oversight

Loan Asset Sales: An Evaluation of FmHA's 1987 Sales

Published by the Government Accountability Office on 1990-04-06.

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

      I.




--                United States General Accounting   Office
                  Report to the Chairman, Subcommittee                 ’ 1
GAO               on Rural Development and Rural
                  Electrification, Committee on
                  Agriculture, Nutrition, and Forestry,
                  U.S. Senate
April II990
                  LOAN ASSET SALES
                  An Evaluation of
                  FknHA’s 1987 Sales



                                                              141338




GAO/AF‘MD-90-42
                    unitedstates
G&O                 General Accounting Office
                    Washington, D.C. 20548

                    Accounting and Financial
                    Management Division

                    B-236161

                    April 6,1996

                   The Honorable Howell Heflin
                   Chairman, Subcommittee on Rural Development
                     and Rural Electrification
                   Committee on Agriculture, Nutrition, and Forestry
                   United States Senate

                   Dear Mr. Chairman:

                   In your letter of June 27,1988, you asked us to conduct a review of two
                   pilot loan asset sales completed by the Department of Agriculture’s
                   Farmers Home Administration (F~HA). These sales were authorized by
                   the Omnibus Budget Reconciliation Act of 1986, Public Law 99-509,
                   which directed FTIIHAto sell enough loans in fiscal year 1987 from its
                   Rural Housing Insurance Fund and its Rural Development Insurance
                   Fund to realize not less than $2.7 billion in net sale proceeds. To meet
                   these targets, FmHAsold loans with an aggregate unpaid principal bal-
                   ance of more than $4.9 billion and realized over $2.8 billion in net sale
                   proceeds. The responsibility for servicing these loans was also trans-
                   ferred to the loan purchaser, as authorized by the act.

                   This report focuses on whether F~HA (1) conducted these loan asset
                   sales in a professional manner-that    is in a manner similar to that of
                   private sector organizations, (2) received the maximum net proceeds
                   practicable for the loan assets sold, and (3) protected the rights of the
                   borrowers whose loans were sold,

                   This report also discusses two commonly       held misunderstandings
                   regarding loan asset sales. First, that the   net proceeds from F~HA loan
                   asset sales are not as large as those from    recourse sales. Second, that the
                   sale of FTMA loans will reduce the budget     deficit in both the short and
                   long term.


                   We concluded that F~HA conducted its pilot loan asset sales in a profes-
Redults in Brief   sional manner by competitively obtaining the services of some of the
                   leading US. investment bankers as financial advisors and underwriters
                   to assist in managing the sales. Further, we found that the ~HA loan
                   sale financing structures followed those established by private sector
            ”      financial markets and used by financial institutions to conduct similar
                   sales for major private sector entities. Overall, the F~HA pilot sales



                   Page 1                               GAO/AFMD-90-42   FmHA’e   1987 Loan Asaet Sales
                     adhered to OMB’S loan sale guidelines. In short, the private sector finan-
                     cial markets treated FmHA the same way they would handle any other
                     private sector entity seeking to sell pools of loans.

                     The financing structures and marketing strategies used by financial
                     advisors and underwriters handling the sales, along with FMA’S use of
                     credit enhancements were designed to ensure maximum net sales pro-
                     ceeds. However, the government paid upfront transaction fees of about
                     3 percent of the amount realized.

                     Our review also showed that the legal rights of the FM borrowers were
                     protected in the loan sale agreements and that the loan servicing rights
                     of the community program borrowers were honored by the commercial
                     loan servicer during the first year following the sale.

 ,
                     The Farmers Home Administration (FmHA), an agency with the Depart-
Bdckground on Loan   ment of Agriculture, is one of the nation’s leading lenders of rural devel-
Abet Sales           opment and housing loans. WHA makes direct loans to farmers and rural
                     communities who are unable to obtain credit from commercial lenders at
                     a reasonable rate through its Rural Housing Insurance Fund and Rural
                     Development Insurance Fund.’

                     In fiscal year 1986, the Reagan administration proposed the pilot sale of
                     federal loan assets as a part of an overall program to improve federal
                     credit management. The chief objectives of these pilot sales were to
                     improve federal loan origination and documentation, reduce the cost of
                     federal credit programs by transferring loan servicing to the private sec-
                     tor, and increase budget receipts in the year of sale. A loan asset sale
                     program was included in the Omnibus Budget and Reconciliation Act of
                      1986 which directed the Secretary of Agriculture to sell enough loans
                     from the Rural Housing Insurance Fund and the Rural Development
                     Insurance Fund to realize not less than $2.7 billion in net proceeds by
                     the end of fiscal year 1987, $1.7 billion and $1 billion respectively, and
                     which authorized the Secretary to transfer loan servicing responsibility
                     to the loan purchaser. Prior to the sale, F~HA’Sunpaid principal balance
                     due on loans outstanding from these two funds was $29.3 billion and
                     $8.0 billion, respectively.



                     ‘The loans from these funds are more commonly referred to as rural housing loans and community
                     program loans, respectively.



                     Page 2                                         GAO/AFMD-99-42     FmHA’s   1987 Loan Asset Sales
         b


 ,
                           B2%!5161




                           In September 1987, the Secretary of Agriculture sold to private inves-
                           tors rural housing and community program loans with an aggregate
                           unpaid principal balance of $4.9 billion. F~HA transferred loan servicing
                           for the community program loans to a private servicer in September
                           1987. However, because of its complex rural housing loan servicing pro-
                           cedures, F~HA agreed to continue to service these loans for a maximum
                           period of 2 years following the sale. Servicing of these loans was trans-
                           ferred to the private sector loan servicer in August 1989.


                           Our work focused on determining whether FMA
Obj&tives, Scope,and
Methodology
   I
                       l   conducted the sales in a professional manner,
                       l   received the maximum net proceeds practicable for the value of the loan
     !                     assets sold, and
                       l   protected the rights of the rural communities and homeowners during
                           the sale of their loans and after servicing had been transferred to the
                           private sector,

                           Our review was performed primarily at FmHA, which conducted the sales
                           with the assistance of several private sector financial institutions, We
                           also held discussions with the private sector financial advisors and sale
                           underwriters that assisted MA.

                           To determine whether Frnm conducted the pilot sales in a professional
                           manner, we compared FmHA financing/sale structures to those generally
                           used by the secondary credit markets to sell pools of loans offered for
                           sale by private sector entities. We focused on assuring ourselves that the
                           FWIA loan sales were handled by MA’S      financial advisors and under-
                           writers in the same manner in which they handled similar sales by the
                           private sector.

                           To determine whether FIXMAreceived the maximum net sale proceeds
                           practicable, we analyzed the F~HA financing structures and marketing
                           strategies used by its financial advisors and underwriters participating
                           in the sale, and we analyzed the costs incurred by F~HA in conducting
                           these sales. In addition, we reviewed the loan sale documentation files
                           available at MA and the proposals received from the other financial
                           institutions interested in helping FhHA conduct the sales, and we inter-
                           viewed agency officials responsible for conducting the sales.




                           Page 3                              GAO/AJ?MD-O-42 FmHA’s 1987 Loan Asset Sales
                                                                                                    I

                      B236161




-
                      Finally, to determine whether the rights of F~HA borrowers were fully
                      protected under these sales, we sent questionnaires to a random sample
                      of 380 of the 3,897 community program borrowers whose loan(s) were
                      sold in September 1987 and still were being serviced by the private ser-
                      vicer at the time of our review. Our sample provided for a 96 percent
                      level of confidence, with a maximum sampling error of plus or minus
                      6 percent. Rural housing program borrowers were not included in our
                      questionnaire universe because servicing of these loans had not trans-
                      ferred to the private servicer at the time the questionnaires were
                      mailed. FmHA agreed to continue servicing these loans for 2 years after
                      the date of sale. Appendix I contains a copy of the questionnaire and
                      provides summary information on selected responses received.

                      Our audit was performed between August 1988 and November 1989, in
                      accordance with generally accepted government auditing standards. As
                      requested by your office, we did not obtain official agency comments on
                      this report. We did, however, discuss the matters in this report with
                      MIA   officials during the course of our review and have incorporated
                      their views where appropriate.


                      FmHA conducted the sale of its rural housing and community program
FhHA Conducted        loans in a professional manner. We defined “professional manner,” as
Loan Sales in a       those sale structures and approaches used by the private sector finan-
Professional Manner   cial institutions to sell similar securities for private sector entities. In
                      addition, the fees charged F~HA by its sale underwriters were compar-
                      able to fees charged to other private entities conducting similar sales.
                      F~HA competitively obtained the management services of private sector
                      financial institutions to serve as financial advisors and loan sale under-
                      writers for its loan sales. These financial institutions assisted F~HA in
                      conducting the pilot sales in a manner similar to that used when they
                      conduct securitized asset sales for major private sector entities. The
                      FIIIHA sales were conducted using a structured sales approach and credit
                      enhancements to secure an AAA rating for the financial interest sold.
                      The AAA rating is the highest credit rating granted to private sector
                      securities and, consequently, would help to ensure the marketability of
                      the securities.

                      For both the rural housing and community program loan sales, F~HA
                      competitively selected a sales management team drawn from major U.S.




                      Page 4                               GAO/AFMD-99-42 FinHA’s 1987 Loan Asset Sales
E235161




financial institutions to assist in managing the loan sales.2 These man-
agement teams were composed of a financial advisor and a group of
seven to eight underwriters. They assisted F~HA in structuring the sale
and provided professional advice and consultation to FIIIHA during the
entire sales process.

F~HA competitively selected the investment firms of Kidder, Peabody
and Company, and Manufacturers Hanover Trust Company to serve as
financial advisors for its rural housing and community program loan
sales, respectively. In addition, F~HA competitively selected a group of
technically qualified underwriters to participate in each loan sale. Each
underwriting group was headed by a lead underwriter.

Shearson Lehman Brothers, Inc. was selected as the lead underwriter for
the community program loan sale and Salomon Brothers, Inc. for the
rural housing sale. These underwriting groups negotiated the placement
of the financial interests in the loan pools with private investors-a
practice which is common for securitized asset sales with the financial
magnitude of m’s       loan asset sales.

The securitized loan sale structures recommended and used by RIJHA’S
sale management teams were similar to those structures used in the
securitized sale of corporate assets and by the Federal National Mort-
gage Association to conduct similar mortgage backed security sales. For
example, F~HA’Ssales management team formed a special purpose pri-
vate corporation to take title to the community program loans and to
issue bonds to private investors as financial interests in the loan pools.
Similarly, the FmHA loan sales management team for the rural housing
loans formed a rural housing trust which issued mortgaged backed
securities similar to those used by the Federal National Mortgage Associ-
ation that represented equity interests in the loans held by the trust.
Appendix III provides more detailed information on the loan sale financ-
ing structures used by FIWA and the types of trusts created.

In keeping with generally accepted financing practices within the
existing secondary credit markets,3 MA’S rural housing and community
program loan sales involved the pooling of loans and the sale of securi-
ties-financial  interests in the pooled loans-to private investors. These

2Appendi II contains a detailed listing of the major financial institutions participating on these msn-
agement teams.

3The secondary credit markets serve as a medium through which the financial community trade
mortgage and nonmortgage loans and related securities.



Page 5                                            GAO/AF’MD-9042      FmHA’s   1987 Loan Asset Sales
        B-235161




-
        sales include the features described below and are commonly termed
        structured sales, as opposed to the simple auction of individual loans
        like the sale of Treasury securities. Further, the F’IIIHA sales were classi-
        fied as structured sales because the sales structure generally included

    9 creating a new security, such as a bond or participation certificate, using
      the future principal and interest payments from the pooled loans as
      collateral;
    l arranging for a third-party commercial organization to collect and
      account for loan principal and interest payments from borrowers-that
      is, servicing the pooled loans; and
    . providing some form of credit enhancement for the new security-that
      is, compensating purchasers at the time of sale for estimated future loan
      losses.

        The foregoing structured sales techniques, including credit enhance-
        ments, are those currently being used in the private sector financial
        market to provide private sector entities, state and local government
        agencies, as well as FmHA, with the means of selling pools of loans to
        maximize net sale proceeds.

        The rural housing and community program loan sales used two forms of
        credit enhancements-overcollateralization     and credit insurance. These
        credit enhancements were used to ensure that the bonds and mortgaged
        backed securities sold to private investors received a AAA credit rat-
        ing-the highest credit rating given securities in the private sector mar-
        kets.4 The AAA credit rating was desired to help ensure that FIIIHA
        received the maximum net sale proceeds practicable from the sale.

        By overcollateralization, we mean that FIWA transferred to the trusts a
        pool of loans whose aggregate unpaid principal balance was greater
        than the face value of the securities sold. The overcollateralization
        amount is determined by the rating agencies-Standard and Poors and
        Moody’s Investors Service- and is based on the collateral quality which
        considers such things as the historic loan collection, delinquency, and
        loss rates.

        Credit insurance obtained from an independent private insurance com-
        pany guarantees all or a portion of the investor’s income stream

        40MB’s loan asset sale guidelines precluded loan sales with future recourse to the government; that
        is, sales with some type of government guarantee protecting the purchaser against future loan losses.
        OMB’s guidelines did permit, however, purchasers to provide credit enhancements such as overcol-
        lateralization and credit insurance.



        Page 6                                          GAO/AFMD-9942       FhHA’s   1987 Loan Asset Sales
     ,
                            B-236161




                           expected from the receipt of future principal and interest payments due
                           on the securities sold. F’mHA used credit insurance to complement the
                           overcollateralization on the rural housing sale to form a total credit
                           enhancement package that would ensure a AAA credit rating for the
                           financial securities sold to private investors. This policy guarantees the
                           holders of senior financial interests in the trust 100 percent of their
                           scheduled principal and interest payments in the event the trust is
                           unable to make these payments. Credit insurance was not used on the
                           community program sale because the sale received a AAA rating based
                           solely on the degree of overcollateralization provided by MA.

                           These forms of credit enhancements are common practice in the private
                           sector financial markets. For example, these forms of credit enhance-
                           ments are used by private sector entities for the securitized sale of
                           pooled automobile loans. As a matter of fact, many private corporations
                           guarantee the payment of principal and interest on some securitized
                           sales.



Co& of FrnHA Pilot
Saks

Thti Cost of Conducting    Loan asset sales under the pilot program were conducted on a credit
Credit Enhanced Sales Is   enhanced basis. OMB’S loan sale guidelines prohibit any federal guaran-
                           tee of principal and interest payments or repurchase agreement-future
Reflected in Net Sale      recourse-which      the government has used in past sales. However, agen-
Proceeds                   cies were permitted to conduct loan sales on a credit enhanced” basis
                           using the credit enhancements discussed in the previous section. These
                           enhancements provide prospective investors limited protection against
                           future losses. The net proceeds realized from the FYIIHA sales, an average
                           of 58 percent of the unpaid principal balance of the loans sold, primarily
                           reflect the up-front costs associated with credit enhanced sales. These
                           costs include the interest rate discount amount” given investors who



                           “Credit enhanced sales, as defined for the purpose of this report, do not include those sales which
                           provide a federal guarantee or repurchase agreement. The financial community does consider these
                           types of recourse provisions to be credit enhancements.

                           “The interest rate discount amount is the reduction in sale proceeds that results when the coupon rate
                           of the financial interests sold is lower than the interest rate of comparable securities at the time of
                           sale.



                           Page 7                                           GAO/AFMD-9042        FmHA’s   1987 LOan Asset Sales
                B-236161                                                                        I




               purchased financial interests in the rural housing and community pro-
               gram trusts as well as the cost of credit enhancements required by the
               rating agencies to obtain the highest credit rating for the financial inter-
               ests sold. These net proceeds also reflect about $91 million in sales
               transaction costs, or about 3 percent of net sale proceeds, paid by F~HA
               at the time of sale.


Ne: Proceeds   The FMA net sale proceeds are equal to or above those realized by other
               federal agencies consummating loan sales under the pilot program on a
               credit enhanced basis. MA conducted its pilot sale in accordance with
               OMB’Sloan asset guidelines and employed generally accepted financing
  I            structures to maximize its sale proceeds from these pilot sales. Nothing
  I            came to our attention during the course of this review to indicate that
  I
  I            F&IA could have restructured these sales to allow it to substantially
  I
  I            increase the net sale proceeds realized from these sales.

               FmHArealized over $2.8 billion in total net proceeds from the securitized
               sale of its rural housing and community program loans with an aggre-
               gate unpaid principal of over $4.9 billion. This amount exceeded the rev-
               enue target of $2.7 billion set in the Omnibus Budget Reconciliation Act
               of 1986 by $106 million. These net proceeds represent about 58 percent
               of the total aggregate unpaid principal balance of the loans sold. The
               remainder of the government’s unpaid principal balance went essen-
               tially towards three types of costs incurred by FYCIHA in conducting these
               sales. These costs include interest rate discounts, credit enhancements,
               and sales transaction costs. Table 1 shows the net proceeds realized
               from both F~HA sales and the related expenses of the sale.




               Page I3                             GAO/AFMD-90-42   FmHA’s   1987 LOan Asset Sales
Table ): Analysis of Proceeds From
FmHPLILoan Asset Sales               Dollars in millions
      /                                                                                        Community                     Rural
      I                                                                                          prw;~g
                                                                                                                          hou3i              Total
                                     Unpaid principal balance of loans sold                        $1,934.4               $2,969.0       $4,903.4
                                     Face value of financial interests not sold                           0                 c594.OP        1594.01
                                     Face value of financial interests sold                         1,934.4                2,575.O        4.309.4
                                     Interest rate discounts                                          (614.0)               (313.2)        (927.2)
                                     Present value of financial interests sold                      1,320.4                2,061.8        3,382.2
                                     Cost of credit enhancements on financial
                                     interests sold                                                   (186.3)               (282.6)b       (468.9)
                                     Gross sale proceeds                                            1,134.l.               1j79.2’        2I913.3.
                                     Transaction costs                                                  (56.9)               (34.5)          191.41
                                     Net sale proceeds                                             $1,077.2               $1,744.7       $2,821.9
                                     aFmHA holds subordinate securities in the rural housing trust for this amount.
                                     bThis includes $61.5 million for the cost of credit insurance used in the rural housing sale.

                                     As shown in table 1, a significant factor in determining the govern-
                                     ment’s net sale proceeds was the interest rate discounts which repre-
                                     sents $927 million or 19 percent of the unpaid principal balance. These
                                     discounts were necessary to compensate investors for the difference in
                                     the interest rate on the securities offered by FIIIHAand the market inter-
                                     est rate available to investors at the time the loans were sold. For exam-
                                     ple, the IMHA community program trust securities were offered to
                                     investors at a coupon rate of 4.6 percent in a market environment where
                                     30-year Treasury obligations were yielding 9 to 10 percent. As a result,
                                     these financial interests had to be discounted to compensate investors
                                     for this disparity in interest rates, The 4.6 percent rate was close to the
                                     level charged to borrowers under the &HA program.

                                     Another factor that impacted F~HA’Snet sale proceeds was the cost of
                                     credit enhancements-overcollateralization      and credit insurance. The
                                     credit enhancements for both sales totalled $468.9 million. Overcollater-
                                     alization on the community program sale resulted in a reduction of
                                     $186.3 million in sale proceeds, while the rural housing sale proceeds
                                     were reduced by $282.6 million due to overcollateralization and insur-
                                     ance costs. As mentioned above, these costs were necessary to obtain the
                                     highest quality rating for the financial interests sold, which helped to
                                     maximize net sale proceeds.

                                     The amount of overcollateralization provided by FI~IHAwas the amount
                                     required by the security rating agencies to compensate investors if


                                     Page 9                                              GAO/AFMD-90-42          FbHA’s     1987 Loan Asset Sales
                                        B.235161




                                        actual loan losses exceed anticipated losses at the time the sale was con-
                                        summated. If actual losses are less than anticipated, the government will
                                        receive back any unused overcollateralization and other remaining inter-
                                        est in the trust when the trust is terminated-that    is, when all obliga-
                                        tions of the trust have been paid. This amount is called the government’s
                                        residual interest7 At the time of sale, the estimated value of FMW’S
                                        residual interest in these trusts was valued at over $234.6 million-
                                        $33.6 million in the community program trust and $201 million in the
                                        rural housing trust. The latter amount includes $180 million which rep-
                                        resents the fair market value, at date of sale, of the $694 million in
                                        subordinate securities held by F~HA in the rural housing trust. The
                                        $234.6 million represents the estimated value of additional cash flows
                                        F’mHA should receive from the two loan sales we reviewed.

                                        The remainder of the government’s unpaid principal balance, $91 mil-
                                        lion or 2 percent, represents the fee FYnHA paid for conducting these
                                        credit enhanced sales. This amount represents costs that the govern-
                                        ment would not have incurred if it had held the loans to maturity. Table
                                        2 provides a breakout of these various transaction costs.

Tablei2: FmHA Sales Transactlon Coats
                                        Dollars in millions
                                                                                                   Community             Rural
                                                                                                     program          housing
                                                                                                         sale             sale            Total
                                        Financial advisors fees                                          $1 .o              $1.1           $2.1
                                        Underwriting fees                                                15.3               17.9           33.2
                                        Issuance costs                                                    5.5                5.5           11.0
                                        Reserve/special accountsa                                        35.1               10.0           45.1
                                        Total                                                           $56.9             $34.5           $91.4
                                        aThese accounts include reserve funds for such trust expenses as principal and interest payments, loan
                                        servicing fees, and estimated future income tax liabilities.




Yields From FmHA Sales                  The net sale proceeds realized from F~HA’Ssale of its rural housing and
FalJ Within Range of Other              community program loans fall within the range of that obtained from
                                        other federal agencies conducting credit enhanced sales under the pilot
Credit Enhanced Sales                   program. As previously mentioned, F~HA’Snet sale proceeds to-date on

                                        7Residual interest is the estimated equity value of all excess funds remaining in the trust after all
                    Y                   trust obligations have been satisfied. This amount is comprised of such things as excess overcollater-
                                        aliiation and servicing fees, and excess interest earned on reserve funds. These pilot sales were
                                        among the first government loan asset sales to use overcollaterahzation and commercial credit insur-
                                        ance as credit enhancement techniques. In the past, government sales have generally been consum-
                                        mated on a full recourse basis.



                                        Page 10                                              GAO/AFMD-90-42      FmHA’s   1987 Loan Asset Sales
                ‘C

        !



    .
                                     R-286161




                                     these pilot sales have averaged 58 percent of the government’s unpaid
                                     principal balance. These amounts are similar to the results achieved by
                                     other federal agencies which consummated pilot sales during the same
                                     time frames and under similar market conditions. For example, the net
                                     sale proceeds realized by other federal agencies selling financial inter-
                                     ests through a similar type financing structure, using overcollateraliza-
                                     tion and insurance as credit enhancements, ranged between 64 and
                                     66 percent of the aggregate unpaid principal balances of the sold loans,
                                     as shown in the following table.

Table 3: Comparison of FmHA Sale
Procec/ds to Other Credit Enhanced   Dollars in millions
sale8       j                                                                                Unpaid              Net
                                                                                           principal           sales         Percent
                                     Federal loan sales                                         sold       proceeds         realized
            I                        FmHA loan sales
                                       Community program                                      $1,927            $1,078              56
                                       Rural housing                                           2,969             1,746              59
                                     Department of Commerce                                       28                15              54
                                     Department of Education                                     761               412              54
                                     Department of Veterans Affairs                              309               172              56
                                     Total                                                   $5,994             $3,423

                                     As these sales were among the first sales to be conducted under OMB’S
                                     loan sale guidelines, no precedent existed for conducting these sales or
                                     for determining what would be a reasonable rate of net sale proceeds.
                                     While these net proceeds may not be comparable because of the differ-
                                     ences in the quality of the loans and interest rate of the underlying loan
                                     pools, they do provide one measure of the success or failure of the FMIA
                                     sales. The above comparison shows that the yields on the FMIA sales
                                     were equal to or above those obtained through other pilot sales.


                                     FmHAtook steps to protect the legal rights of the rural housing and com-
Rights of FmHA                       munity program borrowers whose loans were sold in the 1987 pilot sales
Boirrowers Were Fully                in the sale agreements. Specifically, the agreements between FmHA and
Pr&ected During Sale                 the trusts included provisions to continue all the significant rights avail-
                                     able to these borrowers under FMM regulations. Further, our study of a
                                     sample of F~HA community programs borrowers confirmed that the orig-
                                     inal legal provisions of these loans had not changed and that they had
                     ”

                                     ‘Rural Housing program borrowers were not included in our sample because FmHA was servicing
                                     these loans at the time of our review.



                                     Page 11                                       GAO/AFMD-QO-42      FmHA’s   1987 Loan Awet   Saks
   B235161




   not been adversely affected by the sale. Several borrowers did, however,
   voice concern over certain additional accounting and financial reporting
   requirements which were placed upon them by the new loan servicer
   and which F~HA had not previously exercised.

  As FXIHAproceeded with the sale of its community program and rural
  housing loans, one of its primary objectives was to fully protect borrow-
  ers’ rights. Registration statements filed with the Securities and
  Exchange Commission and the legal documents associated with these
  sales all stipulate that the notes and bonds would not be altered, thus
  protecting all the borrowers’ legal rights.

  Specifically, these documents provide for the protection of such rights
  as the following:

  Loan reamortization-that       is, the extension of a loan’s repayment
  period to the maximum.
  Loan assumption-that      is, the transfer of loan repayment responsibility
  from one borrower to another.
  Payment moratorium- that is, the deferral of principal and interest
  payments for a qualified borrower in whole or in part for a period of
  2 years.
. Interest credit-that  is, the subsidy of the interest payments for quali-
  fied borrowers.

  A sample of 380 community program borrowers, whose loans are now
  being serviced by the General Electric Capital Corporation, confirmed
  that these borrowers’ legal and loan servicing rights had been protected
  during the first year following the sale. For instance, when asked what
  impact the new private servicer has had on loan servicing, 82 percent of
  the 3 11 respondents stated that no change had been made with regard
  to the original provisions of their loans. Further, we found that only five
  borrowers, or 2 percent of the respondents, had requested any type of
  special servicing from the new servicer involving rights previously
  available under ~HA servicing procedures. These borrowers sought the
  private servicer’s approval to sell or lease assets used to secure the loan.
  Approval was granted in three of the five cases. Further, the majority of
  the community program borrowers, about 80 percent, rated the overall
  performance of the new servicer as being adequate or better.

  However, over 16 percent of the respondents did express concern over
  the additional accounting and reporting requirements placed upon them
  by the new loan servicer, but these complaints primarily involved


  Page 12                              GAO/AFMLS90-42   FmHA’e 1987 Loan Asset Sales
                      reporting requirements which FMLA was not enforcing. For example,
                      these borrowers complained about requests for increases in insurance
                      coverage and for annual audited financial statements. According to
                      M      officials, the private servicer is within its legal rights to request
                      this information. Specifically, to protect the government’s interest, F~HA
                      regulations require borrowers to show proof of insurance each year and
                      also authorized F~HA to require borrowers to provide annual financial
                      audits. F~HA officials stated that F~HA has been lax in enforcing these
                      regulations in the past and that corrective actions were under way to
                      ensure that these regulations would be enforced in the future.


                      The concept of selling federal loan assets to private investors is not new.
ProceedsFrom Credit   Historically, FXIHA has sold securities-participation   certificates-to the
Enhanced SalesAre     public which were backed by a specific pool of loans. The net proceeds
Noti Comparable to    reported from these recourse sales have averaged over 99 percent of the
                      aggregate unpaid principal balance in the loans sold. The FTMAloan
RetiourseSales        asset sales discussed in this report, however, were not conducted on the
                      same basis as prior sales of federal loan assets and the difference in sale
                      basis resulted in the FmHA sales yielding an average of 58 percent. Con-
                      sequently, the reported net sale results from these sales are not compar-
                      able because the recourse net sale proceeds do not reflect the interest
  I                   rate discount, recourse costs, and sale costs actually incurred by the
  ,                   government in conducting these sales. These costs are paid separately
                      by the government over the life of the trust and are not reflected in net
                      sale proceeds. In the two pilot sales discussed in this report, F~HA
                      incurred interest rate discounts, credit enhancements (which are analo-
                      gous to recourse costs), and sale costs. These costs were paid in total at
                      the date of sale and were explicitly disclosed as a deduction from sale
                      proceeds. Consequently, the 99 and 58 percent net sale proceed percent-
                      ages should not be compared because they are computed on different
                      bases.

                      The interest rate discount paid by F~HA to compensate investors for the
                      difference between the coupon rate of the financial interests sold and
                      the market interest rate was not reflected in the recourse sales because
                      in those sales, F~HA subsidized the coupon rate offered on the securities.
                      F~HA paid the holders of these recourse securities the difference
                      between the interest due on the securities sold and the interest collected
                      from the pooled loans because the interest rate of the underlying collat-
                      eral loans was less than the coupon rate promised on the financial inter-
                      ests sold. As a result, the securities in these recourse sales were not
                      significantly discounted at the time of sale because F~HA subsidized the


                      Page 13                             GAO/AFMD-90-42   FmHA’s   1987 Loan Asset Saks
-
                    coupon rate of these securities, offering them at an interest rate compar-
                    able to the market interest rate of similar securities. F~HA paid this dif-
                    ference-the interest credit subsidy-over the life of the securities sold
                    from its appropriated funds and did not deduct it from the net sale pro-
                    ceeds reported at the time of sale.

                    These net proceeds also do not reflect losses experienced by FMIA as a
                    result of loan defaults, delinquencies, and/or prepayments to the pooled
                    loans. This cost is paid up front in a credit enhanced sale and is limited
                    to the amount of overcollateralization and credit insurance paid at the
                    time of sale. In past recourse sales, losses due to loan defaults, delin-
                    quencies, and prepayments were borne solely by IWHA over the life of
                    the financial interests sold and were not shared with private investors.
                    Lastly, the proceeds from recourse sales do not reflect all the transac-
                    tion costs which occur in credit enhanced sales. Specifically, F~HA
                    incurred no financial advisor fees or trust operating expenses in these
                    recourse sales. In addition, the underwriting commissions for the
                    recourse sales were passed on to the investor and not paid by the federal
                    government.


                    A misunderstanding regarding loan sales is the view held by the current
S&e of FmHA Loans   and past administrations that loan sales are a means of reducing the
Will Not Reduce     budget deficit. As we have stated in previous reports and testimonies,
Federal Deficit     and as our current analysis indicates, loan sales will not reduce the
                    structural budget deficit. Such sales simply shift the present value of
                    loan principal and interest payments, which the federal government
                    expected to receive in future years, to the year of sale. Consequently,
                    budget cash receipts are increased in the year of sale-thereby reducing
                    the budget deficit for that year. However, in the future years that span
                    the payback periods of the sold loans, budgetary cash receipts are simi-
                    larly reduced.

                    For the two F~HA loan sales we reviewed, financial interests with a face
                    value of $4.3 billion were sold to investors. These securities, which were
                    backed by FIMA loans, had an estimated present value of $3.4 billion
                    because, at the time the securities were sold, market interest rates were
                    higher than the interest rates carried by the loans. The market value of
                    these securities was further adjusted downward by $.5 billion to pay for

                    ‘An Assessment of the Government’s Loan Asset Sale Program (GAO/T-AFMD-87-7, March 26,
                    1987) and Loan Asset Sales: An Assessment of Selected Saks (GAO/AFMD-88-24, February 19,
                    1988).



                    Page 14                                     GAO/AFMD-9642 FmHA’s 1987 Loan Asset Sake
    ’




               B-235161




               credit enhancements-overcollateralization     and credit insurance-
               required to protect investors against future loan losses. The resulting
               $2.9 billion represents, on a present value basis, the net loan principal
               and interest payments F~HA would have expected to receive if it had
               held the loans to term rather than sold them. Thus, MA gave up receiv-
               ing $2.9 billion.

               In conducting the loan sales, FYI-IHA
                                                   was charged about $.I billion in sale
               costs which were deducted to yield net sale proceeds of $2.8 billion to
               FmHA in the year of sale. Consequently, government budgetary receipts
               were increased in the year of sale by $2.8 billion and the government
               could avoid $2.8 billion in borrowing to meet its cash needs. In the bud-
               getary years following the sale, the government will have to borrow
               $2.9 billion (in present value terms), in addition to other borrowing to
               meet cash needs, because it gave up the right to receive these funds.
               Consequently, over the long term, the structural budget deficit is not
               reduced because of loan asset sales.


               The F~HA loan sales were conducted in a professional manner in an
Obbervations   effort to maximize the sale proceeds to the government. The government
               incurred about $91 million in sales transaction costs that it would not
               otherwise have incurred had it held the loans to maturity. The reduction
               in net sale proceeds caused by the interest rate discounts given investors
               and the costs of credit enhancements represent unavoidable costs F~HA
               incurred in conducting these credit enhanced sales. The rights of the
               borrowers whose loans were sold were fully protected during the loan
               sale transactions.

               The sale of federal loans .is not a sound approach to reducing this coun-
               try’s structural deficit. Such sales simply accelerate the government’s
               rights to receive future revenues to the year of sale. The transaction
               costs associated with these sales are the price the government pays for
               accelerating these cash receipts. If the net proceeds from these sales
               equal the government’s present value in the loans less anticipated loan
               defaults and delinquencies, the government incurs neither a gain nor
               loss. If the net sale proceeds are less than the government’s present
               value, then the government incurs a loss, as in the FKIHA sales. Further,
               since these sales do not create additional future cash receipts above
               those which the government would have received if it had held the
               loans, the projected future annual deficit will increase because revenues
               anticipated from loan payments will decrease in later years.



               Page 15                            GAO/AFMD-99-42   F’mHA’s 1987 Loam Asset sales
I   B-236161




    As agreed with your office, we did not obtain agency comments. Unless
    you publicly announce the contents of this report earlier, we will not
    distribute it until 30 days from the date of this report. At that time we
    will send copies of the report to the, Director of the Office of Manage-
    ment and Budget, the Secretary of Agriculture, and other interested par-
    ties. We will also make copies available to others upon request.

    Please contact me at (202) 275-9454 if you or your staff have any ques-
    tions regarding the contents of this report. Major contributors to this
    report are listed in appendix IV.

    Sincerely yours,




                                          w
    Jeffrey C. Steinhoff
    Director, Financial Management
      Systems and Audit Oversight




    Page 16                            GAO/~9642     FmHA’s   1987 Loan Asset sales
Page 17   GAO/AFlKJ.b99-42   FmHA’s   1987 Loan Asset Sales
v‘tter                                                                                                   1

A$pendix I                                                                                          20
Survey to Evaluate
Servicing of
      unity Program

Afipendix II                                                                                        27
List of Major
Pwticipants in the
Rhral Housing and
COmmunity Program
L&an Sales
Appendix III                                                                                        28
SelectedInformation
OIJthe Rural Housing
a@dCommunity
Pfogram Financing
Structures
Appendix IV                                                                                        30
Major Contributors to
This Report
Related GAO Products                                                                               32

Tkbles                  Table 1: Analysis of Proceeds From FmHA Loan Asset
                            Sales
                        Table 2: FmHA Sales Transaction Costs                                      10
                        Table 3: Comparison of FmHA Sale Proceeds to Other                         11
                            Credit Enhanced Sales



                        Page 18                         GAO/AFMD-9042   FmHA’s   1987 Loan Asset Sales
Abbreviations

FmHA      Farmers Home Administration
OMB       Office of Management and Budget


Page 19                          GAO/AFMLMM42   FmHA’s   1987 Loan Asset Sake
Apbndix   I
                                                                                                                                 ,
SQrveyto Evaluate Servicingof Commtiw
fiogramLoans
-   -I-


                                            Survey to Evaluate Servicing of Community
                                            Program Loans



                  INSTRUCTIONS                                           The respondentto this swey shouldprovideanswersto
                                                                         eachapplicablequestionand,if necessary,seek thehelp
                  The UnitedStatesGeneralAccountingOffice (GAO)is        of co-wotkemor associates  in answerhrgthesequestions.
                  anindependentcongressional agencywhich assiststhe      lf GECCis sewicingmorethanoneof your
                  Congressin overseeingtheoperationof thefederal         organixation’sloans.baseyour organization’sanswerson
                  government.Recently,the Congte.saskedusto review       all loansto which the questionapplies.For overall
                  the Departmentof Agriculture’ssaleof community         satisfactionquestions,baseyour organixation’sanswer
                  programloansto privateinvestors.The purposeof this     on its combinedexperiencewith all loans.
                  surveyis to determinehow well theseprivatecompanies
                  areservicingcommunityprogramloanslike yours.           Whatyour organizationhasto sayasa community
                                                                         programborroweris importantto this study. Your name
                  ln September1987,the Secretaryof Agriculturesold       or organizationwiU not be identifiedin our report; all
                  about6,000communityprogramloansto private              responseswill bekeptconfidential.Remember,we
                  investors.As a result,the responsibiityfor servicing   cannotmakeanaccurateevaluationof this areawithout
                  theseloanstransferredfromthe FarmersHome               your assistanceandparticipation,
                  Administration(FmHA)to the GeneralElectricCapital
                  Corporation(GECC),formerlytheGeneralElectric           Pleasereturnyour completedquestionnairein the
                  CreditCorporation.                                     self-addressed
                                                                                      envelopewithin 15days. The return
                                                                         addressis:
                  Throughthis survey,we areaskingfor informationon
                  your organization’sservicingexperienceswith GECC.      US. General Accounting Offlce
                  By servicingwemeanbiing, collections,andhandling       Mr. Ernst Stockel, AFMD
                  of anyotherloan-Matedactivities. Wewantto knowthe      Room 6OB7
                  effect,if any,the changefrom a governmentagencyto a    441 G Street, NW
                  privatecompanyhashadon your organization.              Washtngton, DC 20548

                  Wewouldhaveliked to talk to ah thoseaffectedby this    If you haveanyquestions,pleasecontactRonald Parker
                  sale,but thatwouldhavebeentoo time-consumingand        at (202) 634-5217 or Ernst Stockel at (202) 695.7111.
                  costly.Therefore,we tooka randomsampleof about380
                  borrowersto representa cmsssectionof all the            RESPONDENTINPORh%ATION(PleasePrint)
                  communityprogtamborrowers.Sinceour sampleis            (Primarypersoncompletingthe survey)
                  small,it is importantthateveryborrowerselected
                  answersour survey questions.                           Name:

                  This surveyshouldtakeno longerthan30 minutesto         Title:
                  complete.It shouldbecompletedby the staffmemberin
                  your organizationwhois mostknowledgeable about         Monthsin position:         Phone#:
                  GECC’sservicingof your account.
                                                                         Pleasecormctanyermmin the following information:


              *




                                Page 20                                           GAO/AF’MD-90-42   FmHA’s   1987 Loan Asset Sales
.




                    Appendix I
                    Survey to Evaluate Servidng of C~nununi~
                    ProgralnLoan6




    1. Hasthe GeneralElect& CapitalCorporadon                5. Sincethe Mdal transferof your ~~UXJZ&  hasGECC
       (GECC)servicedyour organization’saccountsince            madeanyof thefollowing change8in the provisions
       October1987(i.e.,bllllng, collection,andother            of anyOfyour loans?(Check all that apply)
       loan-relatedactivities)?(Checkone)                                                                    m-31)
                                                         W3)     I.0 Increasedpaymentamount                     4
       1.0 Yes (CONTlNUB)                               311
                                                                i. 0 Changedfinal paymentduedate                0
       2. 0 No (STOP - Return quedionnalre in             9
             self-addressed envelope)
                                                                3. 0 DecreaseU  daysallowedbeforelate feeis     o
                                                                      charlled
                                                                4.0 lncnasedlatepaymentfee                      1
    2. Whenwereyou first notifkd thattheFarmersHome
       AdministrationCFmHA)would no longerbe                    5.0   Other, specify                          25
       servicingyour organization’saccount?(Fill In the
       bkmkl
                                                               6. 0 No provisionsfor anyloan havechanged 255
                                                               7. 0 No basisto judge                      10
                                                                     No answer                                16
                                                                     If anyof the aboveitems( tl through#S)
    3. Whonotified your organizationof this change?                  havebeenchecked,pleaseexplain:
       (Check all that apply)
                                                      (Pm
       I.0     FmHA                                   262
       2.0     GECC                                    95
       3.0     Other,specify:                           6


       4. 0 No basisto judge                           13
               No Anewer                                4
    4. Wasyour organizationgivenenoughnoticebefore
       you hadto makeyour first scheduledpaymentto
       GECC?(Check one)
                                                        cw
       1.0 Yes                                        282
       2.0 No (EXPLAIN BELOW)                          18
       3. 0 No basisto judge                          10
               NO answer                               1
               If no, explain:




                   Page 21                                      GAO/AFMLMW42       FmHA’s   1987 Loan Asset Sales
               Appendix I
               Survey to Evahate    Servidngof    Commudy          :
               ProgralnLoane




6. HasGECCaddedanyunusualexpenses
                                to your                   8. Forhow manyof your organization’sloansdid you
   organization’saccountwithout prior notice                 askfor the following setvices?(Please
                                                                                                spec@the
   (excludinglatepaymentfees)?(Checkone)                     number of loans for each service requested in
                                                   WI        Question 7)
    1.0 Yes (EXPLAINBELOW)                        23
   2.0   No                                      280
   3. 0 No bardstojudge                            8

         If yes,explain:
                                                                       Service requested from QECC
                                                             1. Reamotdzeanyloan (rearrange
                                                                anyof the original terms)
                                                             2. Approvethe saleor exchangeof
                                                                allorapartoftheassets                                    4
                                                                securlrl~anyloan                !             1
                                                             3. Approvetheleaseof all or a part                          1
                                                                of thepropertysecuringanyloan I                I
7. Sincethetransferof your account,hasyour                   4. Subordiite its hen securingany
   organizationasked GECCto performanyof the                    loan (placepaymentof another
   following services?(Check all that apply)                    debtaheadof GECCin eventof
                                                 (3330)         default)
   1. 0 Reamortizeanyloan(rearrangeanyof the                 5. Approvethetransferof
        original terms)                          0              responsibiityfor anyloan to a
   2. 0 Approvethe saleor exchangeof all or a part              third party                     I              I
        of the assetssecuringanyloan             4
                                                                       Not    applicable                            306
   3. 0 Approvetheleaseof ah or apartof the
        propertysecuringanyloan                   1
   4. 0 Subordinateits lien securinganyloan(place
        paymentof anotherdebtaheadof GECCin
        eventof default)                         0        9. Did GECCapproveall of the servicesyou askedfor
   5. 0 Approvethe transferof responsibiityfor any           in Question71 (Check one)
        loanto a third party                                                                                       (@I
                                                 0           1. 0 Yes (GOTO QUBSTlON13)                                  3
   6. 0 Noneof the aboveserviceshavebeen                     2.0         No                                              2
        requested                              294
        (GOTO QUESTlON13)                                    3. 0 No basisto judge(GOTO QUESTION13)
   7. 0 No basisto judge                         6                       Not applicable                             306
        (GOTO QUESTION13)
        No answer                                6




              Page 22                                              GAO/AFMD-90-42          FmHA’s   1987 Loan Asset sales
          10.   For how manyof your organlzation’rloansdid
                GECCdenythe serviceyou askedfofl (Please
                specify the number of loansfor each servicr detded
                by GECC)                                         OMOl




                                                    I

                2. Approvethe saleor exchangeof 1
                                                             I         1




                5. Approvethe transferof
                   responsibilityfor anyloan to a
                   third party
                     Not applicable                              309
                     No answer                                        1


          11. Did GECCadequatelyexplainall the denials
              specified in Questionlo? (Check one)
                                                                 WI
                1. q Yes(GOTO QUESTION13)
                2.0     No
                3.   0 No basisto judge(GOTO QuEsTION 13)
                        Not applicable                           310
                        No anewer                                     1




Page 23                                         GAO/AFMDSO&           F&IA’s   1981 ban   Amet &lea
               Appendix I
               Survey to Evaluate   Servlclng   of Community
               FrogramL4mns




12. For eachdeniedqucat for services,pleaseindicate:(1) the servicedenied,(2) GECC’smson for denial,(3) why
    youbellevethemaon wasinadequate,and(4) whateffect.if any,thedenialhadon your organization.          z(l=m




              Page 24                                          GAO/AFMD-99-42    FmHA’s   1987 Loan Asset Sales
                Appendix I
                Survey to Evaluate   Servklng   of community
                ProgriunLoanE




13. Hasyour omanizadon asked GECC to wrfonn anv             15. OveralL how would you me GECC’s servicing of
    othei servic& not mentionedin this quktionnairei            your account? (Check one)
    (Check one)                                                                                                      Pa
                                                       0       1.    q   Veryxkquate                 97
   1. c] Yes(EXPLAIN BELOW)                      25
                                                               2. cl Generallyadequate              132
   2.0   No (GOT0 QUESTION15)                   284
                                                               3.C1Marginallyadcquate                33
   3. 0 No basisto judge(GOTO QUESTION15) 0
                                                               4.0       CfetIe~yinadtquatC          16
          No answer                               2
         If yes,approximatelyhow manyrequestshave              5.0       Very inadequate             10
         you made?
                                                               6.0       No basis to judge           13
                                                                          No answer                 10

           If yea,explainthe natureof your quests:




14. Overall,how satisfiedwereyou with GECC’s
    handlingof the otherservicesmentionedin Question
   13?(Check one)
                                                       WI
   1. 0    Satisfiedall of the time       4
   2. 0    Satisfiedmostof thetime        9
   3. Cl   Satisfiedhalf of the time      2
   4. 0    Dissatisfiedmostof thetime     3
   5. 0    DissatisfiedalI of the time    7
   6. 0    No basisto judge                2
           Not applicable                284




                Page 25                                          GAO/AFMD-99-42            FmHA’s    1987 Loan Asset Sales
               Appendix I
               Survey to Evaluate   Servic@    oiCommu&y
               Rorpam-




16. Overall, how would you rate the quality of service you am receiving from CMCC aa compued to that p~~vkhd by
    FmHA?(Check one)
                                                                                                                  ml
    1.0    OECC substantially bc@x than FmHA        6
   2. c]   GECCmoderatelybetterthanFmHA    12
   3. q    GECCaboutthesameasFmHA         176
   4. c]   GECCmoderatelyworsethanFmHA     54
   5. c]   GECCsubstantiallyworsethanFmHA 2 5
   6. c]   No basisto judge                29
           No anawer                        9
           Pleaseexplainyour response:




17. If you haveanyadditionalcomments,pleaseexpressyour viewsbelowandon theblankcover page& if necessary.
   Thank you for your assistance.                                                                                 n




   (Mar. 1989, AFMD, JFL)




              Page 26                                          GAO/AFlMD-00.42     FmHA’s    1987 Loan Aaaet S&a
Lisk of Major Participants in the Rural Housing
an@community Program Loan Sales
            I
  ~~ -I--
Rur+l Housing
Program
Finahcial Advisor          Kidder, Peabody, & Co.


Lead1Underwriter           Salomon Brothers, Inc.

                           E. F. Hutton & Co., Inc.
                           Shearson Lehman Brothers, Inc.
                           Goldman, Sachs & Co.
        I



Co-Managing Underwriters   TheFirstBostonCOW.
                           Merrill Lynch Capital Markets
                           Bear, Stearns & Co., Inc.
                           Manufacturers Hanover Ltd.


Master Servicer            Manufacturers Hanover Agent Bank Services Corp.


Cordunity       Program
Financial Advisor          Manufacturers Hanover Trust Co,


Lead Underwriter           Shearson Lehman Brothers, Inc.


Co-Lead Underwriters       Salomon Brothers, Inc.
                           Morgan Stanley, & Co.


Co-@IanagingUnderwriters   ($)~~~;e~;o~y~~;o
                                ,      ,
                           Bear, Stearns & Co., Inc.
                           Merrill Lynch Capital Markets
                Y


Master Servicer            General Electric Capital Corp.




                           Page 27                           GAO/~90.42   FmlU’s   1987Loan Asset Saiee
Apbndix
   I      III
                                                                                                                                 v
23@xtedIdormation on the Rural Housing and
Qxmunity Program l?lnancingStructures

R$ral Housing
Ptogram

N me of Issuing Entity          Rural Housing Trust 1987- 1
 B
T$pe of Trust                   Real Estate Mortgage Investment Conduit (REMIC)’

                                                ~~
T#pe   of Security   Issued   - Pass-through certificate2

  I


P$r Value of Securities         $2,376 billion
S#ld

Classesof Securities Issued clansA (Senior)--80
                                              percent
                                Class B (Subordinate)-20              percent


Ck.editRating of Securities     z:z; t-Nzated
                                       -

Credit Enhancements Used        Overcollateralization-80/20       ratio3
                                Credit Insurance-$61.6      million-cost               of insurance policy with Ameri-
                                can Loan Guarantee Association




                               ‘A REMIC is a special purpose non-taxable entity authorized by the Tax Reform Act of 1986 which
                               holds a fixed pool of real estate mortgages and which issues securities to its investors representing
                               their financial interest in the pool of mortgages.
                               ‘A pass-through certificate is a debt instrument which is secured by a pool of loans. The issuer of
                Y              these securities passes principal and interest payments made on the loan pool to investors on a regu-
                               lar basis, These certificates, also known as participation certificates, are often issued by quasi-
                               governmental agencies such as the Federal National Mortgage Association.
                               3Ratio of senior/subordinate securities.



                               Page 22                                           GAO/Al?MD-9942      FmHA’s 1987 Loan Asset Sales
         *
                                             Seleetad Information on the Rural Housing
                                             and Cbmmunity Program
                                             Financingstructures




 Com@mity Program

 Namd of Issuing Entity                     Community Program Loan Trust 198’7 A


                 I
Type lof Trust                              Business Trust4

             1



Type of Security Issued                    CM0 type bond”

             I

Par ‘itialueof Securities                  $1.934 billion
Sold ’

Classesof Securities Issued cl~ * (Senior)--93
                                             percent
                                           Class B (Subordinate)-7              percent


Credit Rating of Securities                EfE; i-ATnus
                                                  -

                                           Overcollateralization-93/7                ratio6
Credit               Enhancements   Used   Credi.    insurmce      not   used




                                           4A business trust is a trust which is taxable as a corporation and wherein legal title to its business
                                           ass&s are vested with the trustees who hold and manage them for the benefit of trust beneficiaries.
                                           “A collateralized mortgage obligation(CM0) is a type of mortgage-backed corporate bond which has a
                                           multiclass(multitranche) priority structure. In such issues, each class of bonds is ranked in order by
                                           which it can be redeemed.
                                           “Ratio of senior/subordinate securities



                                           Page 29                                            GAO/AFMD-O-42       FmHA’s   1987 Loan Asset sales
A&pendix
 I       IV

fj4qjorContributors to This Report


                        Ernst F. Stockel, Assistant Director, Financial Management Systems and
Accounting and            Audit Oversight, (202) 697-0816
Financial Management    Ronald E. Parker, Accountant-in-Charge
Qivision, Washington    Denise Ho, Accountant
                        Christina L. Quattrociocchi, Accountant
                        James F. Loschiavo, Evaluator


                        Gary L. Kepplinger, Associate General Counsel
Office of the General   Alan N. Belkin, Senior Attorney
Counsel




                        Page 30                          GAO/AFMDBO-42   FmHA’s   1937 Loan Asset Salem
L




    Page 31   GAO/AFMD-B&42   FmHA’s   1987 Loan Asset Sales
   RelatedGAO lhducts


                 Borrower Loan Prepayments: OMBGuidelines Need to be Strengthened
                 (GAOIAFMD-89-19,January 11, 1989).

                 Federal Assets: Information on Completed and Proposed Sales (GAO/
                             September 2 1,1988).
                 RCED-&I&214FS,

                Budget Reform for the Federal Government (GAO/T-AFMD-88-13,
                                                                         June 7,
                1988).

                Loan Asset Sales: An Assessment of Selected Sales (GAO/AFMD-88-24,Feb-
                ruary 19,1988).

                An Assessment of the Government’s Loan Asset Sales Program (GAO/T-
                AFMD87-7,March 26, 1987).

                The Government’s Loan Asset Sales Pilot Program (GAO/T-AFMD-~~-~,
                March 10, 1987).

                The Government’s Loan Asset Sales Pilot Program, statement of Charles
                A. Bowsher, Comptroller General, before the Legislation and National
                Security Subcommittee, House Committee on Government Operations
                (September 26,1986).

                Loan Asset Sales: OMBPolicies Will Result in Program Objectives Not
                Being Fully Achieved (GAO/AFMD-86-79,September 26, 1986).




(901478)        Page 32                             GAO/~BO-42   FmHA’s   1987 Loan Asset Salea
Ordt*rs   must, Iw l9rt~l9aid by c;lsh or by clwck           or money   order   nude
oiii I.0 1 tit& Srll9t~ririt,errdt~I~t, ol’ Ih9~iimt~nt.s.
                                                 .-
IJnited States                    First-Class Mail
Genwal Accounting Office        Postage & Fees Paid
VVa.shington, D.t:. 20548                GAO
                                  Permit No. GlOO
Official Business
Penalty for Private Ilse $300