oversight

Legislation Recommended To Reduce Losses of Two Insured Loan Funds of the Farmers Home Administration

Published by the Government Accountability Office on 1971-07-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Legislation Recommended
To Reduce Losses Of
Two Insured Loan Funds Of
The Farmers Home Administration
                             B-114873




Department of Agriculture




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                         COMPTROLLER     GENERAL     OF      THE      UNITED    STATES
                                       WASHINGTON.    013.         20548




     B-114873




     To the      President       of the Senate     and the
Cl
,    Speaker       of the     House   of Representatives

              This      is our report     on legislation       recommended                         to re-
     duce losses          of two insured    loan funds of the Farmers                               Home
     Administration,           Department      of Agriculture.

                Our     review   was made pursuant    to the Budget                             and Ac-
     counting         Act,   1921 (31 U.S.C. 53), and the Accounting                               and
     Auditing         Act of 1950 (31 U.S.C.    67).

              Copies   of this report  are being    sent to the                             Director,
     Office    of Management      and Budget;   to the Secretary                                of Agri-
     culture;    and to the Secretary     of the Treasury.




                                                      Comptroller                     General
                                                      of the United                   States




                                50TH   ANNIVERSARY                   1921-     1971
I
                                                                                         :
I

i
 I   COMPTROLLER
               GENERAL'S                  LEGISLATION RECOMMENDED   TO REDUCELOSSES
I    REPORT
          TO THE CONGRESS                 OF TWO INSURED LOAN FUNDS OF THE FARMERS
I
I                                       J HOMEADMINISTRATION        333
I                                      z/ Department of Agriculture   B-li4873 /skc2,
I
I                                       i
I
I    DIGEST
I    D-B---

     WHYTHEREVIEWWASMADE
           The Farmers Home Administration     (FHA) is authorized to make loans from
           the Agricultural    Credit Insurance Fund and the Rural l-lousing Insurance
           Fund to individuals    and to public and nonprofit assoc.iations for vari-
           ous purposes.     As required by law, FHA sells the borrowers' loan notes
           to investors on a guaranteed basis and uses the proceeds to finance
           additional   loans.

           Because of the rapid increase in loans (from $202 million  in 1964 to
           $895 million  in 1969) and the sizable operating losses ($704 million)
           incurred in recent years for the two funds, the General Accounting Of-
           fice (GAO) made a review to determine (1) the reasons for the losses
           and (2) the ways in which f&We losses could be kept to a minimum.
           (See p. 5.)


     FIiViX-NGS
              ANDCONCLUSIONS
           Reasons for opei?atiqy Zosses                   .
           Under money-market conditions    prevailing  in the last few years, the
           iHA interest  rates on loans to borrowers have been significantly    less
           than the rates at which FHA sells the borrowers' loan notes to inves-
           tors.   This difference  in interest   rates has been the principal cause
           of the operating losses reported for the two funds in recent years.
            (See p. 10.)


           Financing loan progpms through
           Treasury borrowings rather than
           through loan note sa’tes
           Future annual operating losses of both funds could be minimized if FHA
           could finance new loans through borrowings from the Treasury rather
           than through sales of borrowers' loan notes to investors.      The sale of
           borrowers' loan notes9 however, is required by legislation     establishing
           the loan programs-- the Consolidated Farmers Home Administration     Act of
           1961 and the Housing Act of 1949.

     Tear Sheet
                      J



                                                1
 To determine the additional   interest  costs which the Government would
 incur by financing the loan programs through the sale of borrowers'
 loan notes rather than through borrowings from the Treasury, GAO com-
 pared the guaranteed interest    rates on a sale of notes totaling
 $350 million  in January 1970 with the interest yields on marketable
 Treasury obligations   of comparable maturity periods.   If the notes had           I
 been financed through borrowings from the Treasury, the Government could            1
 have saved $17.5 million.                                                           I
                                                                                     I
_ FHA plans to market $5.2 billion   of borrowers' loan notes in fiscal
  years 1971 and 1972. The-additional           interest costs which the
  Government will.incur  by not financing these loans through borrowings
  from the Treasury will be substantial.     (See p.17.)

 Another reason for financing     FHA's insured loan programs through borrow-        I
 ings from the Treasury is that such programs then would be subjected                I
                                                                                     I
 to the same budget discipline     and appropriation processes accorded              I
 other Federal activities     whose budget requests are shown as cash out-
 lays in the Federal budget. GAO believes that the public interest       is
 best served when Government programs are financed through the appro-                I
                                                                                     I
 priations   process, because of the periodic congressional scrutiny and
 the affirmative    congressional action inherent in that process.    (See p. 23.)   I
                                                                                     I
 Interest     rates chmged bomowers
 A further reduction in operating losses     of the Agricultural  Credit In-
 surance Fund could be made if FHA were     authorized to charge interest
 on loans at rates more closely related     to the Government's cost of fi-
 nancing the loans and to the borrowers'     abilities  to pay. Pertinent
 legislation  requires that the interest    rate charged to borrowers on
 loans made from this fund be 5 percent     or less per annum. (See p.16.)

 The legislative    history of the act establishing    the Agricultural    Credit
 Insurance Fund does not indicate the intent of the Congress in estab-
 lishing   the 5-percent interest  ceiling.    This rate was higher than the
 interest   rates paid to investors who purchased FHA loan notes from 1961
 to 1965. Since 1965 the 5-percent rate has been significantly          less
 than the rates which FHA has paid to investors on loan notes.          (See p. 18
 and graph on p. 19.)

 FHA officials     said that many borrowers could pay interest     on loans made
 from the Agricultural      Credit Insurance Fund at rates in excess of the
 statutory     rate of 5 percent.    For example, FHA income statistics    on
 borrowers indicated that, in fiscal year 1970, the income levels for
 about 50 percent of the borrowers of 5-percent farm-ownership and rec-
 reation loans were similar       to the income levels of FHA borrowers who
 paid interest     at higher rates for certain types of rural housing loans.
 6=i,p.      20 to 22.1
     ( (
      “, .J
       i



                                      2
              I
             I
             I
             I
  I
  I                     Until fiscal year 197O.FHA set its interest       rates on loans to public
   I                    bodies for water and sewer systems at the same rates that the Econemic
’ I                     Development Administration    charged to borrowers of public works loans
  I
  I                     for development of water and sewer facilities.          In 7970, when this
  I                     Administration   increased its interest   rate on public works loans to
  I
  I                     5-3/4 percent2 FHA was prevented by the statutory         ceiling on its interest
  I                     rate of 5 percent from making a similar      change. For fiscal year 1971
  I                     the Economic Development Administration"s      interest    rate is G-3/4 per-
  I
                        cent.    (See pa 21.)
          I
          I
          I             flked for   improved cost disclosure
          I
          I              FHA's financial    statements furnished to the Treasury Department and the
          I
          I             budget justifications      presented to the Congress relating   to the two funds
          I             do not show the full costs of administering       the loan programs and do not
          I
          I             show the interest      cost on the Government's investment in the two funds.
          I             .(See p0 28.)
          I
         I
          I             Further, FHA budget justifications   do not show the substantial     interest
          I
         I
                        costs on sales of borrowers' loan notes that FHA has committed the Gov-
          I             ernment to pay in future years.    For the loan notes of $3.8 billion       held
         I
         I
                        by investors at March 31, 1970, FHA estimated that, if the investors held
         I              the loans for the full nonkedemption periods, the interest     paid to inves-
         I              tors would be about $443 million   in excess of the interest   collected      from
         I
         I              the borrowers.   (See p. 31.)
         I
         I
         I
         I        RECOMMENDAT~i2&5 OR SUGGESTIONS
       I
       I
      I                 GAD's recommendations for minimizing    operating losses of the two funds,
      I                 which would require changes in existing    legislation,   are discussed un-
      I
      I                 der the matters for consideration    by the Congress.    With regard to f9-
      I                 nancial statements and budget presentations      for the two funds, FHA
      I
      I
                        should provide for
      I

     I
      I                    --including  in its   financial     statements   all       costs            related           to the loan
      I                       programs and
      I
     I
     I                     --disclosing   in its annual budget justifications, the commitments of
     I                        Government resources which the loan sales program has created and
     I
     I
                              the current yields which FHA is required to guarantee investors who
     I                        purchase such loans.   {See p. 33.)                             I
     I
     I
   I
  I               AGEiK’Y ACT<OiW AND VhPZ’SOLV2D ISSUES
  I
  I
  I                     FHA, the Treasury Department, and the Office of Management and Budget
  I
  I
                        agreed or did not disagree wl'th GAO's recotnnendations. Each of the three
  I
 I
 I
  I               Tear Sheet
 I
 I
 I
 I
 I
                                                                  3
 1
  I
 I
                                                                                  I    -   --------A             -----     -..------   -..   ___..-...   “_
   agencies made certain observations regarding the method of financing
   FHA's insured loan programs through the sale of borrowers' loan notes,
   Comments of each agency are presented starting on page 23 and are
   followed by GAO's evaluation.


MATTERS
      FOR CONSIDERATION
                     BY TKECONGRESS
   Because of the potential      annual interest    savings that could.be possible
   through the financing    of   FHA loan programs through Treasury borrowings,
   the Congress may wish to      amend the legislation     which requires FHA to
   finance its insured loan      programs through sales of borrowers' loan
   notes.

   Also, the Congress may wish to remove the E&percent interest    limitation
   and provide that the interest   rates be based on the market yields on
   outstanding Government obligations   of comparable maturities  and be ad-
   justed in accordance with the borrowers' abilities   to pay.


                                                                                     I




                                        4
                         Contents
                                                                  Page

DIGEST                                                              1

CHAPTER

  1       INTRODUCTION                                              5
              Organization  of FHA                                  6
              Loans made from the Agricultural Credit
                Insurance Fund                                      6
              Loans made from the Rural Housing In-
                surance Fund                                        8

  2       FINANCING OF LOANS FROM THE AGRICULTURAL
          CREDIT INSURANCE AND RURAL HOUSING INSURANCE
          FUNDS                                                   10
              Sale of borrowers'       loan notes                 10
              Operating losses                                    14
              Ways to minimize operating         losses           16
                   Cost of financing       through Treasury
                      borrowings    rather than through
                      loan sales                                  16
                   Interest    rates charged to borrowers         18
              Conclusions                                         23
              Agency comments and GAO evaluation                  23
                   FHA comments                                   24
                   Treasury Department comments                   25
                   Office of Management and Budget com-
                      ments                                       25
                   GAO evaluation                                 25
              Matters for consideration         by the Congress   26

  3       NEED FOR IMPROVED COST DISCLOSURE                        28
             Administrative    costs                               28
              Interest   on Government investment                  30
              Future interest   liability  on loan nates
                 sold                                             31
             Conclusions                                          32
             Recommendations to FHA Administrator                 32
             Agency comments                                      32

  4       SCOPE OF REVIEW                                         34
APPENDIX                                                              Page

        I   Letter   dated January 27, 1971, from the Ad-
              ministrator,   Farmers Home Administration,
               Department of Agriculture,   to the General
              Accounting Office                                        37

   II       Letter    dated January 5, 1971, from the Under
               Secretary    of the Treasury for Monetary Af-
               fairs,   Treasury Department,   to the General
               Accounting Office                                       40

 III        Letter  dated February 19, 1971, from the Dep-
              uty Director,  Office of Management and Bud-
              get s to the General Accounting  Office                  43

   Iv       Principal    officials       of the Department of Ag-
               riculture    and the      Farmers Home Administra-
               tion responsible        for administration   of mat-
               ters discussed in         this report                   45

                               ABBREVIATIONS

ACIF        Agricultural      Credit    Insurance      Fund

EDA         Economic Development         Administration

            Farmers Home Administration

GAO         General    Accounting      Office

RHIF        Rural   Housing    Insurance        Fund
COMPTROLLER
          GENERAL'S                LEGISLATION RECOMMENDED   TO REDUCELOSSES
REPORT
     TO THECONGRESS                OF TWO INSURED LOAN FUNDS OF THE FARMERS
                                   HOMEADMINIS’RATION
                                   Department of Agriculture   R-174873


DIGEST
M----m

WHYTHERE?'IEWWAS.
               MADE

    The Farmers Home Administration      (FHA) is authorized to make loans from
    the Agricultural     Credit Insurance Fund and the Rural Housing Insurance
    Fund to individuals     and to public and txnprofit    associations for vari-
    ous purposes.     As required by law, FHA sells the borrowers' loan notes
    to investors on a guaranteed basis and uses the proceeds to finance
    additional    loans.

    Because of the rapid increase in loans (from $202 million  in 1964 to
    $895 million  in 1969) and the sizable operating losses ($104 million)
    incurred in recent years for the two funds, the General Accounting Of-
    fice (GAO) made a review to determine (1) the reasons for the losses
    and (2) the ways in which future losses could be kept to a minimum.
    (See p. 5.)


FINDINGSANDCONCLUSIONS
    Reasons for operating Zosses
    Under money-market conditions    prevailing   in the last few years, the
    FHA interest  rates on loans to borrowers have been significantly     less
    than the rates at which FHA sells the borrowers' loan notes to inves-
    tors.   This difference  in interest    rates has been the principal cause
    of the operating losses reported for the two funds in recent years.
    (See p. 10.)


    F<rumcing loan programs through
    Treasury borrowings rather than
    through loan note sables
     Future annual operatir;g losses of both funds could be minimized if FHA
     could finance new loans through borrowings from the Treasury rather
     than through sales of borrowers' loan notes to investors.      The sale of
     borrowers' loan notes, however, is required by legislation     establishing
     the loan programs-- the Consolidated Farmers Home Administration     Act of
     1961 and the Housing Act of 1949.
To determine the additional   interest costs which the Government would
incur by financing the loan programs through the sale of borrowers'
loan notes rather than through borrowings from the Treasury, GAO com-
pared the guaranteed interest    rates on a sale of notes totaling
$350 million  in January 1970 with the interest yields on marketable
Treasury obligations   of comparable maturity periods.   If the notes had
been financed through borrowings from the Treasury, the Government could
have saved $17.5 million.

FHA plans to market $5.2 billion   of borrowers' loan notes in fiscal
years 1971 and 1972. The-additional           interest costs which the
Government will incur by not financing these loans through borrowings
from the Treasury will be substantial.     (See p.17.)

Another reason for financing FHA's insured loan programs through borrow-
ings from the Treasury is that such programs then would be subjected
to the same budget discipline      and appropriation processes accorded
other Federal activities      whose budget requests are shown as cash out-
lays in the Federal budget. GAO believes that the public interest         is
best served when Government programs are financed through the appro-
priations    process, because of the periodic congressional    scrutiny and
the affirmative     congressional action inherent in that process.     (See p. 23.)

Interest   rates charged borrowem
A further reduction in operating losses     of the Agricultural  Credit In-
surance Fund could be made if FHA were     authorized to charge interest
on loans at rates more closely related     to the Government's cost of fi-
nancing the loans and to the borrowers'     abilities  to pay. Pertinent
legislation  requires that the interest    rate charged to borrowers on
loans made from this fund be 5 percent     or less per annum. (See p.16.)

The legislative   history of the act establishing    the Agricu7tural        Credit
Insurance Fund does not indicate the intent of the Congress in            estab-
lishing   the 5-percent interest ceiling.    This rate was higher       than the
interest   rates paid to investors who purchased FHA loan notes         from 1961
to 1965. Since 1965 the 5-percent rate has been significantly             less
than the rates which FHA has paid to investors on loan notes.             (See p. 18
and graph on p. 79.)

FHA officials    said that many borrowers could pay interest     on loans made
from the Agricultural     Credit Insurance Fund at rates in excess of the
statutory   rate of 5 percent.     For example, FHA income statistics    on
borrowers indicated that, in fiscal year 1970, the income levels for
about 50 percent of the borrowers of 5-percent farm-ownership and rec-
reation loans were similar      to the income 7evels of FHA borrowers who
paid interest   at higher rates for certain types of rural housing loans.
(See pp. 20 to 22.)




                                     2
   Until fiscal year 1970 FHA set its interest       rates on loans to public
   bodies for water and sewer systems at the same rates that the Economic
   Development Administration    charged to borrowers of public works loans
   for development of water and sewer facilities.          In 1970, when this
   Administration   increased its interest   rate on public works loans to
   5-3/4 percent, FHA was prevented by the statutory         ceiling on its interest
   rate of 5 percent from making a similar      change. For fiscal     year 1971
   the Economic Development Administration's      interest    rate is 6-3/4 per-
   cent.    (See p* 21.)

   Need for improved cost discZosure
   FHA's financial     statements furnished to the Treasury Department and the
   budget justifications      presented to the Ccngress relating   to the two funds
   do not show the full costs of administering       the loan programs and do not
   show the interest      cost on the Government's investment in the two funds.
   (See p. 28.)

   Further, FHA budget justifications   do not show the substantial    interest
   costs on sales of borrowers' loan notes that FHA has committed the Gov-
   ernment to pay in future years. For the loan notes of $3.8 billion         held
   by investors at March 31, 1970, FHA estimated that, if the investors held
   the loans for the full nonredemption periods, the interest     paid to inves-
   tors would be about $443 million   in excess of the interest   collected     from
   the borrowers.   (See pa 31.)


RECOIkDlENDATIONS
              ORSUGGESTIONS
   GAO's recommendations for minimizing    operating losses of the two funds,
   which would require changes in existing    legislation,   are discussed un-
   der the matters for consideration    by the Congress. With regard to fi-
   nancial statements and budget presentations      for the two funds, FHA
   should provide for

     --including  in its   financial   statements   all   costs   related   to the loan
        programs and
     --disclosing   in its annual budget justifications, the commitments of
        Government resources which the loan sales program has created and
        the current yields which FHA is required to guarantee investors who
        purchase such loans.   (See p. 33.)


AGENCY
     ACTIONSAND UNRESOLVED
                        ISSUES
   FHA, the Treasury Department, and the Office of Management and Budget
   agreed or did not disagree with GAO's recorrnnendations. Each of the three
   agencies made certain observations regarding the method of financing
   FHA's insured loan programs through the sale of borrowers' loan notes.
   Conments of each agency are presented starting on page 23 and are
   followed by GAO's evaluation.


J$!'TERSFORCONSIDERATION
                      BP TBE CONGRESS
   Because of ine potential   annual interest    savings that could be possible
   through the financing of   FHA loan programs through Treasury borrowings,
   the Congress may wish to   amend the legislation     which requires FHA to
   finance its insured loan   programs through sales of borrowers' loan
   notes.

   Also, the Congress may wish to remove the 5-percent interest    limitation
   and provide that the interest   rates be based on the market yields on
   outstanding Government obligations   of comparable maturities  and be ad-
   justed in accordance with the borrowers' abilities   to pay.
                                 CHAPTER 1

                               INTRODUCTION

       The Farmers Home Administration        makes what are termed
"insured 10an.s'~ from the Agricultural         Credit Insurance Fund
(ACIF) and the Rural Housing Insurance Fund (RHIF) to indi-
viduals    and to public and nonprofit       associations    in rural
areas for various purposes.         Thir: review was directed      to-
ward determining       (1) the reasons for the funds' sizable
operating    losses in recent yearso (2) ways in which future
losses could be kept to a minimum, and (3) the adequacy of
information     presented in financial      statements and budget
presentations     relating    to the cost of operating     the loan
programs.

      As required   by applicable       legislation,      FHA sells bor-
rowers'   loan notes to investors         on a guaranteed basis and
uses the proceeds of the sales to finance additional                   loans
through the two funds.        Investors     may   have   FHA   repurchase
the loans after specified        nonredemption       periods,     and FHA
may either resell     or retain    the loan notes.          FJJA  makes   the
loans, collects    principal     and interest       payments from the
borrowers , performs all other loan-servicing               functions,      and
absorbs all losses on the loans,

       Under existing     legislation    FHA has authority    to bor-
row from the Treasury,         subject to limitations     imposed by the
Secretary    of Agriculture,       to pay obligations   of the funds
when the proceeds of loan sales and the repayment of loans
and interest    thereon are insufficient         to meet such obliga-
tions.

       Loans made by FHA from the two funds have increased
more than fourfold    in 6 years-- from about $202 million      in
1964 to about $895 million     in 1969. At March 31, 1970, in-
vestors held about $3,8 billion      of borrowersv   loan notes,
At that date FHA had recorded accumulated net losses total-
ing about $104 million    for the two funds.      The accumulated
net losses were the result     of sizable operating     losses in
fiscal   years 1968-70,




                                       5

                                                                                  h
ORGANIZATION OF FHA

        Under the direction       of an Administrator,      F'HA's head-
quarters    office    in Washington,     D.C., is responsible       for (1)
determining      overall    policy within    the framework of laws en-
acted by the Congress, (2) issuing operating              instructions,
(3) controlling       budgets, and (4) directing       the technical
training    of field     staffs.

       FHA maintains 41 State offices       and 1,742 county offices
which serve the 50 States, the District         of Columbia, Puerto
Rico, and the Virgin    Islands.    Each FHA State office           is
headed by an FHA State Director      who is responsible          for all
program operations   within   his territorial      jurisdiction.
The FHA county offices,     each under the supervision           of a
county supervisor,   are located to serve all agricultural
counties.

        FHAss fiscal,   business management, and accounting        ser-
vices are carried      out centrally    by about 500 employees at
the Finance Office in St. Louis, Missouri.            The Director   of
the Finance Office--under       the guidance of the Assistant       Ad-
ministrator     for Management-- is responsible     for the design,
installation,      and maintenance of FHA's accounting       and data
processing    system and for related      financial  and reporting
functions,      He is responsible    also for processing     note sales
and repurchases.

      The Director   of the Budget Division,   under the Assis-
tant Administrator    for Management, is responsible      for annual
budget presentations     within  the budgetary contraints    deter-
mined by the Secretary      of Agriculture.

LOANS MADE FROM THE AGRICULTURAL
CREDIT INSURANCE FUND

       The Consolidated   Farmers Home Administration              Act of
1961 (7 U.S.C. 1921) authorizes           FHA to make loans to indi-
viduals,   who are unable to obtain credit            elsewhere at rea-
sonable rates and terms, for the acquisition               of farmland and
buildings,    improvement  and     repair   of  farm   structures,     devel-
opment of recreational     facilities,       and improvement of farm-
land through soil and water conserving             practices.       The act
provides   that the loans be repaid in 40 years or less and

                                     6
bear interest   at the rate of 5 percent or less                    per annum,
The loans may not be made if they increase the                      borrower's
total  indebtedness   against the. farm or other                   security    to
more than $100,000 or the normal value of the                      security    prop-
erty.

      The act authorizes.F'HA       also to make loans to public
and nonprofit   associations      for the development or improve-
ment of water, sewer,      recreational,    and irrigation  facili-
ties and for the acquisition         and development of grazing
land.   The loans must be

      --made at interest           rates        of 5 percent   or less,

      --made only when FHA determines    that the associations
         are unable to obtain credit  elsewhere at reasonable
         rates and terms,

      --limited      so that      the principal  loan indebtedness  and
          grant    assistance       not exceed $4 million  for an associ-
          ation,    and

     --repaid       within      40 years.

     A summary of the various                   types   of loans made in fiscal
year 1970 from ACIF follows.

                    Loan program                               Amount

        Farm-ownership                                      $256,490,900
        Recreation--individuals                                1,211,180
        Soil and water--individuals                            4,047,640
        Associations                                          94,249,920

                Total                                       $355,999,640

      Proposed legislation    introduced     in the 92d Congress
(H.R. 3141 and S. 1806) would provide FHA with authority            to
make farm operating     loans from ACIF.       Operating   loans now
are financed with Treasury borrowings          and are made out of
FHA's Direct Loan Account,      which  would    be abolished under
the proposed legislation,       FHA plans to make $275 million
of farm operating    loans in fiscal     year 1972.


                                            7
    LOANS MADE FROM THE RURAL
    HOUSING INSURANCE FUND

           Title V of the Housing Act of 1949 (42 U.S.C. 1472)
    authorizes    F'HA to make loans to rural residents,     who are un-
    able to obtain credit     elsewhere at reasonable rates and
    terms, for the construction,      improvement, alteration,    re-
    pair,   or replacement   of rural housing and for the purchase
    of the necessary land as a site for such housing.          The act
    provides that the loans be repaid in 33 years or less and
    that interest    rates:

             --For borrowers with low or moderate incomes be based
                on a statutory      formula that ties the interest     rate
                to interest    yields on marketable   Government obliga-
                tions but, depending on the borrowers'       incomes, may
                be reduced to as low as 1 percent.        The interest      rate
                for fiscal    year 1971 is 7-l/4 percent.

             --For borrowers with above moderate incomes be equal
                to the charges for mortgages insured by the Federal
                Housing Administration  under section 203 of the Na-
                tional  Housing Act (12 U.S.C. 1709).  That rate was
                8-l/2 percent in September 1970 and by April 1971 was
                7 percent.

             The 1949 act (42 U.S.C. 1484) also authorizes       FHA to
    make     loans to farmers or to public or nonprofit      associa-
    tions      for housing and related   facilities   for domestic farm
    labor.        The act provides that these loans be repaid in 33
    years      or less and bear interest    at a rate of 5 percent or
    less     per annum.

          The 1949 act (14 U.S.C. 1485) further      authorizes   F'HA
    to make loans to individuals     or associations   for construct-
    ing, improving,   or purchasing rural rental     and cooperative
    housing for rural residents,      The act provides also that
    these loans be repaid in 50 years or less, with interest
    rates to vary in the same way as those charged low-to-
    moderate-income   persons receiving   rural housing loans.

         Following       is a summary of the various        types   of loans
    made in fiscal       year 1970 from RHIF.


4
                                          8
    Loan profzram              Amount

                            $751,013,550
Rural housing                  1,549,260
Farm labor housing            27.132.790
Rural rental  housing

    Total                   $779,695,600




                        9
                                    CHARTER2

                FINANCING OF LOANS FROM THE AGRICULTURAL

           CREDIT INSURANCE AND RURAL HOUSING INSURANCE FUNDS

              FHA sells borrowers1 loan notes from ACIF and RHIF to
      investors     at interest  rates that are higher than the inter-
      est rates that the Government would have to pay if additional
      loans were financed through Treasury borrowings.        The dif-
      ferences in these interest       rates are large enough to signif-
      icantly    increase the cost to the Government of financing      new
      loans.

             In addition,   under money-market conditions       prevailing
      in recent years, the FHA interest        rates on loans made to
      borrowers have been significantly        less than the interest
      rates at which FHA sells the borrowers'          loan notes to in-
      vestors.    This difference   in interest     rates has been the
      principal   cause of the operating     losses reported     for the two
      funds in recent years.

            The following      sections discuss the financing       of the
      loan programs conducted through the two funds, reasons for
      the operating    losses in recent years, and ways in which fu-
      ture operating     losses could be minimized.        Such changes to
      minimize operating      losses would require    legislation     by the
      Congress, since the sale of borrowers"        loan notes to inves-
      tors and the maximum interest        rates FHA can charge borrowers
      on loans are provided for in legislation          authorizing    the
      loan programs.

      SALE OF BORROWERSLOAN NOTES

              Section 309 of the Consolidated Farmers Home Adminis-
      tration    Act of 1961 (7 U.S.C. 1929) and section 517 of
      title    V of the Housing Act of 1949 (42 U.S,C. 1487) require
pr'   FHA to sell the borrowers ) loans made from ACIF and RHIF.
      The proceeds of such sales are used to finance new loans.
            FHA sells the borrowers ' loan notes to investors         on a
      guaranteed-repayment  basis at whatever interest     rates      are
      necessary to make the notes attractive    to investors,


                                        10
    regardless of the rates charged the borrowers. The rates
    of interest on loans sold to investors vary according to
    money-market conditions.   Since 1965 these rates generally
    have been higher than the interest rates charged to the
    borrowers. The following table shows the interest rates
    charged to borrowers and the interest rates at which bor-
    rowers' loan notes were sold to investors as of January 1970
    and January 1971.

                                                      January      1970                                     January      1971
                                                                Interest    rates                                     Interest   rates
                                   Interest     rates            on loans sold            Interest     rates          on loans sold
                                    charged FHA                    to investors            charged EWA                 to investors
         TYDe of loan                 borrowers                       (note a)               borrowers                     (note a>
    Farm-ownership                            5%                                                 5%
    Soil and water                            5                                                  5
    Labor housing                             5            S-1/2% 1 to 2 yrs.                    5               6%          3 to 4 yrs.*
    Rural rental    housing              1 to 6-l/4      . S-518   3 to 5 "                 1 to 7-l/4         b 6-l/2       5to   9 "
      II housing--low       to                             S-3/4  10 to 25 "                                     7          10 to 25 "
      moderate incomes                   1 to 6-l/4                                         1 to 7-l/4
    Rural housing--above
      moderate incomes                         a-112                                                7-l/2

    aRxcludes   loans   sold     under     block-sale      contracts        discussed   on pages    12 and 13.



          Of borrowers' loan notes of $5.1 billion   sold from fis-
    cal year 1959 to March 31, 1970, about $4.1 billion were
    sold through orders received at FHA's Finance Office and
    county offices.    Not all administrative  costs associated
    with the sales of loan notes by the Finance Office and county
    offices are identified    separately in FHA's accounting rec-
    ords, and FHA has not developed estimates of such c0sts.l
5   Sales of the remaining $1 billion were arranged by the FHA
    headquarters office.    Sales by the headquarters office--all
    of which occurred since 1965--involved the following interest
    rates and other costs:


    1 See our comments on page 28 pointing out that FHA, in the
     design of its accounting system, should provide for the al-
     location of administrative costs to its various loan pro-
     grams.




                                                                       11
                        Period    Amount            AIlllUal       Other cost--
       Method          of sales (millions)     interest    rates      fees
By agmt                1966-68      $500      4-314% to 6-l/2%     $    545,000
By competitive  bids   1966-69        55      Various
To Federal National
  Mortgage As sn *      1969            100   7-3/4
To aderwriter
  syndicate             1970            350   8-7/8 to 8-9/10       1,500,000

      The sale of lpan notes totaling $350 million in January
1970 was made to an underwriter syndicate made up of 76
pr&nary security dealers throughout the United States. Under
the purchase agreements the syndicate purchased loan notes
tMaling $200 million,to   be held for 5 years and loan notes
tmtaling $150 million   to be held for 10 years, at a dis-
eomt which provided the syndicate with a fee of about
$1.5 million.   The purchase agreemat provided for the syn-
dicate to sell the loan notes to investors at annual inter-
est rates of 8-T/8 percent for the 5-year holding period and
of S4'SO percent for the IO-year holding period.
     ti pxxrchase agreement provided also that all principal
repazents collected on the loans be reinvested in other F'JU
lm notes, to maintain a fairly constant dollar investment
over the fixed 5- and lo-year holding periods.   A custodian
for the syndicate mainta&ns physfcal possession of the loan
notes which may be disposed of by the investorsat    will.
       Aceordfng to YFHA  officials,    most sales of loan notes
in fiscal years 1971 and 1972 will be marketed through block
sales to underwriter syndicates.         FHA's budget justifications
for fiscal years 1971 and 1972 indicate that sales of loan
notes will total about $2.9 billion        in fiscal year 1971 and
about $2.3 billion     in fiscal year 1972. The following table
shows the terms and conditions under which FYA has made ad-
ditional block sales of loan notes since January 1970.
                                 Annual     Specified     Syndicate
 Da.tze0-f      Amount         in"erest      holding         fees
    sale       (millions)         5ate       period f (millions)
                   $300          B-5/8%         15 years               SL4
                   $300          7              10 years               $lA



                                   12
      The block-sale method is designed to make FHA loans
more attractive   to.long-term investment sources by (1) elim-
inating the requirement of physical possession of the notes
by the purchasers and (2) maintaining the invested funds at
a constant level over the fixed holding periods.     The block-
sale method meets the criteria    established by the Comptrol-
ler General for a sale of assets, because the custodian
takes physical possession of the loan instruments and the
investors may dispose of them at will.
      For the loan notes of $3.8 billion held by investors at
March 31, 1970, FHA estimated that, if the investors held
the loans for the full nonredemption periods, the interest
paid to the investors would be $443 million in excess of the
interest collected from the borrowers. Of this amount, FHA
estimated that about $249 million would be paid to the in-
vestors within the next 5 years.
      As discussed on page 28, FHA budget justifications to
the Congress have not shown the projected interest costs
which FHA has committed the Government to pay in future
years. The interest to be borne by each fund is as follows:
                                   ACIF        ?JHIF      Total
                                           (millions)
Market by underwriter
  syndicate                    $ 40.8        $ 55.9     $ 96.7
Held by Federal National
 Mortgage Association                           6e9        6.9
Held by other investors            221.7      117.5      339.2
    Total                      $262.5        $180.3     $442,8*
       FHA officials have taken the position that sales of
 borrowers' loan notes provide a method of financing the in-
 sured loan programs without significantly   affecting re-
 ported Federal cash outlays.   For  budget purposes  the sales
 proceeds are subtracted from the Government's cash outlays
 for the loans. If borrowings from the Treasury instead of
 revenues derived from sales of borrower's loan notes were
 used to finance additional loans, the budget would show the
 gross cash outlays for the loans. Thus the sale of loan

                              13
notes permits the loan programs to be financed largely with-
out regard to the Federal debt ceiling or the legal limita-
tion of 4-l/4 percent that the Treasury can pay on long-
term marketable obligations.
OPERATING
        LOSSES
       FHA's Statements of Financial Condition for the ACIF
and RHIF at March 31, 1970, showed that the fundslcombined
net accumulated operating losses amounted to about $104 mil-
lion.1   W's statements of income and expense for the funds
showed that, for fiscal years 1960 through 1969 and for the
first 9 months of fiscal year 1970, the operating results
were as follows.
                          Net Income or Loss(-)
       Year              ACIF                 FWF
       1960          $    987,538             $      -
       1961            1,036,553
       1962            1,274,137
       1963            2,127,292
       1964            3,352,179
       1965            4,239,778
       1966            5,198,665                   911,460
       1967 -            -100,105                  493,150
       1968           -4,789,700               -2,152,008
       1969          -54,964,770              -15,123,451
       1970          -33,661,503              -20,218,305
      The income of the funds consists mainly of interest on
loans to borrowers.   The expenses include the interest on
borrowers' loan notes sold to investors, interest on borrow-
ings from the Treasury, losses on loans, and a portion of
the administrative  expenses related to making and servicing
loans.

     Of the combined accumulated net losses of $104 million
for the two funds,about $77 million represented interest


1These losses do not include   significant   administrative
 costs.   (See pm 28.)

                               14
paid to investors in excess of the interest FWAcharged bor-
rowers. The result of selling the borrowers' loan notes to
investors at interest rates that are higher than the inter-
est rates charged the borrowers is illustrated   as follows.
If a borrower's 25-year loan of $20,000, bearing interest at
5 percent, is sold to an investor at an interest rate of
8-l/2 percent, the interest costs--providing   the loan note
was held for 25 years-- would amount to $14,865 in excess of
the interest paid by the borrower.
WAYS TO MINIMIZE OPERATING LOSSES

      F'uture annual net operating      losses of both funds could
be minimized if FHA financed new loans through borrowings
from the Treasury rather than through sales of borrowers'
loan notes to investors.      A further     reduction   in operating
losses of PlCIF could be made if FHA were authorized           to
charge borrowers interest     rates which were more closely          re-
lated to the Government's cost of.financing           such loans and
to the borrowers'   abilities    to pay,

Cost of financing  through Treasury        borrowings
rather than through loan sales

       In hearings in 1962 before the Subcommittee on Conser-
vation and Credit,       House Committee on Agriculture,    the FHA
Administrator      claimed that the financing     of the FHA loan
programs through the sale of borrowers'         loan notes to in-
vestors was not costing the Government much. This situation
was true prior to fiscal       year 1965, when the interest     rates
on loan notes sold to investors        were less than the interest
rates charged to the borrowers.         Since 1965, however, the
interest     rates on the loan notes sold to investors      have been
substantially      higher than the rates charged to borrowers.

      With respect to FHA's block sale of loan notes totaling
$350 million,   as discussed in detail on page12, the Secre-
tary of the Treasury2 in approving the sale, advised the FHA
Administrator   that:

     "As you may'know, the Treasury has been concerned
     for some time about the cost to the Government
     and to the taxpayer of selling  assets in the form
     of direct  loans at rates well above what the Gov-
     ernment would have to pay were it to borrow in
     its own name. This problem has been particularly
     acute in the case of the Farmers Home Administra-
     tion because of the nature of the paper involved,
     and because of the size of the program as a
     whole."

      The following  comparison of the guaranteed interest
rates on this block sale of loan notes with the interest
yields on marketable   Treasury obligations  of comparable
maturity  periods provides an indication     of the additional
interest  costs to the'Government   of financing   the loan pro-
grams through the sale of borrowers'     loan notes rather than
through borrowings   from the Treasury.

                                                 Interest
                  Loan notes     sold          yields on
  Loan                         Interest         Treasury        Difference
 holding        Amount            rates       obligations             in
 period       (millions)       (note a)          (note b)        interest

 5 years          $200            8.675%           8.21%           0.465%
10   "             150            8.7              7.85              .850

aThe interest    rates were reduced two tenths of 1 percent
 for comparison purposes, because interest      on Treasury ob-
 ligations    is paid semiannually and interest   on FHA loans
 is paid annually.
b The interest   yields were furnished  to us by a Treasury of-
  ficial.    The yields were based on the market-bid     yields
  for marketable Treasury obligations     currently  outstanding,
 which mature in 5 and 10 years.

By applying the above interest     differentials    to the amounts
of the loan notes sold, we estimated        that the Government's
additional  interest   costs would amount to about $17.5 mil-
lion--$4.7  million  for the loans in the 5-year holding pe-
riod and $12.8 million     for the loans in the lo-year holding
period.

      As pointed out on page 12, during fiscal                years 1971
and 1972 FHA plans to sell borrowers'             loan notes of
$5.2 billion,     most of which will be sold to underwriter
syndicates.      Although the terms of future sales of loan
notes may vary, interest         differentials      such as those shown
above indicate      that,  in any event, the additional             cost to
the Government resulting         from this method of financing           will
be very substantial.        Assuming an interest         differential      of
only one half of 1 percent for the planned loan note sales
of $5.2 billion,       the additional       annual interest     costs would
amount to $26 million.



                                      17
       In making the above comparisons,        we recognize that the
interest   rates on long-term      Treasury obligations    maturing
in excess of 7 years are limited         by the law to 4-l/4 per-
cent and that, since 1965, the Treasury has been unable to 1
sell its long-term     obligations     because of the high market
interest   rates.   We believe,     however, that our comparison
of the adz'itional   interest     costs to the Government of fi-
nancing the loan programs through the sale of borrowers'
loan notes totaling     $350 million     gives a reasonable indica-
tion of the substantial       savings that could be possible
through the financing      of the loan programs through borrow-
ings from the Treasury.

Interest    rates    charged   to borrowers

      The Consolidated   Farmers Home Administration        Act of
1961 provides that loans from ACIF be made at interest
rates of 5 percent or less per annum. The legislative            his-
tory of the act does not indicate      the intent     of the Congress
in establishing   the 5-percent  interest    ceiling.

       This rate was higher than the interest     rate paid to in-
vestors who purchased FHA loan notes from 1961 to 1965.
Since 1965 the 5-percent    rate has been significantly    less
than the rates which FHA has paid investors       on loan notes.
       The graph on page 19 shows that, since the midpoint of
fiscal   year 1966, the interest     rates on borrowers'    loan
notes sold to investors    have exceeded the interest       rates
charged the borrowers.     The   rates   reached a high  of  8-3/4
percent in fiscal   year 1970.1

     The difference   between the interest    rates charged to
the borrowers and the interest    rates paid to investors     is
the principal   cause of the fund's operating     losses in re-
cent years.

       Inareport  to the Congress           in November 1966, on the
advantages and disadvantages    of          direct   and insured loan
programs, the Secretary of the             Treasury pointed out that,
although subsidies were clearly             a legitimate    means for


1Excludes    loans    sold under block-sale       contracts.

                                      18
          INTERESTRATESONLOANSTOBORROWERS
             AND ON LOANSSOLDTOINVESTORS
                      FISCAL YEtARS 1961 - 1970




 IN’            I LOAI
 TO




                    A-’
                /
                    INTE
                    SOLI




  1s            3     l!     1965   1966   l!     8   19b9   1990

l/SOME BORROWERS CHARGED LESS
    THAN 5 PERCENT INTEREST




                              19
achieving     program objectives,       an interest    rate subsidy
fixed by statute         did not necessarily     accomplish    the program
objectives     as efficiently       and economically     as variable      sub-
sidies tailored        to the borrowers'     needs and abilities        to
PaYe
       The principal        FHA loan programs affected      by the 5-per-
cent interest       rate are farm-ownership       and recreation      loans
to individuals       and loans to public and nonprofit           associa-
tions for water, sewer, recreational,             and irrigation      facil-
ities   and for the purchase and development of grazing land.
FHA officials      responsible      for the administration       of these
loan programs advised us that many of the borrowers could
pay interest      at rates in excess of the statutory            rate of
5 percent.
       FHA's income statistics     on borrowers of certain     types
of loans indicated     that many of the borrowers could pay in-
terest   at higher rates on their       loans.   For example, the
income levels of many borrowers of farm-ownership           and rec-
reation    loans are similar    to the income levels of borrowers
of certain     types of rural housing loans, who must pay in-
terest   at higher rates.      The following   table shows the in-
terest   rates on rural housing, farm-ownership,        and recrea-
tion loans in fiscal     year 1970.
                                  Number         Amount of
                                     of             loans
      Type of --
               loan                loans        (millions)        Interest      rates
Rural housing loans
  to persons of:
     Above moderate in-
       comes                       1,667          $ 21.6          7-l/2      or 8-l/2%a
     Low to moderate
       incomes                    54,037           601.0          6-l/4b
     Low to moderate
       incomes                    11,399           128.4          Less than      6-l/4
          Total                 --67,103          $751.0
Farm-ownership    and
  recreation   loans to
  individuals                     11,316          $257.7          5

aAt January       1971 the rate     is 7-l/2       percent.
bFor fiscal       year   1971, the rate         is 7-l/4      percent.
                                           20
       The graph on page 22, which was developed from FHA in-
come statistics,     shows that,   of the 8,910 recipients     of
farm-ownership    and recreation    loans during fiscal    year 1970,l
4,455, or 50 percent,     had annual incomes of from $6,000 to
over $10,000.     This range of income was similar      to the in-
come of recipients     of rural housing loans who were charged
interest   at higher rates,     as noted above.   During fiscal
year 1970 FHA income statistics        ahow that, of the,65,034    re-
cipients   of rural housing loans,       42,922, or 66 percent,    had
annual incomes of from $6,000 to clxJer $10,000.

        With respect to loans made to associations,       FHA records
show that the bulk of the insured loan funds are used for
the development and improvement of rural water and sewer fa-
cilities.     For example, of the association      loans of $121 mil-
lion    made in fiscal year 1969, $90 million,       or 74 percent,
was for development of rural water and sewer facilities,
Many of these loans had been made to local public bodies
which are in geographical    areas eligible     for assistance      from
the Economic Development Administration        (EDA).

       EDA makes loans and grants for public works and devel-
opment facilities     to local public bodies in regions of sub-
stantial   and persistent    unemployment and underemployment to
enable them to take effective       steps in planning and financ-
ing regional     economic development.      EDA public works loans,
which may be used to finance water and sewer systems, are
made for a maximum term of 40 years, at interest         rates es-
tablished    pursuant to a statutory     formula based on the mar-
ket yields on outstanding      Treasury obligations.     EDA's in-
terest rate for such loans was 4-3/4 percent for fiscal
year 1969, 5-3/4 percent for 1970, and 6-3/4 percent for
1971.

        Until fiscal  year 1970 FRA set its interest      rates on
loans to public bodies in EDA-qualified         areas at the same
rates EDA charged to borrowers of public works loans.           In
1970, when EDA increased its interest        rate on public works
loans to 5-3/4 percent,      FHA was prevented from making a
similar     change by the statutory  ceiling    on its interest
rate of 5 percent.


1Some recipients   received   more than one loan.

                                   21
           NET INCOMEFOR RURALHOUSING
                                    AND FARMOWNERSHIP
                                                   RECIPIENTS
                           JULY 1969 - JUNE 1970

                      65,034 RURAL HOUSING RECIPIENTS
                            ( INITIAL    LOANS ONLY)            1




B
2 40%
it!


     30%



     20%



     10%


 Q




                          ANNUAL INCOME RANGES




                                    22
CONCLUSIONS

        If FHA could finance its insured loan programs through
borrowings     from the Treasury,   the Government's cost of fi-
nancing new loans and the operating        losses of the two funds
could be significantly     minimized.     The operating    losses of
ACIF could be minimized further        by authorizing   FHA to charge
borrowers an interest     rate more closely related      to the Gov-
err&en-t's   cost of financing    such loans and to the borrowers'
abilities    to pay,

     Because applicable  legislation  provides that loans made
from the two funds be sold to investors     and that the inter-
est on loans made from ACIF not exceed 5 percent,      legisla-
tive action for either  change is required.

       In our opinion,   an additional     reason for financing    FUA's
insured loan programs through borrowings          from the Treasury
is because such programs would be subjected to the same bud-
get discipline     and appropriation    processes accorded other
Federal activities     whose budget requests are shown as cash
outlays in the Federal budget.         As pointed out on page 13,
under the present method of financing          FHA's insured loan
programs, the proceeds from sales of borrowers'           loan notes
for budget purposes are subtracted         from the Government's
cash outlays for the loans,

       We consistently     have taken the position   that the public
interest   is best served when Government programs are financed
through the appropriation       process, because of the periodic
congressional     scrutiny   and affirmative  congressional  action
inherent   in that process,

AGENCY COMMENTSAND GAO EVALUATION

      FHA, the Treasury Department,     and the Office of Manage-
ment and Budget, in letters    dated January 27, 1971; Janu-
ary 5, 1971; and February 19, 1971, respectively        (see app. I,
II, and III>,  commenting on a draft of this report,         ex-
pressed agreement with our view that the statutory         interest-
rate ceilings  on loans made from FHA's ACIF should be elim-
inated in favor of variable    interest   rates related   to the
Government's cost of financing     such loans.


                                 23
      The Administrator,       FHA, stated that legislative         propos-
als to amend the governing legislation              were being cleared
for submission to the Congress.            The Deputy Director,      Office
of Management and Budget, stated that his office               understood
that the Department of Agriculture           was currently     considering
FHA proposals providing        for flexible      interest  rates related
to Treasury borrowing costs for FHA loan programs which pres-
ently had statutory      interest-rate      ceilings.

       With respect to financing    FHA's various insured loan
programs through Treasury borrowings,      the three agencies, al-
though recognizing    that the Treasury could borrow funds at
somewhat lower costs than other Federal agencies, made cer-          .
tain observations   regarding    the method of financing    FHAss
insured loan programs through sales of borrowers'        loan notes.
Pertinent   comments of each agency and our views thereon fol-
low.

FHA comments

        The Administrator,       FHA, stated the belief      that FHA was
realizing    benefits,     from   a program    point of  view,which     off-
set a slightly      higher interest       cost and warranted the con-
tinuation    of FHA's authority        to insure and sell borrowers'
loan notes,     The Administrator         stated also that he expected
that, as FHA's block sales of borrowers'             loan notes became
better    known in the financial         community, the differential
between the interest         rates at which the Treasury borrows
funds and the rates which FHA must pay on borrowers'                 loan
notes sold to investors          would be reduced.

       We discussed with an FHA official        the nature of the ben-
efits    FHA derives from its current method of financing             in-
sured loan programs.         That official pointed out that financ-
ing additional      loans through sales of borrowers'       loan notes
provided FHA with greater flexibility         in obtaining      funds,
because such sales were reported as an offset            to the cash
outlays for FHA loan programs shown in the Federal budget,
He stated that,       in view of current restrictions      on budget
outlays,    loan funds for the insured loan programs would be
more readily     available    through the sale'of    borrowers'     loan
notes than if FHA had to finance the programs through borrow-
ings from the Treasury.


                                     24
Treasury    Department     comments

       The Under Secretary        of the Treasury for Monetary Af-
fairs    stated that he had no basic disagreement         with our
findings     but stressed the point that FHA's methods of fi-
nancing the loan programs were not unique,            He stated that,
according to the fiscal         year 1971 budgeto the FHA insured
loans accounted for only $2.3 billion           of $20.7 billion    of
Federal credit      programs financed outside the Federal budget.
The Under Secretary        concluded that,    in the general context
of Federal credit       programs, the cost of financing       had not
been the determining        factor   in much of the credit    program
legislation     enacted by the Congress in recent years.

Office     of Management and Budget comments

      The Deputy Director,       Office of Management and Budget,
stated that the sale of borrowers'           loan notes to investors
provided a mechanism whereby urban-based                lending institu-
tions could assist     in financing      certain      requirements       of the
rural residents.      He stated also that,          if direct     loans fi-
nanced through Treasury' borrowings          were substituted          for
funds obtained through the sale of loan notes, private                     lend-
ing institutions     could no longer avail themselves of this
mechanism.      The Deputy Director      pointed out that,          although
Treasury financing     provided a similar         mechanism inasmuch as
Treasury securities     were purchased by private             investors,
there was a less direct       relationship       between these investors
and the FHA borrowers.

      The Deputy Director     said that direct loans financed
through borrowings     from the Treasury were included in bud-
get totals  as cash outlays,whereas     FHA's sale of insured
loan notes constituted     a sale of assets and thus reduced
program outlays,   as shown in the Federal budget.

GAO evaluation

       The comments of the various agencies did not indicate
any disagreement   with our basic conclusion    that the Govern-
ment's cost of financing   new loans and the operating     losses
of ACIF and RHIF could be significantly     minimized if FHA fi-
nanced its insured loan programs through borrowings      from
the Treasury rather than through sales of borrowers'       loan
notes.
                                       25
       With respect to FHA's view that the continuation                   of
authority     to insure and sell loan notes is warranted by the
greater    flexibility      in obtaining     funds, since sales of loan
notes are reported as an offset            to Federal outlays in the
budget, we previously         have stated our view (see p. 23) that
the public interest         is best served when the financing             of
Government programs is through direct             appropriations,       because
of the periodic        congressional     scrutiny    and affirmative         con-
gressional      action afforded      by the appropriation         process.
This would result        in the programs'being        subjected to the
same budget discipline         as the vast majority        of other Federal
programs and would make appraisal             and control     by the Con-
gress of FHA's insured loan programs easier.

      We do not disagree with the comment of the Under Secre-
tary of the Treasury that, generally,      the cost of financing
has not been the determining     factor in much of the credit
program legislation   enacted by the Congress in recent years.
One of the purposes of this report is to reveal to the Con-
gress the additional    costs incurred  by the Federal Government
as a result   of FHA's method of financing    insured loan pro-
grams 9 so that the Congress may take such action as it deems
appropriate.

       With respect to the comments of the Deputy Director,                  Of-
fice of Management and Budget, concerning the directness                   of
the relationship        between F'HA borrowers and investors        purchas-
ing the borrowers'         loan notes, the investors       purchase the
notes directly       from FHA. FHA makes the loans, collects             all
principal      and interest    payments from the borrowers,        performs
all other loan servicing           functions,    and absorbs all losses
on the loans.        In such circumstances        there is little   or no
direct     contact between the borrowers and the investors             who
purchase the borrowers'          loan notes, and there is very little
difference      from the situation        where the Treasury sells mar-
ketable obligations         to investors      and uses the proceeds,     in
part 9   to  finance    FHA's  insured     loan  programs.

MATTERS FOR CONSIDERATION BY THE CONGRESS

       We recommend, that the Congress consider amending the
legislation    pertaining to the loan programs financed through
ACIF,and RHIF to require     that:


                                       26
--The loans be financed through borrowings    from the
   Treasury within   sqch amounts as may be specified  an-
   nually in appropriation   acts.

--The interest   rates on loans made from ACIF be based
   on the market yields on outstanding      Government obli-
   gations of comparable maturities    and be adjusted    in
   accordance with the borrowers'   abilities     to pay.




                          27
                               CHAPTER3

                NEED FQR IMPROVEDCOST DISCLOSURE

       FHA's financial     statements furnished  to the Treasury
Department and the budget justifications        presented to the
Congress do not show the full costs of administering          the
loan programs financed through ACIF and RHIF and do not show
the interest    cost on the Government's investment      in the two
funds.    Moreoverp FHA's budget justifications       do not show
the substantial     interest    costs on sales of borrowers'    loan
notes that FBA has committed the Government to pay in future
years.

       In our report to the Congress '"Improvements Needed in
Financial     Statements of the Emergency Credit Revolving Fund
of the Farmers Home Administration"         (B-114873, December 30,
19701, we pointed out many areas in FBA's accounting          system
which were in need of improvement.         We recommended that the
Adminis-trator     assign an adequate staff     to the task of de-
signing an accounting      system which would meet the needs of
FHA managers and the requirements        set forth by the Comptrol-
ler General.       In commenting on a draft of that report,     the
Acting FHA Administrator       advised us that FHA was in general
agreement with our recommendation and had hired accounting
specialists     to implement a financial     management system for
the agency as promptly as possible.

        We believe that,       in the design of its accounting       sys-
tem, FHA should provide for the allocation             of administrative
costs to its various loan programs and for the recognition
of interest       on the Government's investment       in the two in-
surance funds.,         We believe also that FHA's annual budget
justifications        should disclose   this information     as well as
the total      interest    costs that the Government will have to
pay on loan notes sold to investors.             I

ADMINISTRATIVE COSTS

      The administrative    costs of FHA include operating    the
headquarters   office,   41 State offices,  1,742 county offices,
and the Finance Office.      FHA's annual salaries  and expenses
appropriation   provides funds for paying such costs and per-
mits a limited    amount of income from the funds to be used
for paying such costs.
                                    28
.




          FHA's financial       statements  submitted to the Treasury De-
    partment pursuant to Treasury Circular            No. 966 and its bud-
    get justifications       for each of these funds do not show all
    the administrative       expenses allocable     to these loan programs.
    The Finance Office prepares an internal            consolidated  state-
    ment of income and expenses which shows FHA's estimate              of
    administrative      costs by major loan types, such as rural
    housing loans0 soil and water loans, andfarm-ownership              loans.
    This statement,      however, does not show the separate costs
    for direct      and insured loans.

           We analyzed FIXA's statements and estimated   the cckts
    allocable   to the insured loans on the basis of the number
    of insured and direct    loans made and the number of borrowers"
    accounts serviced during the last 3 years.       Our estimates
    of the administrative    expenses allocable  to insured loans
    totaled   $81.7 million,   as shown below.

                                        FHA costs          GAO estimates
    Fiscal                         for direct     and         of costs
     year         Program            insured loans      for insured loans

     1968'     Rural housing         $ 19,324,091          $13,632,565
               Farm-ownership           10,151,721         ,8,002,193
               Soil and water            4,123,608           2,516,425
     1969      Rural housing            22,052,191          16,185,518
               Farm-ownership           13,539,568          11,216,595
               Soil and water            3,851,440           2,226,168
     1970a     Rural housing           -21,515,648          16,809,083
               Farm-ownership           10,744,663           9,009,117
               Soil and water            3,45%,659
                                          I                  2,141,781

                                     $108,758,589          $81,739,445

    aThrough March 31, 1970.

          FHA'S ,financial    statements   for the two insurance funds
    for fiscal   years 1968-70 showed a total      of only $3.6 million
    of administrative      expenses for both funds,    This amount was
    the estimated portion      of income of the funds that had been
    used to pay such expenses and did not bear a direct         relation-
    ship to the administrative       costs of making and servicing
    the loans.


                                        29
INTEREST ON GOVERNMENTINVESTMENT
       ACIF and RHIF were capitalized          with a $1 million     and a
$100 million       appropriation,   respectively,       FHA pays interest
at rates ranging from 3-l/4 to 8 percent on funds borrowed
from the Treasury for both funds but pays no interest                on
the appropri?.ted       capital.   The financial     statements and bud-
get justifications         for the funds show the interest       paid
on the borrowings        from the Treasury but do not show (1) in-
terest   on the Government's investment           in the two funds or
(2) the difference         between the interest     paid on certain
borrowings      from the Treasury and the cost to the Government
of borrowing money.

       The accounting     principles       and standards prescribed           by
the Comptroller     General require          the disclosure       of signifi-
cant interest    costs of the Government's investment when such
funds are used in a revenue-producing                 operation.     They re- .
quire also that, when interest             required     to be paid by an
agency is significantly         less than the cost of money to the
Treasury,   the difference        should be shown on the agency's
records as an additional          interest      cost.     The prescribed      ac-
counting principles       and standards provide that interest
costs recognized      for reporting        purposes be determined on the
basis of average yields on outstanding                 marketable    obliga-
tions of the United States having maturities                   reasonably     com-
parable to the estimated period for which Federal funds are
invested.

      The interest    that FHA pays the Treasury on borrowings
for the two funds is determined by formulas set forth in
the legislation    establishing   the funds.    For RHIF the for-
mula provides for payment of interest        based on the average
rate on Treasury marketable obligations        which are neither
due nor callable    for redemption for 15 years from their date
of issue.

      Since fiscal    year 1968-- the first    year of borrowings
for this fund--the      interest   rates have ranged from 3-l/4 per-
cent to 3-34/100 percent.         We believe that the interest
rates derived by this formula do not realistically           measure
the cost of borrowings        from the Treasury for the fund.
Consequently,     the interest    costs shown on the financial
statements    for this fund are understated      by the difference


                                       30
between the interest paid by FHA on borrowings  from the
Treasury and the Government's cost of borrowing money.

       In contrast,   the formula for ACIF provides for payment
of interest    on borrowings   from the Treasury based on the
current average market yield on Treasury marketable       obliga-
tions having comparable maturities.        Since fiscal year 1968,
the interest    rates for borrowings   for this fund have ranged
from 4-88/100 percent to 8 percent.       We believe that these
rates provide a more realistic      measxe of the current   cost
of money to the Government.

      We estimated that the cost of loan programs financed
through the two funds was understated    by about $8 million
in fiscal  year 1970 as a result   of not including  as operat-
ing costs (1) the interest   on the GovernmentVs investment
in the two funds and (2) the difference    between the interest
paid on borrowings   from the Treasury for RHIF and the Gov-
ernment's costs of borrowing money.

FUTURE INTEREST LIABILITY       ON LOAN NOTES SOLD

       FHA's sales of borrowers'        loan notes present a some-
what unique reporting       problem.      Because these transactions
are considered     sales of Government assets rather than bor-
rowings, no direct      liability    is shown on FHA's statement of
financial   condition.       FHA does show, in a footnote     to the
financial   statements,      the contingent    liability  for borrowers'
loan notes held by private        investors.

      As discussed on page 11,FHA sold notes under conditions
ranging from those favorable    to the Government--the   sale of
loan notes to investors   at interest  rates less than those                   *
charged the borrowers --to the present unfavorable     condition
of having to sell loan notes to investors    at interest    rates
in excess of those charged to the borrowers.

       For the loan notes of $3.8 billion        held by investors       at
March 31, 1970, FHA estimated        that, if the investors      held
the loans for the full nonredemption         periods,   the interest
paid to investors     would be $443 million      in excess of the in-
terest   collected  from the borrowers.       This estimated     iiabii-
ity is shown in footnotes       to the statements     of financial      con-
dition   for the two funds at March 31, 1970,but is not shown
in FHA's budget justifications.
                                    31
      Because these  loan sales transactions    are unique and
 commit the Government to pay substantial    interest   costs,
 FHAss annual budget justifications    to the Congress should
 disclose  the full amount of the liability.

 CONCLUSIONS

        FHA's financial     statements and annual budget justifica-
 tions do not disclose       the full costs of the loan programs
 financed through the two insurance funds.          Disclosure   of
 the full   costs of each loan program conducted through both
 funds would be of assistance         in FHA management decisions
 and congressional      evaluations.
RECOMMENDATIONSTO FHA ADMINISTRATOR

     To facilitate     improved disclosure of the costs of the
loan programs financed through ACIF and RHIF, we recommend
that the Administrator      provide for:

      --Including    in financial   statements    all costs related
         to the loan programs';     Specifically,     all administra-
         tive costs,   the interest    on the Government's      invest-
         ment in the two loan funds, and the full         interest
         cost of the borrowings     for the funds should be dis-
         closed.

      --Reporting,   in the explanatory      notes section  of its
         annual budget justifications,       the commitments of Gov-
         ernment resources which the loan sales program has
         created and the current yields which FHA is required
         to guarantee investcrs      who purchase such loans.

AGENCY COMMENTS

      FHA, the Treasury Department,    and the Office of Manage-
ment and Budget   agreed with our findings    and recommendations
concerning   the need for improved cost disclosure.

       The Administrator,      FHA, stated that action was being
taken by FHA to modify the design of its financial        manage-
ment system and that the modified system would produce fi-
nancial statements       showing all costs incurred by ACIF and



                                   32
RHIF.    The Administrator     stated   also that FHA would provide,
in the explanatory     notes   to its   budget justifications,  a
statement showing

      --the current   interest  rates which FJU paid       investors
         who purchased borrowers'    loan notes,

      --the insured    loans outstanding     in the hands of inves-
          tors, and

      --the estimated premium interest        liability   on insured
          loans in the hands of investors.




                                   33
                                CHAPTER 4

                            SCOPE OF REVIEW

      Our review was made at the FHA headquarters               office    in
Washington,   D.C., and at the FHA Finance Office             in St.     Louis.

        We reviewed legislation        pertaining     to FHA's insured
loan programs and FDA's policies            and procedures under which
borrowers'      loan notes were sold to investors            to finance
these programs.        We examined FHA documents, reports,              rec-
ords, and files      pertaining     to the operating       results     of the
insured loan programs; FDA's statistical               reports     showing
borrower income levels;          and the Secretary       of the Treasury's
1966 report to the Congress on the Feasibility,                  Advantages,
and Disadvantages       of Direct Loan Programs Compared to Guar-
anteed or Insured Loan Programs.              We interviewed       various FHA
officials     responsible     for matters discussed in this report
and obtained from a Treasury official              an estimate of the
Treasury's     cost of borrowing money.




                                     34
 APPENDIXES




35
                                                                                                 APPENDIXI

                                   UNITED   STATES        DEPARTMENT            OF AGRICULTURE
                                             FARMERS        HOME     ADMINISTRATION

                                                       WASHINGTON.      D.C.   20250



‘?FFICE   OF THE   ADMINISTRATOR




          Mr. Bernard Sacks                                                      J&i 27 1971
          Assistant   Director
          Civil Division
          U. S. General Accounting             Office
          Washington, D. C.

          Dear Mr. Sacks:

          This is in response to your request for our comments on the draft report
          entitled,  "Financing of Loans Through the Agricultural   Credit and Kural
          Housing Insurance Funds by the Farmers Home Administration."

                            GAOComment: Congress may wish to consider changing
                            legislation  requiring FHA to finance its insured loan
                            programs through loan sales.

          Under GAO proposals to Congress, the report recommends that Farmers Home
          Administration  finance insured loans through Treasury borrowings.       The
          Congress in legislating     authority  to FHA to bring its credit services into
          rural areas has given due and deliberate      consideration to providing a means
          whereby the private sector could invest in Farmers Home insured notes (actual
          promissory notes).      The Congress is aware of the system of financing used
          by the FHA. The offerings      made by FHA are coordinated with and subject to
          the policy overview of the 'Treasury Department and Office of Management and
          Budget.

          The system for marketing insured notes has been improved and perfected by
          FHA and under the present marketing program investors may purchase insured
          notes at the local level through county offices originating           the loan trans-
          action,and this is an attractive     feature to local investors.         Larger investors
          may purchase insured notes through the Finance Office.           In 1469 the agency
          developed a block sale instrument so that it could efficiently            and effectively
          market a portion of its insured notes through the capital market.             'i'he avail-
          ability   of this method of financing the program is one of the components in
          the Congress' annual deliberation     of the budget of the FF&. The authority
          of the FHA to finance its programs through the sale of insured notes to
          private investors is a long standing authority,       originating     with the farmer
          loan programs and extended by the Congress at different          times to other major
          program authorities   of the agency. The block sale contract,          perfected by
          FHA, has received good acceptance in the financial        community and the FHA is
          receiving the benefit of fully competitive     interest    rates.

                                                                      37
      APPENDIXI

    b!e recoqlize that tne 5ki cust or money from the sale of its insured notes
    will be higher than Treasury cost of borrowings.   As our block sale contract
    becomes better known in the financial  coumunity, this differential  will be
    reduced.

    From a program pcint of view, we are realizing         benefits which offset a
    slightly    higher interest   cost and these benefits,    in our opinion, warrant
    the continuation     ,)f our authority to insure and sell notes.      Parmers Home
    Administration     should borrow its loan funds where it can get them at least
    cost, providing there are not disadvantages that more than offset the benefit
    to the puoiic ot borrot7Lng at the lowest cost.

     l'he agency is beginning to obtain additional value from the full faith and
     credit of the U. 3. Government, which was documented by the Attorney Generalts
     Opinion of ticember 29, 1~64. Also, the agency is cooperating with lreasury
     to prcvldo lU and 1%year funds with the aid cf the block sale contract.

                GAO Comment: Congress may wish to consider legislation
                rG=g         the 5 percent interest    limitation  and provide
                %ead        that the rates of interest     be based on the market
                yield
                -       on outstanding government: obligations      of comparable
                maturities.      --

      Legislative   proposals to amend F'l-&*s governing    legislation    are being cleared
-. -I for  submission   to Congress.

                GAL!&commendation:     !?HA should provide in a design of
                its financial    management system for the reporting  in
                financial   statements of all costs related to loan programs.

    Concerted action is being taken to modify the design of the FHA financial
    management system to meet the standards set forth by GAO. This system will
    provide for financial statements which will reveal all costs incurred by
    these funds.

                G&j Xecommenciation: FHA should  --a    provide disclosure of the
                Government's
                         -u--m  futur?.   interest
                                        -e-I_        .aommitments    and include the
                current
                ------- interest
                             I---    rate    in budget  justifications.

    'The following   additions   are being made to the explanatory notes for the
    Agriculture    Cred1.t Insurance Fund and the Rural Housing insurance Fund.

          a.   A statement regardin      the current   interest   rates   available
               to investors.




                                               38
                                                                APPENDIX I


      b.    A statement showing insured loans outstanding in the
            hands of lenders which are contingent Liabilities against
            each fund as of June 30, 1910, 1471, and 1972.

      c.    A statement reflecting  the projected premium interest
            liability  on loans in the hands of investors.

We appreciate your giving us an opportunity  to discuss the draft review
prior to issuance of a final report. and to submit the foregoing comments.

Sinceqly,




                                        39
APPENDIX II


                      THE   UNDER   SECRETARY   OF THE TREASURY
                                 FOR MONETARY    AFFAIRS
                                   WASHINGTON   25.   D.C.



                                                                           JAN 5 1971



Dear   Mr.    Pahl:

       This is in reply       to your letter  to Secretary   Kennedy of
December 1, 1970 in which you request           comments on the proposed
GAO report      to the Congress    on asset  sales   by the Farmers  Home
Administration       (FHA) and on the possible     financing   of FHA loans
through     Treasury   borrowings.

       FHA presently      finances     a substantial      volume of its     loans
through   direct     Treasury    borrowings.        As shown in table     E-3 on
page 74 of the Special          Analyses     of the Budget for fiscal         1971,
FHA had a total       of $2,694 million        in direct     loans outstanding
on June 30, 1969, and the Budget estimates                 were $2,970 million
for June 30, 1970, and $2,112 million                for June 30, 1971.

        FHA is authorized       to make either   direct     or insured       loans
under a number of its programs.            However,     as indicated       in your
report,      those loans which are made from either            the Agricultural
Credit     Insurance    Fund or the Rural Housing        Insurance      Fund must
be sold to private        investors.    Thus, as you indicate,           legisla-
tive    action    would be necessary    in order    to provide       for Treasury
financing       of all  FHA loans.

       While    there     is no question      that    direct     Treasury      financing
of FHA loans would be less expensive                  than insured         loan financing,
this   is also true of a number of other                 Federal      credit     programs.
In fact,     the Department        of Housing      and Urban Development             con-
ducts    a program      of subsidized     loans for low income housing                   in
urban areas,      which     is similar    to the FHA program             in rural      areas;
and the HUD program           is financed     through      the Federal        National
Mortgage     Association        at higher   interest       rates    than those by
the Treasury.

        As indicated       in table     E-6 of the Special        Analyses     of the
1971 Budget,        the net increase         in direct    loans outstanding       in
the fiscal      year 1971 is estimated            at $1.6 billion,       compared     to
an increase       of $20.7 billion         in guaranteed,      insured,     and Govern-
ment sponsored         agency loans.         The FHA loans     discussed     in your
report    account      for only $2.3 billion           of this   $20.7 billion      of
Federal    credit      programs    financed     outside     of the budget      and thus


                                           40
                                                                              APPENDIXII

outside     of the Treasury.        While many of these programs           require
very little       subsidy,     a number of them involve       larger    interest
rate subsidies         and higher   market  borrowing    costs     than the FHA
loans     (See table     E-4).    Thus I think    it important       to view the
financing      of the FHA program       in the context     of Federal       credit
programs      generally.

        It is widely     recognized    that  direct    Treasury    financing,
while     cheaper,    is not appropriate     for all     private   borrowings
assisted     by the Federal      Government;    although      in some cases
Treasury     borrowing     may be clearly    the most appropriate          means
of financing.

       I note in your draft           a reference        to a report         to the Congress
by the Secretary       of the Treasury           in November 1966 on the advan-
tages and disadvantages            of direct       and insured         loan programs.
As you know, that        report      discussed      at some length           the circum-
stances     under which various          methods of financing              Federal     credit
programs     might  be appropriate.            Several      such studies         of Federal
credit    programs   have been made in recent                 years,      yet we still
seem to be lacking         a consensus        as to the principles              and pro-
cedures     which should      govern these programs.                 It is clear       to me
that   the cost of the financing              has not been the determining
factor    in much of the credit            program     legislation         enacted    by the
Congress     in recent     years..

         I certainly         would not disagree            with    your basic        points
regarding         the problems        arising       from fixed       interest      rates      in
Federal      credit       programs.        The Treasury         Department's         views on
this     matter      have been explicitly              stated    in many reports            to the
Congress       on credit        program      legislation.          In fact,      the flexible
interest        rate formula        tied     to Treasury        borrowing      costs which
we recommend,            and which      is suggested          in your report,          is explicitly
set forth         for the guidance           of credit       program      agencies       in Bureau
of the Budget Circular                No. A-70,        February      1, 1965.       We under-
stand that          the Farmers       Home Administration              is presently
considering           the adoption        of more flexible           interest      rates      in
its   loan programs.

        I would also agree that             the financial       management,         accounting,
and reporting          of Federal    credit    programs      should    explicitly
recognize       all    Government    interest      costs,    including       direct                    C-
subsidies       and the implicit         costs   resulting       from the provision
of Federal        capital.     The Treasury       has urged in a number of
reports      to the Congress       the adoption         of revolving       fund financing
for credit       programs     which clearly        discloses       the interest        and
other     costs     to the Government.




                                               41
APPENDIXII

         In short,    I have no basic          disagreement       with   the findings
in your report,         although       we believe     that    the costs     to the
Government      of the Farmers          Home program       should    be calculated
on a present       value     basis.       Yet while     our procedures        in
estimating      these costs would be somewhat different                     from those
employed     in your draft          report,    the conclusions         would be
similar.

         The point       I would like      to stress,       however,    is that      the
loan terms and methods              of financing        employed     by the Farmers
Home Administration             are not unique.           There are many other
Federal      credit      programs     which also involve          fixed   interest       rates,
asset     sales,      hidden    subsidies,      and, in some cases,          much less
efficient        methods     of financing.          There is a clear        need for
greater      understanding         of these programs,          and I believe       that
your report         is a very useful         contribution.
                                              Sincerely      yours,


                                              /?ud
                                                 Lhbdd%
                                              Paul   A.   Volcker



Mr. Eugene L. Pahl
Assistant        Director
Civil     Division
United     States      General
   Accounting        Office
Washington,         D. C. 20548




                                             42
                                                                                             APPENDIX III

                        EXECUTIVE             OFFICE        OF THE         PRESlDENT
                            OFFICE      OF     MANAGEMENT          AND      BUDGET
                                         WASHINGTON,         DC.   20503




                                                                                                19 FEB 1971

Mr. A. T. Samuelson
Director,   Civil  Division
General Accosting      Office
Washington,    D. C.    20548

Dear Mr. Samuelson:

This is in response to your request                 of December 7, 1970, for the views of
the Office      of Management and Budget concerning the General Accounting
Office    draft    report   entitled      “Financing      of Loans Through the Agricultural
Credit    and Rural Housing Insurance              Funds by the Farmers Home Administra-
tion,    Department      of Agriculture.”          Due to the workload     associated with
preparation      of the President’s          1972 budget,     I regret  that we were unable
to provide      comments by your requested             date of January 8, 1971.

We have reviewed          the   draft        report    and offer         the   following   comments    for
your consideration:

      Finding   --      “The interest    rates paid private      investors     by FIN on
loans sold from         the Agricultural     Credit    and Rural Housing Insurance
Funds are higher          than the interest     rates the Government would have to
pay if additional           loans were financed     through  Treasury     borrowings.”

         Comment -- While we recognize               that the Department             of Treasury        can
borrow at somewhat lower cost than other Federal                            agencies,      FHA insured
loans provide         a mechanism for providing               a conduit       for urban based lend-
ing institutions          to assist      in financing         certain     requirements         of rural
residents.         Investment      bankers and pension             funds purchase         FHA insured
loans with maturities             ranging     from three to 25.years.                If direct       loans
were substituted          for the present         FHA insured         loans., private        lending
institutions         could no longer avail           themselves         of this mechanism for
financing       housing     and sewer and water facilities                  in rural      areas.       Of
course, Treasury          financing      through      direct     Federal      loans provide        a
similar      mechanism inasmuch as Treasury                  securities       are also purchased
by private       investors      although      there is a less direct              relationship
between the investor            and the borrower.             Furthermore,        direct     loans are
included      in budget totals          as outlays       while FHA insured            loans constitute
a sale of assets and are excluded                  from budget totals.

       Finding     -- “..:    under money market conditions       prevailing       in the
last few years,        the interest     rates charged borrowers      by FHA are signifi-
cantly    less than the interest          rates FHA must pay private        investors    who
purchase     the loans.       This situation      has been the principal       cause of the
sizeable,    operating     losses reported      in the two funds in recent years.”


                                                        43
                                                                              ,
APPENDIX   III



       CQ-t   -- As a result of considerable di36tassioa between OMBand
USDA, we undeztstand that the Secretary's Office is currently considering
a R-IA set of proposals which would provide for flexible interest rates
for those loan programs which presently have statutory   interest rate
ceiling3 e The rate stmcture under consideration world be related to
Treasaxry bomowiPag costs thereby providing a better correlation be-m
interest rates to borrowers and Treasury borrowing costs- We concur
conpletely with the conclusim contained in the draft report on th$s
matter; namely, that statutory interest rate ceilzkngs should be elimi-
nated, and that variable rates tied $0 Treasury borrowing costs should
be substituted theref or.
       Ftidirnq -- *'FHA's financial statements furnished to the Treasury
Department and the budget justifications       presented to the Cmgress
relating to the Agricultural       Credit and Rural HousLng IpJsurance Fmds
do not show: (1) FHA's full coste of administering the Isan prograk
f8nanced from.the two funds and (2) the fi%terest cost on the
GovernmaW's investment in the two funds."
      CoTiuBent -- We agree completely with your recmdation     concernring
the need for design of sn adequate fimmcfal management system within FHA
for disclosure of the above informtim.       On the matter of budget presen-
tatSon, we agree with the objective to which your recommendation is
directed, but believe that further study by F'iiA of the most appropriate
means for its attainment is required.
We appreciate and thank you for the opportunity to review this       report
in draft and hope that our cements wiPl be helpful to you.




                                            Caspr  W. Weinberge
                                            Deputy Director




                                       44
                                                                APPENDIXIV

       PRINCIPAL OFFICIALS OF THE DEPARTMENT
                                          OF AGRICULTURE
                              AND THE FARMERS
                                            HOMEADMINISTRATION
                       RESPONSIBLE
                                 FORADMINISTRATION
                                                 OF MATTERS
                                  DISCUSSEDIN THIS REPORT

                                                     Tenure of office
                                                     From           To
                                                                    -
                                  DEPARTMENT
                                          OF AGRICULTURE
SECRETARY  OF AGRICULTURE:
    Clifford M. Hardin                            Jan.   1969   Present
    Orville L. Freeman                            Jan.   1961   Jan. 1969
                                 FARMERS
                                       HOMEADMINISTRATION
ADMINISTRATOR:
    James V. Smith                                Jan.   1969   Present
    Howard Bertsch                                Apr.   1961   Jan. 1969
ASSISTANTADMINISTRATOR,  MANAGE-
  MENT:
     George C. Knapp                              June 1971     Present
     Sylvester Pranger                            Mar. 1969     June 1971
     E. Marshall Newton, Jr.                      May 1967      Mar, 1969
     Robert C. Leary                              May 1961      May 1967




U.S.   GAO,   Wash..   D.C.
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