Housing Finance
Options to Help Prevent Suspensions of FHA and RHS Loan Guarantee Programs Gao ID: GAO-05-227 March 15, 2005In 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.
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.
GAO-05-227, Housing Finance: Options to Help Prevent Suspensions of FHA and RHS Loan Guarantee Programs
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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:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-227]:
GAO Highlights:
Highlights of GAO-05-227, a report to the Chairman, Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
House of Representatives:
Why GAO Did This Study:
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.
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.
www.gao.gov/cgi-bin/getrpt?GAO-05-227.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-8678 or woodd@gao.gov.
[End of section]
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:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: FHA and RHS Loan Guarantee Processes:
Appendix III: Applicability of Options to Past Program Suspensions:
Appendix IV: Comments from the Department of Housing and Urban
Development:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Summary of FHA and RHS Suspensions, Fiscal Years 1994-2004:
Table 2: Actual and Straight-Line Estimated Commitment Authority
Utilization under FHA's GI/SRI Account, Fiscal Year 2003:
Table 3: Actual and Straight-Line Estimated Commitment Authority
Utilization under FHA's GI/SRI Account, Fiscal Year 2004:
Table 4: Applicability of Options to Past Program Suspensions, Fiscal
Years 2000-2004:
Figures:
Figure 1: Major FHA and RHS Single-Family and Multifamily Loan
Guarantee Programs, as of Fiscal Year 2004:
Figure 2: Amount of Commitment Authority Enacted and Used for RHS's
Section 502 Program, Fiscal Years 1999-2004:
Figure 3: Loan Guarantee Process for FHA Single-Family Programs:
Figure 4: Loan Guarantee Process for FHA Multifamily Programs:
Figure 5: Loan Guarantee Process for RHS Section 502 Program:
Figure 6: Loan Guarantee Process for RHS Section 538 Program:
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:
Letter 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.[Footnote 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.[Footnote 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 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.[Footnote 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.[Footnote 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).
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.[Footnote 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.[Footnote 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
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:
* 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.
* make FHA's commitment authority limit higher, thereby reducing the
potential for program suspensions due to the exhaustion of this
authority.
* 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.
* 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.
* 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:
[See PDF for image]
[End of figure]
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.[Footnote 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.[Footnote 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.[Footnote 9]
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.[Footnote 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.[Footnote 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 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.[Footnote 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.
FHA Suspended Guaranteed 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.[Footnote 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.[Footnote 14]
Table 1: Summary of FHA and RHS Suspensions, Fiscal Years 1994-2004:
FHA:
Date: February 1994[A];
What was suspended: GI/SRI programs with positive subsidy costs;
Programs remained suspended until: OMB released the agency's third
quarter allotment of credit subsidy budget authority in April 1994.[B].
Date: July 26, 2000;
What was suspended: GI/SRI programs with positive subsidy costs;
Programs remained suspended until: the start of the next fiscal year.
Date: April 2001[A];
What was suspended: GI/SRI programs with positive subsidy costs;
Programs remained suspended until: the start of the next fiscal year.
Date: September 16, 2003;
What was suspended: All GI/SRI programs;
Programs remained suspended until: Congress approved a $2 billion
supplemental appropriations bill (Emergency Supplemental Appropriations
Act, 2003, Pub. L. No. 108-83, Title III, § 3606, 117 Stat. 1038
(September 30, 2003)) and enacted a continuing appropriation for fiscal
year 2004 (Pub. L. No. 108-84, 117 Stat. 1042 (September 30, 2003)).
Date: December 2003[A];
What was suspended: All GI/SRI programs;
Programs remained suspended until: Congress provided additional
commitment authority in a subsequent continuing resolution (Pub. L. No.
108-185, 117 Stat. 2684 (Dec. 16, 2003)).
Date: January 14, 2004;
What was suspended: All GI/SRI programs;
Programs remained suspended until: Congress approved the Consolidated
Appropriations Act, 2004 (Pub. L. No. 108-199, 118 Stat. 3 (January 23,
2004)).
Date: RHS.
Date: Fiscal year 1995[A];
What was suspended: Section 502 program;
Programs remained suspended until: the start of the next fiscal year.
Date: Fiscal year 1996[A];
What was suspended: Section 502 program;
Programs remained suspended until: the start of the next fiscal year.
Date: August 27, 2003;
What was suspended: Section 502 program;
Programs remained suspended until: the start of the next fiscal year.
Date: August 24, 2004;
What was suspended: Section 502 program;
Programs remained suspended until: the start of the next fiscal year.
[End of table]
Sources: FHA and RHS.
[A] The agencies were unable to provide us with more specific dates for
these suspensions.
[B] In 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.[Footnote
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.[Footnote 16]
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.[Footnote 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.[Footnote 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.[Footnote 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 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:
[See PDF for image]
[End of figure]
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.[Footnote 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 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.[Footnote 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
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.[Footnote 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 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:
* 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.
* 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.
* 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.[Footnote 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.[Footnote 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 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.[Footnote 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 of loan
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.
Table 2: Actual and Straight-Line Estimated Commitment Authority
Utilization under FHA's GI/SRI Account, Fiscal Year 2003:
Actual cumulative percentage of commitment authority used at month end;
1st Quarter: October: 4.4%;
1st Quarter: November: 7.9%;
1st Quarter: December: 22.1%;
2nd Quarter: January: 30.0%;
2nd Quarter: February: 37.4%;
2nd Quarter: March: 45.5%;
3rd Quarter: April: 54.5%;
3rd Quarter: May: 64.5%;
3rd Quarter: June: 72.8%;
4th Quarter: July: 80.7%;
4th Quarter: August: 91.0%;
4th Quarter: September: 104.0%.
Projected percentage of commitment authority used at fiscal year end
(straight-line estimates based on above);
1st Quarter: October: 52.7%;
1st Quarter: November: 47.4%;
1st Quarter: December: 88.4%;
2nd Quarter: January: 90.0%;
2nd Quarter: February: 89.7%;
2nd Quarter: March: 91.0%;
3rd Quarter: April: 93.4%;
3rd Quarter: May: 96.8%;
3rd Quarter: June: 97.0%;
4th Quarter: July: 96.9%;
4th Quarter: August: 99.2%;
4th Quarter: September: 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 (February 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.
[End of table]
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:
Actual cumulative percentage of commitment authority used at month end;
1st Quarter: October: 9.9%;
1st Quarter: November: 19.0%;
1st Quarter: December: 24.8%;
2nd Quarter: January: 33.0%;
2nd Quarter: February: 41.6%;
2nd Quarter: March: 52.5%;
3rd Quarter: April: 57.3%;
3rd Quarter: May: 64.2%;
3rd Quarter: June: 71.5%;
4th Quarter: July: 78.2%;
4th Quarter: August: 85.9%;
4th Quarter: September: 95.2%.
Projected percentage of commitment authority used at fiscal year end
(straight-line estimates based on above);
1st Quarter: October: 118.2%;
1st Quarter: November: 113.8%;
1st Quarter: December: 99.3%;
2nd Quarter: January: 99.0%;
2nd Quarter: February: 99.9%;
2nd Quarter: March: 104.9%;
3rd Quarter: April: 98.2%;
3rd Quarter: May: 96.3%;
3rd Quarter: June: 95.3%;
4th Quarter: July: 93.8%;
4th Quarter: August: 93.7%;
4th Quarter: September: 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. 108-301, 118 Stat. 1102 (August 9,
2004)). The table does not reflect this increase.
[End of table]
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.[Footnote 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 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 Notifications on the Use of Commitment Authority:
As noted previously, FHA is currently required to notify its
authorizing and appropriations committees when it has used 75 percent
of the commitment 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.[Footnote 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.[Footnote 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.[Footnote 29]
Currently, negative subsidies generated by some of FHA's multifamily
programs are considered as offsetting receipts in the agency's annual
budgets.[Footnote 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 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.[Footnote 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 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. § 1735c) to allow the
use of negative subsidies as budget authority for programs with
positive subsidy costs, which could result in 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.[Footnote 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.
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 Comments:
We 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 [Hyperlink, 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
[Hyperlink, woodd@gao.gov] or Steve Westley at (202) 512-6221 or
[Hyperlink, westleys@gao.gov]. Major contributors to this report are
listed in appendix V.
Sincerely yours,
Signed by:
David G. Wood:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
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.
We conducted our work in Washington, D.C., between January 2004 and
January 2005 in accordance with generally accepted government auditing
standards.
[End of section]
Appendix II: FHA and RHS Loan Guarantee Processes:
FHA's loan guarantee processes are different for its single-family and
multifamily programs. As shown in figure 3, for FHA's single-family
programs, an FHA-approved lender determines a borrower's (homebuyer's)
eligibility for an FHA loan guarantee. If the lender determines that
the homebuyer and the property being financed are eligible, the loan
case file is sent to an FHA field office for review. If the field
office approves and issues the loan guarantee, FHA then records the
amount of commitment authority used and, when appropriate, obligates
credit subsidy budget authority.
Figure 3: Loan Guarantee Process for FHA Single-Family Programs:
[See PDF for image]
Note: Origination refers to accepting mortgage applications, obtaining
employment verifications and credit histories on applicants, ordering
appraisals, and performing other tasks that precede the loan
underwriting process, while underwriting refers to a risk analysis that
uses information collected during origination to decide whether to
approve a loan.
[End of figure]
For FHA's multifamily programs, the process begins when a borrower
(developer) applies for a loan from an FHA-approved lender, who in turn
submits a loan guarantee application to an FHA field office for review
(see fig. 4). If the field office determines that the borrower and the
property being financed are eligible, then the lender underwrites the
loan and submits an application for commitment--the formal agreement by
the government to guarantee the loan once the lender fulfills certain
conditions--to the field office. If the field office approves the
application, FHA then records the amount of commitment authority used
and, when appropriate, obligates credit subsidy budget authority upon
headquarters authorization, after which the field office issues the
commitment.
Figure 4: Loan Guarantee Process for FHA Multifamily Programs:
[See PDF for image]
[End of figure]
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.
Figure 5: Loan Guarantee Process for RHS Section 502 Program:
[See PDF for image]
[End of figure]
As shown in figure 6, for loans guaranteed under the Section 538
program, a borrower (developer) applies for a guaranteed loan through
an RHS-approved lender. RHS selects proposals based on eligibility
requirements and has a field office review the underwriting. The field
office then forwards a request for credit subsidy budget authority to
headquarters, which obligates the authority.
Figure 6: Loan Guarantee Process for RHS Section 538 Program:
[See PDF for image]
Note: Starting in fiscal year 2005, loan applications are accepted and
processed by the field offices. Lenders no longer send applications to
headquarters.
[End of figure]
[End of section]
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.
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):
Options: Require more notification on CA;
FHA GI/SRI account programs: FY 2003: (CA).
Options: Require notification on CSBA;
FHA GI/SRI account programs: FY 2000: (CSBA);
FHA GI/SRI account programs: FY 2001: (CSBA);
RHS Section 502 program: FY 2003: (CSBA);
RHS Section 502 program: FY 2004: (CSBA).
Options: Provide a higher limit on CA;
FHA GI/SRI account programs: FY 2003: (CA);
FHA GI/SRI account programs: FY 2004[A]: (CA).
Options: Combine multifamily programs under FHA's GI/SRI account for
credit subsidy purposes;
FHA GI/SRI account programs: FY 2000: (CSBA);
FHA GI/SRI account programs: FY 2001: (CSBA).
Options: Authorize use of negative subsidies to cover shortfalls in
CSBA;
FHA GI/SRI account programs: FY 2000: (CSBA);
FHA GI/SRI account programs: FY 2001: (CSBA).
Options: Appropriate advance funding for credit subsidy costs;
FHA GI/SRI account programs: FY 2000: (CSBA);
FHA GI/SRI account programs: FY 2001: (CSBA);
RHS Section 502 program: FY 2003: (CSBA);
RHS Section 502 program: FY 2004: (CSBA).
Options: Continuing or expanding currently permitted practices such as
increasing fees or transferring budget authority;
FHA GI/SRI account programs: FY 2000: (CSBA);
FHA GI/SRI account programs: FY 2001: (CSBA);
RHS Section 502 program: FY 2003: (CSBA);
RHS Section 502 program: FY 2004: (CSBA).
Source: GAO.
[A] As 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.
[End of table]
[End of section]
Appendix IV: Comments from the Department of Housing and Urban
Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT:
WASHINGTON, DC 20410-8000:
ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER:
MAR 04 2005:
Mr. David G. Wood:
Director:
Financial Markets and Community Investments:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Wood:
We appreciate the opportunity to comment on the draft GAO Report
Options to Help Prevent Suspensions of FHA and RHS Loan Guaranteed
Programs. Our comments will address the broad issues covered by the
report and the options that the report presents for consideration by
the Congress.
The Department shares the Congress' and GAO's concern that suspension
of the FHA mortgage insurance programs due to the exhaustion of either
the commitment limitations or credit subsidy is disruptive to the
mortgage finance markets and the FHA borrower constituency.
Specifically to avoid this type of disruption, FHA utilizes all
available tools to estimate its projected needs however, as noted by
GAO, these estimates, because of the requirements of the budget cycle,
are prepared nearly two years in advance of the relevant program
activity and therefore changing economic conditions can have
significant impact on their accuracy. FHA also closely monitors the
usage of both the commitment limitation and credit subsidy and reports
to Congress immediately upon reaching specific levels of use or
estimating that available levels may be insufficient to accommodate
program demand. In spite of the Department's efforts, program activity
has been suspended several times in recent years due to the exhaustion
of commitment authority or credit subsidy.
Therefore, GAO has made several suggestions for actions by Congress
that could possibly reduce the likelihood of such program suspensions
occurring in the future. While the Department appreciates the GAO's
effort to explore possible methods for avoiding program disruptions, we
do see difficulties with each of the suggested alternatives.
Expanding FHA Notifications on the Use of Commitment Authority. The GAO
cites as a specific example fiscal year 2003 where FHA, as required by
law, notified Congress in June that it would soon exhaust 75 percent of
its available commitment authority. GAO suggests that a subsequent
notification in August that FHA had used 90 percent of its limitation
might have been helpful. While, we agree that additional notifications
concerning the use of the commitment level would constitute negligible
administrative burden, we question the presumption that the Congress
did not take action to increase the commitment level because of the
lack of timely notice of the pace of usage.
Establishing a Higher Limit on FHA Commitment Authority. The GAO
suggests that Congress could enact a commitment limitation so large as
to virtually assure that it would never be breached. We agree that this
alternative would largely eliminate the possibility of a program
suspension due to the exhaustion of commitment authority.
Combining Multifamily Programs under FHA's GI/SRI Account for Credit
Purposes. This proposal is inconsistent with Credit Reform which
requires that credit subsidy be determined and recorded at the lowest
possible level.
Authorizing Use of Negative Subsidies to Cover Shortfalls in Credit
Subsidy Budget Authority for FHA. As the GAO notes, the negative
subsidies generated by FHA are currently considered offsetting
receipts. These receipts significantly exceed the credit subsidy
currently required by FHA programs. Therefore, if all negative subsidy
generated by FHA were restricted to this use, this alternative would
severely and artificially restrict the Department's available budget
authority. Conversely, if only the portion required to cover the
anticipated positive credit subsidy needs were set aside, the program
would still be subject to suspension if that level were reached.
Appropriating Advanced Funding for Credit Subsidy Costs at FHA and RHS.
This is only a single time solution because the year from which the
funding was borrowed would be at risk for suspension due to inadequate
credit subsidy.
Permitted Practices at FHA and RHS such as increasin:
Continuin Fees or Transferring Budget Authority. GAO notes that FHA
does not have the authority to transfer Budget Authority but could
possibly reduce credit subsidy utilization per case by raising fees or
premiums. We agree that this could possibly extend the coverage of
available credit subsidy by some amount.
Again, the Department appreciates the opportunity to comment on the
draft report and will be pleased to work with the GAO and the Congress
on any proposals which will allow the FHA to operate more effectively.
Sincerely,
Signed for:
Margaret A. Young,
Deputy Assistant Secretary For Finance and Budget:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
David G. Wood, (202) 512-8678;
Steven K. Westley, (202) 512-6221:
Staff Acknowledgments:
Staff members who made key contributions to this report include Eric
Diamant, Ginger Tierney, Bill Sparling, Patty Hsieh, Barbara Roesmann,
Carlos Diz, Linda Rego, Marc Molino, Jerry Sandau, Dan Blair, Christine
Bonham, Marcia Carlsen, Rachel DeMarcus, and Alison Martin.
(250172):
FOOTNOTES
[1] A 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.
[2] See GAO, Multifamily Housing Finance: Funding FHA's Subsidized
Credit Programs, GAO-02-323R (Washington, D.C.: February 1, 2002).
[3] Although "commitment authority" is not a standard budgetary term,
we are using it for ease of presentation.
[4] The 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. §
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. § 661c(b)).
[5] Only programs with positive subsidy costs require credit subsidy
budget authority.
[6] For 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. § 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.
[7] HUD 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.
[8] The 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).
[9] The 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.
[10] RHS defines a single-family home as a property with one living
unit.
[11] 2 U.S.C. § 661c(a).
[12] Completely 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. § 1341).
Therefore, the agencies suspend these programs before the balance of
their budget authority reaches zero.
[13] We use the phrases "suspended the issuance of loan guarantees" and
"program suspension" interchangeably throughout the report.
[14] In 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.
[15] A 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.
[16] Pub. L. No. 108-199, 118 Stat. 3 (January 23, 2004).
[17] In 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).
[18] The Secretary of Agriculture has the authority under 7 U.S.C. §
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.
[19] A 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.
[20] The FHA Multifamily Loan Limit Adjustment Act of 2003 (Pub. L. No.
108-186, Title III, § 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.
[21] 12 U.S.C. § 1721 note.
[22] For 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. § 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. §
3565.5).
[23] FHA 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.
[24] As noted previously, FHA operated under a series of continuing
resolutions for almost the first 4 months of fiscal year 2004.
[25] Because 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.
[26] In contrast to FHA, RHS has a single accounting system to monitor
obligations of credit subsidy budget authority for both of its
programs.
[27] FHA'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.
[28] 2 U.S.C. § 611c(a).
[29] The 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.
[30] Offsetting receipts are collections that are deducted from gross
budget authority and outlays by agency, rather than added to receipts.
[31] Specifically, 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.
[32] For 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.
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