
additions, and improvements to multifamily rental housing and health care
facilities with FHA-insured first mortgages or HUD-held mortgages).

9The number of programs that require credit subsidy budget authority and
the amount of authority each program requires can vary from year to year.
The credit subsidy rates that agencies use to prepare their annual budget
estimates can change over time, especially as the programs or the
methodology used to estimate subsidy rates change. For example, the rate
for FHA's 221(d)(4) program decreased from 3.35 percent in fiscal year
2001 to negative 0.14 percent in fiscal year 2002 due primarily to FHA
increasing the guarantee fee for this program.

RHS's loan guarantee programs, as a whole, are much smaller than FHA's,
are targeted to rural areas, and have more income restrictions. Under its
RHIF account, RHS guarantees loans through two programs-the Section 502
program and the Section 538 program. The Section 502 program serves rural
residents with incomes not exceeding 115 percent of the U.S. median income
who wish to purchase or refinance a single-family home.10 In fiscal year
2004, this program received $2.7 billion in commitment authority and about
$40 million in credit subsidy budget authority. The Section 538 program
guarantees loans to nonprofit or for-profit developers for the
construction, acquisition, and rehabilitation of multifamily rental
housing in rural areas that serve households with incomes that do not
exceed 115 percent of area median income. In fiscal year 2004, this
program received $100 million in commitment authority and about $6 million
in credit subsidy budget authority.

In formulating and executing the budgets for their loan guarantee
programs, FHA and RHS must adhere to specific federal budgetary and
accounting requirements. The process of preparing their annual budget
request requires that FHA and RHS prepare estimates of the dollar amount
of loans they anticipate guaranteeing nearly 2 years in advance. These
estimates influence the amount of commitment authority and credit subsidy
budget authority the agencies request and receive. The Federal Credit
Reform Act of 1990 requires the President's Budget to reflect the costs of
credit programs and include the planned level of new loan guarantees
associated with each appropriation request.11 Agencies therefore must
calculate and estimate the long-term cost, known as the credit subsidy
cost, to the federal government of extending or guaranteeing credit and
the amount of new loan guarantees they plan on making. The agencies
estimate these costs for each program by calculating a credit subsidy rate
that takes into account factors such as fees, defaults, and recoveries,
and applying this rate to the total dollar amount of loans they anticipate
guaranteeing. When an agency decides to guarantee a loan, it uses this
rate to determine the credit subsidy cost of doing so. Under programs
requiring positive credit subsidies, the agency can issue the new
guarantee only if the budget authority to cover this cost is available. In
contrast, programs with negative subsidies are constrained only by

10RHS defines a single-family home as a property with one living unit. 112
U.S.C. S: 661c(a).

commitment authority, which limits the amount of financial risk the
federal government assumes each year.

FHA and RHS receive their commitment authority limit and appropriations of
credit subsidy budget authority on a somewhat different basis. Although
FHA, as required, estimates its commitment authority and credit subsidy
needs for each loan guarantee program under the MMI/CMHI and GI/SRI
accounts, it requests and receives these authorities on an account, rather
than a program, basis. Congress has generally not specified a level of
commitment authority or credit subsidy budget authority for each program.
In addition, FHA routinely requests and receives a commitment authority
limit that exceeds the dollar amount of loans it has estimated it will
make, a practice that helps prevent exhaustion of commitment authority
before the end of a fiscal year. In contrast, RHS receives credit subsidy
budget authority on a program basis. That is, the Section 502 program and
Section 538 program receive separate appropriations of credit subsidy
budget authority. For both of these programs, the commitment authority
limit is the amount of credit subsidy budget authority divided by the
credit subsidy rate.

Difficulties in Estimating Demand Underlie FHA and RHS's 10 Suspensions of
Loan Guarantee Programs Since 1994

On 10 occasions since 1994, FHA and RHS have suspended the issuance of
loan guarantees under certain programs because the programs effectively
exhausted their commitment authority or credit subsidy budget authority
before the end of a fiscal year.12 Specifically, FHA suspended programs
six times and RHS four times. Several factors contributed to these
suspensions, including unforeseeable fluctuations in mortgage interest
rates that led to changes in the demand for loan guarantees. Further, the
need to make budget estimates nearly 2 years in advance compounds the
difficulty of predicting demand. As a result, and because of resource
constraints and competing priorities within the federal budget, the
resources appropriated for these programs have not always reflected the
amounts required to keep them operating for an entire fiscal year.

12Completely exhausting its credit subsidy budget authority could cause an
agency to violate the Anti-Deficiency Act. Among other things, the act
states that an officer or employee of the United States government may not
make or authorize an expenditure or obligation exceeding an amount
available in an appropriation (31 U.S.C. S: 1341). Therefore, the agencies
suspend these programs before the balance of their budget authority
reaches zero.

FHA SuspendedGuaranteed Loan Programs Six Times Over the Past Decade

As shown in table 1, FHA has suspended the issuance of loan guarantees
under certain programs six times since 1994 after effectively exhausting
the commitment authority or credit subsidy budget authority for these
programs before the end of the fiscal year.13 For example, from fiscal
year 1994 through fiscal year 2004, FHA suspended the programs with
positive subsidy costs under its GI/SRI account three times-in February
1994, July 2000, and April 2001-after effectively exhausting the credit
subsidy budget authority under this account.14

Table 1: Summary of FHA and RHS Suspensions, Fiscal Years 1994-2004

           Date What was suspended Programs remained suspended until

FHA

February 1994a GI/SRI programs with        OMB released the agency's third 
                  positive subsidy                quarter allotment of credit 
                         costs           subsidy budget authority in April    
                                                       1994.b                 
July 26, 2000  GI/SRI programs with   the start of the next fiscal year.   
                  positive subsidy     
                         costs         
                  GI/SRI programs with                                        
    April 2001a   positive subsidy       the start of the next fiscal year.
                         costs         

September 16, 2003 All GI/SRI programs	Congress approved a $2 billion
supplemental appropriations bill (Emergency Supplemental Appropriations
Act, 2003, Pub.

L. No. 108-83, Title III, S: 3606, 117 Stat. 1038 (Sept. 30, 2003)) and
enacted a continuing appropriation for fiscal year 2004 (Pub. L. No.
108-84, 117 Stat. 1042 (Sept. 30, 2003)).

    December 2003a  All GI/SRI programs          Congress provided additional 
                                                    commitment authority in a 
                                             subsequent continuing resolution 
                                                    (Pub. L. No. 108-185, 117 
                                            Stat. 2684 (Dec. 16, 2003)).      
                                           Congress approved the Consolidated 
January 14, 2004 All GI/SRI programs                   Appropriations Act, 
                                         2004 (Pub. L. No. 108-199, 118 Stat. 
                                                          3 (Jan. 23, 2004)). 

13We use the phrases "suspended the issuance of loan guarantees" and
"program suspension" interchangeably throughout the report.

14In contrast, FHA did not suspend the programs under its MMI/CMHI account
during the period covered by our review. However, in fiscal year 2003, FHA
determined that there was a possibility that it would exhaust the
commitment authority for this account before the end of the year. In
August 2003, to help address this situation, FHA permanently changed the
recording of its loan commitments from a date earlier in the loan
guarantee process to the date on which FHA actually guarantees the loans.

(Continued From Previous Page)

           Date What was suspended Programs remained suspended until

RHS

Fiscal year 1995a  Section 502 program  the start of the next fiscal year. 
Fiscal year 1996a  Section 502 program  the start of the next fiscal year. 
August 27, 2003    Section 502 program  the start of the next fiscal year. 
August 24, 2004    Section 502 program  the start of the next fiscal year. 

Sources: FHA and RHS.

aThe agencies were unable to provide us with more specific dates for these
suspensions.

bIn fiscal year 1994, OMB allotted FHA's credit subsidy budget authority
on a quarterly basis.

FHA has also suspended all of the programs under the GI/SRI account three
times after effectively exhausting the account's commitment authority. On
September 16, 2003, FHA suspended the issuance of loan guarantees under
the GI/SRI account until Congress raised the commitment authority limit in
a supplemental appropriations act. The other two suspensions occurred
while the agency was operating under a series of continuing resolutions in
early fiscal year 2004.15 The first suspension occurred in early December
2003, when FHA exhausted the $3.8 billion in commitment authority provided
in the first of these resolutions. FHA lifted the suspension after
receiving an additional $3.9 billion under a subsequent resolution in
mid-December 2003 but suspended the programs again after exhausting this
amount on January 14, 2004. FHA restarted the programs approximately 2
weeks later, after Congress passed the Consolidated Appropriations Act,
2004.16

15A continuing resolution provides temporary appropriations and can
provide commitment authority to continue the operation of federal agencies
and programs if the agencies' annual appropriations bills have not been
enacted.

16Pub. L. No. 108-199, 118 Stat. 3 (Jan. 23, 2004).

RHS Suspended Its Section 502 Program Four Times during the Past Decade

RHS has suspended its Section 502 program four times since 1994-in fiscal
years 1995, 1996, 2003, and 2004-after effectively exhausting its credit
subsidy budget authority.17 However, in some cases, RHS was able to take
actions that delayed or mitigated the impact of the suspensions on
borrowers and lenders. For example, in early August 2003, RHS transferred
$3.6 million in budget authority from the Section 523 (Mutual and
Self-help Technical Assistance) grant program to the Section 502 program
in order to delay suspension of the program.18 This transfer enabled the
Section 502 program to guarantee an additional $297 million in loans and
delayed suspension of the program until August 27. Also, during the 4-week
suspension period, RHS continued to accept and approve loan guarantee
applications submitted by lenders and committed to issuing the guarantees
as soon as it received its next appropriation. Further, in March 2004, RHS
anticipated that the Section 502 program would exhaust its credit subsidy
budget authority early in the fourth quarter. In June, RHS increased the
program's guarantee fee and transferred a total of $7 million in budget
authority from the Section 504 (Natural Disaster), 514 (Farm Labor
Housing), 515 (Multifamily Housing), 516 (Rural Housing Assistance), and
538 programs to the Section 502 program.19 The increase in the guarantee
fee enabled RHS to issue an additional $100 million in loan guarantees,
and the transfers enabled RHS to issue an additional $531 million in loan
guarantees. Although these actions delayed suspension of the program, RHS
eventually had to suspend the program on August 24, 2004. During this
suspension period, RHS again accepted and approved loan guarantee

17In contrast, RHS did not suspend its Section 538 program before the end
of a fiscal year during the period covered by our review. However,
according to RHS officials, the program has never received
appropriations-and therefore has not issued loan guarantees-during the
first quarter of a fiscal year. This has occurred because since the
program's inception in 1996, the federal government has operated in the
beginning of each fiscal year under continuing resolutions, which
appropriate budget authority based on appropriations received in the first
quarter of the previous year (zero in the case of the Section 538
program).

18The Secretary of Agriculture has the authority under 7 U.S.C. S: 2257 to
transfer up to 7 percent of the budget authority appropriated for any
program to another (subject to the availability of budget authority in the
former program). The Secretary of HUD does not have similar authority.

19A guarantee fee is paid by the borrower as part of the cost of securing
the loan guarantee. Before fiscal year 2005, RHS was permitted to increase
or decrease the guarantee fee throughout the year, subject to statutory
limitations. The fiscal year 2005 appropriations act required that the fee
be set at 2 percent, and therefore RHS currently does not have
administrative flexibility to change the fee.

applications submitted by lenders and committed to issuing the guarantees
as soon as it received its next appropriation.

Difficulties in Estimating Program Demand Contributed to the Exhaustion of
Commitment and Budget Authority before the End of a Fiscal Year

Due partly to difficulties in estimating the demand for loan guarantee
programs, the resources budgeted for these programs have not always
reflected the amounts required to keep them operating for a full fiscal
year. Estimating demand for budget purposes is difficult for several
reasons. A primary reason is that demand for loan guarantees is highly
responsive to interest rates, which are volatile and difficult to
forecast. For example, due in part to the decline in mortgage interest
rates in fiscal year 2003, the number of FHA single-family refinancing
loans was 60 percent higher than in fiscal year 2002. According to FHA
officials, they could not have anticipated the interest rate change or
reflected it in their fiscal year 2003 budget. As a result, FHA used its
commitment authority faster than anticipated and effectively exhausted the
authority for the GI/SRI account 2 weeks before the end of the fiscal
year. Similarly, according to RHS officials, low interest rates in fiscal
year 2003 resulted in significantly higher demand for Section 502 loan
guarantees (and a corresponding increase in the use of commitment
authority) compared with the previous 3 years (see fig. 2). Because RHS
based its fiscal year 2003 budget estimate primarily on actual demand
levels from these prior years, the amount the agency requested and was
appropriated for the Section 502 program was not adequate to fund the
program for the entire fiscal year, resulting in suspension of the program
in late August 2003.

Figure 2: Amount of Commitment Authority Enacted and Used for RHS's
Section 502 Program, Fiscal Years 1999-2004

Dollars in billions

3.5

3.0

2.5

2.0

1.5

1.0

.5

0 1999 2000 2001 2002 2003 2004 Fiscal year

Amount enacted

Amount utilized

Source: RHS.

In addition, FHA and RHS have implemented program and policy changes that
were not foreseen or whose specific effects could not be known at the time
the agencies developed their budgets. For example, in response to a
statutory change that occurred after HUD submitted its fiscal year 2004
budget request, FHA increased its individual loan limits for multifamily
housing in high-cost areas during the second and third quarters of fiscal
year 2004.20 FHA officials told us that while they expected that these
changes would result in higher utilization of commitment authority, they
could not have factored them into the department's budget request.
Additionally, in the beginning of fiscal year 2003-well after federal

20The FHA Multifamily Loan Limit Adjustment Act of 2003 (Pub. L. No.
108-186, Title III, S: 302, 117 Stat. 2692 (Dec. 16, 2003)) increased the
maximum mortgage amount for individual FHA-insured mortgages for
multifamily housing located in high-cost areas.

agencies had developed their budgets for that year-the administration
established a goal to increase the number of minority homeowners by at
least 5.5 million families by 2010. To help achieve this goal, RHS, among
other things, lowered its guarantee fee, conducted outreach with minority
lenders, and promoted credit counseling and homeownership education.
According to RHS, these actions helped increase loan volume under the
Section 502 program to an historic high but could not have been taken into
account in preparing the agency's fiscal year 2003 budget.

Compounding the difficulty in predicting demand is the federal budget
process, which requires that FHA and RHS submit to OMB estimates of the
dollar amount they anticipate guaranteeing in a given year nearly 2 years
in advance. The agencies' estimates influence the amount of commitment
authority and credit subsidy budget authority the agencies request and
receive through the budget process. Because these estimates are prepared
so far in advance, they cannot be made with a high level of certainty.
Further, the agencies' appropriations do not always reflect estimates of
program demand because of resource constraints and competing priorities
within the federal budget.

FHA and RHS Manage Their Programs in a Similar Manner but Estimate and
Notify Congress of the Rate at Which They Will Exhaust Commitment and
Budget Authority Differently

FHA and RHS basically manage their loan guarantee programs on a first
come, first-served basis, a factor limiting both agencies' ability to
control the rate at which they use commitment authority and obligate
credit subsidy budget authority. FHA is required to estimate, at least
monthly, the rate at which it will use commitment authority for the
remainder of any fiscal year and notify Congress (1) if an estimate
indicates that the agency will exhaust its commitment authority before the
end of a fiscal year or (2) when 75 percent of the authority has been
used.21 FHA has recently complied with the 75 percent notification
requirement, but could not provide us with documentation of notifications
prior to fiscal year 2003. FHA has also prepared the estimates on a daily
basis since the beginning of fiscal year 2004 and determined that none of
the estimates indicated that it would exhaust its commitment authority
before the end of a fiscal year. Our analysis indicates that FHA's basic
approach for making estimates does not always accurately forecast whether
the agency will exhaust its commitment authority; however, FHA officials
and federal budget experts said that more complex methods would not
necessarily produce better

2112 U.S.C. S: 1721 note.

estimates. Although not subject to the same requirements as FHA, RHS
periodically estimates the rate at which it will obligate credit subsidy
budget authority for its Section 502 and Section 538 programs and in
recent years has notified Congress when the agency's estimates indicated
that the Section 502 program would deplete its budget authority before the
end of the fiscal year.

FHA and RHS Manage Their Loan Guarantee Programs on a First-Come,
First-Served Basis

FHA and RHS basically manage their loan guarantee programs on a first
come, first-served basis, a factor that limits control over the rate at
which they use commitment authority and obligate credit subsidy budget
authority. More specifically, according to FHA and RHS officials, neither
agency prioritizes or rejects eligible applications as long as sufficient
commitment and budget authority are available because they have determined
that, with few exceptions, they lack the authority to do so.22 The
agencies do not, for example, try to reduce their utilization or
obligation rates by placing a higher priority on smaller loans than larger
loans. FHA officials told us that even if they had this authority, they
would not want to be in the position of judging whether loans under one
program should be guaranteed before loans under another program or
choosing between eligible loans under the same program. Consequently, all
FHA programs (those with positive and negative subsidy costs) under the
same account provide loan guarantees until the account's commitment
authority is exhausted, or, for programs with positive subsidy costs,
until either the account's commitment authority or credit subsidy budget
authority is exhausted.

FHA and RHS implement the first-come, first-served approach somewhat
differently. Although FHA makes loan guarantees through its single-family
and multifamily housing field offices, it does not allocate commitment
authority and credit subsidy budget authority to these offices in advance
of using and obligating the authorities. In contrast, under its Section
502 program, RHS first allocates the budget authority to its state offices
based on a formula. Each state office then obligates the budget authority
on a first-come, first-served basis. RHS also maintains a central reserve
that can

22For its Section 502 program, RHS gives preference to first-time
homebuyers or veterans, their spouses, or children of deceased veterans
when there is a shortage of budget authority and there is more than one
request for a loan guarantee (see 7 C.F.R. S: 1980.353). For its Section
538 program, RHS gives priority to projects in smaller rural communities,
in the neediest communities, or located in Empowerment Zones/Enterprise
Communities or on tribal lands (see 7 C.F.R. S: 3565.5).

be used to supplement funding to state offices that run out of budget
authority before the end of the fiscal year. In addition, RHS may
redistribute budget authority from state offices that have more than
necessary to state offices with shortfalls. For its Section 538 program,
RHS obligates budget authority on a first-come, first-served basis without
first allocating the funds to its state offices. Appendix II provides
additional information on FHA's and RHS's processes for making loan
guarantees.

FHA Has Specific Estimation and Notification Requirements for Utilization
of Commitment Authority and Relies Primarily on a Straightforward
Estimation Process to Satisfy These Requirements

FHA is required by statute to estimate, on at least a monthly basis, the
rate at which it will use commitment authority for the remainder of the
fiscal year and to notify Congress (1) when 75 percent of the authority
has been used or (2) if estimates indicate that the authority will be
exhausted before the end of the year. These notifications help Congress to
determine whether supplemental authority may be needed to prevent a
suspension of the programs due to the exhaustion of commitment authority.
These requirements do not pertain to FHA's credit subsidy budget
authority.

To determine when it has reached the 75 percent level, FHA continuously
monitors the amount of commitment authority used under its loan guarantee
programs. FHA currently relies on several unintegrated data systems to
monitor its authority balances. An FHA official receives end-of
day activity reports from all guaranteed lending programs on commitment
authority utilization and credit subsidy budget authority obligations and
manually enters the data into a spreadsheet on a daily basis. By the end
of calendar year 2006, FHA expects to complete the implementation of a new
subsidiary ledger accounting system that, according to FHA officials, will
replace the spreadsheet and provide them with real-time utilization and
obligation data.

Although FHA notified Congress, as required, when it had used 75 percent
of its commitment authority in fiscal years 2003 and 2004, it could not
provide us with documentation of notifications prior to fiscal year 2003.
Specifically:

o In June 2003, FHA notified Congress that it had used 75 percent of the
commitment authority under the MMI/CMHI account and that it anticipated
using 75 percent of the commitment authority under the GI/SRI account
within a few weeks.

o In January 2004, FHA notified Congress that while it did not anticipate
exhausting the commitment authority provided under a continuing

resolution, it had used 75 percent of the commitment authority under the
MMI/CMHI account.

o In July 2004, FHA notified Congress that the agency estimated it would
use 75 percent of the commitment authority under the GI/SRI account within
a few weeks and that while the utilization rate was slightly lower than
the rate necessary to exhaust the commitment authority before the end of
the fiscal year, there was a possibility of a shortfall.

FHA has estimated the rates of future use of commitment authority on a
daily basis since fiscal year 2004, essentially using a "straight-line"
method that applies the utilization rate experienced up until the time of
the analysis to the remainder of the fiscal year.23 To supplement the
straight-line estimates, FHA officials indicated that they also use their
judgment and experience to factor in market and economic variables, such
as interest rates. Although FHA provided us with examples of its
straight-line estimates, it did not maintain records of its more
comprehensive estimates, which incorporated judgments about these other
variables. FHA officials told us that none of these more comprehensive
estimates made after the agency had received its fiscal year 2004
appropriation clearly indicated that either the MMI/CMHI or the GI/SRI
account would exhaust its commitment authority before the end of the
fiscal year.24 The officials said that they do not make similar estimates
of obligation rates for credit subsidy budget authority but indicated that
they monitor actual obligations on a daily basis and monitor anticipated
obligations by periodically querying the FHA field offices that process
loan guarantees.

Although a straight-line estimation analysis has its limitations, FHA
officials told us they do not believe that a more complex method for
making estimates-one that might systematically account for the effects of
additional variables-would necessarily result in more accurate estimates
because of the inherent unpredictability of the demand for loans. They
also said that it would be difficult to develop such a method. Officials
from OMB, CBO, and housing industry groups agreed that it is difficult to

23FHA officials told us that prior to fiscal year 2004, they made
estimates using a similar method but on a less frequent basis. FHA could
not provide us with documentation of these estimates.

24As noted previously, FHA operated under a series of continuing
resolutions for almost the first 4 months of fiscal year 2004.

estimate the rate at which commitment authority will be used and that a
more complex method may not yield better estimates.

While FHA maintains data on its utilization of commitment authority, it
could not provide us with complete records of its straight-line estimates.
In the absence of these estimates, we analyzed FHA's data on commitment
authority utilization and found that a basic straight-line method cannot
always accurately predict whether the agency will exhaust its commitment
authority before the end of a fiscal year.25 As shown in table 2, by the
end of March 2003-halfway through the fiscal year-FHA had used less than
half of its commitment authority (45.5 percent) under the GI/SRI account.
Assuming the same utilization rate for the second half of the year (i.e.,
45.5 percent over 6 months), we estimated that FHA would have used 91
percent of its commitment authority by the end of the fiscal year.
However, in actuality, FHA used 91 percent of its commitment authority by
the end of August-earlier than it might have estimated based on a
straight-line analysis-and was forced to suspend the issuance ofloan
guarantees under this account in the middle of September. Even if FHA had
conducted this analysis at the end of June, it would have estimated that
it would use less than 100 percent of its commitment authority by the end
of the fiscal year.

25Because FHA does not have a systematic process for taking other
variables into account, we performed this analysis assuming that the
agency would use commitment authority for the remainder of the fiscal year
at the same rate experienced previously in the year, without considering
other variables.

Table 2: Actual and Straight-Line Estimated Commitment Authority
Utilization under FHA's GI/SRI Account, Fiscal Year 2003

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Oct. Nov. Dec. Jan. Feb.
Mar. Apr. May June July Aug. Sept.

Actual cumulativepercentage ofcommitment authority used at month end 4.4
7.9 22.1 30.0 37.4 45.5 54.5 64.5 72.8 80.7 91.0 104.0

Projected percentage of commitment authority used at fiscal year
end(straight-line estimatesbased on above) 52.7 47.4 88.4 90.0 89.7 91.0
93.4 96.8 97.0 96.9 99.2 N/A

Source: GAO analysis of FHA data.

Note: In early fiscal year 2003, FHA operated under a series of continuing
resolutions that gave the agency sufficient commitment authority to
operate its loan guarantee programs until it received the $23 billion in
commitment authority that was provided in the Consolidated Appropriations
Resolution, 2003 (Pub. L. No. 108-7, 117 Stat. 11, 496 (Feb. 20, 2003)).
However, for our purposes, we calculated the utilization rates and
projections for October through June as if FHA had received the $23
billion at the beginning of the fiscal year. FHA used 104 percent of this
$23 billion in commitment authority after Congress raised the commitment
authority limit in a supplemental appropriations act on September 30,
2003, which allowed FHA to issue additional loan guarantees up to $25
billion under its GI/SRI account.

Further, as shown in table 3, straight-line calculations can also
overestimate utilization. Specifically, an analysis conducted at the end
of March 2004, when FHA had used 52.5 percent of the commitment authority
under the GI/SRI account, would have projected that FHA would exhaust the
authority before the end of the fiscal year and that almost 105 percent of
its commitment authority would be needed in order to prevent a suspension.
However, FHA actually used only 95.2 percent of its total commitment
authority by the end of the fiscal year.

Table 3: Actual and Straight-Line Estimated Commitment Authority
Utilization under FHA's GI/SRI Account, Fiscal Year 2004

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Oct. Nov. Dec. Jan. Feb.
Mar. Apr. May June July Aug. Sept.

Actual cumulativepercentage of commitment authority used at month end 9.9
19.0 24.8 33.0 41.6 52.5 57.3 64.2 71.5 78.2 85.9 95.2

Projected percentage of commitment authority used at fiscal year
end(straight-line estimatesbased on above) 118.2 113.8 99.3 99.0 99.9
104.9 98.2 96.3 95.3 93.8 93.7 N/A

Source: GAO analysis of FHA data.

Note: In early fiscal year 2004, FHA operated under a series of continuing
resolutions that provided $7.6 billion in commitment authority. However,
for our purposes, we calculated the utilization rates and projections for
October through July as if FHA had received the $25 billion in commitment
authority that was provided in the Consolidated Appropriations Act, 2004,
at the beginning of the fiscal year. On August 9, 2004, Congress provided
an additional $4 billion in commitment authority. (Pub. L. No. 108301, 118
Stat. 1102 (Aug. 9, 2004)). The table does not reflect this increase.

Variations in utilization rates are a fundamental reason why FHA faces
difficulty in estimating its use of commitment authority for the entire
year. For example, in fiscal year 2003, FHA's monthly utilization rates
ranged from 3.5 percent in November to 14.2 percent in December. In
addition, the widely varying size of multifamily projects adds to the
difficulty in projecting volume, and a single large project can
significantly change a utilization rate.

RHS Does Not Have Estimation and Notification Requirements but Has Relied
on a Complex Estimation Process to Notify Congress of the Rate at Which it
Obligates Budget Authority

Although not subject to the same requirements as FHA, RHS, as a matter of
policy, monitors its obligations of credit subsidy budget authority on a
daily basis and has recently notified Congress when it appeared that its
Section 502 program would exhaust its credit subsidy budget authority
before the end of a fiscal year.26 In August 2003, RHS notified Congress
that credit subsidy budget authority for the Section 502 program would
soon be exhausted and that the agency was exercising its authority to
transfer budget authority between programs to help cover the expected
shortfall. Similarly, in early 2004, RHS officials notified Congress that
credit subsidy budget authority for the Section 502 program might be
exhausted by July 2004 because of a strong demand for housing that would
most likely remain constant or increase. Then, in June 2004, RHS notified
Congress that credit subsidy budget authority for the Section 502 program
would be exhausted early in the fourth quarter and that in order to
continue guaranteeing loans, RHS would (1) increase the guarantee
fee-effectively decreasing the subsidy rate and allowing the agency to
guarantee more loans-and (2) exercise its authority to transfer budget
authority. In contrast, RHS officials told us that in August 2004 they
estimated that the Section 538 program would exhaust its credit subsidy
budget authority by September 15, but did not notify Congress of this
situation. However, the program was able to operate until the end of the
fiscal year.

In contrast to FHA, RHS's estimation process is less formulaic, more
reliant on staff judgment, and performed less frequently. To estimate when
the Section 502 program may exhaust its budget authority, RHS officials
told us they analyze obligation data and external variables at least
monthly. RHS officials explained that, depending on current program
performance and time elapsed into the fiscal year, they may base the
estimate on obligation rates from a specific prior year or an average of
several prior years and on differences in obligations from the previous
year(s) to the current year. RHS officials emphasized that they also use
their experience and judgment to incorporate market and economic
information, such as interest rates and data on new housing starts, into
formulating the estimates. Because RHS's estimation process (1) can differ
from one estimate to another, (2) relies heavily on program officials'
interpretations of external variables, and (3) does not include
documentation of all the data used and assumptions made in reaching the
estimates, we could not replicate this

26In contrast to FHA, RHS has a single accounting system to monitor
obligations of credit subsidy budget authority for both of its programs.

process to assess it. However, RHS provided us the results of an estimate
from April 2004, which accurately predicted that the Section 502 program
would exhaust its budget authority before the end of the fiscal year.

Because RHS's Section 538 program is relatively small-it guaranteed 42
loans in fiscal year 2003-RHS officials told us they are able to estimate
whether the credit subsidy budget authority for the program will be
sufficient for the entire fiscal year by surveying RHS's state offices and
participating lenders about anticipated demand for loan guarantees.

Congress, FHA, and RHS Could Exercise Options to Help Prevent Suspensions,
but Options Would Have Other Implications

Through discussions with FHA, RHS, OMB, CBO, and housing industry
officials, and a review of relevant literature, we identified options-some
of which would require statutory changes-that could provide better warning
of future suspensions of loan guarantee programs or help prevent them
altogether. For example, by requiring FHA to provide more frequent
notifications concerning its commitment authority balances and creating
notification requirements for FHA and RHS concerning their balances of
credit subsidy budget authority, Congress could gain additional and more
timely information to consider whether supplemental appropriations would
be needed to prevent program suspensions. Congress could also provide FHA
higher annual limits on commitment authority to minimize the likelihood
that the agency would exhaust this authority before the end of a fiscal
year. To help prevent program suspensions due to the exhaustion of credit
subsidy budget authority, Congress could (1) combine multifamily programs
with negative and positive subsidy costs under the GI/SRI account to
eliminate the need for credit subsidy appropriations, (2) authorize FHA to
use negative subsidies to cover any shortfalls in credit subsidy budget
authority, or (3) make budget authority from the subsequent year's
appropriation available in the current year. Finally, the agencies can
continue to use or be given additional administrative tools to help delay
or prevent program suspensions due to exhaustion of credit subsidy budget
authority. However, each of the options we identified would have legal,
budgetary, administrative, or oversight implications, and their specific
impacts would depend on how they were structured and implemented.

Expanding FHA As noted previously, FHA is currently required to notify its
authorizing and Notifications on the Use of appropriations committees when
it has used 75 percent of the commitment Commitment Authority authority
for the MMI/CMHI and GI/SRI accounts. (In contrast to FHA,

RHS-which manages its programs based on credit subsidy budget
authority-does not have a notification requirement.) Congress could
require FHA to provide additional notifications before and after the
agency has reached the 75 percent level-for example, when the agency has
used specified percentages of commitment authority or at certain points in
the fiscal year.

More frequent notifications would provide additional and more timely
information to Congress on the status of commitment authority balances for
FHA's MMI/CMHI and GI/SRI accounts. For example, in June 2003, FHA, as
required, notified Congress that it would soon use 75 percent of the
commitment authority in its GI/SRI account. However, this was the only
notification Congress received prior to FHA's suspension of the GI/SRI
account programs in mid-September. Had FHA been required to provide an
additional notification when it reached, for example, the 90 percent
level, Congress would have been notified in August-when there was a strong
possibility that the programs would need to be suspended-giving Congress
timelier information to consider providing supplemental commitment
authority that could have prevented the suspension.

FHA could implement this option with little administrative effort because
it already maintains the data on its commitment authority balances that
would be needed to meet expanded notification requirements.

Expanding Notifications to Include Obligations of Credit Subsidy Budget
Authority by FHA and RHS

As discussed previously, the exhaustion of credit subsidy budget authority
before the end of a fiscal year has resulted in FHA and RHS suspending the
issuance of loan guarantees. Currently, neither agency is required to
notify Congress of the status of its balances of credit subsidy budget
authority. Congress could require FHA and RHS to provide such
notifications-for example, when they have obligated specified percentages
or at certain points in the fiscal year. These notifications would apply
only to FHA's GI/SRI account and RHS's Section 502 and 538 programs, which
require credit subsidy budget authority.

Requiring these notifications would provide Congress with more information
to use in considering if supplemental appropriations would be needed to
prevent program suspensions. FHA and RHS could implement this option with
little administrative effort because they already maintain the data on
their balances of credit subsidy budget authority that would be needed to
meet the notification requirements.

Establishing a Higher Limit on FHA Commitment Authority

The amount of commitment authority for FHA's loan guarantee programs is
set in annual appropriations acts and serves as a limitation on the volume
of loans the agency can guarantee. For programs under FHA's MMI/CMHI
account, this limitation exists even though they generate substantial
negative subsidies. As noted previously, for the programs with positive
subsidy costs under the GI/SRI account, the volume of loans FHA can
guarantee is also limited by annual appropriations of credit subsidy
budget authority. FHA's annual budget requests and enacted levels of
commitment authority for its MMI/CMHI and GI/SRI accounts reflect
commitment authority limits that usually exceed the dollar volume of loans
the agency estimates it will actually guarantee. According to FHA
officials, the "cushion" between the enacted commitment authority limit
and FHA's estimate of guarantees is intended to minimize the possibility
of FHA exhausting its authority before the end of the fiscal year. The
enacted commitment authority limits are increased periodically to reflect
growth in the loan guarantee programs over time but do not always reflect
changes in FHA's estimates from year to year. As a result, the difference
between the enacted commitment authority limits and FHA's estimates-what
FHA refers to as "standby authority"-has varied considerably. For example,
from fiscal years 1999 through 2004, the enacted commitment authority
limits exceeded FHA's estimates by anywhere from 5 to 49 percent for the
MMI/CMHI account and 0 to 94 percent for the GI/SRI account. To overcome
the inherent difficulties in forecasting program demand and to help ensure
that FHA's commitment authority limit is high enough to prevent program
suspensions, Congress could enact total commitment authority limits that
exceed FHA's estimates by at least a minimum level.

With a higher commitment authority limit, it is possible that FHA would
guarantee a higher volume of loans-thereby assuming a greater insurance
risk-than it would otherwise. In that event, loan programs with negative
subsidy costs, such as FHA's 203(b) program, would, all other things being
equal, increase the amount of negative subsidies available to offset FHA's
budget but also increase the agency's exposure to risk. In contrast, loan
volume for programs with positive subsidy costs under FHA's GI/SRI account
would continue to be limited by the annual credit subsidy appropriation
and so would not be affected by this option. Depending on the level of
additional loan guarantee activity resulting from a higher limit,

FHA may also require supplemental administrative resources to process,
review, and manage additional loan guarantees.27

Combining Multifamily Programs under FHA's GI/SRI Account for Credit
Subsidy Purposes

Currently, several multifamily, healthcare, and single-family programs
make up FHA's GI/SRI account, and programs may have a positive or negative
credit subsidy rate. Under the Federal Credit Reform Act of 1990, the
President's Budget must reflect the costs of loan guarantee programs and
must include the amount of new loan guarantees planned.28 Federal agencies
must therefore prepare a budget estimate for each loan guarantee program
which represents the amount of credit subsidy budget authority the program
would require or the amount of negative subsidy the program would
generate. For example, for fiscal year 2004, FHA estimated that it would
need approximately $8 million in credit subsidy budget authority for three
multifamily programs under the GI/SRI account. FHA also estimated that the
remaining six multifamily programs under the account would generate
approximately $79 million in negative subsidies. As proposed by the
Millennial Housing Commission in 2002, HUD could combine all nine of these
programs for credit subsidy purposes, which, unless current credit subsidy
rates and levels of program activity changed dramatically, would result in
a single negative credit subsidy rate and thus eliminate the need for
annual appropriations of credit subsidy budget authority.29

Currently, negative subsidies generated by some of FHA's multifamily
programs are considered as offsetting receipts in the agency's annual
budgets.30 Using some of the negative subsidies to, in effect, pay for the
positive subsidies required for other GI/SRI programs would reduce the
offset, all other things being equal. The elimination of credit subsidy
appropriations under a combined multifamily program could compensate for
the reduced offset. However, because the programs with positive

27FHA's appropriations for the MMI/CMHI and GI/SRI accounts typically
include limited additional budget authority for administrative expenses
that becomes available if guaranteed loan commitments exceed specified
levels on or before April 1.

282 U.S.C. S: 611c(a).

29The Millennial Housing Commission, established at the request of
Congress in 2000, studied the federal role in meeting the nation's housing
challenges and issued a report in 2002 recommending a variety of reforms
to federal housing programs, among other things.

30Offsetting receipts are collections that are deducted from gross budget
authority and outlays by agency, rather than added to receipts.

subsidies would no longer be constrained by appropriations of budget
authority, they could experience more activity and higher resulting costs
than they would otherwise, thus increasing the budget deficit (all other
things being equal). Because FHA already estimates credit subsidy rates
for each multifamily program to comply with Federal Credit Reform Act
requirements, limited additional administrative effort would likely be
required to merge these rates into a single rate.

This option would require congressional action and pose several challenges
to Congress and FHA. For example, to the extent that the option may be
inconsistent with Federal Credit Reform Act requirements, Congress would
have to provide FHA a limited exception to these requirements. Further,
congressional oversight would be affected because combining the programs
would eliminate the need for credit subsidy budget authority. Therefore,
congressional appropriators would only be able to control the size of the
programs through limits on commitment authority. Additionally, to maintain
its current level of oversight, Congress would need to ensure that HUD
continued providing the estimated cost of, and number of guarantees under,
individual programs in its annual budget requests. This option would also
require FHA to alter its accounting and record keeping systems to
accurately track the budget activity for the combined programs.

Authorizing Use of Negative Subsidies to Cover Shortfalls in Credit
Subsidy Budget Authority for FHA

In recent years, negative subsidies generated by the single-family and
multifamily programs under FHA's GI/SRI account have exceeded the
account's positive subsidy requirements (i.e., credit subsidy costs) by
over $200 million per year. A bill introduced in April 2001 would
authorize FHA to use negative credit subsidies from its GI/SRI account
programs to cover the credit subsidy costs of making loan guarantees if
FHA exhausted the original appropriation of credit subsidy budget
authority before the end of a fiscal year.31

If this option were implemented, it would be unlikely-given the current
credit subsidy rates and level of activity for each program-that FHA would
have to suspend the issuance of loan guarantees for GI/SRI account

31Specifically, H.R. 1481, 107th Cong. (2001) provided that the amount of
negative credit subsidy from any of the programs under the General
Insurance Fund or the Special Risk Insurance Fund would be considered as
new budget authority provided in advance in an appropriations act for that
fiscal year and that it would be available for covering the costs of
making guarantees under any program funded by the GI/SRI account.

programs due to the exhaustion of credit subsidy budget authority. The
proposal would require Congress to amend section 519 of the National
Housing Act (codified at 12 U.S.C. S: 1735c) to allow the use of negative
subsidies as budget authority for programs with positive subsidy costs,
which could resultin these programs experiencing more activity and higher
resulting costs than they would otherwise, thus increasing the budget
deficit (all other things being equal). From a budgeting perspective, this
option would prevent these subsidies from being used as offsetting
receipts in HUD's overall budget. As a result, additional appropriations
or cuts in HUD's other discretionary spending might be required to
compensate for the elimination of the offset. Further, the amount of
negative subsidies that CBO estimated FHA would need to cover shortfalls
in credit subsidy budget authority would be charged against FHA's overall
budget authority in the current fiscal year.

Appropriating Advanced Funding for Credit Subsidy Costs at FHA and RHS

To help ensure that FHA and RHS programs with positive subsidy costs would
not be suspended due to exhaustion of credit subsidy budget authority,
Congress could also provide "advance funding" for FHA and RHS program
credit subsidy costs. Advance funding authorizes agencies, if necessary,
to charge obligations in excess of the specific amount appropriated for
that year to the next fiscal year's appropriation. Congress could
stipulate in the agencies' annual appropriations acts that an additional
amount of budget authority would automatically be made available to cover
additional credit subsidy costs in the current fiscal year if the original
appropriation of credit subsidy budget authority were exhausted.32 For
example, Congress could specify this amount as a fixed sum or a percentage
of the original appropriation.

If FHA or RHS were to obligate any of these additional amounts, the
amounts would be charged to the agencies' appropriations of credit subsidy
budget authority for the subsequent fiscal year. All other things being
equal, this would reduce the amount of budget authority available in the
subsequent year.

32For FHA's GI/SRI account programs and RHS's Section 502 program, the
credit subsidy budget authority available in any fiscal year includes
current year appropriations plus any unobligated budget authority from
prior fiscal years.

Continuing or Expanding Currently Permitted Practices at FHA and RHS, Such
As Increasing Fees or Transferring Budget Authority

FHA and RHS have existing tools that they can and have used to help delay
or prevent program suspensions. For example, FHA and RHS establish
application or guarantee fees for their loan guarantee programs and have
the discretion to change them during the fiscal year. All other things
being equal, raising fees lowers the credit subsidy rate for the affected
program and allows the agencies to cover the credit subsidy costs for more
loan guarantees. For example, in June 2004, RHS increased its loan
guarantee fee by 25 basis points (0.25 percent) on all Section 502
guaranteed loans. RHS indicated that the fee increase allowed it to reduce
its credit subsidy rate and thereby cover the credit subsidy costs for
more than 1,000 additional loan guarantees. Additionally, and as discussed
previously, RHS has limited authority to transfer budget authority to
cover resource shortfalls. RHS used this authority in fiscal years 2003
and 2004, when it transferred funds from various loan and grant programs
to cover the credit subsidy costs for the Section 502 program. FHA does
not have, but could be given, similar authority by Congress.

The agencies cannot transfer budget authority or change fees without
significant administrative effort. According to FHA officials, changing
application fees requires them to promulgate regulations, while increasing
guarantee fees requires them to develop and place a notice in the Federal
Register. Furthermore, increasing fees makes loan guarantees less
affordable for borrowers. Finally, administrative transfers of budget
authority cannot be made without budget authority being available
elsewhere in an agency's budget and requires concurrence by OMB.

Agency CommentsWe provided a draft of this report to HUD and USDA for
their review and comment. HUD provided comments in a letter from the
Deputy Assistant Secretary for Finance and Budget (see app. IV). HUD
agreed with our findings but said it saw difficulties with each of the
options we presented for helping to prevent program suspensions. HUD cited
specific difficulties with some of the options. For example, HUD
questioned the option to expand FHA notifications on the use of commitment
authority, saying we presumed that Congress did not act to prevent the
suspension of the GI/SRI account programs in fiscal year 2003 because it
did not receive timely notifications. Our draft report did not make this
presumption. Nevertheless, we clarified the final report to emphasize that
had FHA been required to provide an additional notification once there was
a strong possibility that the programs would need to be suspended,
Congress would

have had timelier information to consider providing additional commitment
authority.

HUD also commented that the option to combine multifamily programs under
FHA's GI/SRI account for credit subsidy purposes is inconsistent with the
Federal Credit Reform Act, which requires that credit subsidy rates be
determined for each program. Our draft report indicated that this option
would require congressional action. We added language to our final report
to recognize that this could involve giving FHA a limited exception to
Federal Credit Reform Act requirements to the extent that the option may
be inconsistent with these requirements. Also, as our draft report stated,
to maintain its current level of oversight, Congress would need to ensure
that HUD continued providing the estimated cost of, and number of
guarantees under, individual programs in its annual budget requests.

HUD said that the option for appropriating advance funding for credit
subsidy costs was a one-time-only solution because program activity in the
year from which funding was advanced would be at risk for suspension due
to inadequate credit subsidy budget authority. We disagree that the option
would only be a one-time solution, because any year from which funding was
advanced could likewise receive an advance from the subsequent fiscal year
to avoid program suspensions, if necessary.

USDA agreed with our findings and provided technical comments, which we
incorporated into this report as appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of the letter. At that time, we will send copies to other
interested Members of Congress and congressional committees and to the
Secretaries of HUD and USDA. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.

Should you or your staff have any questions or comments on matters
discussed in this report, please contact me at (202) 512-8678 or
[email protected] or Steve Westley at (202) 512-6221 or [email protected].
Major contributors to this report are listed in appendix V.

Sincerely yours,

David G. Wood Director, Financial Markets and Community Investment

Appendix I

Scope and Methodology	

To determine how often and why FHA and RHS have suspended their loan
guarantee programs due to the exhaustion of commitment authority or credit
subsidy budget authority before the end of a fiscal year, we reviewed
relevant agency and housing industry notices, budget data, and
correspondence relating to program suspensions since fiscal year 1994. We
also interviewed cognizant agency and housing industry officials.

To determine how FHA and RHS manage, and notify Congress of, their use and
obligation of these authorities, we reviewed laws, regulations, and
guidance governing the agencies' approval, monitoring, and estimation
processes and the agencies' procedures for informing Congress of the
status of their loan guarantee programs. We also interviewed agency
officials responsible for these tasks and obtained information on the
information systems they use to administer their loan guarantee programs.
Finally, to assess FHA's approach for estimating utilization of commitment
authority, we analyzed FHA monthly budget and accounting data for fiscal
years 2003 and 2004. We conducted a straight-line analysis for each month
within that time frame that assumed that the agency would use commitment
authority for the remainder of the fiscal year at the same rate
experienced previously in the year.

To identify options that Congress, FHA, and RHS could exercise to help
prevent the agencies from suspending their loan guarantee programs before
the end of a fiscal year and the likely implications of these options, we
interviewed budget, legal, and housing finance specialists from OMB and
CBO; housing industry officials from the National Association of Home
Builders, the Mortgage Bankers Association, and the National Association
of Realtors; and we conducted a literature review to identify relevant
studies and legislation. To determine and illustrate the potential
implications of these options, we obtained these officials' views on the
effects of various alternatives and analyzed agency budget and accounting
data.

We assessed the reliability of the data used in our analyses by (1)
reviewing existing information about the systems and the data, (2)
interviewing agency officials knowledgeable about the data, and (3)
examining the data elements (fields) used in our work by comparing known
and/or anticipated values. When inconsistencies were found, we discussed
our findings with agency officials to understand why inconsistencies could
exist. We determined that the data were sufficiently reliable for the
purposes of this report.

Appendix I Scope and Methodology

We conducted our work in Washington, D.C., between January 2004 and
January 2005 in accordance with generally accepted government auditing
standards.

                                  Appendix II
                      FHA and RHS Loan Guarantee Processes

         Figure 4: Loan Guarantee Process for FHA Multifamily Programs

Sources: GAO (analysis); Nova Development (images).

RHS also has separate loan guarantee processes for its Section 502 and
Section 538 programs. For the Section 502 program, as shown in figure 5, a
borrower (homebuyer) applies for a guaranteed loan through an RHS
approved lender. RHS is notified and reserves the required amount of
credit subsidy budget authority. The RHS field office then reviews the
loan documentation and, if the documentation meets RHS's requirements,
obligates credit subsidy budget authority, and issues a commitment.

                                  Appendix II
                      FHA and RHS Loan Guarantee Processes

Figure 6: Loan Guarantee Process for RHS Section 538 Program

Sources: GAO (analysis); Nova Development (images).

Note: Starting in fiscal year 2005, loan applications are accepted and
processed by the field offices. Lenders no longer send applications to
headquarters.

Appendix III

Applicability of Options to Past Program Suspensions

The usefulness of options for delaying or preventing suspensions of FHA's
and RHS's guaranteed loan programs can be considered in light of whether
they would have been applicable to past suspensions. (See table 4.) As
previously noted, the expanded notification options would have provided
additional information on the status of resources for FHA and RHS
guaranteed lending programs and would thus have been applicable to most of
the suspensions since fiscal year 2000. Providing a higher limit on
commitment authority would have increased the amount of commitment
authority available to FHA and, as a result, would have been applicable to
the suspension of programs under FHA's GI/SRI account in fiscal years 2003
and 2004 due to the exhaustion of commitment authority. The option that
would combine the multifamily programs under FHA's GI/SRI account for
credit subsidy purposes would likely eliminate the need for appropriations
of credit subsidy budget authority and therefore would have been
applicable to the suspension of GI/SRI account programs due to the
exhaustion of budget authority in fiscal years 2000 and 2001. The option
that would permit the use of negative subsidies to cover shortfalls in
credit subsidy budget authority would have been applicable to the same
suspensions. In addition, the option that would appropriate advance
funding for credit subsidy costs would have been applicable to the
suspension of programs under FHA's GI/SRI account in fiscal years 2000 and
2001 and the suspension of RHS's Section 502 program in fiscal years 2003
and 2004-all of which were due to the exhaustion of credit subsidy budget
authority. Further, the option to continue or expand currently permitted
practices, such as increasing fees or transferring budget authority, would
have been applicable to or was actually used to delay the same four
suspensions. For example, RHS used its authority to increase fees to delay
suspension of the Section 502 program in fiscal years 2003 and 2004. FHA
could have taken similar steps to help avoid or delay the suspension of
programs under its GI/SRI account in fiscal years 2000 and 2001. Finally,
RHS used its authority to transfer budget authority to delay the
suspension of its Section 502 program in fiscal years 2003 and 2004. If
FHA had the authority to transfer budget authority, this option would have
been applicable to its fiscal year 2000 and 2001 suspensions.

       Appendix III Applicability of Options to Past Program Suspensions

  Table 4: Applicability of Options to Past Program Suspensions, Fiscal Years
                                   2000-2004

Program suspensions due to exhaustion of commitment authority (CA) or
credit subsidy budget authority (CSBA)

FHA GI/SRI account programs RHS Section 502 program

                        FY 2000  FY 2001  FY 2003  FY 2004a FY 2003   FY 2004 
         Options         (CSBA)   (CSBA)    (CA)     (CA)    (CSBA)    (CSBA) 
       Require more                       ✔                   
    notification on CA                                               
Require notification ✔ ✔                   ✔ ✔ 
         on CSBA                                                     
     Provide a higher                     ✔ ✔          
       limit on CA                                                   
Combine multifamily  ✔ ✔                            
         programs                                                    
    under FHA's GI/SRI                                               
       account for                                                   
      credit subsidy                                                 
         purposes                                                    
     Authorize use of   ✔ ✔                            
    negative subsidies                                               
to cover shortfalls                                               
         in CSBA                                                     
Appropriate advance  ✔ ✔                   ✔ ✔ 
       funding for                                                   
credit subsidy costs                                              

Continuing or expanding currently  ✔  ✔   ✔  ✔ 
      permitted practices such as                                   
    increasing fees or transferring                                 
            budget authority                                        

Source: GAO.

Note: ✔ indicates "applicable."

aAs noted previously, FHA suspended the programs under its GI/SRI account
twice in early fiscal year 2004 when it was operating under a series of
continuing resolutions. Under the continuing resolutions, FHA was required
to notify Congress about the status of its commitment authority balances
on a daily or weekly basis.

Appendix IV

Comments from the Department of Housing and Urban Development

Appendix IV
Comments from the Department of Housing
and Urban Development

Appendix V

                    GAO Contacts and Staff Acknowledgments	

GAO ContactsDavid G. Wood, (202) 512-8678 Steven K. Westley, (202)
512-6221

Staff Staff members who made key contributions to this report include Eric
Diamant, Ginger Tierney, Bill Sparling, Patty Hsieh, Barbara Roesmann,

AcknowledgmentsCarlos Diz, Linda Rego, Marc Molino, Jerry Sandau, Dan
Blair, Christine Bonham, Marcia Carlsen, Rachel DeMarcus, and Alison
Martin.

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