Financial Audit: Farmers Home Administration's Financial Statements for 1988 and 1987

Published by the Government Accountability Office on 1990-01-25.

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


                           United   States   Genera1 Accounting,   Office.
                           Report to the Secretary of Agrkulture

Juuuary   1990
                           FINANCIAL AUDIT
                           Farmers Home
                           Fhancial Statements
                 .         for 1988 and 1987
United States
General Accounting  Office
Washington, D.C. 20648

Accounting and Financial
Management Division


January 25,199O

The Honorable Clayton K. Yeutter
The Secretary of Agriculture

Dear Mr. Secretary:

This report presents the results of our examination of the Farmers
Home Administration’s (FmHA) financial statements for the fiscal year
ended September 30, 1988. Our opinion on ~HA’S consolidated financial
statements is qualified because we were not able to satisfy ourselves
that FMA'S acquired property accounts were presented fairly.

FIIIHA lost $13.8 billion in fiscal year 1988. The 1988 loss was partially
offset by appropriations of $7.5 billion. F~HA'S accumulated deficit is
now $42.6 billion. The 1988 loss was primarily attributable to net inter-
est expenses of $6.4 billion and provisions for losses on direct and guar-
anteed loans of $5.7 billion. Delinquent farm loan balances were $12.5
billion or 49 percent of the farm loan portfolio.

This report contains separate reports on MA'S system of internal
accounting controls and on its compliance with laws and regulations.
Our report on FmHA'S system of internal accounting controls discloses the
following material internal control weaknesses related to acquired prop-
erty: (1) FdA'S loan classification system used to estimate losses on
individual farm loans is unreliable, (2) F~HA'S Acquired Property Track-
ing System (AETS) contained inaccurate and incomplete information,
(3) FmfIA has not completed APTS modifications which would allow it to
properly record acquired property at fair market value or to record the
associated gain or loss at the time of acquisition, and (4) FITIHA has not
developed a methodology for determining property holding and disposi-
tion cost factors for estimating loan losses and for computing the
acquired property balance.

Our report on compliance with laws and regulations discloses that FIWA
complied with the provisions of laws and regulations for the transac-
tions we tested.

This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations to the Senate Committee on
Governmental Affairs and the House Committee on Government Opera-
tions not later than 60 days after the date of this letter and to the House

Page 1                               GAO/-St%37      Famwm Home Admhistration
Page 3   GAO/AFMLbW-37Farmers HomeAdministration

Pagr 5   GAO/AFMD-9037 Farmers Home Administration

                         significant internal accounting control weaknesses in the system allow
                         the reporting of inaccurate data. These inaccuracies remain undetected
                         and uncorrected because reports produced by the system are not prop-
                         erly reconciled with detailed acquired property files at FmHA’S field
                         offices. Accordingly, in the absence of an accounting system which gen-
                         erates reliable financial data on acquired property operations, we deter-
                         mined it was not practical to perform, nor did we perform, sufficient
                         alternative audit procedures to satisfy ourselves as to the net realizable
                         value of FmHA’S acquired property and the associated provision for
                         losses for 1988.

                         In our opinion, except for the effects of such adjustments, if any, as
GAO Opinion              might have been determined to be necessary had we been able to per-
                         form the necessary auditing procedures to satisfy ourselves as to the
                         value of acquired property and the associated provision for losses, the
                         statements of financial position as of September 30, 1988 and 1987, and
                         the related statements of operations and cash flows for the year ended
                         September 30, 1988, present fairly, in all material respects, the financial
                         position of the Farmers Home Administration as of September 30, 1988
                         and 1987, and the results of its operations and its cash flows for the
                         year ended September 30, 1988, in conformity with generally accepted
                         accounting principles.

                         As discussed in not.e 6, the fiscal year 1987 financial statements recog-
                         nized cumulative ad,justments to correct the allowances for loan and
                         interest losses. Because fiscal year 1987 was the first year that F~HA’S
                         financial statements were audited, we were unable to determine the
                         amounts of these ad,justments pertaining to prior years. Consequently,
                         the full amounts of these adjustments were recognized in the statements
                         of financial position and operations for fiscal year 1987.

                         The following section provides supplementary comments relating to the
                         impact of the agricultural economy on the financial condition of the
                         Farmers Home Administration.

                         Over the past 2 years, the 1J.S.agricultural economy has shown signs of
Financial Condition of   improvement. This is reflected in part by a number of factors, including
FmHA                     increased farmland values. The improved financial strength of farmers
                         has led to similar improvements for farm lenders, such as the Farm
                         Credit System and commercial banks, between 1987 and 1988. Loan
                         delinquencies for these lenders have declined, as have the number of

                         Page 7                               GAO/AF’MD-W-37Farmers Home Administration

in note 12, FmHA estimates it will request $17.3 billion in appropriations
to fund realized losses for fiscal years 1986 through 1988.

Donald H. Chapin
Assistant Comptroller General

August 30, 1989

Page 9                               GAO/AFMIMO47   Fanners   Home Addnhhntion
Repwton Internal AccountingControls

applicable to agency operations are properly recorded to permit the
preparation of accounts and reliable financial and statistical reports and
to maintain accountability over agency assets. Because of inherent limi-
tations in any system of internal accounting controls, errors or irregular-
ities may nevertheless occur and not be detected. Also, projection of any
evaluation of the system to future periods is subject to the risk that pro-
cedures may become inadequate because of changes in conditions or that
the degree of compliance with the procedures may deteriorate.

FmHA annually evaluates its system of internal accounting and adminis-
trative controls and issues a report to the Secretary of Agriculture for
inclusion in Agriculture’s annual FMFIA report to the Congress. In its
November 1988 FMFIA report covering fiscal year 1988, FmHA reported
that its internal control system, taken as a whole, complied with the
requirement to provide reasonable assurance that internal control objec-
tives were achieved. However, F~HA also reported that several material
weaknesses existed in its system of internal controls. These weaknesses
involved items such as inadequate internal controls over the manage-
ment and leasing of acquired farm properties and an accounting system
which did not completely serve the agency’s needs with respect to fun-
damental accounting and financial control functions.

The 1988 FMFIA report also contained FmHA'S annual assessment of its
financial management system’s compliance with accounting principles,
standards, and related requirements for federal agencies. FmHA has one
overall accounting system comprised of 13 accounting subsystems. For
those subsystems, the assessment identified seven areas which materi-
ally failed to comply with the applicable accounting principles and stan-
dards. Six of these areas were not corrected as of August 30, 1989.
However, FmHA reported that, except for the seven areas noted, the
accounting system taken as a whole generally complied with accounting
principles and standards.

We considered FmlIA'S FMFIA reports, the Department of Agriculture’s
Office of Inspector General reports on financial matters and internal
accounting controls, and other GAO reports in determining the nature,
timing, and extent of our audit procedures. We also considered the
Office of Management and Budget (OMR) staff summary of FmHA'S high-
est risk areas, issued in December 1989. Our study and evaluation of the
system of internal accounting controls, made for the limited purpose
described in the second paragraph, would not necessarily disclose all
material weaknesses in a system. Accordingly, we do not express an

    Report on Internal Accounting Chtrols

    Specifically, FmHA has not completed system modifications which would
    allow it to properly record acquired property at fair market value or to
    record the associated gain or loss at the time of acquisition. Moreover,
    F~HA has not integrated the subsidiary APTS data with the related gen-
    eral ledger control accounts. System modifications to correct these
    weaknesses were scheduled for completion by September 1989, but have
    been delayed until October 1990.

    Additionally, our tests at 30 FmHA county offices disclosed that APTS con-
    tained inaccurate and incomplete information from 24 of these offices

. acquired properties were not always entered into AFTS, while others
  remained in APTS after they were sold;
l new appraisals, reducing property values, were not recorded in APTS;
. data entry errors wcrc not always detected and corrected.

    Inaccuracies and data entry errors were not detected and corrected
    because the reports produced by APTS were not reconciled with detailed
    acquired property records at FmHA'S field offices as required by Title 2.
    Our review noted that county offices in 2 of the 10 states included in our
    sample did not receive copies of the APW reports needed to perform the
    reconciliations. Furthermore. l\~~ software did not include parameter
    checks to detect the recording of unreasonable property values. For
    example, although FI~IN regulations generally limit approval of single-
    family housing loans in excess of $60,000. some single-family houses
    were erroneously recorded in the system at values exceeding $1 million.

    In March 1989, we notified FmlIA about the serious nature of the internal
    control weaknesses in the acquired property accounting system. In an
    effort to reconcile the information in AM‘S with source documents main-
    tained at the county offices. FmflA required all county offices to review
    and correct their records and to certify that the inventory as recorded in
    .u-‘I’sas of July 21, 1989. was correct. However, as of August 30, 1989,
    the agency had not corrected the errors or made the software changes
    necessary for detecting unreasonable property values.

    Page 13                                 GAO/AFMD-90-3’7Farmers Home Administration
                            Report on Internal Accounting Controls

                            collateral with no loss reported in the loan classification system. How-
                            ever, a September 21, 1988, appraisal lowered the value of the collat-
                            eral, indicating a potential loss of about $2.7 million.

                            Procedural errors by FmHA personnel resulted in inaccurate loss esti-
                            mates in 64 cases. Although FIIIHAinstructions provide guidance to
                            supervisors for preparing the loan classification system documents, we
                            found that they did not apply this guidance consistently and accurately.
                            For example, our audit procedures disclosed

                        l   a $12 million error was made in calculating collateral liquidation costs
                            because the 20-percent cost factor for holding and disposition costs was
                            incorrectly applied to the loan balance rather than to the collateral
                            value, and
                        l   prior liens were not considered in establishing an estimated loss, result-
                            ing in an $86,000 understatement of the estimated loss.

                            Additionally, we found seven loans in our sample with loss estimates
                            that were omitted from the total loan loss projection in the general
                            ledger. These omissions could have been detected and corrected if a rec-
                            onciliation between loss estimates in the field office files and automated
                            files in the farm loan classification system at the finance office had been
                            performed as required by Title 2. The remaining 37 cases contained a
                            combination of the above mentioned errors.

                            Although we found 212 inaccurate loss estimates in our sample of 500,
                            the internal control weaknesses discussed above did not affect our opin-
                            ion on the fiscal year 1988 financial statements. Many of these errors
                            offset one another, and our statistical projection of the errors and other
                            audit procedures indicated that the fiscal year 1988 loan loss estimates
                            for the farm loan portfolio were not materially misstated. However, as
                            adequate control procedures were lacking, it is only happenstance that
                            the fiscal year 1988 loss estimates were not materially in error.

                            GAAP require that property holding and disposition cost factors which
Holding and                 consider historical repair and maintenance costs, as well as current esti-
Disposition Costs Are       mates of taxes, insurance, and the cost of capital, be considered in esti-
Not Based on Sound          mating loan losses and in determining the net realizable value of
                            acquired property. FITIHAhas not developed an appropriate methodology
Methodology                 for determining such costs. Instead, FIIIHA applied a flat 20-percent fac-
                            tor to collateral values to calculate its estimate of $3.5 billion in holding
                            and disposition costs for use in establishing loan loss estimates. F~HA

                            Page 16                                  GAO/AFMD-90.37Farmers Home Administration
                          Report on Internal Accounting Controls

                  l       Ensure that field office supervisors use market values of collateral as
                          close to the end of the fiscal year as practicable to estimate loan losses
                          in the loan classification system.
                  l       Reconcile estimated loan losses between the field office files and the
                          automated files at the finance office as of fiscal year-end.
                  l       Ensure that field office supervisors follow instructions when calculating
                          the estimated loan losses, particularly the procedures regarding the con-
                          sideration of prior liens in loss calculations, and the proper application
                          of liquidation costs. One possible approach would be to provide periodic
                          training on loan classification procedures.
                      l   Develop a sound methodology for determining holding and disposition
                          cost factors applied to loan collateral and acquired property by consid-
                          ering historical repair and maintenance costs, as well as current esti-
                          mates of taxes, insurance, and cost of capital.

                          We provided a draft of this report to responsible F~HA officials for com-
Agency Comments           ment. They concurred with our findings and have already initiated some
                          corrective actions. For example, they said that R~HA has

                      . initiated procedures to ensure proper reconciliations of APTS reports to
                        field office files and has made changes within the system to correct the
                        data entry problems we found and
                      l established requirements to reconcile automated farm loan classification
                        records to field office files on an annual basis.

                          Further, they stated that MA             is committed to implementing the remain-
                          ing recommendations.

                          Page 17                                      GAO/~90.37   Farmers Home Administration
Flnancid Statements

Consolidated   Statements    of Financial           Position

                                                                                                                           As of Septenber 30
                                                                                                                        1988                 1987
                                                                                                                         1Dollarr in Thousands)
                        Fund Balance     with       U.S. Treaswy                                                 I     3.343.405        I       6.987.940

                        Accounts Receivable  (Note 3)
                        Net of Allowance for Losses of
                          $0.237 in 1988 and $6.593 in 1987                                                                36.852                  133.757

                        Interest    Receivable  (Notes 4 (I 6)
                        Net of Allowance for Losses of
                           14.871.014    in 198B and 14,279,752              in 1907                                      139.546                1.001.750

                        Loans Receivable    (Notes 5 & 6)
                        Net of Allowance for Losses of
                          118.473.501    in 1988 and $14.664.348                in 1987                               39.697.111                46.228.186

                        lnvestM"ts       In Loan Sale Trust         Assets      (Note 7)                                  233,275                  234,615

                        Acquired     Property       (Note 8)                                                              867,941                1.232.758

                        Other Assets                                                                                       33.089                  31,270
                                                                                                                 ____..._____            _______-____
                             Total    Assets                                                                     I 44.951.219            I 55.850.276
                                                                                                                 iilsz*==llii            il=s/xli==ii

                         Accpunts Payable                                                                         I         90.539          I        78.047
                         Accrued Interest  Payable (Note 9)                                                             3.580.859                3.820.891
                         lntragoverrnental  Debt (Note 9)                                                              80.154.218               84.641.218
                         notes Payable - Investors   (Note 9)                                                              670,270               1.042.225
                         Accrual for Estimated Losses on
                            Guaranteed Loans (Note 10)                                                                  1.278.587                  764,431
                         Other Liabilities                                                                                 109.855                 159.517
                             Total    Liabilities                                                                      85,884.336              90.506.329
                                                                                                                     ____________           _________-_-

                      EQIJITV: (Note 11)
                        Unexpended Appropriations:
                           Undelivered  Orders                                                                             493.916                 525.036
                           Unobligated  Balances                                                                            11,617                  11.839
                        Invested Capital                                                                                1.148,812               1.142.489
                        Cumulative Results Of Operations                (Note    12)                                  (42.587.462)           (X335.417)
                                                                                                                     __________-_           _________-__
                             Total    Equity                                                                          (40.933.117)           (34.656.053)

                             Total    Liabilities        L Equity

                      The accmpanying           notes   are an integral       part     of these financial   statements.


                                                               Page19                                                          GAO/AFMLh9037 Farmers Home Administration
Consolidated   Statements      of Cash Flows

                                                                                                                    For Fiscal Years Ended September              30
                                                                                                                           1988                 1987
                                                                                                                            (Dollars in Thousands)

                        Cash Flows frcn Operating Activities:
                          Interest    Received                                                                       I      2.432.661         I      2.914.345
                          Interest    Paid                                                                                 (9.203.252)              (9.291.284)
                          Appropriations     Received (Note 11)                                                                574.098                  556.806
                          Appropriations     Disbursed                                                                        (596.433)                (596.239)
                          wogran Expenses                                                                                     (383.658)                (285,393)
                          Other (Net)                                                                                          224,433                  137,801

                                Net Cash Used in Operating           Activities                                            (6.952.151)              (6.563.964)

                        Cash Flows frcw InvestIng     Activities:
                          Collections   on Loans                                                                              3.380.200              4,536.550
                          Loans Yade                                                                                        (3.493.511)             (3.874.236)
                          Proceeds from LOa" Principal        Asset Sales                                                     1.053.975              2,825.121
                          Proceeds frm Sale of Acquired Property                                                                 155.344                154.837
                          Collections   Received on Behalf of tnvestors                                                            30,838                50.772
                          Payments Made to Investors                                                                              (74.550)              (51.884)
                          Acquired Properly "isb"rsements                                                                        (73.698)               (91.195)
                          Purchase of Loans                                                                                     (262.015)               (59,123)
                          Loss Settlement    of Guaranteed Loans (Note 10)                                                      (113.486)               (95.704)
                          Return of ,nvestment       LOan Asset Sale Trust                                                           1.795                      0
                                Net Cash Provided          by Inuest~ng       Activities                                         604.892              3.395.146

                            Cash Fhxs from Financing Activities:
                              Borrowings  ~PM U.S. Treasury (note 9)                                                       17.705.000                12.530,OOO
                              Payments on U.S. Treasury Borrowings (Note 9)                                               (15.679.000)               (7.100.000)
                              Reimbursements for Losses (Notes 11 and 12)                                                    7.554.171                4.413.671
                              Borrwings   froa.Federal    Financing Bank (Note 9)                                           (6.513.00:)                  170.000
                              Payments on Federal Financing Bank Borrowings (Note 9)                                                                    (535.000)
                              Payments on notes Payable (Note 9)                                                               (371.947)                  (35,179)
                              Revolving  Fund Appropristions                                                                       7.500                          0
                                                                                                                         _.__._-._-._             _-__-__-_--_
                                Net Cash Provided          by Financing       Activities                                     2.702.724                9.443.492
                                                                                                                         _-._-__.____             _______-__-_
                            Net Increase   (Oecrease)        in Cash                                                        (3.644.535)               6.274.674
                                                                                                                         _-__._______             ____-__-_--_
                            Fund Balance   with     U.S. Treasury.          Beginning      of Year                           6.987.940                    713,266
                                                                                                                         ____________             ____-__-__-_

                            Fund Balance   with     U.S. Treasury.          End of Year                                  $ 3.343.405              f 5387.940
                                                                                                                         iE=ICiisilisl            ==iiiil=I==i

                            See Note 15 for       Reconciliation       of Net Loss to Net Cash Used in Operating                Activities.

                            The acccepanying       notes    are an integral         part    of these financial   statements.

                                                              Page     21                                                          GAO/AFBlD9@37Farmers HomeAdministration
Lending   Prograns

Insured   Lending Activities

      Fsmers tine Administration     budgeted lending programs include insured loans.      The tern 'insured'
      is defined as loans made directly     fm   the revolving  funds.   These insured loans are available    to
      be pledged as collateral   for barrwings     fra  the Federal Financing Bank. Generally.     an insured
      loan is made only if a borrower can not secure adequate credit from other sources at reasonable
      rates and twms.

      Federal law provides for multiple       servicing    actions   to assist   financially    troubled   borrwers.   The
      Ylst significant   of theSe actions     include:

      Interest    Credit Program:
      An Interest    credit     agreement is a contractual     agreement between FnHA and single family or rural
      rental housing borrowers to reduce the borrowers'             effective  interest  rate to as low as 1 percent.
      Eligibility    requirements      for single family housing borrowers receiving        interest credit are
      reviewed annually.          Rural rental housing borraers      receive interest   credit for the life of the
      loan: however. a#wxnts in excess of scheduled repayments may be due to f&HA based on tenants'
      income levels.        Interest    inccw on related   insured loans is accrued at the contractual      rate on the
      principal    amount outstanding        (Note 4).

      Debt Set-Aside   Proqram:
      The debt set-aside    program was implemented       during fiscal   year 1985. This program prxwides for
      setting  aside up to 25 percent of 1 farmer         program borrower's    total indebtedness   to a maximum of
      f200.000 for 5 years.      During the set-aside      period.  no interest    is accrued nor are principal
      payments required    (Note 4).

      Rental Assistance     Program:
      federal   law provides FnHA the authority         to provide rental assistance   to eligible   tenants occupying
      eligible    rural rental housing. rural cooperative         housing, and certain   labor housing projects
      financed by FM.         Rental assistance     is the portion of the approved shelter      cost (consists  of
      basic OP market rent plus utility         allowance)    paid by FnHA to compensate for the difference     between
      the approved shelter      cost and the monthly ten&M contribution.          Payments nade under this program
      are reported on the Consolidated        Statement of Operations a5 grants and contributions.

      Loan Deferra!   Program:
      The loan deferral     program allns      1 delinquent     borrower to postpone the payment of principal      and
      interest  for up to 5 yews.        TO qualify.      a borrower must be unable to pay essential      living
      expenses or maintain      the farm property      and pay the debts, but wst demnstrate         the potential  to
      begin debt payments when the deferral          period ends. The borrower is not required to pay interest
      on the deferred    interest.     Instead.   the deferred      interest  will be repaid in equal installments
      over the remaining term of the loan.           The interest      rate at the end of the deferral   will be the
      lesser of the current rate on a similar           type new loan or the original      rate on the loan.

                                Page 23                                                        GAO/AFMlMW7 FzumemHome Administration
                                       Financial    Statements

      net Recovery     BUyOut Program

      If the borrower IS unable to show repayment ability        "sjng the available       servicing    options
      including   Debt Wit?-Down,   the borrower will be offered the option to Satisfy              his loan at the net
      recovery value Of collateral.      The recovery va1"e. since it reflects        liquidation      costs, wi11 be
      less than the market "ll"e    of the collnterdl.     Borrowers qualifying     for the option will be
      required   to sign an equity recapture    agreement.   The agreement provides that. if the borrower
      sells the property which secured the loan within 2 years of the agreement. FrnHA will receive the
      difference   between the net recovery vnl"e and the current market value.             FmHA cannot recapture
      mare than the debt written    off.


Loans and Allowance         for     Loan Losses

      Loans are carried       at the principal  amo"nt outstandIng  less an allowsnce to reflect       their ultimate
      collectibility.        The allowance for loan losses is based on historical     data (writeoffs.      loan
      settlement      data, and acquired property data). an aoalys~s of the agency's loan Classification            of
      borrower accounts,       and an analysis  of current market factors  and conditions   (to include delinquent
      and rescheduled       accounts).

Accrual   for   Estimated         LoSses on Guaranteed     Loans

      Anticipated     losses on        guaranteed loans ape estimated based on historical      dita,    losses experienced
      in comparable insured            programs. current market conditions,   and field office      expectations   of lonn
      losses.     This estimate         is reported as an expense. and a corresponding     .xcr"al    for estimated    losses
      on guaranteed loans is            reported as a liability  on the Consolidated   Statement of Financial

Inccww Recognition      and Reimbursanent          for   Losses

      All significant     intra-agency      balances and transactions      have been eliminated   in the consolidation.
      Sources of funds for the three major revolving              funds of FnHA (Agricultural   Credit Insurance Fund
      IACIFI. Rural Housing Insurance Fund IRHIFI. and Rural Developnent Insurance Fund (RDIFI) are
      provided by reimburwwnt            for losses. borraings       fran the Federnl Financing Bank (FFB). borrowings
      fran Treasury,     borrow?      loan repayments.     and loan asset sales.     Sources of funds for the Rural
      Developlent     Loan Fund and Self-Help        Housing Land Development Fund we provided Solely through
      Congressional     appropriations       and borrower loan repayments.

Interest Income
      Interest    income on loans is accrued at the contractual         rate on the outstanding     principal   amount.
      The amo"nt of interest       income accruing to nonperforming       loans (in excess of 90 days delinquent)         is
      reported    as an offset   to interest    income on the Consolidated     Statement of Operations.       This offset
      is not included in the provision        for losses on accrued interest       on loans as reported on the
      Consolidated     Statement of Operations;      however. the Offset is included as an adjustment to the
      allowance for losses on interest        receivable    IS reported on the Consolidated     Statement of Financial

                                        Page 25                                                 GAO/AFMD-SO-37Fanners HomeAdministration

The outstanding unpaid loan interest             receivable         and the related    allowance       for    losses,   by entity,       as of
September 30. 1988 and ,987. fo,lo,.:

                   -                 September 30. 1988                                                   Septmber 30, 1987
                                   (0011~s   I" Thousands)                                              (Dollars  in Thousands)

                        Loa"              AllO*a"Ce                 net                     LCl.3"               n11ovance               Net
                    i"teWSt              FOP Losses              l"tWeSt                 interest               For tosses            rnterest
                   Recelvlble             (Note 6)              Receivable              Receivable               (Note 6)            Recel"able

  AClF             15,071.905            14.470.154             f   601,751             14.757.631              13.928.889           I   828.742

  RHIF                   235,524             181.328                  54,196                 217,662                139.316                78.346

  RDlf                   301.185            218.559                  82,626                  304.070                210,727                93,343

  Other                    1,946                 973                         973                2.139                    820                1,319
                   _._...._-.                                   __-_._-.-.
    Total          $5.610,560            14.871.014             I 739.546               15.281.502              14.279.752           11.001,750

interest  inccm on loans ii            accrued It      the contractual    rate     on the outstanding   principal     amount.    The
interest  incme recognized.            consiSt?ng      primrily    of accrued      loan interest.   by entity,    for the fiscal
year* *9*a and 1987 foi10ws:

                                                                                             1988                         1987
                                                                                               (Dollars        in Thousands)

          Agn‘"it"ral     Credit 1nS"ra"Ce Fund (AUF)                                    11.906.753                     $2,101,107
          Rural Housing Insurance Fund (RHIF)                                             1.305.785                      1.561.015
          R"Fll Development Insurance Fund (ROIF)                                            365.321                        484.091
          *II Other tntlties                                                                        720                       2,113
          1ntere5t on bms                                                                 3.578.579                     $4.148.326
            Less Interest on Nonperfonning              Loans                                997.267                     1.093.355

          Net Interest     ,ncme                                                         $2.581.312                     13.054.9/l
                                                                                         I==i=i=izs                     _-_-.-_-_-

AS Of Septetnber 30, 1988, approxmately     14.200 bormwers were participants      in the debt set-aside
program with almost $604.000.000   of principal    being set aside.   Interest  rates on the majority    of the
related   loans ranged frm 4.5 to 13.5 percent;     however. interest   lncme is not mxrued on the set-aside

InlereSt   inc~le for RHIF does not include $1,427,314,280     of Interest credit provided to single family
housing and rural rental housing barrowers:       however. the mount is recognized IS other incme and the
related  interest   credit  progrm expense is reported in other expenres.      The unpaid principal baldnce of
loans receiving    interest  credit is approximately   $19.2 b~ilion.

The unpaid principal     balance of nonperfoming     lams (in excess of 90 days delinquent)    is approximately
$14.7 billion.    /\lthough interest    on these accounts continues to be .xcrued,  this interest   is not
included in the net interest      inccme reported on the Consolidated  Statement of Operations.


                                     Page 27                                                                 GAO/AFMD-90-37Farmers HomeAdministration
                                    Financial Statements

The following    schedule       provides    the loan principal       repayments   based on borrowers'          repayment    schedules.

                                    Loan Principal      Repayments By Fiscal       Year
                                               (Collars    in Thousands)

                       fiscal       Years                                           Fxpagnents

                        1989                                                        15.781.192         l

                         1990                                                        1.921.883

                         1991                                                         1,837.406

                         1992                                                        1.748.630

                         1993                                                         1.619.219

                         1994-1998                                                   9.202.613

                         1999-2003                                                    6.810.217

                         2004-2008                                                    7.668.029

                         2009-2013                                                    837.916

                         over 2013                                                   12.837.127

                         Subtotal                                                  157.654.232

                         Guaranteed loans purchased
                         frcm holders                                                      516.380
                            Total   loans receivable                               $58.170.612

       * NOTE:   The FY 1989 principal repayments                include   approximately         $3 billion   of fully   natured   lams
                 which are due and payable.

                                     Page 29                                                               GAO/AFMD-90-37Farmers HomeAdministration
                                    Financial Statements

    In recognition  of the diversity of the FlnHA portfolio.             the following     schedules provide the provision
    and other adjustments made to the allowance for losses               by entity for     fiscal  year 1988:

                                                       Allowance for Loan Losses
                                                          (Oollars in Thousands)

                            Beginning                   Loans                        and Other
                             Balance                   Uritten                     Adjustments              Ending Balance
                            October 1,                    Off.                   I" Allowance                September 30,
                              1907                        "et                      for Losses                     1988

         ACIF               S12.176,199               $(1,473,728)                   13.007.169                  114.509.640

         IWIF                  2,208,366                  (290,353)                      1.285.035                  3.203.048

         RDIF                      275,947                  (14.826)                       494,904                     756,105

         Others                          3.836                   (171)                        1,043                      4,708
         Total              114.664.348                f(1.779.070)                  S5.588.231                    118.473.501
                                                  EiiiiLiiiiiiZEi                                           ilzEiii=iilillE

                                                       Allowance for Interest   Losses
                                                            (Dollars in Thousands)

                            Beginning                  Interest                       and Other
                             0alWCe                  Receivable                     Adjustments             Ending Balance
                            October 1.              written     Off.              I" AlloXBnCe               September 30,
                              1907                        Net                       for Losses                    1908

         A‘IF               I 3.920.889                  S(477.631)                  11.018.895                  I 4.470.153

         RHIF                      139.316                   (9.024)                        51.036                     181,328

         ROIF                      210.727                   (4.580)                        12.412                     218.559



    Yith consideration         to the State of the agricultural    econany and its effect      on rural housing and farm
    property     values. F&A management is of the opinion that the allowance for losses at September 30, 1988.
    is adequate to absorb future losses inherent            in the portfolio    at that date.    However. considerable
    uncertainties       continue to remain w?r the agricultural        environment.     The losses which will ultimately
    be realized      on the loan portfolio    are dependent upon the impact of future cornnodity prices.          production
    costs, land and housing values. and Gavernnent agricultural               and economic policy.


                                     Page 31                                                         GAO/AFMD-90.37Farmers HomeAdministration

The Secretary   of Agriculture       IS authorized   by law to Wake and issue "OteS to the Secretary           Of the
Treasury for the purpose of obtaining           funds necessary fop dIscbarging    obligations    and for making loans.
advances. and authorized        expenditures    wt of the insurance Funds:      ihis authority      is exercised    in the
event that cash in the insurance funds is insufficient            to covw Congressionally       approved loan program
authority   or other liabilities        incurred by the funds in maintaining    related     loan portfolios.

Bornwings     from the Federal Financing Bank and private     investors  are in the form of Certificates     Of
Beneficial    Omership.     Certificates  of Beneficial  OwnershIp outstanding  with the Federal Financing Bank
are sec"wd by unpaid loan principal        balances and cash. Of the S3.343.405.005      and 16.987.940,236   fund
Balance with U.S. Treasury as of September 30, 1988 and 1987, 12.703,822.547          and S6.281,076.419,
respectively,     were held in ~ererve which. with pledged "npa~d loan principal      balances. Served as
collateral    fw borrowings     frm the Federal Financing Bank. Certificates      of Beneficial    Ownership
outstanding     wth private   investors  are secured by unpaid loan principal   balances.      The long-tern
borrowings    of FmHA as of September 30, 1988 and 1987. follow:

                                                      Long-Term 0orrovlngs
                                                     (Oollars  in Thousands)

                                                                        -.-I_ 1988                                1967

           Federal Financing Bank                                       $58.496.000                       I 65.00'3.000
           U.S. Department of Treasury                                    21.658.218                        19.632.216
           Private investors                                                  670,278                        1.042.225

           Total    0orrow1ngs                                          I 80.824.496                      $ 85.683.443

AS of September 30. 1988, about 54 percent               of the FMA's     long-ten"     debt is payable    o"er     the next 5
years as indicated below:

           Fiscal                                                                       Ueighted
          Years Of                                            Outstanding                Average
          naturit1es              Pnmunt Due                    Borrowings-             &
                                        (Dollars       in Thousands)

             1988                                              $ 00.824.496              11.61%
             1909                 $ 22.041.644                   58.782.852              12.351
             1990                    8.375.644                   50.407.208              12.66%
             1991                    3.390.461                   47.008.747              12.53%
             1992                    5.793.051                   41.215.696              12.34%
             1993                    4.421.708                   36.793.900              12.49%


          1994      2006             36.793,900                               0          12.49%

                                     I 00.024,4’36

                                   Page     DB                                                     GAO/AFMD-90-37Farmers Home Administration
                                     Financial Statements


F&A guaranteed loans we authorized      through the Agricultural   Credit Insurance Fund (ACIF), the Rural
Housing Insurance Fund (RHIF). and the Rural Oevelopnent Insurance Fund (ROIF).         The total outstanding
guaranteed loan principal   on Septenber 30, 1988. was $5.258.976.683     of which Fe-LA had guaranteed
$4,600.845,451.   The period of guarkntee provided by FnHA may extend 40 years depending on loan

The guaranteed     unpaid       principal   balance     by entity         as of September 30. 1988 and 1987. follows:

                                                                          1988                                       1981
                                                                  Guaranteed "npa,d                          Guaranteed Unpaid
                                                                  Principal    Balance                       Principal    Balance
                                                                                  (Dollars         in Thousands)

                            ACIF                                       I 3.618.477                               $ 2.068.910
                            RHIF                                                 17,306                                     21.457
                            ROIF                                               965,062                               1.093.968
                                                                       ----_-_____                               ___________
                            Total                                      t 4.600.845                               I 3.184.335
                                                                       . ..I..*.../                              I..........

Conditional     cannitments         to make guaranteed        loans have been established                in the amount of $447,348.713.

Anticipated     losses on guaranteed loans are estimated based on historical      d&S, losses experienced        in
Ccwarrble     insured programs, current market conditions,     and field office   expectations      of loan losses.
This estimate      is reported as an expenre. and I corresponding    accru.~l for estimated     lasses on guaranteed
loans is reported       as a liability on the Consolidated Statenent of Financial     Position.

The adjustments  in the accru(11 for estimated                   losses       (also   see Nate 6) .SS of September           30, 1988 and
1987, in thousands of dollars.   foll&

                        Beginning                                                          Adjustments                 Ending
                         B.?la"Ce                                                           to Accrual                 Balance
                        October 1.                           LOSS                         for Estimated             September 30.
                          1987                           Settlement                           Losses                     1988

      ACIF                  I    644.338                  I      (82.057)                    I    606.163                 $1.166.444
      RHIF                            271                             (404)                            366                           233
      ROiF                       119.622                          (31.025)                         21.113                       109.910
                                                      _____________.                                                -----.-_.____
       TOTAL                 $ 764,431                      $ (113.486)                          $ 627,642                $1,278.587
                      . ..iii.....ii                  . . . ..E...iE..E                   i...i..*.....             .E....ii....i

                        Beginning                                                          Adjustments                 Ending
                         Balance                                                            to Accrw.1                 Salance
                        octcber 1.                           LOSS                         for Estimated             September 30.
                           1986                          Settlement                           LOSSeS                     1987

       AClF                 $     38,814                  I     (77.750)                      I     683.274              S 644,338
       RHIF                           369                           (166)                                 68                    271
       ROlF                      132.526                     (17.788)                                 5.084                119.822
                                                      _______.__----                      -......______
       TOTAL                 I 171.709                    I     (95.704)                        $ 688.426                 $ 764.431
                      ..iii........                                                                                 . . . . ..iiii...

                                     Page   36
                                    Financial Statements

invested Capital
Inverted   Capital   represents:         amunts appropriated     by Congress      to ccanence operations   of the revolving
funds; amounts appropriated         to    increase the working capital     of     revolving   funds which do not receive
reimbursement     fop losses (Note        2); donations or nonreciprocal        transfer    of assets frca other agencies;
the results    of operations     fran     the transferred   assets: and the       Government's net investment    in FmHA's
property    and equipment.

The following     is a sunary      of the activity      in Invested   Capital    for   the 1988 and 1987 fiscal      years:

                                                                                                    invested Capital
                                                                                                1988                   1987
                                                                                                (Dallars    in Thousands)

         Beginning    Balance                                                               I 1.142.489            I 1.140.844

         Fiscal Yew Activity:
            Appropriated    increase to Yorking Capital                                              7,500                            0
            Capital    Expenditures                                                                  3,505                      3.068
            Depreciation                                                                            (3.776)                    (1.666)
            6001: Value of Disposed Equipment                                                       (1.082)                       (555)
            Nonreciprocal     Transfer of Loan Assets fran        Other Agencies                        573                      1.041
            Loan Repayments Returned to U.S. Treasury                                                  (385)                      (452)
            Results of Operations frown the Transferred           Loan Assets                            (12)                       211
                                                                                            __.____.___            ___.__.__._
         Ending Balance                                                                     I 1.148.812            I 1.142.489
                                                                                            i....i.*.i.            ../.....ii.
Cumulative   Results of Operations
The Cumulative Results of Operations      is the net result of operations    from the WvOlving funds since
their inception     and the amounts reimbursed due to realized    losses (Note 12).   The following  is a
sure'nary of the 1988 and 1987 fiscal    years' activity   far the Cumulative Results of Operations:

                                                                                                    Cumulative Results
                                                                                                         of Operations
                                                                                                 1988                  1967
                                                                                                  (Dollars   in Thousands)

          Beginning   Balance                                                              S(36.335.417)          $(18.662.411)

          Fiscal Year Activity:
             Net Results fran Operations                                                       (13.806.216)          (22.086.677)
             Reimburserrent for Losses                                                             7.554.171             4.413.671
                                                                                          ______-_____-          ___-_--_____-
          Ending Balance                                                                    f(42.587.462)          S(36.335.417)
                                                                                          ii...........          . . ..i.......i

                                    Page 37                                                          GAO/AFMD4O37 Fanners Home Administration
                                 Financial Statements


As In the previous fiscal  year, FM+A was required to sell loan assets in fiscal    year 1988. An overview
of the 1988 and 1987 sales (required     by the Agricultural Credit Act of 1987 and the Omnibus Budget
Reconciliation   Act of 1986.respectively)     follows:

                                                                       1988                                     1987
                                                                                 (Oollarr      in Thousands)

     Receivables      Sold:                                      $1.663.735                               $5,006.885
       Cash                                                          1.086.842                              2.871.673
        I""estnents   in LO*”Sale
           Trust Assets (Note 7)                                                   0                            234.615
        Protective  Advance Fund                                                   0                            10.000
                                                                 _____...~.                               ___---____
           Tot.31 PrOceeds                                       11.086.842                               13.116.288
        on Sale Of Loans:                                        I     576.893         l                  $1.890.597

     * NOTE:       The $576.893.000        loss shown above relates        solely to those loan assets actually     sold in
                   fiscal    year 1988.        FnHA also provided for      in f?scal year 1988 an estimated S498.000.000
                   loss attributable         to the bnticipated   loan     asset sale of fiscal     year 1989. Consequently,
                   the total     loss on sale of loans recognized            in fiscal yew 1988 was 11.074.893.000.
                    Information     regarding the 1989 loan asset          sale is furnished    within this note under Future
                   Asset Sales.

                   An allowance for     losses   aIY)unt was not allocated                 to the 1988 or 1987 receivables   sold due
                   to immateriality.

1987 Loan Asset Sales
The asset sales of fiscal     yew 1987 were primarily conducted through the sale of a portion of FmHA's
rural housing and cwmxunity programs loan portfolio    to the Rural Housing Trust. 1987-l. and the
Cmunity      Program Loan Trust. 1987A. respectively.  Additionally.  prior to the sale of CMRnunity
program loans to the Trust. eligible    CMnunity program borrowers were given the Opportunity   to PuPChase
their   loans at a c!iscaunt.

The asset sale conducted with the Rural Housing Loan Trust. 1987.1. consisted of the sale of
approximately  32.9 billion of rural housing loans.   FMA received over $1.7 billion   and investments                            in
the Trust and a protective  advance fund valued at $211 milllan (I201 million  and $10million.
respectively).   A loss of approximately  $1 billion was realized on the rural housing loan sale.

The asset sale conducted with the Canunity       Program Loan Trust. 1987A. consisted of the sale of $1.9
billion    of ccwwnity   program loans.  The sole proceeds were approximately    $1.1 billion and an
investment    in the Trust valued at $33.6 million.     Frd!A realized a loss of approximately $842 million on
the community program loans sold to the Trust.

In addition    to the cannunity program trust sale. 152.7 mIllion  was received from the sale of $72.1
million   of receivables  directly  to borrowers.  Borrowers who purchased their loans received a discount
of 119.5 million.

                                  Page 39                                                                GAO/AFMD-SO-37Farmers Home Administration
                                       Financial Statements


The following  schedule          provides    a reconciliation       of expenses to budgetary         outlays   as of September    30,
1988 and 1987:
                                                                              -__1988                                 1987
                                                                                          (Oollars    in Thousands)
Expenses As Reported on Consolidated
statenent    Of operations:
   Nonperforming    Loans interest                                            I      997,267                     I 1.093.355
   Total Interest    Expense                                                       8.987.288                       9237.861
   Total Provision     for Losses                                                  6.008.583                      13.674.463
   Total Other Expenses                                                            3.494,316                       4.279.405

    Tot*,       Expenses                                                          19.487.454                      28.385.084
  Expenses Nat Requiring Outlays:
     Provision    for Losses on:
        Loans (Note 6)                                                             5.090.231                       9.315.840
        Accrued Interest    on
           Loans (Note 6)                                                              95,318                      3.063.104
        Guaranteed Loans (Note IO)                                                    627,642                         688,426
        Acquired Property     (Note 8)                                                205.397                         607,093
  Loss on Sale of Loan Assets
     (Note 13)                                                                      1.074.893                       1.890.597
  Interest     Credit Program Expense (Note 4)                                      1.427.314                       1.514.131
  lnterert     on Nonperforming    Lams
     (Note 6)                                                                         997,267                       1.093.355
  Other                                                                                27.004                           50,675

        Total      Expenses Not Requinng       Outlays                            9.535.061                       18.223.221
                                                                               ..~.._...._                       __.___.__..
   Expenses Requiring          Outlays                                            9.952.393                       10.161.863
                                                                               _.._...---_                       ___.._.._..
  Other outiays:
     Loans Nade                                                                     3.493.511                       3.874.236
     LOSS Settlement  of Guaranteed Loans                                              113.486                           95.704
     Acquired Property Oisbursements                                                    73.698                           91.195
     Purchase of Loans                                                                 262.015                           59,123
     Payments Made to Investors                                                         74,550                           51.884
     Payments on Notes Payable                                                         371.947                           35,179
     Other                                                                               6,854                            1.394
           Total     Other Outlays                                                  4.396.061                        4.208.715
Change in Accounts           and Accrued     Interest    Payables                     227.540                             7,990

Total      Outlays                                                                 14.575.994                       14.378.568
                                                                                  __.-___-_-.                     -__-__-____
 Less Offsetting         Collections                                                 7,301.975                      10.633.419
                                                                                  __.._.._.._                     __-._______
 Net Outlays                                                                      I 7.274.119                     I 3.745.149
                                                                                  E3iE==lis=i                     IIa.sii*izi=

                                        Page 41                                                         GAO/AFMD-90.37Farmers Home Administration
                                                Financial Statements

           Within RHIF, the portfolio            is canprised of single family housing (SFH) and multiple                 family housing
           (YFH) loans.       Regarding the SFH loan programs. the stated rate on the majority                     of loans approximates
           the U.S. Treasury average interest               rate.     Although SFH borrowers may participate         in the interest        credit
           program (thereby receiving            an effective      rate below the market rate).       the interest     credit     is subject to
           an annual review/adjustment.              Additionally,       FMA is authorized     to recapture partial       or full repayment
           of the interest       credit when the property            is sold, transferred.     or vacated by the borrower and
           appreciation      in the property has occurred.               Because an unknown portion of the interest            credit may be
           recovered      and the fact that few SFH loans are held to the full tern Of the note. the extent of the
           interest     rate cost Subsidy over the life of SFH loans cannot be reasonably estimated.                           The stated
           interest     rate on I!!% loans also approximates              the average Treasury rate; however. WFH loans are eligible
           for interest      credit     for the entire life of the loan and is not subject to recapture.                      FnllA estimates
           the unamortized       discount on UFH loans would approximate               15.2 billion   as of September 30, 1988. The
           expense of providing           the interest     credit    program to SFH and MFH borrowers is currently             recognized     as an
           operating      expense during the year and reported in the Consolidated                  Statement of OperationS.           (See Note
           4 for additional         information     regarding the RHIF interest         credit program expense.)

           These estimates     assme borrwer     repamyments under the terms of the note.       Also. if the $9.6 billion
           unamortized    loan discount was reported on the Statement of financial        Position.    then the related
           allowance for losses rould be established        based on the discounted    lo&ns receivable.      It is estimated
           that the allowance for losses would be reduced by approximately          $6.8 billion     and the net cumulative
           effect   of reporting   the unamortized discount would cause an approximate $2.8 billion           reduction  in net
           loans receivable.

           Since unamortized   discount and allowance fo?' loss data IT? not maintained   on a loan-by-loan     basis. the
           reduction  in the allowance for losses was based upon an analysis    of each of the largest     funds in
           aggregate.   A loan-by-loan  analysis would be rewired   to determine the actual effect     of the unamortized
           discount on the allowance for losses cnputation.

           Following   are the estimated adjustments which would be necessary to recognize the interest    rate                            cost
           subsidy on the below market rate loans receivable     as of September 30. 1966. These estimated
           adjustments    represent the cumulative  effect on a11 prior years and the current year.

           Consolidated       Statement    of Financisl    Position
                                                                                                                  (Dollrrs      in Thousands)
                Loans Receivable.      as presently   recorded. net of allownce for losses                                   139.697,111
                  Cumulative effect       on current and prior years of
                    recording   interest     rate cost subsidy                                                                (9.646335)
                  Cumulative effect on current and prior yews of
                     recording   interest    rate cost subsidy on allowance for losses                                      6.784.102
                 Loans Receivable.        net                                                                              f36.834.370
                Cumulative Results of Operations.   as presently recorded                                                S(42.587.462)
                   Cumulative effect on current and prior years of
                     recording  interest rate cost subsidy                                                                 (2.862.733)
                 Cumulative     Results    of Operations                                                                 1(45,450.195)
            Consolidated      Statement    of Operations

                 Net Loss frca Operations,     as presently  recorded                                                    1(13.806.228)
                   Cumulative effect on current and prior years of
                     recording  interest   rate cost subsidy                                                                 (2.862.733)
                 Net Loss fm        Operations                                                                           S(16.668.961)

(917109)                                        Page 43                                                       GAO/AJ?MD-9037Farmers HomeAdministration
--   ----
                          Financial Statements

The following    schedule provides a reconciliation      of net loss to the net cash used in operating
activities    as reported on the Consolidated     Statement of Cash Flows for the fiscal  years ended
September 30. 1988 and 1987:

                                                                           1988                                1987
                                                                                  (Oollars     in Thousands)

Net Loss fra-a Operations                                             $(13.806.228)                    f(22.087.659)

   Expenses Not Requiring Outlays          (Note 14)                      9.535.061                       18.223.221
   Incme Attributable      to Interest      Credit Progr&r               (1.427.314)                      (1,514*131)
  Appropriations     Received                                                 574.098                         556.806
   Expended Appropriations                                                  (589.225)                        (601,588)
   Interest   Receivable   Reclassified                                     (255,770)                        (449.043)
   Change in Interest     Receivable                                        (329.058)                        (439,070)
   Interest   Receivable   Written-Off,        Net                           (491,323)                       (263,687)
   Change in Accounts Receivable                                                95.261                         (27.870)
   Change in Accounts and Accrued          Interest   Payables               (227.540)                           (7,990)
   other                                                                       (30.113)                         47.047
                                                                        .-___...___                      __._.-____.
  Total    Adjustments                                                     6.854.077                      15.523.695
                                                                        _..- _.__...

Net Cash Used an Operating        Activities                           1(6,952.151)                      S(6.563.964)


FM.4 loan making activities       provide for stated loan interest    rates which are below Treasury market
l-e?*.     Because the revolving    funds typically   borrow ~ney to fund these lending programs at the U.S.
Treasury rate. costs associated        with making loans at a lower interest    rate have historically   been
recognized    through the difference      between the interest expense on intragoverrwntal      debt and accrued
loan interest     income on an annual basis.

Federal accounting      principles    governing the recording    of interest    rate cost subsidy on below market
rate receivables      are undergoing reexamination     by the Congress, the Executive Branch. and the General
Accounting    Office.     The final   interpretation  of federal accounting principles.       as they relate to
interest   rate cost Subsidy. cannot presently        be determined.      Accordingly,   the FnHA accounting   system
Currently    does not provide for loan discounting       or provrde the automated capability        for the related
accounting    entries    over the life of the loan.

Uithio ACIF. loans are available        at limited      resource rates significantly      below the Treasury average
interest   rate.     Based on an analysis      of loans outstanding     us of September 30. 198E. if a discount         had
been recognized      at the time of loan closing.        the unamortized discount would approximate       $2.8 billion.
Similarly.    withrn ROIF. camwnity       facility     and water and waste loans are typically      made at interest
rates substantially       below the U.S. Treasury average interest         rate.     In analyzing ROIF loans outstanding
as Of September 30. 1988. if a discount had been recognized at the time of loan closing.                    the
unawtized       discount would approximate         $1.6 billion.

                             Page 42                                                         GAO/AFMD-9037 Farmers HomeAdministration
                                  Financial Statements

During fiscal     year   1988. FlnHA sold only mnmunity program low *ssets through a borrower buyback offer
(lliscount  Purchase     Program) whereby eligible     borrowers were provxded the opportunity ta purchase their-
loans at a discount        under the provisions   of the Agricultural  Credit Act of 1987. The Act extended to
eligible   corwnity      program borrowers the right to buy back their loans at a price cornparable to that
paid by the C-unity          Program Loan Trust, 1987A (the carmunlty program trust asset sale of fiscal     year
1987). but updated       for current karlret conditions.

During fiscal     year 1988. approximately   2100 borrowers purchased nearly 3700 loans with an unpaid
balance,   including   accrued interest.   of 11.663.734.368.     Proceeds frcn the Discount Purchase Program
awunted to $1.086.841.795.        The discount associated     wth the program was $576.692.573.

Future   Asset   Sales

Farmers Hone Administration           is required by the Omnibus Budget Reconciliation       Act of 1986 and the
Continuing     Appropriations      Act of 1987 to raise net proceeds of $584 million        in fiscal    year 1989 through
the sale of camwnity          program loans.     The Rural Development. Agriculture.      and Related Agencies
Appropriations      Act of 1989 includes a provision        which requires   that before any loans are sold bo~~owcr~
be lttorded     the opportwlty        O+ prepayment.   Based (I" these stat"tory   req",reme"ts.      Fn*1A plans to offer
another Discount Purchw? Program to eligible              canwnity   program borrowers.     To the extent proceeds from
this program do not meet the required $584 million,               FMA will conduct a sale of loans (securitired
sale. private      placement. or sew? other type of third party sale) which will achieve the full amount.

As of I(arch 1989 approximately         1800 borrowers with unpaid principal           balances of $1.679 blll~on      have
indicated     interest     in the Discount Purchase Program.        interested     cornnunity program borrorerS      have until
May 9, 1989. to submit their final payment; hcwevw. it is anticipated                      that not a11 borrowers will
comply.    Consequently.        F*IA has estimated that sufficient         payments will be received     to satisfy    loan
balances with an approximate          fwx value in the range of $1.458 to $1.679 billion             resulting     in a lass of
approximately       1498 to 1574 million.      Accordingly.     the fiscal    year 1988 consolidated     financial
Statements provide for an estimated $496 million              loss (included      ?n the loss on sale of loan assets on
the Consolidated        Statement Of Operations)      through an increase in the allcwnnce for loan Josses on the
Consolidated       Statement of Financial     Position.

                                  Page 40                                                      GAO/AFML-99-37 Farmers HomeAdministration


Cumulative     results   of operations     represent the cumulative      deficit  or surplus resulting      from operations
for 411 of the FrdiA revolving         funds.    The cumulative   results of aperetions      for the Agricultural      Credit
Insurance Fund (ACIF) which WIS established            in 1946. the Rural Housing Insurance Fund (RHlF) which was
estlblished      in 1965. and the Rural Development Insurance Fund (ROIF) which YLS established                  in 1972
equll the net losses sust4ined fwn current 4.nd 411 prior yews less the Iccumul4ted                     reinburrwents       for
rellized    losses received by those funds.          The cumulative     results  of operations.    by entity,    IS of
September 30. 1988. follow:

                                                                    Reimbursement                 Cumul*tiw
                                        Net Losses                   for LDSWS                    Results Of
                                        (Inception)                  (Inception)                  operations

      ACIF                       $(39,546,722.703)                 f10.980.735.000            S(28.565.987.703)
      RHIF                         (                  I5.I28,607.573               (9.883.496.267)
      RDIF                           (8.245.456.735)                   4.110.666.000              (4.134,786.735)
      All Others                           (3.189.600)                                 0                 (3.189.600)
                                 --_______________                 _-...-._-______            _______--....----
      Total                      $(72.807.552,878)                 $30.220.090.S73            $(42.587,462.305)
                                 *****************                 ***************            ***ii***********i

The reimbursement       for realized      losses does not include current and prior fiscal     year realized  losses
eligible   for future reimbursement.            Additionally, FrdA ~4s not fully reimbursed for the losses
sust4ined     in fiSC41 year 1986. which will be carried fanrrd           and requested in the next fiscal    year.
The Potentill      reimbursements      (based an the fiscI1   year of loss realization)   which FlnHA may receive
pwsunt     to Congressional       action follow:

                          1986                           1987                        19BB                    Total

      ACIF         I    35.000.000                13.442.596.000            f4.452.159.000           I 7.929.755.000
      RHIF                              0          3.660.061.000              2.677.897.000            6.337.958.000
      ROIF                  7.500.000              1.592.047.000              1.470.999.000            3.070.546.000
                   ------------..               ._...___-_____-             _______-______           ____________.__
      Total        5      42.500.000              $8.694.704.000            18.601.055.000           f17.338.259.000
                   __________                   ***************             **************           --..---.---****

Reported      cumulative  results  of opentions     in excess of the outstanding     requests for reimbursement
Primlrily      represent  allwance   for future losses on receiv4bleS.      lllwance     for losses on acqu,red
Property.      and accrual for estimated     losses on guaranteed loins.

                                   Page38                                                         GAO/AFMLM@37Farmers HomeAdministration
                                 Financial Statements


Unexpended Appropriations
Unexpended Appropriations  include           the undelivered       orders   and unobligated  balances      of the FmW\ general
funds which receive Congressional            appropriations       through   the budgetary process.

As appropriated       funds incw obligations.     the obligated   aIraunt is recorded as an undelivered              order and
show- as an equity item on the Consolidated          Statement of Financial       Position.      Undelivered      orders are
relieved     by either an expenditure     or an obligation    cancellation.      Appropriated      funds which are not
obligated      are shorn as the unobligated     awunt of the Unevwded          Appropriations      on the Consolidated
Statement of Financial         Position.  At the end of the fiscal       year. certain multi-year         appropriations
which have unobligated        balances remain available     to FnHA for obligation        in future periods.         Unobligated
appropriations      returned to the U.S. Treasury may be made available           for restoration       to FmHA subject to
administrative      determination.

The following   summarizes the activity for the appropriations    and the Unexpended Appropriations                      balances
of the appropriated   funds for the 1986 and 1987 fiscal    years in thousands of dollars:

                                                                       Undelivered        Unobligated
                                             Appropriations              Orders            0a1.Wlces

         Beginning Balances.
         October 1. 1987                                                    1525.036          I 11.839

         Fiscal Year Activity:
            Appropriations     Received             $574.098                                   574.098
            0b;igkions     Incurred                                          577,653          (577,653)
            Obligations    Cancelled                                          (14.570)           14.570
            Accrued Expenditures                                            (592,730)
            Reimbursements                                                      (1.473)           1.473
            Balances Returned
               to U.S. Trelsury                                                                 (12.710)

           Ending Balances,
           September 30. 1986                          1574.098

                                                                       Undelivered         Unobligated
                                             Appropriations              Orders             Balances

           Beginning Balances.
           October 1, 1966                                                  1563.473          S 8.684

           Fiscal Year Activity:
              Appropriations      Received          1556.806                                    556,806
              Obligations     Incurred                                       562,256           (562.256)
              Obligations     Cancelled                                      (16.037)             16,037
              Accrued Expenditures                                          (602.890)
              Relnbursmnts                                                     (1.766)            1.766
              Balmier     Returned
                to U.S. Treasury

           Ending Balances.
           September 30. 1987                                               $525.036


                                 Page 36                                                       GAO/AFMD-90.37Fanners Home Administration
                                 Financial Statements

Supplemental       information    associated   with       fiscal      years   1966 and 1967 long-term    borrowings   follows:

                                                      Accrued lnterert  Payable
                                                       (Oollars  in Thousands)

                                                             1988                                   1987
      lntragovernnental   Debt:
         U.S. Treasury                                I       706.981                          I     651.537
         Federal Financing Bank                            2.029.543                              3.081.562
        Subtotal                                            3.536.524                             3.733.099

      Private      Investors                                       37.783                               56,320

      Other                                                         6.552                              31,472
      TOTAL                                           I     3,5E!n.859                         I 3.620.891

                                                             ,nterest    Expense
                                                          (Oollars    in Thousands)

                                                              1988                                  1987
      Intragovernmental   Debt:
         U.S. 1re*sury                                $     1.211.362                          I   1.155.462
         Federal Financing Bank                             7.678.991                              8.046.262

         Subtots                                            8.890.353                              9.201.724
      Private      investors                                       66.851                               64,762

      Other                                                        28.084                               51.375

      TOTAL                                           I 8.987.288

During July 1974, FrMA began selling   Certificates of Beneficial  hrnerrhip   (CEO) to the Federal
financing  Bank (FFB) as a primary means of program financing.    The CBO interest    rate Is based on
Trea~ury~s cost of money plus l/8 of 1 percent to cover FFB's aaninistrative       expenses.  The interest
Pates on FFB CEO's outstanding   LS of September 30, 1988. range fra    7.324 percent to 16.516 percent.

Owing flrcrl      year 1966. FMA was required to pay a prepayment penalty on the early retirement      of FFE
CBO'r.     In cwlying    with the mandated loan asset sales. FnHA diminished   the unpaid loan principal
balances which Served as collateral      for the CBO's. The agreement between FnHA and FFB provides      that
redmption     of MO's nay occur at my tine: hwever.      the payment made shall be of an anount 'which will
result   in 1 yield for the period from the date of repurchase to the maturity      date of such CBO equal to
the U.S. Treasury new issue rate for a security      wth a maturity  and pament schedule conparable to the
remaining maturity     and payment schedule of such CBO: The application     of this provision  of the
agreement resulted     in a penalty of $79.507.592.

                                 Page 34                                                           GAO/AFMO-9037 Farmers HomeAdministration
                                       Financial Statements

    In fiscal  year 1987, FlaHA conducted loan asset sales as tequired       in the Omnibus Budget Reconciliation
    Act of 1986 (Public Law 99-509).      As a result of these sales (Note 13), the Rural Development Insurance
    Fund (ROIF) maintains   an investment   in the Cwnnuoity Program Loan Trust. 19i37.4. This investment,
    reported at its appraised value of $33.614.488,       represents  a Class C residual  security in the Trust and
    entitles  the holder to residual   cash flows resulting     fran loan repayments not required  to pay trust
    security  holders or to fund required     reserves.

    The Rural Housing Insurance         Fund (RHIF) maintains    an investment    in the Rural Housing Trust. 1987-1.
    This investment      represents    Class 6 securities   valued at $178.660.537      (1987 appraxsed value of
    $180.000.000    less return of       investment received during fiscal     year 1988 of $1.339.463)    and Class C
    residual   Securities     valued   at ~21.000.000.

    FnkP intends to retain the ROOF and RHIF Class C investments      at least until a sufficient     tract record
    has been establlshed    to allow their true value to be determined.     FMA intends to sell the RHTF Class 6
    investment  during fiscal   year 1990. Based on estimates of the Class 8 investment's       future value, It is
    anticipated  that FnHA will receive sale proceeds not less tnan its recorded value.


    Acquired property       is reported at net realizable        value (estimated   market value less cost of
    disposition).       Property is acquired by the FlnHA revolving          funds largely through foreclosure       and
    voluntary     conveyance.      The properties     consist primarily   of 4.685 farm properties    (total   acreage of
    approximately      1.5 million)     and 12.330 rural single family dwellings        which are held by the revolving
    funds for resale.         The revolving    funds aw allowed to lease certain        properties to eligible     individuals
    for a period not to exceed 1 year.             Fiscal yews 1988 and 1987 lease and rental incMne of $10.769.632
    and S11.566.253.      respectively,     is reported IS other incane on the Consolidated        Statement of Operntlons.

    The 1987 Agricultural      Credit Act provides borrcwer rights        regarding the sale of acquired farm
    properties.    In order    to protect these rights.  restrictions       were imposed on the sale of acquired         farm

    During GAO's FY 1987 financial        audit. internal    control weaknesses wwe cited concerning the valuation
    of acquired property      and the reconciliation      of the Property accounting records.         Due to accounting
    system limitations     in recording    gains or losses realized      at the tine property      is acquired through
    voluntary   conveyance. FmHA implemented procedures in fiscal           yew 1988 to properly       report these losses
    as loan losses.      These procedures estimated the losses incurred fran property acquired through
    voluntary   conveyance and included these losses in the loan receivable             writeoffs.     These weaknesses will
    continue to exist and related        corrective  procedures will remain in effect         until revisions   are fully
    implemented to the acquired property system.            These revisions    are included in a major systems
    alteration   currently    in proces*.

                                       Page 32                                                  GAO/AFMD-9037 Farmers Home Administration
                                       Financial Statements


In fiscal    year 1988 FM Substantially        canpleted the implementation        of a loan ClisSification      syste'n:
approximately      75 percent of the portfolio     including     farmer and single family housing program loans was
classified.      The loan classification     system, required by OMB Circular        A-129, provides the Agency
additional     data to .asSist in assessing the credit        risk of the portfolio.      OWECircular      A-129 provides
that Federal agencies annually perform a risk assessment of their portfolio                 and assign risk ratings.
The Tisk ratings      are based on the borrow?TIS fin(Lncial         position, payment history.    collateral    or
security    value. as well IS other relevant       information.

An analysis      of the canparability     of the fiscal      years 1988 and 1987 provision    for losses must include
recognition      that the 1987 provision      provided for both the current provision       IS well &s adjustments    to
prior yew provisions.         The significant       incre.Sse in the fiscal   year 1987 allowance for losses ~15
related     to the declining   trend in the agricultural          economy over several years: that is. the increase
was not attributable       to I single adverse event during fiscal          year 1987.

The procedureS    followed    in estimating      IoSSeS for   fiscal         year   1988 included:

    --The allowance for loan losses is based on historical              data (consisting    of writeoffs,     loan
       settlement  data. and acquired property      losses).    and an analysis of the loan classification                         of
       borrower .SccountS. and an analysis of current market factors             and conditions     (to include
       delinquent.  rescheduled.  and collection-only        accounts).

    --The allowance for losses on accrued interest          receivable   is based on historical     data (cumulative
       writeoffs  of interest    receivable).   an analysis    of the loan classification     of borrower accounts.
       and an analysis    of recent delinquency     data.   The latter   analysis   provides for a 100 percent
       allowance for 105s on the interest       receivable    on loans delinquent     over 90 days.

The other adjustments     in allowance for lo.% losses for 1988 include an estimated $498 million     loss on
the anticipated  fiscal     year 19E9 sale of camunity   program loan assets.   The $498 million estimated
loss is not reported    in the Provision    for Losses on Loans but is included in the Loss on Sale of Loan
Assets in the Consolidated       Statement of Operations (Note 13).

The other adjustments    in allowance for         interest   losses      represent        IntereSt       on Nonperforming    Loans as
reported  in the Consolidated    Statement        of Operations.

The provision     and other   adjustments      in the allowance        for     IoSseS for the fiscal           years   1988 and 1987

                                                                                                                    Allowance for
                                                          Allowx~nce for Loan Losses                               Interest    Losses
                                                              1988            1907                              1988                1987
                                                             (Dollars  in Thousands)                           (Dollars     in Thousands)

 Beginning Balance                                       $ 14.664.348               I   6.102.903          I  4279.752        I     386.980
 Receivables    Yritten   Off. Net                           (1.779,078)                 (754.395)              (491.323)          (263.687)
 Provision   for LosSeS                                       5.090.231                 9.315.840                  85.318        3.063.104
 Other Adjustments      in Allowance     for   LoSSeS            498.000                             0           997,267         1.093.355
                                                         __________-.               ..~__._..___           _____--___--       ____--__-.__
       Ending Balance                                    I 18.473.501               $ 14.664.348           $ 4.871.014        I 4.279.752
                                                         IZillSlXliil               E=ii**im=ssci          lisSi=imLli.       S5*Sii==IESi

                                        Page 30                                                                GAO/AFMW9@37Farmers Home Administration
                                 Financial      Statements

NOTE 5:          L@ANS

The unpaid principal  balances and the related        allowance       for   losses    by entity   and Mjor     loan progrm         as
of Septmber   30. 1966 and 1987. follw:

                                          September 30. 1988                                          septmber    30. 1987
                                        (Dollars  in Thousands)                                     (Dollars   in Thousands)

                                               Allcwance                                                     Allaance
                                                   for                                                           for
                                               Losses on               Net                                   Losses on                 Net
                             Unpaid            Principal              Unpaid                 Unpaid          Principal               Unpaid
                            Principal         _ (Nate 6L          .fri~bcc~zL               Principal          (Note 6)             Principal
Agricultural     Credit
Insurance Fund
Fam Dmership               I 7.304.333        S 2.629.309         II 4.675.024             I 7.549.307       I 1.978.908           I 5.570.399
Operating                    5,729,855          2.409.106            3320.749                6.280.074         2.085.088             4.194.906
Emergency                    8.419.073          6.5R5.509            1.833.564               9.292.036         5.751.240             3.540.796
fconmic      Emergency       3.419.262          2.842.750               576,512              3.798.945         2.331.236             1.467.709
Other                           564.036             28.095              535.941                 587.966            15.360               572.606
Guaranteed loans
   purchased fran
   holders                        29,742            14.871               14.871                  28,733            14,367                 14.366
                                                         __       _ _ _. _ _.              _._________       ___________           ._.______~_
                            25.466.301         14.509.640           10,956.661              27,537,061        12.176.199             15.360.862
                           ___________        ___________         __________.              __.________       ___________           ___-_______

Rural Housing
Insurance Fund
Aural Housing               18.560.191           3.1x3.259          15.441.932               18.368.197         2.126.932           16.241.265
Labor Housing                   137.566              19.667             117,899                  139,457            19.937              119.520
Rural Rental Housing         0.347.437               64,300          8.283.137                7.901.688             60.867           7.840.821
Rural Housing Site                   566                      1              565                      704                     1              703
Guaranteed loans
   purchased frm
   holders                         1.641                 821                    820                1,258                  629                629
                                                          _.       _. __ _ _. . _.          ___________      ___________           ______-__-.
                            27.047.401           3.203.048          23.044.353               26.411.304        2.206.366            24.202.938
                                                          -_       _-__-----..                         __    __ _ _ _ _ __ _ _ _   ______.____

Rural Developlent
insurance Fund
uater I waste                 4.072.137            465,434            3.606.703               5.192.352              28.320             5.164.032
Ccunity     Facilities        1.025.371             47.310               978.061              1.183.506                  683            1.182.623
Business I Industrial             36.914                862               36.052                  37,689                 880                36,809
Guaranteed loans
   purchased frm
   holders                        484,997            242,499              242.498                492.127          246.064                246,063
                           _____-_____         ___________         _________--              ___________      ___________           ______.....
                              5.619.419              756.105          4.863.314               6.905.674           275.947             6.629.727
                           ___________         _._____-.__         ___________              ______-____      _______-_--           _.__._____.
 All     Other Entities             37.491              4.708              32,783                 38.495              3.836                34.659
                           _..________         _. _ _ __ __        _._________                               ___..._.._.           ____.______
 Total     Fti             $58.170.612         $18.473.501         $39.697.111              160.892.534      114.664.348           146.226.186
                           **rl*l*i*.i         i*sc**s*si*         liEEiii=iS=i             i====si==,ci     ==**s.il====i         /IS/iSliCii

 FWA had unliquidated loan and grant obligations              of $4.645.631.423        and $4.962.626.952     as of
 Septmber 30. 1988 and 1987. respectively.

                                  Page 28                                                               GAO/AF’MD-9037Farmers Home Administration
                                  Financial Statements

Expended Appropriations

      Appropriations      are provided by Congress on both an annual and mult,-year            basis to fund certain
      general funds and other expenses such as personnel Compensation and fringe benefits,                       rents.
      ccawnications.       utilities.   other administrative    expenses. and capital      expenditures.         The current
      budgetary process does not distinguish          between capital    and operating    expenditures.        For budgetary
      purposes. bath are recognized         as a use of budgetary resources as paid. however foP financial
      reporting    purposes under accrual accounting.        operating   expenses are recognized        currently      while
      expenditures     fo? capital    and other long-tern    assets are capitalized      and are not recognized          as
      expenses until they are consumed in FUiA's operations.              Appropriations    for general fund activities
      we recorded as a financing          source when expended.      Unexpended appropriations       we recorded as
      equity of the U.S. Government (Nate 11).

Loss Reimbursement

      Reimbursement for losses is provided by Congressional           appropriations     and is used to reimburse the
      three major revolving      funds of F&A for losses sustained        in excess of reported     income.  The losses
      reimbursed include actual amounts written          off and losses sustained on the sale of acquired
      property;    hwever.   adjustments     in the allowance accounts to record estimated future losses are not
      included in the requests for reimbursement.            Requests for reimbursement are submitted as part of
      the budgetary process.        Appropriations    to reimburse revolving     fund losses are typically   received 2
      years after the year in which the loss was sustained (Notes 11 and 12) and are recorded as an
      offset    to cuwlative    results   of operations.

Intragovernmental     Financial    Activities

      The FmHA's consolidated     financial   statements  are not Intended to report the Agency's proportionate
      share of the Federal deficit       or of public borrowings.   including    interest thereon.   Financing for
      budget appropriations    reported on the FrklA's Consolidated       Statement of Operations   and Consolidated
      Statement Of Cash Flors could derive frcnx tax revenues or public borrowings or both; the ultimate
      source of this financing,      whether from tax revenues or public borrowings,        has not been
      Specifically   allocated  to the FMA.

      During fiscal    years 1968 and 1987. the majority    of the FDHA's employees participated     in the
      contributory    Civil Service Retirement    System (CSRS) or Federal Employees Retirement     System (FERS),
      to which FnHA made matching contributions.        The F&A does not, howwr.       report CSRS and FERS
      assets,    accumulated plan benefits.   or unfunded liabilities.   if any. applicable   to Its employees
      since this data is only reported      in total by the Office of Personnel Managetnent.


Accounts receivable       is caprised      primarily of receivables     resulting    from accrued rent on acquired
property,      accrued interest     on judgments. and the recapture      of interest     credit.   Of these. the most
Significant       is the S10.987.773 recapture of interest        credit receivable.        This amount represents the
amount of interest       credit   to be repaid to the Government and is determined after giving consideration
to the awwnt Of interest          credit provided,   the appreciation      in property    value, the method used to
Satisfy     the loan. the periW of time the loan was outstanding.               and the amount of equity the borrower
has in the property       when the loan is satisfied.

The substantial     reduction    in the amount of accounts receivable      during fiscal year 1988 is primarily
attributable     to the collection     of the Governnent National  Mortgage Association     (GNWI) receivable.    This
receivable    ($104.835,716     LS of SepteWer 30. 1987) became due and payable to FnHA in fiscal          year 1986
due to the maturity      of the outstanding    GNWl participation  certificates.

                                  Page 26                                                    GAO/AFMD-9037 Fanners Home Administration
--                                                                                ~~ ___
                                            Financial Statements

     Guaranteed     Lending    Activities

            In addition        to the insured lending activities,         FnHA has authority   to guarantee loans.         The term
            a9uarantee*        means 'to guarantee the paynent of 8 loss on a loan originated.             held, and     serviced   by
            a private     financial       agency or other lender approved by the Secretary        of Agriculture.'         FmHA
            provides    financial        assistance   to borrowers by guaranteeing      loans made by I federal    Or'   State
            chartered     bank, savings and loan association.           cooperative   lending agency. or approved        lending
            institution        who perform all loan servicing      activities.      Guaranteed loans are accounted         for as
            contingent       liabilities       (Note 10).

            The guaranteed       loan program a11ows FlrHA to guarantee       up to 90 percent of the rn~ney loaned           by a
            financial   institution      (lender) to borrowers in rural       areas or who employs people in rural            areas.

            The lender is required  to inform FrnWI on the loan status on Oecenber 31 and June 30 (depending                           on
            the type of loan). unless the loan is in default   which requires more frequent reporting.

            Most guaranteed     loans nay be sold in the secondary market by the lender to an institution          known as
            a holder.    Although a portion   of the loan is So?d to a holder.       all servicing  responsibility
            remains with the lender.      Payments by the borrower are forwarded on a pro rata basis to the
            holder.    If the holder does not receive      payments on the note within 60 days of an installment       due
            date. the holder can demand that FM@ pwchase the holder's            share of the loan.     When the loan is
            purchased.    FmHA assumes the rights    of the holder and IS entitled      to the pro rata share of any
            payments made by the borrower to the lender.         All guaranteed loans purchased by Fn+lA are treated
            as an asset (loans receivable)      ?n its portfolIo    (Note 5).

            If the borrower defaults on the loan, the lender is responsible   for                liquidating     the collateral.
            After the proceeds of the sale have been applied to the outztand?ng                  balances,     FmHA is liable      for
            losses under the te""s of the guarantee  (Notes 5. 6. and 10).

            Interest      Rate Guydown Program:
            The Fwd Security         Act of 13i35 (Public Law 99-198) authorized     FlnHA to enter into an agreement with
            participating       guaranteed   lenders to reduce the interest     rate paid by guaranteed borrowers.     In
            return,     FmUA will make annual interest      rate buydom payments to the lender in an amunt not to
            exceed 50 percent of the cost of reducing the interest            rate on the loan up to a maximum of two
            percentage      points.     The Act authorized  $490.000.000  for this program to be available     through
            September 30. 1988. As of September 30. 1gGG. funds were obligated               for this program in the amount
            of 148.930.066.
     Agricultural     Credit     Act of 1387

            Yith the passage of the Agricultural      Credit Act of 1987 (Public Law 100-233).         the loan servicing
            options of delinquent     farmer program borrowers were expanded.        The regulation    changes F&A has
            made to accnnodate     the Act became effective    October 14. 19GG. In addition        to the servicing
            options that were availsble      prior to the Act. FnHA anticipates      the following    two new options will
            have 1 significant    impact on the farmer program loans receivable.         As of Septenber 30, 1389. FM
            notified  75.352 delinquent     borraers  of all the servicing    options available.

            Debt Yrlte-Dmm         Program

            The Act permits FnW\ to wite-down            farmer program loans to the recovery         value of the collateral      if
            the barvower has a feasible        plan to continue the farming operation.           Loans can be witten-dam
            only if the restructured       loan would result      in ~ecove~y to the Goverment          that would be equal to or
            greater     than the anount recovered      if the collateral    was involuntarily      liquidated.      Borrowers who
            participate      in the Debt Write-Oom       Program must sign a shared appreciation           agrewnt    entitling
            FM4 to share in the appreciation          of the real estate securing the loan. thereby recapturing                 a
            Portion     of the debt write-dnm      want.       The agreement allws     FllHll to receive fm        50 to 75 percent
            Of the apPreCiati0n      during the life of the IO-year agreement if. during the 10 years, the borrower
             sells or conveys the property,        ceases farming operations.      or pays the debt in full.          At the end of
            the tenth year. the borrower must pay 50 percent of the appreciation                 on the property.        The -nt

                                            Page 24                                                GAO/AFMD-SO-37Farmers Home Administration
                                                          Financial Statements

Notes to Financial   Statements

                                                           FOR FISCAL YEARS E"CIFO SEPTEMBER30. ,988 AND 1987

                         NOTE 1:      ORGANIUTION AND PROGW6

                         Entity     and Basis   of Consolidation

                                  Farmers Hare Mninistration          (FnHA) is the credit sgency for agriculture    and rural developlent           in
                                  the U.S. Department of Agriculture         (USOA). In 1988. the Agency marked 53 years of financial               and
                                  technical   assistance    to rural America.      This service has been performed under the successive             names
                                  of Resettlement     Administration,     Fan Security    Administration. and Farmers nW Administration.

                                  Yhen it began in 1935. the Agency's original            function   was to make loans and grants to Oepression-
                                  stricken      families    and help them regain self-sufficiency        in making their living     on family farms.
                                  For 53 years. Fti          has been concerned primarily      with credit and counseling     services    that have
                                  supplemented resources of the private          sector for building       strong family farms.      In 1gEG. farm
                                  credit     still    accounted fov almost one-half of al1 ~esowces administered           by FMA.       This fact was
                                  particularly        apparent in 1988 when America's fanners were hit by the nrst            drought since the
                                  Oepression era.          FWA responded with 1 full package of fan credit assistance             including     low
                                  interest       emergency farm loan*.     The Agency designated      1.489 counties eligible     for emergency loans.
                                  In its farm programs. FnHA made or guaranteed over 37,700 loans totalling                  $2.3 billion     to fa~mel‘s
                                  who could not otherwise          obtain credit from cw-aercial      lenders.

                                  During the last 2 decades. Congress created additlonal            nonfarm programs to benefit        families and
                                  camwnities       in rural areas.   These programs have helped to provide safe, modest housing: modern,
                                  sanitary    water and sewer systems: essential     canunity     facilities:     and job- and economy-boosting
                                  business and industry      in rural areas.    These are reflected        in the current mission statement which
                                  directs    FlnHA to 'serve as a temporary source of supervised           credit and technical   support for rural
                                  &v?ricans     for improving their farming enterpnses,       housing conditions.        c-unity   facilities.   and
                                  other business endeavors until they are able to qualify            for private     sector rescwrces:

                                  Over the years. Fti      has developed a credit     system that reaches the county level.     The Agency has
                                  approximately   11.400 permanent full-time     employees who serve rural America frDR 46 State Offices.
                                  266 District   Offices.   and 1.907 County Offices.      plus the National Office in Washington. O.C.. and
                                  the Finance Office in St. Louis. Missouri.          Service is provided in every rural county or parish in
                                  the 50 states.    plus the Pacific   Trust Territory.     Pllerican Samoa. Guam, Puerto Rico, and the Virgin

                                  In fulfilling     its mission as a 'lender of last resort'         in providing   housing. credit.    and
                                  agricultural    assistance    to people in rural areas. the Farmers Hone Ministration              (FMA) maintains
                                  11 general funds. 5 revolving       funds. and 2 other funds.        The majority   of FnHA loans are made from
                                  three revolving      loan funds.   The oldest is the Agricultural        Credit Insurance Fund (ACIF),
                                  established   rhen F*LA began to make insured loans in the 1940’s. and na the fund from which all
                                  fanner progrsn loans are made. The Rural Pausing Insurance Fund (AHIF) was established                    with
                                  inauguration    of insured rural housing loans in 1965. The Rural Development Insurance Fund (RDIF).
                                  established   under the Rural Developent           Act of 1972. took over fm      AClF the Agency's lending for
                                  water. sewer, and other cwnity           facilities.     and for business and industrial    development.

                                  The consolidated financial statewnts      account fov all funds for tiich  FMA is responsible                  and are
                                  presented on the accrual basis of accwnting       as required by the GAO Policy and Procedures                 Manual
                                  for Guidance of Federal &encies    (Title   2).

                                                           Page 22                                                     GAO/AFMD9037 Farmers Home Administration
                                                               Financial        Statements

Consolidated   Statements   of Operations

r                                                                                                                FOP Fiscal Years Ended September            30
                                                                                                                        1988                1987
                                                                                                                         (DollaA in Thousands)
                       INTEREST INCOME:
                         Interest   on Loans (Note 4)                                                               I      3.578.579       $    4.148.326
                            Less Interest  on Nonperfoming                  Loan5 (Note 6)                                    991.267            1.093.355
                              Interest      Incane                                                                         2.581.312             3.054.971
                       INTEREST EXPENSE:
                         Interest  on Intragoverrw,tal    Debt (Nate 9)                                                    8.890.353          9,201,724
                         Other interest    Expense (Note 9)                                                                    96,935             136,137
                              Interest      Expense                                                                        8.987.288          9.337,861

                       NET lNTEREST EXPENSE                                                                               (6.405.976)         (6.282.890)
                       PROVISION FOR LOSSES ON:
                         Loans (Note 6)                                                                                    5.090.231          9.315.840
                         ACCPWd ,nterest   0" Loans (Note 6)                                                                   85,318          3.063.104
                         Acquired Property  (Note 8)                                                                          205.392             607,093
                         Guaranteed Loans (Note 10)                                                                           627.642             688.426
                              Total      Provision       for   Losses                                                  6.008.583             13.674.463
                                                                                                                    ___________.           ____________

                       NET INTEREST EXPENSE AND PROVISION FOR LOSSES                                                     (12.414.559)       (19.957.353)
                       OTHER INCOME:
                         Inc~ne Attributable     to interest                Credit     Program (Note 4)                     1.427.314          1.514.131
                         Expended Appropriations                                                                               589.225            601,5&3
                         Other Income                                                                                           86.108             33.380
                              Total      Other    Income                                                                   2.102.647           2.149.099
                       OTHER EXPENSES:
                         Loss on Sale of Loan Assets (Note 13)                                                               1.074.693          1.890.597
                         Interest  Credit Prqlran Expense                                                                    1.427.314          1.514.131
                         Grants and Contributions                                                                               351.532            348.647
                         Personnel Canpensatio"     and Fringe Benefits                                                         303.905            298,647
                         Rents. Connunications,     and Utilities                                                                 42.451            45,205
                         Other A&ai"istrative     Expenses                                                                        51,650            49.942
                         Other Program Expenses                                                                                 163.063            132.236
                         Preprynent Penalty on Intragovernental        Debt (Note 9)                                              79.508                     0
                              Total      Other Expenses                                                                     3.494.316         4.279.405

                        NET LOSS FRO,, OPERATlONS                                                                       $(13.806.228)      $(22.087.659)
                                                                                                                                              . .._._._..

                        The accmpany~ng          notes     are an integral           part of these fl"a"cidl   Statements

                                                               Page        20
Report on Compliance With Laws
and Regulations

               We have audited the consolidated financial statements of the Farmers
               Home Administration ( F~HA) for the fiscal years ended September 30>
                1988 and 1987, and have issued our opinion thereon. This report per-
               tains only to our consideration of compliance with laws and regulations
               for the year ended September 30, 1988. Our report on compliance with
               laws and regulations for the year ended September 30, 1987, is pre-
               sented in GAOIAFMD-89.~0, dated December 20, 1988.

               We conducted our audit in accordance with generally accepted govern-
               ment auditing standards. Those standards require that we plan and per-
               form the audit to obtain reasonable assurance about whether the
               financial statements are free of material misstatement.

               Compliance with laws and regulations applicable to FmIlA is the respon-
               sibility of FmHA'S management. As part of obtaining reasonable assur-
               ance as to whether the consolidated financial statements were free of
               material misstatement, we performed tests of FmHA'S compliance with
               the following provisions of laws and regulations:

             - Anti-Deficiency Act (:I1 I1.S.C. 1341-1519);
             - Debt Collection Act of 1982 (31 LJ.S.C.3711-3719) and related
             - Prompt Payment Act (31 U.S.C. 3901-3906);
             . Omnibus Budget Reconciliation Act of 1986 (PI,. 99-509); and
             - other legislation and regulations concerning F~IIA'S farm, housing, and
               community and businclss loans and grants.

               The results of our tests indicate that, with respect to the items tested,
               the FmlIA complied, in all material respects, with the provisions referred
               to in the third paragraph. With respect to items not tested, nothing came
               to our attention that c,auscd us to believe t,hat the FmIlA had not com-
               plied. in all material resptbcts. with those provisions.

               Page   1x                          GAO/AFMD-90-37   Farmers   Home   Administration
                    applied the same factor to the current value of acquired farm property
                    and a ‘i-percent factor to housing property to estimate $154.9 million in
                    holding and disposition costs when computing the net realizable value of
                    acquired property.

                    Without a sound methodology for determining holding and disposition
                    costs and other refinements, loan loss estimates and the acquired prop-
                    erty balance may be inaccurate.

                    F-IIIHA'S newly implemented Acquired Property Tracking System has
Conclusions         improved its ability to track and account for property acquired through
                    foreclosure and voluntary conveyance. However, FITIHA has not recon-
                    ciled APTS data to detailed records and has not implemented software
                    enhancements that would detect unreasonable property values.

                    Although F~HA'S loan classification system, implemented in fiscal year
                    1988, is a major step toward meeting Title 2 and OMB requirements, field
                    office instructions that provide guidance for estimating realistic collat-
                    eral values and computing estimated losses are applied inconsistently. In
                    addition, FITIHA has not performed reconciliations between the loan clas-
                    sification system data and detailed files to detect errors and omissions
                    from the system.

                    Accordingly, without reconciliations of system data to source docu-
                    ments, consistent application of instructions, and necessary software
                    enhancements, significant errors in the acquired property and loan loss
                    allowance accounts occur and are not promptly detected and corrected.

                    In addition, the development of a sound methodology for determining
                    holding and disposition costs is necessary to ensure that the loan loss
                    estimate and the acquired property balance are reasonable.

                    We recommend that the Secretary of Agriculture direct the Administra-
Recommendations     tor of the Farmers Home Administration to:

                  . Ensure that all county offices receive APTS reports, require periodic rec-
                    onciliations of API% report information with the detailed acquired prop-
                    erty files as of fiscal year-end, and develop appropriate internal controls
                    to detect the recording of unreasonable dollar values for inventory

                            Report on Internal Accounting Controls

                            In response to our fiscal year 1987 report on internal accounting con-
Weaknessesin the            trols, FmHA implemented a loan cIassification system for its Agricultural
New Farm Loan               Credit Insurance Fund (farm loan portfolio) to comply with Title 2 and
Classification System       OMB requirements. This system is designed to classify loans according to
                            the degree of risk and to estimate losses based on collateral shortfalls.
                            All farm loans were classified by September 30, 1988, and the informa-
                            tion was used by F~HA as the primary basis for determining the fiscal
                            year 1988 allowance for loan losses for its $25 billion farm loan

                            However, our audit tests revealed significant internal control weak-
                            nesses in the farm loan classification system, which caused it to be unre-
                            liable. We reviewed a statistical sample of 500 F~HA farm loan
                            classifications and supporting documentation and found that loss esti-
                            mates were inaccurate in 212 of the 500 cases. Specifically, in the 212
                            cases, we identified the following types of problems:

                        l current market values of collateral were not always used to determine
                          estimated loan losses,
                        . numerous procedural errors were made in computing estimated losses,
                        . detailed files at the field offices were not reconciled with the automated
                          farm loan classification system detailed records, resulting in the omis-
                          sion of loans from the system.

                            Although generally accepted accounting principles (GAAP) require that
                            allowances for loan losses be based on present market conditions and
                            other factors, we found that in numerous cases F~HA supervisors were
                            not establishing market values for collateral in order to project loan
                            losses. Market value is defined as the monetary value that F~HA could
                            reasonably expect to receive for the property in a current sale to a will-
                            ing buyer other than a forced or liquidation sale. In 104 cases, supervi-
                            sors used outdated appraisals or borrower financial statements to
                            establish the value of the collateral, as illustrated in the following

                        - In 1988, FmHA estimated a loan loss of $12.1 million based on a 1981
                          appraisal of loan collateral. However, an updated September 30, 1988,
                          appraisal of the collateral value indicated the loss would likely be about
                          $6.7 million.
                        . Using estimated collateral values as stated on a borrower’s financial
                          statement as of January 1987, a loan was considered fully supported by

                            Page 14                                  GAO/AFMD-9097 Farmers Home Administration
                           opinion on FmHA'S system of internal accounting controls taken as a

                           In our fiscal year 1987 report on internal accounting controls. wc dis-
                           closed four conditions which we believed adversely affected t.‘nln\‘s abil-
                           ity to record, process. and report financial data. Specifically. WCfound

                       l controls over the tlntr) of guaranteed loans into the accounting system
                         were inadequate;
                       l FIIIIIA'S Automated Multiple Family IIousing Accounting System ( ;\YIW)
                         was implemented wit,h numerous control weaknesses;
                       . acquired property was improperly valued, and det,ailed property files
                         were not reconciled with general ledger control accounts, and
                       l   FmIIA’S analysis of thcl nh imatc collectibility of its loan portfolio fot
                         establishing an adcqriatc allowance for loss was not in acXcordanc8cwith
                         OMH Circular A-l 29

                           The results of our t’is(‘al year 1988 examination indicate t,hat hllA
                           improved its internal control procedures for ensuring that all guaran-
                           teed loans are recorded in the Guaranteed Loan Accounting System.
                           Accordingly, we no lorigt>r consider this to be a material internal cant 1-01
                           weakness. Furthermore, although Fmfli\ recognized AMASinternal control
                           weaknesses in its fiscal yclar 1989 FMFIA report,, we arc not reporting on
                           those weaknesses bc~usc~ corrective actions have been substantially

                           However, our study and evaluation disclosed three conditions that WV
                           believe result in the, risk that errors and irregularities in amounts that
                           would be material in relation to PrnkiA'S financial statements may occur
                           and not be promptly tlctc~cted. These weaknesses conctrn VIUI~A’S    valua-
                           tion of acquired proptrty. implementation of its new farm loan classifi-
                           cation system, and it 5 melthodology for compuung holding and
                           disposition costs.

                           In response to the dcficicncies reported in our fiscal year 1987 report on
Control Weaknessesin       internal accounting c~mt~rols,F~IIA implemented the Acquired Property
the New Acquired           Tracking System ( WIX), an automated subsidiary ac~counting system for
Property Accounting        farm and housing properties acquired through foreclosure and voirn-
                           tary conveyance. While ~1’s has improved FmtlA'~ ability to track and
System                     account for acquired l)roperty, the system does not conform with UO’S
                           L       and Proccdl IIP Manual for Guidance__-.--
                                                                         of Federal --.Agcncics. Title 2.
Report on Internail Aeeourking Controls

                   We have examined the consolidated financial statements of the Farmers
                   Home Administration (EYIIHA) for the fiscal years ended September 30,
                   1988 and 1987, and have issued our opinion thereon. As part of our
                   examination, we made a study and evaluation of the system of internal
                   accounting controls to the extent we considered necessary to evaluate
                   the system as required by generally accepted government auditing stan-
                   dards This report pertains only to our study and evaluation of the sys-
                   tem of internal accounting controls for the fiscal year ended
                   September 30, 1988. Our report on the study and evaluation of internal
                   accounting controls for the year ended September 30, 1987, is presented
                   in GAOIAFMD-89-20, dated December 20, 1988.

                   The purpose of our study and evaluation was to determine the nature,
                   timing, and extent of the auditing procedures necessary for expressing
                   an opinion on FmHA'S financial statements. Our study and evaluation was
                   more limited than would be necessary to express an opinion on the sys-
                   tem of internal accounting controls taken as a whole. For the purpose of
                   this report, we have classified the significant internal accounting con-
                   trols into the following categories:

               l   loans and grants,
               s   guaranteed loans,
               .   acquired property,
               .   treasury, and
               .   financial reporting.

                   Our study and evaluation included all of the control categories listed
                   above, except for the treasury and financial reporting categories. For
                   those categories, we found it more efficient to expand the scope of our
                   substantive audit tests. Substantive audit tests can also serve to identify
                   weaknesses in internal control policies and procedures.

                   The management of RIIHA is responsible for establishing and maintaining
                   a system of internal controls, including accounting controls, in accord-
                   ance with the Accounting and Auditing i\ct of 1950 and the Federal
                   Managers’ Financial Integrity Act of 1982 (FMFIA). In fulfilling this
                   responsibility, estimates and judgments by management are required to
                   assess the expected benefits and related costs of control procedures. The
                   objectives of a system of internal accounting controls are to provide
                   management with reasonable assurance that (1) obligations and costs
                   are in compliance with applicable laws, (2) funds, property, and other
                   assets are safeguarded against waste, loss, and unauthorized use or mis-
                   appropriation, and (3) assets: liabilities, revenues, and expenditures

                   Page10                               GAO/AFMD-9037FarmersHomeAdministration

agricultural bank failures. In addition, bankruptcy filings by family
farmers declined between the end of 1987 and the end of 1988.

However, the improved farm economy has not had the same positive
impact on F~HA. F~HA, as the lender of last resort, has served as a
“shock absorber” for the farm industry, providing financing to those
farmers unable to qualify for loans with commercial lenders. As farm-
ers’ financial condition deteriorated significantly from the mid-1970s to
the mid-1980s, increasing numbers of farmers who had been refused
financing by private lenders, turned to F~HA for credit assistance. F~HA'S
farm loan portfolio increased from $5.1 billion in 1976 to $25.5 billion in
1988. As farmers’ financial condition further deteriorated during this
period, many ceased repaying their debts to F~HA. This severely affected
FmHA'S financial condition by increasing its loan losses and interest costs.

MA'S    farm loan portfolio remained stressed in 1988. R~HA increased its
allowance for loan losses by $5.1 billion in fiscal year 1988. In addition,
F~HA recognized a $628 million provision for losses related to its guaran-
tee programs, increasing the accrual for estimated losses on guaranteed
loans to $1.3 billion.

As of September 30, 1988, the outstanding principal balance on delin-
quent loans to farm program borrowers was about $12.5 billion or 49
percent of the total outstanding principal. As discussed in note 1 to the
financial statements, the options of delinquent farm program borrowers
were expanded with the passage of the Agricultural Credit Act of 1987.
As of September 30, 1989, FmHA notified 75,352 delinquent borrowers of
all servicing options available. With the use of these options, delinquent
balances are expected to decrease.

The agricultural economy is driven by elements such as weather condi-
tions, interest rate fluctuations, government agricultural and economic
policies, and foreign economic conditions. These factors influence farm
income and available cash, as well as the value of farm assets. Farmers’
ability to repay debt and the value of the underlying collateral deter-
mine the ultimate realized losses on FmHA'S loan portfolio. As discussed

      United States
GAO   General Accounting  Office
      Washington, D.C. 20548

      Accounting and Financial
      Management Division


      To the Acting Administrator
      Farmers Home Administration

      We have audited the accompanying consolidated statements of financial
      position of the Farmers Home Administration (FmHA), an agency of the
      Department of Agriculture, as of September 30, 1988 and 1987, and the
      related statements of operations and cash flows for the fiscal years then
      ended. These financial statements are the responsibility of FmHA’S man-
      agement. Our responsibility is to express an opinion on these financial
      statements based on our audits. In addition to this report on our audits
      of FmllA’S fiscal year 1988 and 1987 financial statements, we are also
      reporting on our consideration of FmHA’S system of internal accounting
      controls and on its compliance with laws and regulations.

      We conducted our audit in accordance with generally accepted govern-
      ment auditing standards, except for scope limitations as discussed in the
      following paragraphs. Those standards require that we plan and per-
      form the audit to obtain reasonable assurance about whether the finan-
      cial statements are frc,e of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclo-
      sures in the financial statements. An audit also includes assessing the
      accounting principks used and significant estimates made by manage-
      ment, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our opinion,

      Prior to fiscal year 1987. F~HA did not prepare its financial reports or
      maintain its accounting records in accordance with generally accepted
      accounting principles. Although F~HA adopted such principles during
      fiscal year 1987, thr scope of our work was not sufficient to enable us to
      express, and we do not express, an opinion on the results of operations
      and cash flows for the: fiscal year ended September 30, 1987.

      Our opinion on FmIiA's fiscal year 1987 statement of financial position
      (GAOIAFMD-~20)    was qualified because FmHA’S accounting system did not
      capture current property market values at the time of acquisition for
      voluntarily conveyed property, and it was not feasible for us to deter-
      mine the amount of adjustments, if any, to the allowance for losses and
      the related provision that would have been required to record these
      assets at their fair values at the time of acquisition.

      Our audit of the fiscal year 1988 financial statements disclosed that
      although FmHA implt~rnented a new acquired property system (referred
      to as the Acquired I’ropc,rty Tracking System) during fiscal year 1988,

      Page 6                              GAO/AFMD-90-37Farmers Home Administration


Letter                                                                                            1
Opinion Letter                                                                                    6

Report on Internal                                                                               10
Accounting Controls    Control Weaknesses in the New Acquired Property                           12
                             Accounting System
                       Weaknesses in the New Farm Loan Classification System                     14
                       Ilolding and Disposit,ion Costs Are Not Based on Sound                    16
                       Conclusions                                                               16
                       Recommendations                                                           16
                       Agency Comments                                                           17

Report on Compliance                                                                             18
With Laws and
                       ______-            -~-~                    --
Financial Statements                                                                             19
                        Consolidated Statements of Financial Position                            19
                        Consolidated Statements of Operations                                    20
                        Consolidated Statements of Cash Flows                                    21
                        Notes to Financial Statements                                            22


                        AMAS      Automated Multiple Family Housing Accounting System
                        AI'TS     Acquired Property Tracking System
                        FiMFIA    Federal Managers’ Financial Integrity Act
                        FmHA      Farmers Home Administration
                        GAAI      generally accepted accounting principles
                        OM11      Office of Management and Budget

                        Paye 4                             GAO/AFMD-SO-37Farmers Home Administration

and Senate Committees on Appropriations with the agency’s first
request for appropriations made more than 60 days after the date of
this letter.

We are sending copies of this report to the Director of the Office of Man-
agement and Budget, the Secretary of the Treasury, the Acting Adminis-
trator of the Farmers Home Administration, and interested
congressional committees.

Sincerely yours,

Donald H. Chapin
Assistant Comptroller General

Page 2                              GAO/AFMD-9&37   Farmers   Home Administration