oversight

Audit of the Federal Housing Administration’s Financial Statements for Fiscal Years 2008 and 2007

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-07.

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

                                                                          Issue I)ate




 /audit\
/report \
                                                                                 November 7. 200$
                                                                          udit Case \umber
                                                                                 2009-FO-0002
                                                                                                    I
  TO: Brian D. Montgomery, Assistant Secretary for HousingFederal Housing Commissioner, II


  FROM:     Thnas R. McEnanly, ector, Financial Audits Division, GAF


 SUBJECT:       Audit of the Federal I-lousing Administration’s Financial Statements for Fiscal
                  Years 2008 and 2007

 In accordance with the Government Corporation Control Act as amended (3 1 U.S.C. 9105). the
 Office of Inspector General engaged the independent certified public accounting firm of Urbach
 Kahn and Werlin LLP (UKW) to audit the fiscal sear 2008 and 2007 financial statements of the
 Federal Housing Administration (FHA). The contract required that the audit be performed
 according to generally accepted government auditing standards (GAGAS).

 UKW is responsible for the attached auditor’s report dated October 30. 2008 and the conclusions
expressed in the report. Accordingly, we do not express an opinion on FHA’s financial
statements or conclusions on FHA’s internal controls or compliance with laws, regulations and
government-wide policies. Within 30 days of this report. UKW expects to issue a separate letter
to management dated October 30. 2008 regarding other matters that came to its attention during
the audit.

This report includes both the Independent Auditor’s Report and FHAs principal financial
statements. Under Federal Accounting Standards Advisory Board (FASAB) standards. a general-
purpose federal financial report should include, as required supplementary information (RSI). a
section devoted to Management’s Discussion and Analysis (MD&A). The MD&A is not
included with this report. FHA plans to separately publish an annual report for fiscal year 2008
that conforms to FASAB standards.

The report contains one significant deficiency in FHA’s internal controls and two reportable
instances of noncompliance with laws and regulations. The report contains six new
recommendations. As part of the audit resolution process. we will record six new
recommendation(s) in the I)epartment’s Audit Resolution and Corrective Action Tracking System
(ARCATS). We will also endeavor to work with FHA to reach a mutually’ acceptable
management decision prior to the mandated deadline. Ihe proposed management decision and
corrective action plan will be rev ievved and evaluated by UKW with concurrence from the 01G.

We appreciate the courtesies and cooperation extended to the UKW and OIG audit staffs during
the conduct of the audit.
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                                       Table of Contents
   OIG Transmittal Memorandum........................................................................................1

   Independent Auditor’s Report ..........................................................................................5

            Appendix A – Significant Deficiency................................................................ 11

            Appendix B – Management's Response ........................................................... 15

            Appendix C – UKW’s Assessment of Management's Response .................... 17

            Appendix D – Status of Prior Year Findings and Recommendations ............. 18

   Principal Financial Statements ...................................................................................... 21

            Consolidated Balance Sheets ............................................................................. 23

            Consolidated Statements of Net Cost ................................................................ 24

            Consolidated Statements of Changes in Net Position ....................................... 25

            Combined Statement of Budgetary Resources .................................................. 26

            Notes to the Financial Statements ...................................................................... 28

            Required Supplementary Information ............................................................... 67




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                          INDEPENDENT AUDITOR’S REPORT



   Inspector General
   United States Department of Housing and Urban Development

   Commissioner
   Federal Housing Administration


   We have audited the accompanying consolidated balance sheets of the Federal Housing
   Administration (FHA), a wholly owned government corporation within the United States
   Department of Housing and Urban Development (HUD), as of September 30, 2008 and
   2007, and the related consolidated statements of net cost, changes in net position, and
   the combined statements of budgetary resources (Principal Financial Statements) for the
   years then ended.

   Summary

   We concluded that FHA’s Principal Financial Statements are presented fairly, in all
   material respects, in conformity with accounting principles generally accepted in the
   United States of America.

   Our consideration of internal control over financial reporting resulted in the following
   matter being identified as a significant deficiency:

      x   FHA needs to continue its efforts to modernize and enhance its information
          systems

   We found two reportable instances of noncompliance with laws and regulations.

   This report (including Appendices A through D) discusses: (1) these conclusions and our
   conclusions relating to supplemental information presented in the Annual Management
   Report, (2) management’s responsibilities, (3) our objectives, scope and methodology,
   (4) management’s response and our evaluation of their response, and (5) the current
   status of prior year findings and recommendations.

   Opinion on the Principal Financial Statements

   In our opinion, the Principal Financial Statements referred to above present fairly, in all
   material respects, the financial position of FHA as of September 30, 2008 and 2007, and
   its net cost, changes in net position, and combined budgetary resources for the years
   then ended, in conformity with accounting principles generally accepted in the United
   States of America.




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                   INDEPENDENT AUDITOR’S REPORT, CONTINUED


   The Cranston-Gonzales National Affordable Housing Act of 1990 required that FHA’s
   Mutual Mortgage Insurance Fund maintain a capital ratio of at least 2.0 percent, which is
   determined based on a statutorily-defined formula relating net assets (or economic value)
   as a percentage of insurance-in-force. As reported by management in Note 6 to the
   Principal Financial Statements, an independent actuarial study found that the capital ratio
   has dropped from 6.4 percent in fiscal year 2007 to 3.0 percent at the end of fiscal year
   2008. This study used independent macroeconomic forecast data as of June 2008 as well
   as certain management assumptions to estimate the economic value of endorsements for
   each of the next seven years. Based on these assumptions, the study projects the capital
   ratio will decline slightly through fiscal year 2011, but remain slightly above 2.0 percent,
   and begin to increase through fiscal year 2015. These projections are profoundly sensitive
   to macroeconomic data forecasts and several alternative projections using more
   pessimistic assumptions, including higher loss rates of foreclosed properties and the
   continued use of seller-assisted down payment loans, show the capital ratio dropping
   below 2.0 percent in future years. The dramatic deterioration in the macroeconomic
   environment during the third quarter of 2008 may result in this study overstating the
   projected capital ratio of the fund.

   Consideration of Internal Control

   In planning and performing our audits, we considered FHA’s internal control over financial
   reporting and compliance (internal control) as a basis for designing our audit procedures
   that are appropriate in the circumstances and to comply with Office of Management and
   Budget (OMB) audit guidance, but not for the purpose of expressing an opinion on the
   effectiveness of FHA’s internal control. Accordingly, we do not express an opinion on
   FHA’s internal control.

   A control deficiency exists when the design or operation of a control does not allow
   management or employees, in the normal course of performing their assigned functions, to
   prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency
   in internal control, or a combination of deficiencies, that adversely affects FHA’s ability to
   initiate, authorize, record, process, or report financial data reliably in accordance with
   generally accepted accounting principles such that there is more than a remote likelihood
   that a misstatement of FHA’s Principal Financial Statements that is more than
   inconsequential will not be prevented or detected by FHA’s internal control. We noted one
   matter, summarized below and more fully described in Appendix A, involving the internal
   control and its operation that we consider to be a significant deficiency:

          FHA needs to continue to modernize and enhance its information
          systems

          FHA continues to make progress improving its overall financial system
          control environment despite limited systems resources. Efforts to implement
          newly legislated HUD and FHA programs have increased the demand on
          these resources. This may further reduce FHA’s ability to address various
          system initiatives and control deficiencies affecting the reliability of FHA’s
          financial information. We recommend FHA management work with the HUD
          Secretary and the Chief Information Officer to conduct a risk assessment of
          the various systems initiatives in connection with the Office of the Chief



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                   INDEPENDENT AUDITOR’S REPORT, CONTINUED


          Information Officer Strategic Plan and ensure HUD information technology
          resources are appropriately allocated to address the Department’s and
          FHA’s highest system priorities.

   Additional detail and the related recommendations for this finding are provided in Appendix
   A of this report.

   A material weakness is a significant deficiency, or combination of significant deficiencies,
   that results in more than a remote likelihood that a material misstatement of the financial
   statements will not be prevented or detected by the entity’s internal control. However, we
   believe that the significant deficiency described above is not a material weakness.

   Our consideration of internal control was for the limited purpose described in the first
   paragraph above and would not necessarily identify all deficiencies in internal control that
   might be significant deficiencies or material weaknesses.

   Compliance with Laws and Regulations

   The results of our tests of compliance with laws, regulations and government-wide policies
   disclosed two instances of noncompliance that are required to be reported under
   Government Auditing Standards and OMB Bulletin No. 07-04, Audit Requirements for
   Federal Financial Statements, as amended, as described below. Providing an opinion on
   compliance with laws and regulations was not an objective of our audit and, accordingly,
   we do not express such an opinion.

          Due to deficiencies in the interface with the Generic Debt subsystem, the
          FHA’s core financial management system does not maintain accurate trial
          balance account information at the cohort level for the financing accounts.
          Accordingly, FHA may not be able to accurately calculate the reestimated
          cost “for a group of direct loans or loan guarantees for a given credit
          program made in a fiscal year” in accordance with the requirements of
          Statement of Federal Financial Accounting Standard No 2, Accounting for
          Direct Loans and Loan Guarantees and the Federal Credit Reform Act of
          1990. These balances are adjusted manually at the end of the year.

          The HUD Office of the Chief Financial Officer (OCFO) is responsible for
          investigating and reporting on violations of the Anti-Deficiency Act. The
          OCFO determined an Anti-Deficiency Act violation occurred associated with
          the commitment limitation for FHA's General Insurance/Special Risk Fund
          programs for fiscal year 2003, but has not formally reported this matter to
          the President and Congress of the United States and the Government
          Accountability Office (GAO) as required by OMB Circular A-11, Preparation,
          Submission and Execution of the Budget, Section 435 and 31 U.S.C. 1351
          and 1517(b). Other potential violations are still under review by the OCFO.
          No final legal determination regarding these other potential compliance
          matters has been made.




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                   INDEPENDENT AUDITOR’S REPORT, CONTINUED

   Supplementary Information

   The information in the Management’s Discussion and Analysis and Required
   Supplementary Information sections is not a required part of the Principal Financial
   Statements, but is supplementary information required by accounting principles generally
   accepted in the United States of America. We have applied certain limited procedures,
   which consisted principally of inquiries of management regarding the methods of
   measurement and presentation of the supplementary information. However, we did not
   audit the information and express no opinion on it.

   Management Responsibilities

   Management is responsible for the information in the Annual Management Report,
   including the preparation of: (1) the Principal Financial Statements in conformity with
   accounting principles generally accepted in the United States of America, (2)
   Management’s Discussion and Analysis (including the performance measures), and (3)
   Required Supplementary Information. Management is also responsible for establishing,
   maintaining and assessing internal control to provide reasonable assurance that the broad
   control objectives of the Federal Managers Financial Integrity Act of 1982 (FMFIA) are
   met, ensuring that FHA’s financial management systems substantially comply with the
   Federal Financial Management Improvement Act of 1996 (FFMIA) and complying with
   applicable laws, regulations and government-wide policies.

   Objectives, Scope and Methodology

   Our responsibility is to express an opinion on FHA’s Principal Financial Statements based
   on our audits. We conducted our audits in accordance with auditing standards generally
   accepted in the United States of America, the standards applicable to financial audits
   contained in Government Auditing Standards issued by the Comptroller General of the
   United States, and OMB Bulletin No. 07-04, as amended. Those standards and OMB
   Bulletin No. 07-04 require that we plan and perform the audit to obtain reasonable
   assurance about whether the Principal Financial Statements are free of material
   misstatement.

   An audit also includes examining, on a test basis, evidence supporting the amounts and
   disclosures in the financial statements, assessing the accounting principles used and
   significant estimates made by management, as well as evaluating the overall financial
   statement presentation. We believe our audits provide a reasonable basis for our opinion.
   In planning and performing our audits, we also obtained an understanding of FHA and its
   operations, including it’s internal control over financial reporting (including safeguarding of
   assets) and compliance with laws, regulations and government-polices (including
   execution of transactions in accordance with budget authority), determined whether these
   internal controls had been placed in operation, assessed control risk, and performed tests
   of controls in order to evaluate and report on internal control and determine our auditing
   procedures for the purpose of expressing our opinion on the financial statements. We
   limited our internal control testing to those controls necessary to achieve the objectives
   described in OMB Bulletin No. 07-04 and Government Auditing Standards, which include
   ensuring:




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                   INDEPENDENT AUDITOR’S REPORT, CONTINUED


      x   Transactions are properly recorded, processed, and summarized to permit
          the preparation of financial statements in conformity with U.S. generally
          accepted accounting principles, and assets are safeguarded against loss
          from unauthorized acquisition, use, or disposition.
      x   Transactions are executed in accordance with (1) laws governing the use of
          budget authority, (2) other laws and regulations that could have a direct and
          material effect on the financial statements, and (3) any other laws,
          regulations, and government-wide policies identified by OMB audit guidance.
   We did not test all internal controls relevant to operating objectives as broadly defined by
   FMFIA, such as those controls relevant to preparing statistical reports and ensuring
   efficient operations. Because of inherent limitations in internal control, misstatements due
   to error or fraud may nevertheless occur and not be detected. We also caution that
   projecting our evaluation to future periods is subject to the risk that controls may become
   inadequate because of changes in conditions or that the degree of compliance with
   controls may deteriorate.
   We are also responsible for testing compliance with selected provisions of laws,
   regulations and government-wide policies that have a direct and material effect on the
   financial statements. We limited our tests of compliance to those laws and regulations
   required by OMB audit guidance that we deemed applicable to the financial statements for
   the fiscal year ended September 30, 2008. Compliance with FFMIA will be reported on by
   the HUD Office of Inspector General (OIG) in connection with their audit of the
   consolidated financial statements of HUD.

   We limited our tests of compliance to the provisions described above and we did not test
   compliance with all laws and regulations applicable to FHA. We caution that
   noncompliance may occur and not be detected by these tests and that such testing may
   not be sufficient for other purposes.

   FHA Comments and Our Evaluation

   FHA management generally concurred with our findings and recommendations. The full
   text of FHA management’s response is included in Appendix B. We did not perform audit
   procedures on FHA management’s written response and accordingly, we express no
   opinion on it. Our assessment of FHA management’s response is included in Appendix C.
   The current status of prior year findings and recommendations is included in Appendix D.

   We also noted other less significant matters involving FHA’s internal control and its
   operation, which we have reported to the management of FHA in a separate letter, dated
   October 30, 2008.




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                    INDEPENDENT AUDITOR’S REPORT, CONTINUED


   Distribution

   This report is intended solely for the information and use of the HUD OIG, the
   management of HUD and FHA, OMB, GAO and the Congress of the United States, and is
   not intended to be and should not be used by anyone other than these specified parties.




   Arlington, Virginia
   October 30, 2008




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                                        Appendix A
                                   Significant Deficiency



   In our report dated October 30, 2008, we described the results of our audits of the
   consolidated balance sheets of the Federal Housing Administration (FHA), a wholly
   owned government corporation within the United States Department of Housing and
   Urban Development (HUD), as of September 30, 2008 and 2007, and the related
   consolidated statements of net cost, changes in net position, and the combined
   statements of budgetary resources (Principal Financial Statements) for the years then
   ended. The objective of our audits was to express an opinion on these financial
   statements. In connection with our audits, we also considered FHA’s internal control
   over financial reporting and tested FHA’s compliance with certain provisions of
   applicable laws and regulations that could have a direct and material effect on its
   financial statements. The following presents additional detail on the internal control
   matters discussed in that report.


   1.   FHA needs to continue to enhance and modernize its information
        systems

   FHA continues to make progress improving its overall financial system control
   environment despite limited systems resources. During fiscal year (FY) 2008, we noted
   several key improvements to FHA’s overall systems general control environment,
   including (a) reductions in the number of system security vulnerabilities, (b) progress in
   implementing a new user access management system, (c) a new automated interface
   between FHA’s reverse mortgage notes management system and the core financial
   management system, and (d) improved security controls at the single family property
   management contractors.

   These improvements were implemented with FHA’s historically limited resources for IT
   systems maintenance and development. Our audit and several audits by the Office of
   Inspector General (OIG) continue to identify systems control deficiencies that need to be
   addressed. However, recent efforts to implement newly legislated FHA programs have
   increased the demand on these limited resources. Although FHA received new funding
   in FY2008 for these new programs, management focus on these new initiatives may
   further reduce FHA’s capacity to simultaneously address other system modernization
   initiatives and control deficiencies thereby affecting the reliability and completeness of
   FHA’s financial information.

   FHA manages its program operations through a complex set of Multifamily and Single
   Family business systems that provide data to the core financial management system
   (FHA Subsidiary Ledger or FHASL) through automated interfaces. After the
   implementation of FHASL in 2003, FHA’s Enterprise Architecture Plan anticipated than
   many of these business systems would be replaced by components of FHASL. Several
   of these system replacements have been delayed due to resource constraints. FHA
   currently maintains four Multifamily and 11 Single Family systems that are administered
   separately from FHASL.




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                                         Appendix A
                              Significant Deficiency, Continued

   Multifamily Systems

   Two of these business systems to be replaced are FHA’s two primary Multifamily
   insurance systems. The new systems were scheduled to be operational on October 1,
   2008, but as of the date of this report they were still going through user acceptance
   testing. The implementation date was revised to November 11, 2008. Preliminary test
   results indicated anomalies in the transaction processing and missing system
   functionality. The FHA Comptroller has indicated that these anomalies have been
   corrected. Because these systems are being developed as modules of FHASL, FHA will
   conduct a re-accreditation of FHASL in November 2008. Funding for the systems
   implementation contract expires on December 31, 2008.

   Single Family Systems

   In an audit conducted by the OIG, other system general control weaknesses were noted
   as follows:

         x Only 3 of 24 HUD employees or contractors with access to the Single Family
           Claims system had complete and proper background investigations.
         x Two users of the Single Family Claims system had unauthorized access rights to
           read, write and update records.
         x Five contract developers had update access to Single Family Claims production
           data files.
         x FHA neither had adequate controls over, nor reviews of, audit logs for the Single
           Family Claims system.
         x FHA did not develop or implement adequate security controls over information
           transmitted between FHA and its numerous lenders and other business partners.
         x FHA failed to adequately assess its compliance with mandatory system security
           controls.
         x FHA did not properly ensure annual security reviews were completed by HUD
           employees.

   Detailed findings and specific recommendations can be found in a separate OIG audit
   report.1

   HECM Systems

   As noted in our prior year Independent Auditor’s Report, the FHA continues to use a
   manual business process for handling applications for claim benefits for the FHA’s Home
   Equity Conversion Mortgage (HECM) program. FHA has conducted an accounting risk
   assessment to identify short and long term deficiencies in this process, but will continue
   to rely on significant review and reconciliation procedures as compensating controls until
   a replacement system solution can be procured and implemented.




   1
      Audit Report No. 2008-DP-0004 Review of Selected FHA Major Applications’ Information Security
   Controls




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                                       Appendix A
                            Significant Deficiency, Continued


   An independent examination, conducted in accordance with AICPA Statement on
   Auditing Standards (SAS) No. 70, Audits of Service Organizations, Type I, Control
   Design, of the HECM notes servicing system identified over thirty specific system control
   deficiencies, including:
         x Lack of formal approval for critical system security documents
         x Weaknesses with system access policies and physical access control monitoring
         x Inadequate system baseline documentation
         x Lack of formal authorization procedures for system software changes
         x Segregation of duties weaknesses
         x Deficiencies in the Continuity of Operations Plan

   Management has planned to conduct a SAS No. 70 Type II examination, which will test
   the operation of the controls over the HECM notes servicing system during FY2009.

   Other Systems

   We also found that due to deficiencies in the Generic Debt subsystem interface, FHA is
   unable to maintain reliable cohort level data for the financing accounts within its (FHASL)
   general ledger system as required by the Credit Reform Act of 1990.

   In addition to the efforts to address these deficiencies, the FHA’s Systems Division is
   currently responsible for a number of other major IT related projects, including:
        x Implementing systems to handle the newly legislated Hope for Homeowners
           program for risk-sharing of single family loans insured that became effective
           October 1, 2008.
        x Procurement and implementation of a new integrated insured reverse mortgage
           loan and notes servicing system.
        x Implementing the new Real Estate Owned property management system at the
           various Single Family Marketing and Management (M&M) contractor sites. This
           system will be interfaced with the SAMS legacy application system.

   Managing such critical system initiatives simultaneously and without sufficient funding or
   staff resources may increase the risk of system or processing errors in the agency’s
   financial data, or increase the risk of unauthorized access into critical or sensitive
   agency systems. Such errors or unauthorized access could lead to misstatements in
   financial reporting or misappropriation of FHA assets.


   Recommendations

   We recommend:

   1a. The FHA Commissioner, Assistant Secretary for Housing, coordinate with the HUD
       Secretary and the HUD CIO to conduct a risk assessment of the various systems
       initiatives and required corrective actions in connection with the OCIO Strategic Plan
       and document how HUD’s/FHA’s IT resources will be appropriately allocated in fiscal
       year 2009 to address the Department’s and FHA’s highest system priorities. (New)




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                                      Appendix A
                           Significant Deficiency, Continued


   1b. The FHA Comptroller document the revised Multifamily business processes, identify
       and assess key internal controls and perform tests of those controls commensurate
       with the inherent risk for a new system in conjunction with the agency’s OMB Circular
       No. A-123 Management Control Program and ensure the system’s compliance with
       OMB Circular No. A-130, Management of Federal Information Resources. (New)

   1c. The FHA Comptroller develop an automated process for HECM claims and establish
       an automated interface with FHASL and ensure such interfaces are included in the
       overall system functional requirements document. (Repeat)

   1d. The FHA Comptroller should ensure the identified deficiencies in the controls over
       the HECM notes servicing system are corrected before proceeding with the Type II
       review. (New)

   1e. The FHA Comptroller should ensure the control testing of the HECM notes system to
       be performed under AICPA SAS No. 70, Type II is expanded to test for compliance
       with systems requirements unique to the federal government. (New)

   1f. The FHA Comptroller should ensure that any HECM system replacement is initiated
       in accordance with HUD system development life cycle guidelines and established
       program timelines. (New)

   1g. The FHA Comptroller should work with OCIO to correct the Generic Debt system
       interfaces to ensure FHASL properly balances the financing accounts at the cohort
       level. (New)




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                                  Appendix B
                             Management’s Response




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                                 Appendix B
                       Management’s Response, Continued




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                                 Appendix C
                   UKW’s Assessment of Management’s Response



   UKW has obtained and reviewed FHA management’s response to the findings and
   recommendations made in connection with our audit of FHA’s 2008 Principal Financial
   Statements, which is included as Appendix B. We did not perform audit procedures on
   FHA’s written response to the significant deficiency and accordingly, we express no
   opinion on it. Our assessment of management’s responses is discussed below.

   Assessment of management’s response to significant deficiency No. 1:

   As indicated in Appendix B, FHA management concurred with our finding and
   recommendations, but did not provide specific information regarding planned corrective
   actions or information needed to assess whether management will be able to effectively
   implement our recommendations.

   Assessment of management’s response to noncompliance with laws and
   regulations:

   We concur that FHA’s core financial management system is properly designed to
   account for credit reform transactions at the cohort level and that the transactions
   derived from the Generic Debt subsystem are generally not material to the financial
   statements as a whole. However, qualitative, rather than quantitative, factors are
   considered when assessing reportable matters regarding an agency’s compliance with
   laws and regulations. We believe SFFAS No. 2 and OMB Circular A-11, Preparation,
   Submission and Execution of the Budget, which represent government-wide policies
   designed to properly and effectively implement the requirements of the Credit Reform
   Act of 1990, explicitly outline the requirements for the use of cohorts to account for
   financing account transactions. Federal system guidelines are designed to ensure that
   agencies comply with accounting standards “at the transaction level”.

   This system deficiency affects the ability of FHA to perform reconciliations to ensure that
   all of its other accounting transactions are being recorded to the proper cohorts and
   resulting reestimates may not accurately present the interest costs or technical
   reestimate costs arising from changes in the program’s performance for a given cohort.
   Accordingly, we believe we have properly classified this as reportable noncompliance.




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                                     Appendix D
                Status of Prior Year Findings and Recommendations

   Our assessment of the current status of reportable conditions and material weaknesses
   identified in prior year audits is presented below:

        Prior Finding/Recommendation                     Type          Fiscal Year 2008
                                                                            Status
 1. We recommend the FHA Comptroller:
    a. Coordinate with the Acting Deputy            2007 Material   Resolved.
       Assistant Secretary for Single Family        Weakness
       Housing to compile and document a
       comprehensive program risk assessment
       of the HECM program based on
       anticipated program volume, and activity.
    b. Coordinate with HUD’s Acting Chief           2007 Material   Not yet completed.
       Information Officer and the Acting Deputy    Weakness        FHA has developed a
       Assistant Secretary for Single Family                        solicitation Statement
       Housing to establish a comprehensive                         of Work but no
       system functional requirements document                      Functional
       in accordance with HUD guidance for the                      Requirements
       new HECM system based on anticipated                         Document.
       future volumes of transactions.
    c. Coordinate with HUD’s Acting Chief           2007 Material   Resolved.
       Information Officer to complete a full       Weakness
       assessment of the Privacy Act
       requirements for the HECM notes
       database and its contractor.
    d. Complete a full assessment of the            2007 Material   Partially resolved.
       effectiveness of the existing controls       Weakness        Management was able
       (including an Independent Type II review                     to complete a Type I
       of the service provider under AICPA                          SAS 70 review and
       Statement on Auditing Standards No. 70,                      plans to complete a
       Service Organizations) over the notes                        Type II review in
       database given the sensitivity of the data                   FY2009. See 2008
       and the anticipated growth in reported                       Significant Deficiency.
       assigned note balances and transactions.
    e. Develop and implement automated              2007 Material   Partially resolved. A
       system interfaces between the current        Weakness        system interface
       HECM claims and notes systems and                            between the HECM
       FHASL, if the new system(s) cannot be                        notes system and
       implemented timely.                                          FHASL implemented in
                                                                    2008. See 2008
                                                                    Significant Deficiency.




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                                      Appendix D
             Status of Prior Year Findings and Recommendations, Cont’d



          Prior Finding/Recommendation                      Type         Fiscal Year 2008
                                                                              Status
 2. We recommend the Deputy Assistant
     Secretary for Finance and Budget request
     the Director of the Office of Evaluation to:
     a. Enhance its documentation on how               2007 Material   Resolved.
        specific assignment and termination rates      Weakness
        are calculated and how macroeconomic
        projections are incorporated

     b. Document the results of the current            2007 Material   Resolved.
        pricing and termination model reviews          Weakness
        and their effect on the methodology for
        calculating future cash flow reestimates

     c. Document any impact on the FY2007              2007 Material   Resolved.
        HECM liability reestimate as a result of       Weakness
        changes in the methodologies for
        calculating future cash flow estimates

     d. Document FHA’s conclusion on how               2007 Material   Resolved.
        recent HUD studies on HECM                     Weakness
        experience can be used to improve the
        calculation of the model’s calculated
        assumptions
     e. Establish new validation review                2007 Material   Resolved.
        procedures to compare the actual               Weakness
        premium collections and post-assignment
        terminations to the balances in the model

     f.   Document the use OMB approved CSC2           2007 Material   Resolved.
          calculator in the model                      Weakness

     g. Ensure the propriety of the discounting        2007 Material   Resolved.
        algorithm used in next year’s model            Weakness

     h. Reevaluate the assumption for                  2007 Material   Resolved.
        calculating note recoveries to better          Weakness
        reflect the “crossover risk” in the recovery
        cash flows




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                                      Appendix D
             Status of Prior Year Findings and Recommendations, Cont’d




          Prior Finding/Recommendation                    Type         Fiscal Year 2008
                                                                            Status
 2. We recommend the Deputy Assistant
     Secretary for Finance and Budget request
     the Director of the Office of Evaluation to:
     i. Incorporate the use of disbursements into 2007 Material      Resolved.
         the calculation of the credit subsidy rate Weakness

     j.   Incorporate sensitivity analysis variables 2007 Material   Resolved.
          directly within the cash flow model and Weakness
          document management’s assessment of
          the results of the sensitivity analysis.

     k. Develop a more formal process for           2007 Material    Resolved.
        documenting management’s conclusions        Weakness
        regarding required model modifications
        as a result of the annual validation
        process.




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                               PRINCIPAL
                               FINANCIAL
                              STATEMENTS




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                (THIS PAGE LEFT BLANK INTENTIONALLY)




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                         FEDERAL HOUSING ADMINISTRATION
         (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                           CONSOLIDATED BALANCE SHEETS
                             As of Septe mbe r 30, 2008 and 2007
                                     (Dollars in Millions)

                                                                                        2008               2007
ASSETS
  Intragovernmental
    Fund Balance with U.S. Treasury (Note 3)                                      $           12,590   $     9,559
    Investments (Note 4)                                                                      19,254        22,481
    Other Assets (Note 7)                                                                        21                4
  Total Intragovernmental                                                                     31,865        32,044


  Investments (Note 4)                                                                           48               121
  Accounts Receivable, Net (Note 5)                                                             128               119
  Loans Receivable and Related Foreclosed Property, Net (Note 6)                               5,506         4,738
  Other Assets (Note 7)                                                                         134               143
TOTAL ASSETS                                                                      $       37,681       $    37,165


LIABILITIES
  Intragovernmental
    Borrowings from U.S. Treasury (Note 9)                                        $            4,832   $     4,573
    Other Liabilities (Note 10)                                                                1,530         3,657
  Total Intragovernmental                                                                      6,362         8,230


  Accounts Payable (Note 8)                                                                     585               385
  Loan Guarantee Liability (Note 6)                                                           19,486         7,431
  Debentures Issued to Claimants (Note 9)                                                        52               70
  Other Liabilities (Note 10)                                                                   438               474
TOTAL LIABILITIES                                                                         26,923            16,590


NET POSITION
  Unexpended Appropriations (Note 16)                                                           411               544
  Cumulative Results of Operations                                                            10,347        20,031
TOTAL NET POSITION                                                                        10,758            20,575


TOTAL LIABILITIES AND NET POSITION                                                $       37,681       $    37,165

                           The accompanying notes are an integral part of these statements.




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                                     FEDERAL HOUSING ADMINISTRATION
           (AN AG ENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                  CONSOLIDATED STATEMENTS OF NET COST
                                         As of September 30, 2008 and 2007
                                                (Dol lars i n Mill ions)


                                                                                               2008           2007
MMI/CMHI PROGRAM COSTS
 Intragovernmental Gross Costs (Note 12)                                               $         175      $     284
 Less: Intragovernmental Earned Revenue (Note 13)                                               1,320          1,299
Intragovernmental Net Costs                                                                    (1,145)        (1,015)


 Gross Costs with the Public (Note 12)                                                          9,495          4,700
 Less: Earned Revenue from the Public (Note 13)                                                       9          24
Net Costs with the Public                                                                       9,486          4,676
NET MMI/CMHI PROG RAM COST (SURPLUS)                                                   $        8,341     $    3,661


GI/SRI PROGRAM COSTS
 Intragovernmental Gross Costs (Note 12)                                               $         138      $     141
 Less: Intragovernmental Earned Revenue (Note 13)                                                 73            107
Intragovernmental Net Costs                                                                       65             34


 Gross Costs with the Public (Note 12)                                                          1,569         (1,235)
 Less: Earned Revenue from the Public (Note 13)                                                   68             91
Net Costs with the Public                                                                       1,501         (1,326)
NET G I/SRI PROG RAM COST (SURPLUS)                                                             1,566         (1,292)


NET COST (SURPLUS) OF OPERATIONS                                                       $        9,907     $    2,369



                            The accompanying notes are an integral part of these statements.




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                       FEDERAL HOUSING ADMINISTRATION
      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
             CONSOLIDATED STATEMENTS OF CHANGES IN NET POSITION
                                        As of September 30, 2008 and 2007
                                                (Dollars in Millions)

                                                  2008                  2008                    2007                2007
                                                Cumulative                                    Cumulative
                                                Results of         Unexpended                 Results of         Unexpended
                                                Operations        Appropriations              Operations        Appropriations

BEG INNING BALANCES                         $      20,031     $                544        $      23,405     $              594


BUDGETARY FINANCING SOURCES
 Appropriations Received (Note 16)                        -                    627                      -               1,252
 Other Adjustments (Note 16)                              -                     (49)                    2                  (119)
 Appropriations Used (Note 16)                        435                      (435)                415                    (415)
 Transfers-Out (Note 15 and Note 16)                 (613)                     (276)              (1,014)                  (768)


OTHER FINANCING SOURCES
 Transfers In/Out (Note 15)                           387                         -                (445)                      -
 Imputed Financing (Note 12)                             14                       -                    37                     -
TOTAL FINANCING SOURCES                               223                      (133)              (1,005)                   (50)


NET (COST) SURPLUS OF OPERATIONS                    (9,907)                           -           (2,369)                         -


ENDING BALANCES                             $      10,347     $                411        $      20,031     $              544



                          The accompanying notes are an integral part of these statements.




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                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                                    As of September 30, 2008
                                      (Dollars in Millions)

                                                                    2008                 2008                2008
                                                                  Budgetary          Non-Budgetary           Total
BUDGETARY RESOURCES
Unobligated Balance, brought forward, October 1              $         22,843    $              4,077    $      26,920
Recoveries of prior year unpaid obligations                                72                      19               91
Budget Authority:
   Appropriations                                                        627                       -                 627
   Borrowing authority                                                     3                     940                 943
   Spending authority from offsetting collections (gross):
      Earned
         Collected (Note 18)                                            1,636               14,160              15,796
         Change in receivables from Federal sources                       (25)                 (42)                (67)
      Change in unfilled customer order w/o advance                         -                    -                   -
Nonexpenditure transfers, net (Note 19)                                   (41)                   -                 (41)
Permanently not available                                                (294)                (690)               (984)
TOTAL BUDGETARY RESOURCES                                    $        24,821     $         18,464        $     43,285

STATUS OF BUDGETARY RESOURCES
Obligations incurred, Direct (Note 20)                       $          5,274    $          10,316       $      15,590
Unobligated balance-Apportioned                                           365                2,622               2,987
Unobligated balance-Not available                                      19,182                5,526              24,708
TOTAL STATUS OF BUDGETARY RESOURCES                          $        24,821     $         18,464        $     43,285

Change in Obligated Balances
Obligated balance, net:
   Unpaid obligations, brought forward, October 1            $            954    $              1,342    $       2,296
   Uncollected customer payments from Federal sources,                   (263)                    (44)            (307)
   brought forward, October 1
Total, unpaid obligated balance, brought forward, net                     691                1,298               1,989
Obligations incurred (Note 20)                                          5,274               10,316              15,590
Gross outlays                                                          (5,293)             (10,043)            (15,336)
Recoveries of prior-year unpaid obligations, actual                       (72)                 (19)                (91)
Change in uncollected customer payments-Federal sources                    25                   42                  67
Total, unpaid obligated balance, net, end of period                       625                1,594               2,219
Obligated balance, net, end of period:
   Unpaid obligations                                                     863                   1,596            2,459
   Uncollected customer payments from Federal sources                    (238)                     (2)            (240)
Total, unpaid obligated balance, net, end of period                       625                   1,594            2,219
Net outlays:
   Gross outlays                                                        5,293               10,043              15,336
   Offsetting collections (Note 18)                                    (1,636)             (14,160)            (15,796)
   Less: Distributed offsetting receipts                                1,511                    -               1,511
NET OUTLAYS                                                  $         2,146     $         (4,117)       $     (1,971)

                             The accompanying notes are an integral part of these statements.




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                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                                    As of September 30, 2007
                                      (Dollars in Millions)

                                                                    2007                  2007             2007
                                                                  Budgetary           Non-Budgetary        Total
BUDGETARY RESOURCES
Unobligated Balance, brought forward, October 1              $         22,390     $           7,032    $      29,422
Recoveries of prior year unpaid obligations                                89                   124              213
Budget Authority:
   Appropriations                                                       1,252                     2            1,254
   Borrowing authority                                                     15                   602              617
   Spending authority from offsetting collections (gross):
      Earned
         Collected (Note 18)                                            2,057                 9,104           11,161
         Change in receivables from Federal sources                        56                    42               98
      Change in unfilled customer order w/o advance                         -                    (4)              (4)
Nonexpenditure transfers, net (Note 19)                                  (609)                    -             (609)
Permanently not available                                                (291)               (2,315)          (2,606)
TOTAL BUDGETARY RESOURCES                                    $        24,959      $         14,587     $     39,546

STATUS OF BUDGETARY RESOURCES
Obligations incurred, Direct (Note 20)                       $          2,116     $          10,510    $      12,626
Unobligated balance-Apportioned                                           187                   993            1,180
Unobligated balance-Not available                                      22,656                 3,084           25,740
TOTAL STATUS OF BUDGETARY RESOURCES                          $        24,959      $         14,587     $     39,546

Change in Obligated Balances
Obligated balance, net:
   Unpaid obligations, brought forward, October 1            $            980     $           1,377    $       2,357
   Uncollected customer payments from Federal sources,                   (207)                   (7)            (214)
   brought forward, October 1
Total, unpaid obligated balance, brought forward, net                     773                 1,370            2,143
Obligations incurred (Note 20)                                          2,116                10,510           12,626
Gross outlays                                                          (2,053)              (10,420)         (12,473)
Recoveries of prior-year unpaid obligations, actual                       (89)                 (124)            (213)
Change in uncollected customer payments-Federal sources                   (56)                  (38)             (94)
Total, unpaid obligated balance, net, end of period                       691                 1,298            1,989
Obligated balance, net, end of period:
   Unpaid obligations                                                     954                 1,342            2,296
   Uncollected customer payments from Federal sources                    (263)                  (44)            (307)
Total, unpaid obligated balance, net, end of period                       691                 1,298            1,989
Net outlays:
   Gross outlays                                                         2,053               10,420           12,473
   Offsetting collections (Note 18)                                     (2,057)              (9,104)         (11,161)
   Less: Distributed offsetting receipts                                 2,759                    -            2,759
NET OUTLAYS                                                  $         (2,763)    $          1,316     $     (1,447)

                             The accompanying notes are an integral part of these statements.




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                     NOTES TO THE FINANCIAL STATEMENTS
                                             September 30, 2008

Note 1. Significant Accounting Policies

Entity and Mission

The Federal Housing Administration (FHA) was established under the National Housing Act of 1934 and became a
wholly owned government corporation in 1948 subject to the Government Corporation Control Act, as amended.
While FHA was established as a separate Federal entity, it was subsequently merged into the Department of
Housing and Urban Development (HUD) when that department was created in 1965. FHA does not maintain a
separate staff or facilities; its operations are conducted, along with other Housing activities, by HUD organizations.
FHA is headed by HUD's Assistant Secretary for Housing/Federal Housing Commissioner, who reports to the
Secretary of HUD. FHA's activities are included in the Housing section of the HUD budget.

FHA administers a wide range of activities to make mortgage financing more accessible to the home-buying public
and to increase the availability of affordable housing to families and individuals, particularly to the nation's poor
and disadvantaged. FHA insures private lenders against loss on mortgages, which finance Single Family homes,
Multifamily projects, health care facilities, property improvements, manufactured homes, and reverse mortgages,
also referred to as Home Equity Conversion Mortgage (HECM). The objectives of the activities carried out by
FHA relate directly to developing affordable housing.

FHA categorizes its activities as Single Family including Title 1, Multifamily and HECM. Single Family activities
support initial or continued home ownership; Title I activities support manufactured housing and property
improvement. Multifamily activities support high-density housing and medical facilities. HECM activities support
reverse mortgages which allow homeowners 62 years of age or older to convert the equity in their homes into lump
sum or monthly cash payments without having to repay the loan until the loan terminates.

FHA organizes its operations into two overall program types – MMI/CMHI and GI/SRI. These program types are
comprised of four major funds. The Mutual Mortgage Insurance fund (MMI), FHA's largest fund, provides basic
Single Family mortgage insurance and is a mutual insurance fund, whereby mortgagors, upon non-claim
termination of their mortgages, share surplus premiums paid into the MMI fund that are not required for operating
expenses and losses or to build equity. The Cooperative Management Housing Insurance fund (CMHI), another
mutual fund, provides mortgage insurance for management-type cooperatives. The General Insurance fund (GI),
provides a large number of specialized mortgage insurance activities, including insurance of loans for property
improvements, cooperatives, condominiums, housing for the elderly, land development, group practice medical
facilities, nonprofit hospitals, and reverse mortgages. The Special Risk Insurance fund (SRI) provides mortgage
insurance on behalf of mortgagors eligible for interest reduction payments who otherwise would not be eligible for
mortgage insurance. Effective in fiscal year 2009, the HECM program and Single Family programs currently in
the GI fund will move to the MMI fund.

The Housing and Economic Recovery Act of 2008

On July 30, 2008 the President signed the Housing and Economic Recovery Act of 2008. This legislation requires
FHA to modify existing programs and initiated a new program entitled HOPE for Homeowners (H4H). The H4H
program will begin on October 1, 2008; however, preparations for this new program began soon after the legislation
was signed.




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Basis of Accounting

The principal financial statements are presented in conformity with accounting principles generally accepted in the
United States of America (GAAP) applicable to Federal agencies as promulgated by the Federal Accounting
Standards Advisory Board (FASAB). The recognition and measurement of budgetary resources and their status for
purposes of preparing the Combined Statements of Budgetary Resources (SBR), is based on concepts and guidance
provided by Office of Management and Budget (OMB) Circular A-11, Preparation, Submission, and Execution of
the Budget. The format of the SBR is based on the SF 133, Report on Budget Execution and Budgetary Resources.

Reclassifications

In fiscal year 2008, FHA reclassified certain accounts receivable and accounts payable amounts to different
financial statement note line items in Note 5 and Note 8, respectively. These changes in classifications have no
effect on previously reported financial statements.

Basis of Consolidation

The accompanying principal financial statements include all Treasury Account Fund Symbols (TAFSs) designated
to FHA, which consist of three principal program funds, six revolving funds, two general funds and a deposit fund.
All inter-fund accounts receivable, accounts payable, transfers in and transfers out within these TAFSs have been
eliminated to prepare the consolidated balance sheets, statements of net cost, and statements of changes in net
position. The SBR is prepared on a combined basis as allowed by OMB Circular A-136, Financial Reporting
Requirements.

Fund Balance with U.S. Treasury

Fund balance with U.S. Treasury consists of amounts collected from premiums, interest earned from Treasury,
recoveries and appropriations. The balance is available to fund payments for claims, property and operating
expenses and of amounts collected but unavailable until authorizing legislation is enacted (see Notes 2 and 3).

Investments

FHA investments include investments in U.S. Treasury securities, Multifamily risk sharing debentures and
investments in private-sector entities where FHA is a member with other parties under the Accelerated Claims
Disposition Demonstration program (see Note 4).

Under current legislation, FHA invests available MMI/CMHI capital reserve fund resources in excess of its current
needs in non-marketable market-based U.S. Treasury securities. These U.S. Treasury securities may not be sold on
public securities exchanges, but do reflect prices and interest rates of similar marketable U.S. Treasury securities.
Investments are presented at acquisition cost net of the amortized premium or discount. Amortization of the
premium or discount is recognized monthly on investments in U.S. Treasury securities using the effective interest
rate method.

FHA implemented the Accelerated Claims Disposition Demonstration program (the 601 program) to shorten the
claim filing process, obtain higher recoveries from its defaulted guaranteed loans, and support the Office of
Housing’s mission of keeping homeowners in their home. To achieve these objectives, FHA transfers assigned
mortgage notes to private sector entities in exchange for cash and equity interest. With the transfer of assigned
mortgage notes under the 601 program, FHA obtains ownership interest in the private-sector entities. To comply
with the requirement of Opinion No. 18 issued by the Accounting Principles Board (APB 18), FHA uses the equity
method of accounting to measure the value of its investments in these entities. The equity method of accounting




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requires FHA to record its investments in the entities at cost initially. Periodically, the carrying amount of the
investments is adjusted for cash distributions to FHA and for FHA’s share of the entities’ earnings or losses.

Multifamily Risk Sharing Debentures [Section 542(c)] is a program available to lenders where the lender shares the
risk in a property by issuing debentures for claim amount paid by FHA on defaulted insured loans. If FHA’s risk is
over 50%, HUD must review and approve the underwriting standards, terms, and conditions of the loan. If the loan
defaults FHA pays the lender the initial settlement. On the settlement date the lender issues FHA a debenture for
the amount of the settlement at the note rate (determined by the U.S. Treasury) thus sharing the risk in the property.

Credit Reform Accounting

The Federal Credit Reform Act (FCRA) established the use of program, financing, general fund receipt and capital
reserve accounts to separately account for transactions that are not controlled by the Congressional budget process.
It also established the liquidating account for activity relating to any loan guarantees committed and direct loans
obligated before October 1, 1991 (pre-Credit Reform). These accounts are classified as either budgetary or non-
budgetary in the Combined Statements of Budgetary Resources. The budgetary accounts include the program,
capital reserve and liquidating accounts. The non-budgetary accounts consist of the credit reform financing
accounts.

In accordance with the Statement of Federal Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct
Loans and Loan Guarantees, the program account receives and obligates appropriations to cover the subsidy cost
of a direct loan or loan guarantee and disburses the subsidy cost to the financing account. The program account
also receives appropriations for administrative expenses. The financing account is a non-budgetary account that is
used to record all of the cash flows resulting from Credit Reform direct loans, assigned loans, loan guarantees and
related foreclosed property. It includes loan disbursements, loan repayments and fees, claim payments, recoveries
on sold collateral, borrowing from the U.S. Treasury, interest, negative subsidy and the subsidy cost received from
the program account.

The general fund receipt account is used for the receipt of amounts paid from the GI/SRI financing account when
there is negative subsidy from the original estimate or a downward reestimate. The receipt account is a general
fund receipt account and amounts are not earmarked for the FHA’s credit programs. They are available for
appropriations only in the sense that all general fund receipts are available for appropriations. Any assets in this
account are non-entity assets and are offset by intragovernmental liabilities. At the beginning of the following
fiscal year, the fund balance in the general fund receipt account is transferred to the U.S. Treasury general fund.
Negative subsidy and downward reestimates in the MMI/CMHI fund are transferred to the Capital Reserve account.

The liquidating account is a budget account that is used to record all cash flows to and from FHA resulting from
pre-Credit Reform direct loans or loan guarantees. Liquidating account collections in any year are available only
for obligations incurred during that year or to repay debt. Unobligated balances remaining in the GI and SRI
liquidating funds at year-end are transferred to the U.S. Treasury’s general fund. Consequently, in the event that
resources in the GI/SRI liquidating account are otherwise insufficient to cover the payments for obligations or
commitments, the FCRA provides that the GI/SRI liquidating account can receive permanent indefinite authority to
cover any resource shortages.

Loans Receivable and Related Foreclosed Property, Net

FHA’s loans receivable include mortgage notes assigned (MNA), also described as Secretary-held notes, and
purchase money mortgages (PMM). Under the requirements of the FCRA, PMM notes are considered to be direct
loans while MNA notes are considered to be defaulted guaranteed loans. The PMM loans are generated from the
sales on credit of FHA’s foreclosed properties to qualified non-profit organizations. The MNA notes are created
when FHA pays the lenders for claims on defaulted guaranteed loans and takes assignment of the defaulted loans




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for direct collections. In addition, Multifamily and Single Family performing notes insured pursuant to Section
221(g)(4) of the National Housing Act may be assigned automatically to FHA at a pre-determined point.

In accordance with the FCRA and SFFAS No. 2, Credit Reform direct loans, defaulted guaranteed loans and related
foreclosed property are reported at the net present value of expected cash flows associated with these assets,
primarily estimated proceeds less selling and maintenance costs. The difference between the cost of these loans
and property and the net present value is called the allowance for subsidy (AFS). Pre-Credit Reform loans
receivable and foreclosed property in inventory are recorded at net realizable value, which is based on historical
recovery rates net of any selling expenses (see Note 6).

Loan Guarantee Liability

The net potential future losses related to FHA’s central business of providing mortgage insurance are reflected in
the Loan Guarantee Liability in the consolidated balance sheets. As required by SFFAS No. 2, the Loan Guarantee
Liability includes the Credit Reform related Liabilities for Loan Guarantees (LLG) and the pre-Credit Reform Loan
Loss Reserve (LLR) (see Note 6).

The LLG is calculated as the net present value of anticipated cash outflows and cash inflows. Anticipated cash
outflows include lender claims arising from borrower defaults, (i.e., claim payments), premium refunds, property
costs to maintain foreclosed properties arising from future defaults and selling costs for the properties. Anticipated
cash inflows include premium receipts, proceeds from asset sales and principal and interest on Secretary-held notes.

FHA records loss estimates for its Single Family LLR (includes MMI and GI/SRI) to provide for anticipated losses
incurred (e.g., claims on insured mortgages where defaults have taken place but claims have not yet been filed).
Using the net cash flows (cash inflows less cash outflows), FHA computes an estimate based on conditional claim
rates and loss experience data, and adjusts the estimate to incorporate management assumptions about current
economic factors.

FHA records loss estimates for its Multifamily LLR (includes CMHI and GI/SRI) to provide for anticipated
outflows less anticipated inflows. Using the net present value of claims less premiums, fees, and recoveries, FHA
computes an estimate based on conditional claim rates, prepayment rates, and recovery assumptions based on
historical experience.

Use of Estimates

The preparation of the principal financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.

Amounts reported for net loans receivable and related foreclosed property and the Loan Guarantee Liability
represent FHA’s best estimates based on pertinent information available.

To estimate the allowance for subsidy (AFS) associated with loans receivable and related to foreclosed property
and the liability for loan guarantees (LLG), FHA uses cash flow model assumptions associated with loan guarantee
cases subject to the Federal Credit Reform Act of 1990 (FCRA), as described in Note 6, to estimate the cash flows
associated with future loan performance. To make reasonable projections of future loan performance, FHA
develops assumptions, as described in Note 6, based on historical data, current and forecasted program and
economic assumptions.




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Certain programs have higher risks due to increased chances of fraudulent activities perpetrated against FHA. FHA
accounts for these risks through the assumptions used in the liabilities for loan guarantee estimates. FHA develops
the assumptions based on historical performance and management's judgments about future loan performance.

General Property, Plant and Equipment

FHA does not maintain separate facilities. HUD purchases and maintains all property, plant and equipment used by
FHA, along with other Office of Housing activities.

Current HUD policy concerning SFFAS No. 10, Accounting for Internal Use Software, indicates that HUD will
either own the software or the functionality provided by the software in the case of licensed or leased software.
This includes “commercial off-the-shelf” (COTS) software, contractor-developed software, and internally
developed software. FHA had several procurement actions in place and had incurred expenses for software
development. FHA identified and transferred those expenses to HUD to comply with departmental policy.

Unearned Premiums

Unearned premiums are recognized for pre-Credit Reform loan guarantee premiums collected but not yet earned in
the liquidating account. Premiums charged by FHA’s MMI fund include up-front and annual risk-based premiums.
Up-front risk-based premiums are recorded as unearned revenue upon collection and are recognized as revenue
over the period in which losses and insurance costs are expected to occur. Annual risk-based premiums are
recognized as revenue on a straight-line basis throughout the year. FHA's other funds charge periodic insurance
premiums over the mortgage insurance term. Premiums on annual installment policies are recognized for the
liquidating account on a straight-line basis throughout the year. Premiums associated with Credit Reform loan
guarantees are included in the calculation of the LLG and are not included in the unearned premium amounts
reported in the consolidated balance sheets.

Appropriations

FHA receives annual appropriations for Working Capital and Administrative Contract expenses for its MMI/CMHI,
GI/SRI, and H4H program activities. Additionally, FHA receives appropriations for GI/SRI positive subsidy,
upward reestimates, and permanent indefinite authority to cover any shortage of resources in the liquidating
account. The MMI/CMHI fund obtains appropriations for upward reestimates from the Capital Reserve account.

Full Cost Reporting

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards, requires that Federal agencies report the full
cost of program outputs in the financial statements. Full cost reporting includes all direct, indirect, and inter-entity
costs. For purposes of HUD’s consolidated financial statements, HUD identifies each responsibility segment’s
share of the program costs or resources provided by other Federal agencies. As a responsibility segment of HUD,
FHA’s portion of these costs was $14 million for fiscal year 2008 and $19 million for fiscal year 2007, and was
included in FHA’s financial statements as an imputed cost in the Consolidated Statements of Net Cost, and an
imputed financing in the Consolidated Statements of Changes in Net Position.

In a separate effort, FHA conducts time allocation surveys of all Office of Housing operational managers. These
surveys determine FHA’s direct personnel costs associated with the Housing Salaries and Expenses (S&E) transfer
in from HUD and where to allocate these costs between the MMI/CMHI and GI/SRI programs. The HUD Chief
Financial Officer (CFO) office also conducts surveys to determine how the department’s fiscal year overhead,
Office of Inspector General, and Working Capital Fund costs should be accounted for by responsibility segments.
This data is an integral part of the FHA direct cost S&E allocation prepared for financial statement reporting.




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Distributive Shares

As mutual funds, excess revenues in the MMI/CMHI Fund may be distributed to mortgagors at the discretion of the
Secretary of HUD. Such distributions are determined based on the funds' financial positions and their projected
revenues and costs. No distributive share distributions have been declared from the MMI fund since the enactment
of the National Affordable Housing Act (NAHA) in 1990.

Liabilities Covered by Budgetary Resources

Liabilities of federal agencies are required to be classified as those covered and not covered by budgetary resources,
as defined by OMB Circular A-136, and in accordance with SFFAS No. 1, Selected Assets and Liabilities. In the
event that available resources are insufficient to cover liabilities due at a point in time, FHA has authority to borrow
monies from the U.S. Treasury (for post-1991 loan guarantees) or to draw on permanent indefinite appropriations
(for pre-1992 loan guarantees) to satisfy the liabilities. Thus, all of FHA’s liabilities are considered covered by
budgetary resources.

Statement of Budgetary Resources

The Statement of Budgetary Resources has been prepared as a combined statement and as such, intra-entity
transactions have not been eliminated. Budget authority is the authorization provided by law to enter into
obligations to carry out the guaranteed and direct loan programs and their associated administrative costs, which
would result in immediate or future outlays of federal funds. FHA's budgetary resources include current budgetary
authority (i.e., appropriations and borrowing authority) and unobligated balances brought forward from multi-year
and no-year budget authority received in prior years, and recoveries of prior year obligations. Budgetary resources
also include spending authority from offsetting collections credited to an appropriation or fund account.

Unobligated balances associated with appropriations that expire at the end of the fiscal year remain available for
obligation adjustments, but not for new obligations, until that account is canceled. When accounts are canceled,
five years after they expire, amounts are not available for obligations or expenditure for any purpose.

FHA funds its programs through borrowings from the U.S. Treasury and debentures issued to the public. These
borrowings and debentures are authorized through a permanent indefinite authority at interest rates set each year by
the U.S. Treasury and the prevailing market rates.




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Note 2. Non-entity Assets

Non-entity assets consist of assets that belong to other entities but are included in FHA’s consolidated balance
sheets. To reflect FHA’s net position accurately, these non-entity assets are offset by various liabilities. FHA’s
non-entity assets as of September 30, 2008 and 2007 are as follows:

           (Dollars in Millions)
                                                                                 2008          2007
           Intragovernmental:
                      Fund Balance with U.S. Treasury                        $    1,551    $    2,828
                      Investments in U.S. Treasury Securities                         8             5
           Total Intragovernmental                                                1,559         2,833

                      Other Assets                                                 103           110
           Total Non-entity Assets                                               1,662         2,943
           Total Entity Assets                                                  36,019        34,222
           Total Assets                                                      $ 37,681      $ 37,165



FHA’s non-entity assets consist of FHA’s U.S. Treasury deposit of negative credit subsidy in the GI/SRI general
fund receipt account and of escrow monies collected by FHA from the borrowers of its loans.

According to the FCRA, FHA transfers negative credit subsidy from new endorsements and downward credit
subsidy reestimates from the GI/SRI financing account to the GI/SRI general fund receipt account. At the
beginning of each fiscal year, fund balance in the GI/SRI general fund receipt account is transferred into the U.S.
Treasury’s general fund.

Other assets consisting of escrow monies collected from FHA borrowers are either deposited at the U.S. Treasury
or Minority-owned banks or invested in U.S. Treasury securities. Subsequently, FHA disburses these escrow
monies to pay for property taxes, property insurance or maintenance expenses on behalf of the borrowers.




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Note 3. Fund Balance with U.S. Treasury
FHA’s fund balance with U.S. Treasury was comprised of the following as of September 30, 2008 and 2007:

              (Dollars in Millions)
                                                                         2008                2007
               Fund Balances:
                     Revolving Funds                                $        10,746     $         6,450
                     Appropriated Funds                                         308                 321
                     Other Funds                                              1,536               2,788
               Total                                                $       12,590      $        9,559

               Status of Fund Balance with U.S. Treasury:
                      Unobligated Balance:
                                    Available                       $         2,987     $         1,180
                                    Unavailable                               7,144               6,083
                      Obligated Balance not yet Disbursed                     2,459               2,296
               Total                                                $       12,590      $        9,559

Revolving Funds
FHA’s revolving funds include the liquidating and financing accounts as required by the FCRA. These funds are
created to finance a continuing cycle of business-like operations in which the fund charges for the sale of products
or services. These funds also use the proceeds to finance spending, usually without requirement of annual
appropriations.
Appropriated Funds
FHA’s appropriated funds consist of the program accounts created by the FCRA. Annual or multi-year program
accounts expire at the end of the time period specified in the authorizing legislation. For the subsequent five fiscal
years after expiration, the resources are available only to liquidate valid obligations incurred during the unexpired
period. Adjustments are allowed to increase or decrease valid obligations incurred during the unexpired period that
were not previously reported. At the end of the fifth expired year, the annual and multi-year program accounts are
cancelled and any remaining resources are returned to the U.S. Treasury.

Other Funds
FHA’s other funds include the general fund receipt accounts established under the FCRA. Additionally, included
with these funds is the capital reserve account that is used to retain the MMI/CMHI negative subsidy and
downward credit subsidy reestimates transferred from the financing account. If subsequent upward credit subsidy
reestimates are calculated in the financing account or there is shortage of budgetary resources in the liquidating
account, the capital reserve account will return the retained negative subsidy to the financing account or transfer the
needed funds to the liquidating account, respectively.
Status of Fund Balance with U.S. Treasury
Unobligated Fund Balance with U.S. Treasury represents Fund Balance with U.S. Treasury that has not been
obligated to purchase goods or services either because FHA has not received apportionment authority from OMB to
use the resources (unavailable unobligated balance) or because FHA has not obligated the apportioned resources
(available unobligated balance). Fund Balance with U.S. Treasury that is obligated, but not yet disbursed, consists
of resources that have been obligated for goods or services but not yet disbursed either because the ordered goods
or services have not been delivered or because FHA has not yet paid for goods or services received by the end of
the fiscal year.




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Note 4. Investments

Investment in U.S. Treasury Securities

As discussed in Note 1, all FHA investments in Treasury securities are in non-marketable securities issued by the
U.S. Treasury. These securities carry market-based interest rates. The market value of these securities is calculated
using the bid amount of similar marketable U.S. Treasury securities as of September 30th. The cost, net amortized
premium/discount, net investment, and market values of FHA’s investments in U.S. Treasury securities as of
September 30, 2008 were as follows:


                                                          Amortized
                                                          (Premium)/           Investment,
    (Dollars in Millions)                Cost            Discount, Net             Ne t            Market Value

    MMI/CMHI Investments            $        18,958      $            55      $         19,013     $        20,214
    GI/SRI Investments                            8                    -                     8                   8
                       Subtotal     $        18,966      $            55      $         19,021     $        20,222

    MMI/CMHI Accrued Interest                    -                     -      $           233      $          233
    Total                           $       18,966       $            55      $        19,254      $       20,455




The cost, net amortized premium/discount, net investment, and market values as of September 30, 2007 were as
follows:



                                                           Amortized
                                                          (Premium)/              Investment,
    (Dollars in Millions)                 Cost           Discount, Net                Ne t         Market Value

    MMI/CMHI Investments            $        22,129      $            85      $         22,214     $        22,667
    GI/SRI Investments                            5                    -                     5                   5
                       Subtotal     $        22,134      $            85      $         22,219     $        22,672

    MMI/CMHI Accrued Interest                    -                     -      $           262      $          262
    Total                           $       22,134       $            85      $        22,481      $       22,934




.




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Investments in Private-Sector Entities

The following table presents financial data on FHA’s investments in Section 601 and Risk Sharing Debentures as of
September 30, 2008 and 2007:


                                                               Share of
                                 Be ginning      New          Earnings      Return of                        Ending
  (Dollars in Millions)           Balance     Acquisitions    or Losses    Investment       Rede emed        Balance

  601 Program             $             41    $         -     $      (4) $         (19) $           -    $          18
  Risk Sharing Debentures                80             -             -              -            (50)              30
  FY 2008 Total           $            121    $         -     $     (4) $         (19) $          (50)   $          48

  601 Program             $             98    $         -     $      (1)   $         (56)   $       -    $           41
  Risk Sharing Debentures                 -            80             -                -            -                80
  FY 2007 Total           $             98    $        80     $      (1)   $         (56)   $       -    $          121




The fiscal year for the Section 601 Program investments is from December 1 to November 30 for 2008 and a
combination of December 1 to November 30 and January 1 to December 31 for 2007. The condensed, audited
financial information is as follows:



         (Dollars in Millions)                                      2008                         2007

         Total assets, primarily mortgage loans              $                 107          $                258
          Liabilities                                                            -                             2
          Partners’ capital                                                    107                           256
         Total liabilities and partners’ capital             $                 107          $                258

          Revenues                                                               7                            78
          Expenses                                                              (5)                          (23)
         Ne t Income                                         $                   2          $                 55




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Note 5. Accounts Receivable, Net

Accounts receivable, net, as of September 30, 2008 and 2007 are as follows:

                                                Gross                     Allowance                        Net
 (Dollars in Millions)                   2008           2007           2008       2007             2008              2007
 With the Public:
 Receivables Related to              $      55      $          6   $      (3)   $        (5)   $      52         $          1
  Credit Program Assets
 Premiums Receivable                         2              5              -              -            2                 5
 Generic Debt Receivables                   72            113              -              -           72               113
 Miscellaneous receivables                   2              -              -              -            2                 -
 Total                               $     131      $     124      $      (3)   $        (5)   $     128         $     119


Receivables Related to Credit Program Assets

These receivables include asset sale proceeds receivable and rents receivable from FHA’s foreclosed properties.

Premiums Receivable

These amounts consist of the up-front and periodic premiums due to FHA from the mortgagors at the end of the
reporting period. The details of FHA premium structure are discussed in Note 13 – Earned Revenue/Premium
Revenue.

Generic Debt Receivables

These amounts are mainly composed of receivables from various sources the largest of which are Single Family
Partial Claims, Single Family Indemnification, and Single Family Restitutions.

Miscellaneous Receivables

Miscellaneous receivables include late charges and penalties receivable on premiums receivable, refunds receivable
from overpayments of claims and distributive shares and other immaterial receivables.

Allowance for Loss

The allowance for loss for these receivables is calculated based on FHA’s historical loss experience and
management’s judgment concerning current economic factors.




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Note 6. Direct Loans and Loan Guarantees, Non-Federal Borrowers

FHA Direct Loan and Loan Guarantee Programs and the related loans receivable, foreclosed property, and Loan
Guarantee Liability as of September 30, 2008 and 2007 are as follows:

  Direct Loan and Loan Guarantee Programs Administered by FHA Include:

  MMI/CMHI Direct Loan Program
  GI/SRI Direct Loan Program
  MMI/CMHI Loan Guarantee Program
  GI/SRI Loan Guarantee Program

For the Loan Guarantee Program at FHA, in both the MMI/CMHI and GI/SRI funds there are Single Family and
Multifamily activities. In the MMI/CMHI fund, the Single Family portion is represented by Section 203(b) which
is the largest program in terms of Insurance in Force. The Multifamily portion of the MMI/CMHI fund is
represented by Section 213 which is one of the smallest programs at FHA. In the GI/SRI fund, the Single Family
portion is mostly comprised of Section 234(c) and HECM. Due to the size of the program, HECM is reported on its
own line in this footnote and the rest of Single Family in GI/SRI on a separate line. The Multifamily portion of the
GI/SRI fund contains numerous programs the largest of which are Section 221(d)(4), Section 207/223(f), Section
223(a)(7), and Section 232.

For the Direct Loan Program at FHA, all activity in the MMI/CMHI fund is Single Family and all activity in the
GI/SRI fund is Multifamily.

Direct Loan Program

(Dollars in Millions)
                                 Loans                                                                  Value of Assets
                               Receivable,        Interest                             Foreclosed         Related to
Programs                         Gross           Receivable          Allowance          Property         Direct Loans

MMI/CMHI - Single Family        $           1       $            -    $          (4)   $            -     $         (3)
GI/SRI - Multifamily                       13                    4               (5)                -               12
FY 2008 Total                   $          14       $            4    $          (9)   $            -     $          9

MMI/CMHI - Single Family        $           2       $            1    $         (4)    $            -     $         (1)
GI/SRI - Multifamily                       15                    4              (6)                 -               13
FY 2007 Total                   $          17       $            5    $        (10)    $            -     $         12

Total Amount of Direct Loans Disbursed (Post-1991):

(Dollars in millions)

Programs                                  FY 2008                FY 2007
MMI/CMHI - Single Family              $                 -    $             3
GI/SRI - Multifamily                                    -                  -
Total                                 $                 -    $             3




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Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):

(Dollars in Millions)
                                                                                                Value of
                                                                                                 Assets
                                                                                               Related to
                                Defaulted                                                       Defaulted
                               Guaranteed                                                      Guaranteed
                                 Loans                                                           Loans
                               Receivable,      Interest       Allowance for   Foreclosed      Receivable,
Loan Guarantee Programs          Gross         Receivable      Loan Losses      Property          Net
FY 2008
MMI/CMHI
Single Family - 203(b)         $        16     $          3    $         (2)   $         9     $           26
Multifamily                              -                -               -              -                  -
MMI/CMHI Subtotal              $        16     $          3    $         (2)   $         9     $           26

GI/SRI
Multifamily                    $     2,787     $         179   $       (738)   $         -     $     2,228
Single Family - HECM *                   5                 2              -              1               8
Single Family - Other                    9                 3             (6)             6              12
GI/SRI Subtotal                $     2,801     $         184   $       (744)   $         7     $     2,248

FY08 Total                     $     2,817     $         187   $       (746)   $        16     $     2,274



FY 2007
MMI/CMHI
Single Family - 203(b)         $        10     $          4    $         (2)   $         4     $           16
Multifamily                              -                -               -              -                  -
MMI/CMHI Subtotal              $        10     $          4    $         (2)   $         4     $           16

GI/SRI
Multifamily                    $     2,963     $         202   $       (794)   $         -     $     2,371
Single Family - HECM *                   5                 2              -              -               7
Single Family - Other                   11                 4             (8)             5              12
GI/SRI Subtotal                $     2,979     $         208   $       (802)   $         5     $     2,390

FY07 Total                     $     2,989     $         212   $       (804)   $         9     $     2,406

*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to
FHA.




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Defaulted Guaranteed Loans from Post-1991 Guarantees:

(Dollars in Millions)
                                                                                              Value of
                                                                                               Assets
                                                                                             Related to
                               Defaulted                                                      Defaulted
                              Guaranteed                                                     Guaranteed
                                Loans                                                          Loans
                              Receivable,      Interest       Foreclosed    Allowance for    Receivable,
Loan Guarantee Programs         Gross         Receivable       Property     Subsidy Cost        Net
FY 2008
MMI/CMHI
Single Family - 203(b)        $       403     $          -   $      4,053    $     (2,219)   $     2,237
Multifamily                             -                -              -               -              -
MMI/CMHI Subtotal             $       403     $          -   $      4,053    $     (2,219)   $     2,237

GI/SRI
Multifamily                   $       356     $         -    $          2    $      (263)    $        95
Single Family - HECM *                565             277              13            (89)            766
Single Family - Other                  39               1             398           (313)            125
GI/SRI Subtotal               $       960     $       278    $        413    $      (665)    $       986

FY08 Total                    $      1,363    $       278    $      4,466    $     (2,884)   $     3,223



FY 2007
MMI/CMHI
Single Family - 203(b)        $       331     $          -   $      2,710    $     (1,661)   $     1,380
Multifamily                             -                -              -               -              -
MMI/CMHI Subtotal             $       331     $          -   $      2,710    $     (1,661)   $     1,380

GI/SRI
Multifamily                   $       187     $         -    $          -    $       (44)    $       143
Single Family - HECM *                310             188               3              -             501
Single Family - Other                  45              (2)            327            (74)            296
GI/SRI Subtotal               $       542     $       186    $        330    $      (118)    $       940

FY07 Total                    $       873     $       186    $      3,040    $     (1,779)   $     2,320



*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to
FHA.




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Guaranteed Loans Outstanding:

(Dollars in millions)                   Outstanding Principal of
                                        Guaranteed Loans, Face         Amount of Outstanding
Loan Guarantee Programs                         Value                  Principal Guaranteed
FY 2008
Guaranteed Loans Outstanding:
MMI/CMHI
Single Family - 203(b)              $                    479,579   $                   447,299
Multifamily                                                  416                           353
MMI/CMHI Subtotal                   $                    479,995   $                   447,652

GI/SRI
Single Family                                             30,346                        27,685
Multifamily                                               62,855                        56,384
GI/SRI Subtotal                     $                     93,201   $                    84,069

Total                               $                    573,196   $                   531,721



FY 2007
Guaranteed Loans Outstanding:
MMI/CMHI
Single Family - 203(b)              $                    351,751   $                   321,816
Multifamily                                                  449                           336
MMI/CMHI Subtotal                   $                    352,200   $                   322,152

GI/SRI
Single Family                                             24,164                        21,519
Multifamily                                               62,509                        56,289
GI/SRI Subtotal                     $                     86,673   $                    77,808

Total                               $                    438,873   $                   399,960




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New Guaranteed Loans Disbursed:

(Dollars in millions)                   Outstanding Principal of
                                        Guaranteed Loans, Face          Amount of Outstanding
Loan Guarantee Programs                         Value                   Principal Guaranteed
FY 2008
New Guaranteed Loans Disbursed:
MMI/CMHI
Single Family - 203(b)              $                    171,811    $                   167,338
Multifamily                                                   14                             14
MMI/CMHI Subtotal                   $                    171,825    $                   167,352

GI/SRI
Single Family                                              9,449                          9,204
Multifamily                                                3,458                          3,446
GI/SRI Subtotal                     $                     12,907    $                    12,650

Total                               $                    184,732    $                   180,002



FY 2007
New Guaranteed Loans Disbursed:
MMI/CMHI
Single Family - 203(b)              $                     56,477    $                    56,134
Multifamily                                                   33                             33
MMI/CMHI Subtotal                   $                     56,510    $                    56,167

GI/SRI
Single Family                                               3,409                         3,387
Multifamily                                                 3,592                         3,584
GI/SRI Subtotal                     $                       7,001   $                     6,971

Total                               $                     63,511    $                    63,138




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HECM (reverse mortgages) are not included in the previous tables due to the unique nature of the program.
Currently, FHA has 360,033 active HECM insured loans with a maximum claim amount of $78 billion. As of
September 30, 2008, the insurance in force (the outstanding balance of active loans) was $44 billion. The insurance
in force includes balances drawn by the mortgagee; interest accrued on the balances drawn, service charges, and
mortgage insurance premiums. The maximum claim amount is the dollar ceiling to which the outstanding loan
balance can grow before being assigned to FHA.

Home Equity Conversion Mortgage Loans Outstanding (not included in the balances in the previous table)
(Dollars in M illions)
                                                                                   Cumulative

                                      Current Year               Outstanding                         Potential
Loan Guarantee Programs               Endorsements                Balance                            Liability

FY 2008 GI/SRI                    $      24,166              $       43,741                     $        77,736

FY 2007 GI/SRI                    $      24,567              $       29,982                     $        56,676




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Loan Guarantee Liability, Net:

                                   Liabilities for
                                  Losses on Pre-     Liabilities for Loan
 (Dollars in Millions)           1992 Guarantees,      Guarantees for           Total Loan
                                 Estimated Future        Post-1991              Guarantee
 Loan Guarantee Programs          Default Claims     Guarantees (LLG)            Liability
 FY 2008
 MMI/CMHI
 Single Family - 203(b)          $             20    $           17,384     $          17,404
 Multifamily                                    -                    (4)                   (4)
 MMI/CMHI Subtotal               $             20    $           17,380     $          17,400

 GI/SRI
 Multifamily                     $            160    $             (354)    $            (194)
 Single Family - HECM                           -                 1,521                 1,521
 Single Family - Other                          2                   757                   759
 GI/SRI Subtotal                 $            162    $            1,924     $           2,086

 FY 2008 Total                   $            182    $           19,304     $          19,486



 FY 2007
 MMI/CMHI
 Single Family - 203(b)          $             89    $            6,906     $           6,995
 Multifamily                                    -                    (4)                   (4)
 MMI/CMHI Subtotal               $             89    $            6,902     $           6,991

 GI/SRI
 Multifamily                     $            275    $             (419)    $            (144)
 Single Family - HECM                          (2)                  326                   324
 Single Family - Other                          9                   251                   260
 GI/SRI Subtotal                 $            282    $              158     $             440

 FY 2007 Total                   $            371    $            7,060     $           7,431




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Subsidy Expense for Loan Guarantees by Program and Component:

(Dollars in millions)
Subsidy Expense for New Loan                    Fees and Other
Guarantees                        Defaults        Collections                   Other                Total
FY 2008
MMI/CMHI
 Single Family - 203(b)      $          4,545   $           (6,600)   $               1,620   $              (435)
 Multifamily                                1                   (1)                       -                     -
MMI/CMHI Total               $          4,546   $           (6,601)   $               1,620   $              (435)

GI/SRI
Multifamily                   $          151    $             (227)   $                  -    $                (76)
Single Family - HECM                     486                  (948)                      -                   (462)
Single Family - Other                    284                  (339)                      -                     (55)
GI/SRI Total                  $          921    $           (1,514)   $                  -    $              (593)

FY08 Total                    $         5,467   $           (8,115)   $               1,620   $            (1,028)



FY 2007
MMI/CMHI
Single Family - 203(b)        $         1,248   $           (2,124)   $                 667   $              (209)
Multifamily                                 1                   (1)                       -                     -
MMI/CMHI Total                $         1,249   $           (2,125)   $                 667   $              (209)

GI/SRI
Multifamily                   $          177    $             (255)   $                  -    $                (78)
Single Family - HECM                     491                (1,188)                      -                   (697)
Single Family - Other                     86                  (126)                      -                     (40)
GI/SRI Total                  $          754    $           (1,569)   $                  -    $              (815)

FY07 Total                    $         2,003   $           (3,694)   $                 667   $            (1,024)



Subsidy Expense for Modifications and Reestimates:

(Dollars in Millions)                                        Total                     Technical
                                                          Modifications               Reestimate
FY 2008
MMI/CMHI                                             $                     -      $            8,650
GI/SRI                                                                     -                   1,709
Total                                                $                     -      $           10,359

FY 2007
MMI/CMHI                                             $                    (5)     $               3,940
GI/SRI                                                                     -                       (310)
Total                                                $                    (5)     $               3,630




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Total Loan Guarantee Subsidy Expense:

(Dollars in Millions)                                    2008                      2007
 MMI/CMHI                                         $               8,215    $               3,726
 GI/SRI                                                           1,116                   (1,125)
Total                                             $               9,331    $               2,601




Subsidy Rates for Loan Guarantee Endorsements by Program and Component:

(Percentage)                                                                     Fees and
                                                                     Defaults     Other       Other        Total

Budget Subsidy Rates for FY 2008 Loan Guarantees:
MMI/CMHI
 Single Family - Section 203(b), Effective 10/01/2007-7/13/2008           2.45      (3.71)          0.95    (0.31)
 Single Family - Section 203(b), Effective 7/14/2008-9/30/2008            2.99      (4.07)          0.93    (0.15)
 Multifamily                                                              1.96      (3.86)          1.00    (0.90)

GI/SRI
 Multifamily
  Section 221(d)(4)                                                       4.46      (5.29)           -      (0.83)
  Section 207/223(f)                                                      1.98      (4.73)           -      (2.75)
  Section 223(a)(7)                                                       1.98      (4.73)           -      (2.75)
  Section 232                                                             3.73      (5.31)           -      (1.58)
 Single Family - HECM                                                     2.00      (3.90)           -      (1.90)
 Single Family - Section 234(c.)                                          2.68      (3.56)           -      (0.88)

Budget Subsidy Rates for FY 2007 Loan Guarantees:
MMI/CMHI
 Single Family - Section 203(b)                                           2.21      (3.76)          1.18    (0.37)
 Multifamily                                                              1.77      (3.93)          0.87    (1.29)

GI/SRI
 Multifamily
  Section 221(d)(4)                                                       4.87      (5.48)           -      (0.61)
  Section 207/223(f)                                                      3.15      (4.78)           -      (1.63)
  Section 223(a)(7)                                                       3.15      (4.78)           -      (1.63)
  Section 232                                                             4.64      (5.55)           -      (0.91)
 Single Family - HECM                                                     1.99      (4.81)           -      (2.82)
 Single Family - Section 234(c.)                                          2.15      (3.64)           -      (1.49)




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Schedule for Reconciling Loan Guarantee Liability Balances:

(Dollars in millions)
                                                                               2008                        2007
                                                                       LLR          LLG            LLR         LLG
Beginning Balance of the Loan Guarantee Liability                    $   371       $ 7,060       $   498      $ 2,984
Add:
              Subsidy Expense for guaranteed loans disbursed
              during the reporting fiscal years by component:
                  Default Costs (Net of Recoveries)                            -        5,467           -          2,003
                  Fees and Other Collections                                   -       (8,115)          -         (3,694)
                  Other Subsidy Costs                                          -        1,620           -            667
Total of the above subsidy expense components                                  -       (1,028)          -         (1,024)
Adjustments:
              Fees Received                                                 -           5,468          -           3,234
              Foreclosed Property and Loans Acquired                        -           4,683          -           3,756
              Claim Payments to Lenders                                     -          (8,486)         -          (5,869)
              Interest Accumulation on the Liability Balance                -             161          -             (68)
              Other                                                         -             (66)         -              (6)
Ending Balance before Reestimates                                         371           7,792        498           3,007
Add or Subtract Subsidy Reestimates by Component:
              Technical/Default Reestimate:
                  Subsidy Expense Component                              (189)       10,369          (127)      3,571
                  Interest Expense Component                                -         1,141             -         381
              Adjustment to credit subsidy reestimates                      -             2             -         101
Total Technical/Default Reestimate                                       (189)       11,512          (127)      4,053
Ending Balance of the Loan Guarantee Liability                       $    182      $ 19,304      $    371     $ 7,060

Administrative Expense:

(Dollars in millions)
                                   2008                       2007
MMI/CMHI                   $                228      $                   221
GI/SRI                                      277                          273
Total                      $                505      $                   494


Other Information on Foreclosed Property:

Additional information on FHA foreclosed property as of September 30, 2008 and 2007 is as follows:

                                                             2008                        2007
Number of properties in foreclosure process                     67                          84
Number of properties held                                   37,890                      27,782
Average holding period for property held                  7 months                    6 months




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Pre-Credit Reform Valuation Methodology

FHA values its Pre-Credit Reform related notes and properties in inventory at net realizable value, determined on
the basis of net cash flows. To value these items, FHA uses historical claim data, revenues from premiums and
recoveries, and expenses of selling and maintaining property.

The majority of FHA’s Pre-Credit Reform liability relates to the Mark-to-Market program. A separate analysis was
conducted to adjust the loan loss estimate for anticipated reductions for these project-based Section 8 rental
assistance subsidies administered by the Office of Affordable Housing Preservation (OAHP). All projects that are
required to submit financial statements and have submitted annual financial statements within the past two years,
received Section 8 assistance, expected to expire in the next five years, and had contract rents exceeding 100
percent of fair market value were included. In the analysis, the gross rent for these projects was reduced to bring
the contract rent for assisted units to fair market levels. The effects of this rent reduction on projects’ financial
health was assessed and a revised loan principal balance was computed based on a sustainable debt service level. A
potential claim was calculated based on this reduction of loan principal.

Credit Reform Valuation Methodology

FHA values its Credit Reform LLG and related receivables on notes and properties in inventory at the net present
value of their estimated future cash flows.

To apply the present value computations, FHA divides the loans into cohorts and risk categories. Multifamily
cohorts are defined based on the year in which loan guarantee commitments are made. Single Family mortgages are
grouped into cohorts based on loan endorsement dates for the GI/SRI and MMI fund. Within each cohort year,
loans are subdivided by risk categories. Each risk category has characteristics that distinguish it from others,
including risk profile, premium structure, and the type and quality of collateral underlying the loan. The MMI fund
has one risk category and single family GI/SRI loans are grouped into four risk categories. HECM loans are
considered a separate risk category. There are thirteen different multifamily risk categories.

The cash flow estimates that underlie the present value calculations are determined using the significant
assumptions detailed below.

Significant Assumptions – FHA developed financial models in order to estimate the present value of future
program cash flows. The models incorporate information on the cash flows’ expected magnitude and timing. The
models rely heavily on the following loan performance assumptions:

    x   Conditional Termination Rates: The estimated probability of an insurance policy claim or non-claim
        termination in each year of the loan guarantee’s term given that a loan survives until that year.

    x   Recovery Rates: The estimated percentage of a claim payment that is recovered through disposition of a
        mortgage note or underlying property.

    x   Claim Amount: The estimated amount of the claim payment relative to the unpaid principal balance at the
        time the claim occurs.

Additional information about loan performance assumptions is provided below:

Sources of data: FHA developed assumptions for claim rates, prepayment rates, claim amounts, and recoveries
based on historical data obtained from its systems.




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Economic assumptions: Forecasts of economic conditions used in conjunction with loan-level data to generate
Single Family and Multifamily claim and prepayment rates were obtained from Global Insights (formerly DRI)
forecasts of U.S. annual economic figures. OMB provides other economic assumptions used, such as discount rates.

Actuarial Review: An independent actuarial review of the MMI fund each year produces conditional claim and
prepayment rates that are used as inputs to the LLG calculation.

Reliance on historical performance: FHA relies on the average historical performance of its insured portfolio to
forecast future performance of that portfolio. Changes in legislation, subsidy programs, tax treatment and economic
factors all influence loan performance. FHA assumes that similar events may occur during the remaining life of
existing mortgage guarantees, which can be as long as 40 years for Multifamily programs and affect loan
performance accordingly.

Current legislation and regulatory structure: FHA's future plans allowed under current legislative authority have
been taken into account in formulating assumptions when relevant. In contrast, future changes in legislative
authority may affect the cash flows associated with FHA insurance programs. These changes cannot be reflected in
LLG calculations because of uncertainty over their nature and outcome.

Discount rates: The disbursement weighted interest rate on U.S. Treasury securities of maturity comparable to the
guaranteed loan term is the discount factor used in the present value calculation for cohorts 1992 to 2000. For the
2001 and future cohorts, the rate on U.S. Treasury securities of maturity comparable to the term of each cash flow
for the loan guarantee is used in the present value calculation. This methodology is referred to as the basket of zeros
discounting methodology. OMB provides these rates to all Federal agencies for use in preparing credit subsidy
estimates and requires their use under OMB Circular A-11, Part 4, “Instructions on Budget Execution.” The basket
of zeros discount factors are also disbursement weighted.

Analysis of Change in the Liability for Loan Guarantees

FHA has estimated and applied credit subsidy rates to each FHA loan guarantee program since fiscal year 1992.
Over this time FHA’s credit subsidy rates have varied. The variance is caused by three factors: (1) additional loan
performance data underlying the credit subsidy rate estimates, (2) revisions to the calculation methodology used to
estimate the credit subsidy rates, and (3) revisions on expected claims and prepayments derived from the revised
Actuarial Review of the MMI Fund. Loan performance data, which reflect mortgage market performance and FHA
policy direction, are added as they become available. Revisions to the estimation methodology result from
legislative direction and technical enhancements.
FHA estimated the credit subsidy rates for the 2008 cohort in December 2006. At the time of budget submission,
the rates reflected prevailing policy and loan performance assumptions based on the most recent information
available at that time. The annual credit subsidy reestimates allow FHA to adjust the LLG and subsidy expense to
reflect the most current and accurate credit subsidy rate.
Described below are the programs that comprise the majority of FHA’s fiscal year 2008 business. These
descriptions highlight the factors that contributed to changing credit subsidy rates and the credit subsidy
reestimates. Overall, FHA’s liability increased from the fiscal year 2007 estimates.
Mutual Mortgage Insurance (MMI) - During fiscal year 2008, FHA continued to experience increased claim rates
due to the nationwide decrease in house price appreciation, which resulted in increased claims and lower proceeds
from the sale of foreclosed properties. Moreover, due to the shrinkage of capital availability in the conventional
mortgage market, FHA has experienced a surge in new endorsements during fiscal year 2008. This caused a
significant increase in the volume of insurance-in-force, coupled with the increase in expected claims and lowered




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sales proceeds, the liability for MMI increased from $6,906 million in fiscal year 2007 to $17,384 million in fiscal
year 2008.

GI/SRI Home Equity Conversion Mortgage (HECM) - The HECM volume leveled off during fiscal year 2008 and
the HECM liability increased from $326 million in fiscal year 2007 to $1,521 million in fiscal year 2008. The
change in liability from fiscal 2007 to fiscal 2008 is primarily due to the drop in house price appreciation
projections from Global Insights. The drop in house price appreciation projections results in lower recoveries from
future HECM assigned assets which increases the liability.

GI/SRI Section 221(d)(4) - The Section 221(d)(4) program was established to provide mortgage insurance for the
construction or substantial rehabilitation of Multifamily rental properties with five or more units. Under this
program, HUD may insure up to 90 percent of the total project cost and is prohibited from insuring loans with
HUD-subsidized interest rates. The Section 221(d)(4) program is the largest Multifamily program in the GI/SRI
fund. The Section 221(d)(4) liability increased by $4 million in FY 2008.
Mark-to-Market - The Mark to Market (MTM) program was established by legislation to assess rents at the time of
Section 8 Assistance contract renewal. If rents are above market levels, the project is referred to OAHP. OAHP
then evaluates the project for potential financial restructuring to determine if the project could survive given the
lower revenues from reduced rents. The pool of loans eligible for MTM restructuring is comprised of active insured
loans with Section 8 Assistance contracts, which also meet all eligibility requirements such as financial statements
submitted within the last 2 years and assistance contracts expiring within the next 5 years. While new Section 8
assistance contracts are not being offered to any properties, which reduces the number of active insured loans with
section 8 contracts, the number of projects that meet MTM eligibility criteria may actually increase from year to
year. A loan can fail one or more of the eligibility criteria one year but become eligible the following year. For
calculating the liability for loan guarantees in FY 2008, the number of loans that met all eligibility requirements
increased. As a result, the MTM liability increased.
GI/SRI Section 234(c) - The Section 234(c) program insures loans for condominium purchases. One of the many
purposes of FHA’s mortgage insurance programs is to encourage lenders to make affordable mortgage credit
available for non-conventional forms of ownership. Condominium ownership, in which the separate owners of the
individual units jointly own the development’s common areas and facilities, is one particularly popular alternative.
As in the MMI fund, Section 234(c) continued to experience increased claim rates due to the nationwide decrease in
house price appreciation, which resulted in increased claims and lower proceeds from the sale of foreclosed
properties. These changes resulted in an increase in the liability from $108 million in fiscal year 2007 to $502
million for fiscal year 2008.

Hurricane Ike - In September 2008, Hurricane Ike made landfall in Texas as a category 2 hurricane. While this
hurricane caused property damage in areas along or near the Texas shoreline, the impact on FHA insured mortgages
is not significant enough to warrant an adjustment in the liability calculation.

Impact of Changing Economic Conditions

The MMI Fund constitutes the majority of FHA’s single family business, with 93.7 percent of the total single
family IIF dollars. One measure of the fund’s financial soundness is the MMI capital ratio, based on the economic
value of the MMI Fund to the balance of the MMI Insurance-In-Force. The Cranston-Gonzalez National
Affordable Housing Act of 1990 requires an independent actuarial analysis of the economic net worth of the MMI
Fund. In addition, the Act mandates that the MMI Fund achieve a capital ratio, a measure of the Fund’s economic
net worth, of at least 2 percent by the year 2000, which was achieved in 1995 and maintained ever since. In fiscal
year 2008, the estimated economic value of the MMI fund decreased significantly with the forecast of expected
house price declines due to a declining housing market. Conversely, the total MMI insurance-in-force, increased
significantly due to the volume of new endorsements. The combination of these factors resulted in a decrease in the
capital ratio from 6.4 percent in fiscal year 2007 to 3.0 percent in fiscal year 2008.




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Note 7. Other Assets

The following table presents the composition of Other Assets held by FHA as of September 30, 2008 and 2007:

     (Dollars in Millions)
                                                                                 2008              2007
     Intragovernmental:
      Advances to HUD for Working Capital Fund Expenses                      $          21    $           4
     Total                                                                   $          21    $           4

     With the Public:
      Escrow Monies Deposited at Minority-Owned Banks                        $       103       $       110
      Undistributed Charges                                                           31                33
     Total                                                                   $       134       $       143


Advances to HUD for Working Capital Fund Expenses

The Working Capital Fund was established by HUD to consolidate, at the department level, the acquisition of
certain property and equipment to be used by different organizations within HUD. Advances to HUD for Working
Capital Fund expenses represent the amount of payments made by FHA to reimburse the HUD Working Capital
Fund for its share of the fund’s expenses prior to the receipt of goods or services from this fund.

Escrow Monies Deposited at Minority-Owned Banks

FHA holds in trust escrow monies received from the borrowers of its Multifamily mortgage notes to cover property
repairs and renovations expenses. These escrow monies are deposited at the U.S. Treasury (see Note 2), invested in
U.S. Treasury securities (see Note 4 - GI/SRI Investments) or deposited at minority-owned banks.

Undistributed Charges

Undistributed charges include FHA disbursements processed by the U.S. Treasury but the identification of the
specific FHA operating area associated with the disbursement has not been determined by the end of the reporting
period. When the FHA operating area that initiated the disbursement is identified, the undistributed charges are
reclassified by recognizing new expenses or by liquidating previously established accounts payable.




.




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Note 8. Accounts Payable

Accounts Payable as of September 30, 2008 and 2007 are as follows:

             (Dollars in Millions)
                                                                         2008             2007
             With the Public:
             Claims Payable                                          $       316      $       152
             Premium Refunds and Distributive Shares Payable                 174              175
             Miscellaneous Payables                                           95               58
             Total                                                   $       585      $       385


Claims Payable

Claims payable represents the amount of claims that have been processed by FHA, but the disbursement of
payment to lenders has not taken place at the end of the reporting period.

Premium Refunds and Distributive Shares Payable

Premium refunds payable are refunds of previously collected Single Family premiums that will be returned to the
borrowers resulting from prepayment of the insured mortgages. Distributive shares payable represent the amount
of excess revenues in the liquidating account of the CMHI fund that is to be distributed to the mortgagors at the
discretion of the Secretary of HUD.

Miscellaneous Payables

Miscellaneous payables include interest enhancement payables, interest penalty payables for late payment of
claims, generic debt payables and other payables related to various operating areas within FHA.




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Note 9. Debt

The following tables describe the composition of Debt held by FHA as of September 30, 2008 and 2007:

 (Dollars in Millions)                                  2007                                         2008
                                        Beginning       Net             Ending           Net                Ending
                                         Balance      Borrowing         Balance        Borrowing            Balance

 Agency Debt:
       Debentures Issued to Claimants   $       95   $           (25)   $         70   $          (18)      $          52
 Other Debt:
       Borrowings from U.S. Treasury         6,258            (1,685)       4,573                 259              4,832
 Total                                  $    6,353   $        (1,710)   $   4,643      $          241       $      4,884


                                                                                           2008                 2007
 Classification of Debt:
        Intragovernmental Debt                                                         $      4,832         $      4,573
        Debt held by the Public                                                                  52                   70
 Total                                                                                 $      4,884         $      4,643

Debentures Issued to Public

The National Housing Act authorizes FHA, in certain cases, to issue debentures in lieu of cash to settle claims.
FHA-issued debentures bear interest at rates established by the U.S. Treasury. Interest rates related to the
outstanding debentures ranged from 4.00 percent to 12.875 percent in both fiscal years 2008 and 2007. Lenders
may redeem FHA debentures prior to maturity in order to pay mortgage insurance premiums to FHA, or they may
be called with the approval of the Secretary of the U.S. Treasury.

The par value of debentures outstanding, not including accrued interest, was September 30 was $51 million in fiscal
year 2008 and $69 million in fiscal year 2007. The fair values for fiscal years 2008 and 2007 were $74 and $101
million, respectively.

Borrowings from U.S. Treasury

In accordance with Credit Reform accounting, FHA borrows from the U.S. Treasury when cash is needed in its
financing accounts. Usually, the need for cash arises when FHA has to transfer the negative credit subsidy amounts
related to new loan disbursements and existing loan modifications from the financing accounts to the general fund
receipt account (for cases in GI/SRI funds) or to the capital reserve account (for cases in MMI/CMHI funds). In
some instances, borrowings are also needed to transfer the credit subsidy related to downward reestimates from the
GI/SRI financing account to the GI/SRI receipt account or when available cash is less than claim payments due.

During fiscal year 2008, FHA’s U.S. Treasury borrowings carried interest rates ranging from 2.33 percent to 7.34
percent. In fiscal year 2007, the carried interest rates also ranged from 2.33 percent to 7.34 percent. Fiscal year
2008 maturity dates occur from September 2009 – September 2027. Loans may be repaid in whole or in part
without penalty at any time prior to maturity.




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Note 10. Other Liabilities

The following table describes the composition of Other Liabilities as of September 30, 2008 and 2007:

         (Dollars in Millions)

         2008                                   Current           Non-Current               Total
         Intragovernmental:
          Receipt Account Liability         $          1,530     $               -     $          1,530
         Total                              $         1,530      $               -     $         1,530

         With the Public:
         Trust and Deposit Liabilities      $           152      $              -      $            152
         Unearned Premiums                               15                    13                    28
         Undistributed Credits                           49                     -                    49
         Miscellaneous Liabilities                      209                     -                   209
         Total                              $           425      $             13      $            438

         2007                                   Current           Non-Current               Total
         Intragovernmental:
          Receipt Account Liability         $          3,657     $               -     $          3,657
         Total                              $         3,657      $               -     $         3,657

         With the Public:
         Trust and Deposit Liabilities      $           155      $              -      $            155
         Unearned Premiums                               24                     7                    31
         Undistributed Credits                           48                     -                    48
         Miscellaneous Liabilities                      240                     -                   240
         Total                              $           467      $              7      $            474


Special Receipt Account Liability

The special receipt account liability is created from negative subsidy endorsements and downward credit subsidy in
the GI/SRI special receipt account.

Trust and Deposit Liabilities

Trust and deposit liabilities include mainly escrow monies received by FHA for the borrowers of its mortgage notes
and earnest money received from potential purchasers of the FHA foreclosed properties. The escrow monies are
eventually disbursed to pay for insurance, property taxes, and maintenance expenses on behalf of the borrowers.
The earnest money becomes part of the sale proceeds or is returned to any unsuccessful bidders.

Unearned Premiums

As discussed in Note 1, unearned premiums represent premiums collected for the pre-1992 loan guarantees, but not
recognized as revenue because the earning process has not been completed.




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Undistributed Credits

Undistributed credits represent FHA collections processed by U.S. Treasury, but the identification of the specific
operating area associated with the collections has not been determined at the end of the reporting period. When the
FHA operating area that is entitled to the collections is identified, the undistributed credits are reclassified by
recognizing revenue or by liquidating previously established accounts receivable.

Miscellaneous Liabilities

Miscellaneous liabilities include mainly other unearned revenue from Single Family and Multifamily operations. It
also may include loss contingencies that are recognized by FHA for past events that warrant a probable, or likely,
future outflow of measurable economic resources.



Note 11. Commitments and Contingencies

Litigation

FHA is party in various legal actions and claims brought by or against it. In the opinion of management and
general counsel, the ultimate resolution of these legal actions and claims will not have a material affect on FHA’s
consolidated financial statements as of September 30, 2008. FHA has not recognized any contingent liability due to
the probable, or likely, adverse judgment in these cases. However, there are legal actions where judgment against
FHA is considered reasonably possible with an estimated potential loss of $3 million.


Pending Litigation Against FHA

(Dollars in millions)
                             2008                2007
Expected Outcome        Estimated Loss      Estimated Loss
Probable                       -                 $11
Reasonably Possible           $3                  $3
Remote                         -                   -




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Note 12. Gross Costs

Gross costs incurred by FHA for the fiscal years ended September 30, 2008 and 2007 are as follows:

   (Dollars in Millions)                         2008                                 2007
                                          MMI/CMHI                 GI/SRI      MMI/CMHI              GI/SRI

   Intragovernmental:
    Interest Expense                      $         167        $       127     $        263      $        104
    Imputed Costs                                     6                  8                8                29
    Other Expenses                                    2                  3               13                 8
   Total                                  $         175        $       138     $        284      $        141

   With the Public:
   Salary and Administrative Expenses     $         226        $        274    $        208      $        265
   Subsidy Expense                                8,215               1,116           3,726            (1,125)
   Interest Expense                               1,108                 251             697              (338)
   Bad Debt Expense                                   5                 (49)            (20)               11
   Loan Loss Reserve Expense                        (69)               (123)             48              (143)
   Other Expenses                                    10                 100              41                95
   Total                                  $       9,495        $      1,569    $      4,700      $     (1,235)

Interest Expense

Intragovernmental interest expense includes interest expense on borrowings from the U.S. Treasury in the financing
account. Interest expense is calculated annually for each cohort using the interest rates provided by the U.S
Treasury. Interest expense with the public consists of interest expense on debentures issued to claimants to settle
claim payments and interest expense on the annual credit subsidy reestimates.

Imputed Costs/Imputed Financing

Imputed costs represent FHA’s share of the departmental imputed cost calculated and allocated to FHA by the
HUD CFO office. Federal agencies are required by SFFAS No. 4, Managerial Cost Accounting Concepts and
Standards, to account for costs assumed by other Federal organizations on their behalf. The HUD CFO receives its
imputed cost data from the Office of Personnel Management (OPM) for pension costs, federal employee health
benefits (FEHB) and life insurance costs. It also receives Federal Employees’ Compensation Act (FECA) costs
from the Department of Labor (DOL). Subsequently, using its internally developed allocation basis, HUD CFO
allocates the imputed cost data to each of its reporting offices. The imputed costs reported by FHA in its
Statements of Net Cost are equal to the amounts of imputed financing in its Statements of Changes in Net Position.

Salary and Administrative Expenses

Salary and administrative expenses include FHA’s reimbursement to HUD for FHA personnel costs and FHA’s
payments to third party contractors for administrative contract expenses.




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Subsidy Expense

Subsidy expense, positive and negative, consists of credit subsidy expense from new endorsements, modifications,
and annual credit subsidy reestimates and the subsidy expense incurred by the Church Arson program. Credit
subsidy expense is the estimated long-term cost to the U.S. Government of a direct loan or loan guarantee,
calculated on a net present value basis of the estimated future cash flows associated with the direct loan or loan
guarantee. Subsidy expense incurred by the Church Arson program is the expense of a HUD program administered
by the Office of Community Planning and Development (CPD) even though its cost is funded through a FHA
program account.

Bad Debt Expense

Bad debt expense represents the provision for loss recorded for uncollectible amounts related to FHA’s pre-1992
accounts receivable and credit program assets. FHA calculates its bad debt expense based on the estimated change
of these assets’ historical loss experience and FHA management’s judgment concerning current economic factors.

Loan Loss Reserve Expense

Loan loss reserve expense is recorded to account for the change in the balance of the loan loss reserve liabilities
associated with FHA’s pre-1992 loan guarantees. The loan loss reserve is provided for the estimated losses
incurred by FHA to pay claims on its pre-1992 insured mortgages when defaults have taken place but the claims
have not yet been filed with FHA.

Other Expenses

Other expenses with the public include only those associated with the FHA pre-1992 loan guarantees. They consist
of net losses or gains on sales of FHA credit program assets, insurance claim expenses, fee expenses, and other
miscellaneous expenses incurred to carry out FHA operations. Other intragovernmental expenses include FHA’s
share of HUD expenses incurred in the Working Capital Fund and expenses from intra-agency agreements.




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Note 13. Earned Revenue

Earned revenues generated by FHA for the fiscal years ended September 30, 2008 and 2007 are as follows:

    (Dollars in Millions)                                     2008                         2007
                                                       MMI/CMHI           GI/SRI    MMI/CMHI            GI/SRI

    Intragovernmental:
     Interest Revenue from Deposits at U.S. Treasury   $     424      $        73   $       308     $        107
     Interest Revenue from MMI/CMHI Investments              896                -           991                -
    Total                                              $   1,320      $        73   $     1,299     $        107

    With the Public:
    Premium Revenue                                    $        10    $        21   $        13     $         38
    Interest Revenue                                            (1)            41             2               53
    Other Revenue                                                -              6             9                -
    Total                                              $         9    $        68   $        24     $         91

Interest Revenue

Intragovernmental interest revenue includes interest revenue from deposits at the U.S. Treasury and investments in
U.S. Treasury securities. FHA’s U.S. Treasury deposits are generated from post-1991 loan guarantees and direct
loans in the financing accounts. FHA’s investments in U.S. Treasury securities consist of investments of surplus
resources in the MMI/CMHI liquidating accounts and of escrow monies collected from borrowers in the GI/SRI
liquidating accounts.

Interest revenue with the public is generated mainly from FHA’s acquisition of pre-1992 performing MNA notes as
a result of claim payments to lenders for defaulted guaranteed loans. Interest revenue associated with the post-1991
MNA notes is included in the Allowance for Subsidy (AFS) balance.

Premium Revenue

According to the FCRA accounting, FHA’s premium revenue includes only premiums associated with the pre-1992
loan guarantee business. Premium revenue for post-1991 loan guarantee cases is included in the balance of the
LLG. The FHA premium structure, set by the National Affordable Housing Act and published in the Code of
Federal Regulations, which became effective July 1991, includes both up-front premiums and annual periodic
premiums.

Up-front Premiums

The up-front premium rates, which are set by legislation, vary according to the mortgage type and the year of
origination. The pre-1992 up-front premiums in the MMI fund were recorded as unearned revenue upon collection
and are recognized as revenue over the period in which losses and insurance costs are expected to occur. Other
FHA funds’ unearned revenue is recognized monthly as revenue on a straight-line basis.




.




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The FHA up-front premium rates in fiscal year 2008 were:

                                           Premium Rate
                       Single Family       1.50%
                       Multifamily         0.45 %, 0.50%, 0.57% or 0.80%
                       HECM                2.00% (Based on Maximum Claim Amount)

Periodic Premiums

The periodic premium rate is used to calculate monthly or annual premiums receivable. These rates, which are also
legislated, vary by mortgage type and program. The FHA periodic premium rate in fiscal year 2008 for Single
Family and Multifamily were:

                                            Mortgage Term 15         Mortgage Term More
                                             Years or Less             Than 15 Years

                       Single Family       0.25%                    0.50%
                       Multifamily         0.45 %, 0.50%, 0.57%     0.45 %, 0.50%, 0.57%
                                           or 0.80%                 or 0.80%
                       HECM                0.50% (All Terms)

For Title I, the maximum insurance premium paid for guaranteed cases endorsed in years 1992 through 2001 is
equal to 0.50 percent of the loan amount multiplied by the number of years of the loan term. The annual insurance
premium for a Title I Property Improvement loan is 0.50 percent of the loan amount until the maximum insurance
charge is paid. The annual insurance premium of a Title I Manufactured Housing loan is calculated in tiers by loan
term until the maximum insurance charge is paid. For guaranteed cases endorsed in fiscal years 2007 and 2008, the
Title I annual insurance premium is 1.00 percent of the loan amount until maturity.

Other Revenue

Other revenue includes revenue associated with FHA pre-1992 loan guarantees. FHA’s other revenue consists of
late charges and penalty revenue, fee income, and miscellaneous income generated from FHA operations.




Note 14. Gross Cost and Earned Revenue by Budget Functional Classification

FHA cost and earned revenue reported on the Statements of Net Cost is categorized under the budget functional
classification (BFC) for Mortgage Credit (371). All FHA U.S. Treasury account symbols found under the
department code “86” for Department of Housing and Urban Development appear with the Mortgage Credit BFC.




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Note 15. Transfers

Transfers in/out incurred by FHA for the fiscal years ended September 30, 2008 and 2007 are as follows:

 (Dollars in Millions)
 2008
 Budgetary Financing Sources
                               Cumulative Results of Operations    Unexpended Appropriations          Total
 Treasury                      $                          (613)    $                   (235)      $           (848)
 HUD                                                         -                           (41)                   (41)
 Total                         $                          (613)    $                   (276)      $           (889)

 Other Financing Sources
                               Cumulative Results of Operations   Unexpended Appropriations           Total
 Treasury                      $                           (19)   $                         -     $            (19)
 HUD                                                       406                             -                   406
 Total                         $                           387    $                         -     $            387




 2007
 Budgetary Financing Sources
                               Cumulative Results of Operations   Unexpended Appropriations           Total
 Treasury                      $                        (1,014)   $                     (159)     $       (1,173)
 HUD                                                          -                         (609)               (609)
 Total                         $                        (1,014)   $                     (768)     $       (1,782)

 Other Financing Sources
                               Cumulative Results of Operations   Unexpended Appropriations           Total
 Treasury                      $                          (834)   $                        -      $           (834)
 HUD                                                       389                             -                   389
 Total                         $                          (445)   $                         -     $           (445)

Transfers Out to U.S. Treasury

Transfers out to U.S. Treasury consists of negative subsidy from new endorsements, modifications and downward
credit subsidy reestimates in the GI/SRI general fund receipt account, and the prior year unobligated balance of
budgetary resources in the GI/SRI liquidating account.

Transfers In/Out From HUD

In fiscal year 2007, FHA made non-expenditure Transfers Out of appropriated funds to HUD for Salaries and
Administrative Expenses (S&E) as well as for Working Capital Fund Expenses. In FY 2008, FHA did not receive
an appropriation for S&E; instead the FHA amounts were appropriated directly to HUD. In order to recognize the
S&E in FHA’s Statement of Net Cost, a Transfer In from HUD was recorded with the recognition of FHA S&E
costs. FHA continues to make a non-expenditure Transfer Out to HUD for Working Capital Fund Expenses.




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Note 16. Unexpended Appropriations

Unexpended appropriation balances at September 30, 2008 and 2007 are as follows:

 (Dollars in Millions)
                         Beginning   Appropriations    Other    Appropriations Transfers-Out         Ending
 2008                     Balance      Received     Adjustments     Used                             Balance
  Positive Subsidy       $      28     $        8     $           -    $     (21)    $         -    $        15
  Working Capital and          293            205               (49)         (98)            (41)           310
  Contract Expenses
  Reestimates                    -            301                 -         (301)              -              -
  GI/SRI Liquidating           223            113                 -          (15)           (235)            86
 Total                   $     544     $      627     $         (49)   $    (435)    $      (276)   $       411

 2007
  Positive Subsidy       $      64     $        9     $         (40)   $      (5)    $         -    $        28
  Working Capital and          365            721               (79)        (105)           (609)           293
  Contract Expenses
  Reestimates                    -            109                 -         (109)              -              -
  GI/SRI Liquidating           165            413                 -         (196)           (159)           223
 Total                   $     594     $    1,252     $        (119)   $    (415)    $      (768)   $       544

As required under FCRA, FHA receives appropriations to cover expenses or fund shortages related to its loan
guarantee and direct loan operations.

FHA receives appropriations in the annual program accounts for administrative and contract expenses. The GI/SRI
no-year program account also receives appropriations for positive credit subsidy and upward reestimates.
Additionally, FHA obtains permanent indefinite appropriations to cover any shortfalls for its GI/SRI pre-1992 loan
guarantee operations.

When appropriations are first received, they are reported as unexpended appropriations. As these appropriations
are expended, appropriations used are increased and unexpended appropriations are decreased. Additionally,
unexpended appropriations are decreased when: administrative expenses, and working capital funds are transferred
out to HUD; the year-end unobligated balance in the GI/SRI liquidating account is returned to the U.S. Treasury;
appropriations are rescinded; or other miscellaneous adjustments are required.




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Note 17. Budgetary Resources

The SF-133 and the Statement of Budgetary Resources for fiscal year 2007 have been reconciled to the fiscal year
2007 actual amounts included in the Program and Financing Schedules presented in the Budget of the United States
Government. There were no significant reconciling items. Information from the fiscal year 2008 Statement of
Budgetary Resources will be presented in the fiscal year 2010 Budget of the U.S. Government. The Budget will be
transmitted to Congress on the first Monday in February 2010 and will be available from the Government Printing
Office and online at that time.

Obligated balances for the period ended September 30, 2008 and 2007 are as follows:

        Unpaid Obligations

                (Dollars in Millions)
                Undelivered Orders                         FY 2008                FY 2007
                 MMI/CMHI                                $        795           $        662
                 GI/SRI                                           526                    588
                Undelivered Orders Subtotal              $      1,321           $      1,250
                Accounts Payable
                 MMI/CMHI                                $           793        $          772
                 GI/SRI                                              345                   274
                Accounts Payable Subtotal                $         1,138        $        1,046

                Unpaid Obligations Total                 $         2,459        $        2,296


In fiscal year 2007, FHA made non-expenditure Transfers Out of appropriated funds to HUD for Salaries and
Administrative Expenses (S&E) as well as for Working Capital Fund Expenses. In FY 2008, FHA did not receive
an appropriation for S&E; instead the FHA amounts were appropriated directly to HUD. In order to recognize the
S&E in FHA’s Statement of Net cost, a Transfer In from HUD was recorded with the recognition of FHA S&E
costs. FHA continues to make a non-expenditure Transfer Out to HUD for Working Capital Fund Expenses.




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NOTE 18. Budgetary Resources - Collections

The following table presents the composition of FHA’s collections for the period ended September 30, 2008 and
2007:

          (Dollars in Millions)
          2008                                   MMI/CMHI              GI/SRI                  Total
          Collections:
           Premiums                              $        4,239    $          1,219        $        5,458
           Notes                                              9                 331                   340
           Property                                       2,900                 153                 3,053
           Interest Earned from U.S Treasury              1,273                  73                 1,346
           Subsidy                                          435                  21                   456
           Reestimates                                    4,560                 301                 4,861
           Other                                             71                 211                   282
          Total                                  $       13,487    $          2,309        $       15,796

          (Dollars in Millions)
          2007                                   MMI/CMHI              GI/SRI                  Total
          Collections:
           Premiums                              $        2,148    $            904        $        3,052
           Notes                                             39                 542                   581
           Property                                       3,334                 142                 3,476
           Interest Earned from U.S Treasury              1,264                 107                 1,371
           Subsidy                                          214                 124                   338
           Reestimates                                    1,904                 109                 2,013
           Other                                            101                 229                   330
          Total                                  $        9,004    $          2,157        $       11,161


Note 19. Budgetary Resources – Non-expenditure Transfers

The following table presents the composition of FHA’s non-expenditure transfers through September 30, 2008 and
2007:

  (Dollars in Millions)
  2008                                                        MMI/CMHI            GI/SRI               Total
  Transfers:
  Working Capital Expenses                                    $        (25)   $            (16)    $            (41)
  Total                                                       $        (25)   $            (16)    $            (41)

  (Dollars in Millions)
  2007                                                        MMI/CMHI            GI/SRI               Total
  Transfers:
  Salaries, Administrative Expense and Working Capital        $     (369)     $        (240)       $           (609)
  Expenses
  Total                                                       $     (369)     $        (240)       $           (609)




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Note 20. Budgetary Resources – Obligations

The following table presents the composition of FHA’s obligations for the period ended September 30, 2008 and
2007:


 (Dollars in Millions)
 September 30, 2008                                    MMI/CMHI            GI/SRI          H4H            Total
 Obligations:
  Claims                                                $     6,494    $      1,146    $          -   $      7,640
  Single Family Property Management Contracts                   411              21               -            432
  Contract Obligations                                           47              79              20            146
  Subsidy                                                       435             643               -          1,078
  Downward Reestimates                                            5             897               -            902
  Upward Reestimates                                          4,555             301               -          4,856
  Interest on Borrowings                                        167             134               -            301
  Other                                                          94             141               -            235
  Total                                                 $   12,208     $     3,362     $         20   $    15,590



 (Dollars in Millions)
 September 30, 2007                                    MMI/CMHI            GI/SRI          H4H            Total
 Obligations:
  Claims                                                $     5,340    $      1,003    $          -   $      6,343
  Single Family Property Management Contracts                   360              17               -            377
  Contract Obligations                                           40             142               -            182
  Subsidy                                                       214           1,134               -          1,348
  Downward Reestimates                                          554           1,746               -          2,300
  Upward Reestimates                                          1,351             109               -          1,460
  Interest on Borrowings                                        263             115               -            378
  Other                                                          68             170               -            238
  Total                                                $     8,190     $     4,436     $          -   $    12,626




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NOTE 21. Reconciliation of Net Cost of Operations to Budget

This note (formerly the Statement of Financing) links the proprietary data to the budgetary data. Most transactions
are recorded in both proprietary and budgetary accounts. However, because different accounting bases are used for
budgetary and proprietary accounting, some transactions may appear in only one set of accounts. The
Reconciliation of Net Cost of Operations to Budget is as follows for the periods ending September 30, 2008 and
2007:

(Dollars in Millions)                                                                            2008         2007
RESOURCES USED TO FINANCE ACTIVITIES
 Obligations Incurred                                                                        $    15,590 $     12,626
 Spending Authority from Offsetting Collections and Recoveries                                   (15,820)     (11,468)
 Offsetting Receipts                                                                              (1,511)      (2,759)
 Transfers In / Out                                                                                  387         (445)
 Imputed Financing from Costs Absorbed by Others                                                      14           37
TOTAL RESOURCES USED TO FINANCE ACTIVITIES                                                   $    (1,340) $    (2,009)

RESOURCES THAT DO NOT FUND THE NET COST OF OPERATIONS
Undelivered Orders and Adjustments                                                           $       (87) $       90
Revenue and Other Resources                                                                       15,784      12,668
Purchase of Assets                                                                               (10,419)     (9,879)
Appropriation for prior year Re-estimate                                                          (4,856)     (1,460)
TOTAL RESOURCES NOT PART OF NET COST OF OPERATIONS                                           $       422 $     1,419

TOTAL RESOURCES USED TO FINANCE THE NET COST (SURPLUS) OF OPERATIONS                         $     (918) $      (590)

COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL NOT
REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD
Upward Re-estimate of Credit Subsidy Expense                                                 $   11,611 $       4,870
Downward Re-estimate of Credit Subsidy Expense                                                      (99)         (817)
Changes in Loan Loss Reserve Expense                                                               (192)         (127)
Changes in Bad Debt Expenses Related to Uncollectible Pre-Credit Reform Receivables                 (44)           (9)
Reduction of Credit Subsidy Expense from Endorsements and Modifications of Loan Guarantees       (1,047)       (1,032)
Gains or Losses on Sales of Credit Program Assets                                                   101            56
Other                                                                                               495            18
TOTAL COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL
NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD                                      $   10,825 $       2,959

NET COST (SURPLUS) OF OPERATIONS                                                             $    9,907 $       2,369




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Required Supplementary Information

Schedule A: Intragovernmental Assets

FHA's Intragovernmental assets, by federal entity, are as follows for the periods ending September 30, 2008 and
2007:


                  (Dollars in millions)    Fund Balance       Investments in
                                             with U.S.         U.S. Treasury
                                                                                      Other Assets
                  Agency                     Treasury            Securities
                  U.S. Treasury            $      12,590      $       19,254           $               -
                  HUD                                   -                   -                         21
                  2008 Total               $      12,590      $       19,254           $              21

                  U.S. Treasury            $        9,559     $           22,481       $              -
                  HUD                                    -                      -                     4
                  2007 Total               $        9,559     $           22,481       $              4




Schedule B: Intragovernmental Liabilities

FHA's Intragovernmental liabilities, by federal entity, are as follows on September 30, 2008 and 2007:


                   (Dollars in Millions)
                                                  Borrowings from
                   Agency                                                         Other Liabilities
                                                   U.S. Treasury
                    U.S. Treasury               $             4,832           $                1,530
                   2008 Total                   $             4,832           $                1,530


                    U.S. Treasury               $                 4,573       $                3,657
                   2007 Total                   $                 4,573       $                3,657




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Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program
September 30, 2008 and 2007:

(Dollars in Millions)                                 MMI/CMHI                 GI/S RI               H4H                Total
                                                     2008   2007            2008     2007            2008        2008           2007

BUDGETARY RESOURCES
 Unobligated Balance Carried Forward
     Beginning of p eriod                           $ 25,499    $ 26,367   $ 1,421    $ 3,055    $          -   $ 26,920    $ 29,422
 Recoveries of Prior Year Obligations                     49         127        42         86               -         91         213
 Budget Authority :
    Ap p rop riations received                           77         413       520        841            30          627         1,254
    Borrowing Authority                                 235           2       708        615             -          943           617
 Sp ending Authority from Offsetting Collections:
    Earned
        Collected                                     13,487    9,004   2,309   2,157                    -        15,796   11,161
        Receivable from Federal Sources                  (29)      63     (38)     35                    -           (67)      98
    Unfilled Customer Orders                               -        -       -      (4)                   -             -       (4)
 Net T ransfers                                          (25)    (369)    (16)   (240)                   -           (41)    (609)
 Permanently Not Available                              (252)  (1,919)   (732)   (687)                   -          (984)  (2,606)
TO TAL BUDGETARY RES O URCES                        $ 39,041 $ 33,688 $ 4,214 $ 5,858 $                 30      $ 43,285 $ 39,546

STATUS OF BUDGETARY RESOURCES
 Obligations Incurred                    $ 12,208               $ 8,190    $ 3,362    $ 4,436    $      20      $ 15,590    $ 12,626
 Unobligated Balance-Ap p ortioned          2,179                    537       798        643           10         2,987       1,180
 Unobligated Balance Not Available         24,654                 24,961        54        779            -        24,708      25,740
TO TAL S TATUS O F BUDGETARY RES O URCES $ 39,041               $ 33,688   $ 4,214    $ 5,858    $      30      $ 43,285    $ 39,546

CHANGE IN OBLIGATED BALANCES
 Obligated Balance, Net, Beginning of Period:
  Unp aid Obligations Carried Forward               $ 1,435 $ 1,476 $ 861 $ 881 $                        - $ 2,296 $ 2,357
  Receivable from Federal Sources Carried Forward      (263)   (203)    (44)    (11)                     -     (307)     (214)
  Obligations Incurred                               12,208   8,190   3,362   4,436                     20   15,590   12,626
  Gross Outlay s                                    (12,005) (8,101) (3,311) (4,372)                   (20) (15,336) (12,473)
 Obligated Balance T ransfers, Net:                                                                                         -
 Recoveries of Prior Year Obligations                   (49)       (127)       (42)       (86)           -      (91)     (213)
 Change in Receivable from Federal Sources               29         (63)        38        (31)           -       67       (94)
 Obligated Balance, Net, End of Period:                                                                           -         -
  Unp aid Obligations                                 1,589       1,435       870        861             -    2,459     2,296
  Receivable from Federal Sources                      (234)       (263)       (6)       (44)            -     (240)     (307)
 Outlay s:                                                                                                        -         -
       Disbursements                                $ 12,005 $ 8,101 $ 3,311 $ 4,372 $                  20   15,336   12,473
       Collections                                   (13,487)  (9,004) (2,309) (2,157)                   - (15,796) (11,161)
       Subtotal                                       (1,482)    (903)  1,002   2,215                   20     (460)    1,312
 Less: Offsetting Receip ts                                -        -   1,511   2,759                    -    1,511     2,759
NET O UTLAYS                                        $ (1,482) $ (903) $ (509) $ (544) $                 20 $ (1,971) $ (1,447)




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Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by Appropriation for the MMI/CMHI Program
September 30, 2008:

(Dollars in M illions )                                                               86x4587
                                                                                         &                    M M I/CM HI
                                                          86 0183        86x4070      86x4242       86x0236         Total

BUDGETARY RESOURCES
 Unobligated Balance Carried Forward
    Beginning of period                               $           47 $        64 $       2,993 $      22,395 $      25,499
 Recoveries of Prior Year Obligations                             13          23            13                          49
 Budget A uthority:
   A ppropriations received                                       77            -            -             -            77
   Borrowing A uthority                                            -            -          235             -           235
 Spending A uthority from Offs etting Collections :
   Earned
       Collected                                                  -           13         12,185         1,289        13,487
       Receivable from Federal Sources                            -            -              -           (29)          (29)
   Unfilled Cus tomer Orders                                      -            -              -             -             -
 Net Trans fers                                               4,531           15              -        (4,571)          (25)
 Permanently Not A vailable                                     (17)           -           (235)            -          (252)
TOTAL BUDGETARY RES OURCES                            $      4,651 $         115 $      15,191 $      19,084 $      39,041

STATUS OF BUDGETARY RESOURCES
 Obligations Incurred                                 $       4,603 $         65 $        7,540 $           - $      12,208
 Unobligated Balance-A pportioned                                 4           50          2,125             -         2,179
 Unobligated Balance Not A vailable                              44            -          5,526        19,084        24,654
TOTAL S TATUS OF BUDGETARY RES OURCES                 $      4,651 $         115 $      15,191 $      19,084 $      39,041

CHANGE IN OBLIGATED BALANCES
 Obligated Balance, Net, Beginning of Period:
  Unpaid Obligations Carried Forward                  $          71 $        212 $        1,152 $          - $        1,435
  Receivable from Federal Sources Carried Forward                 -            -             (2)        (261)          (263)
  Obligations Incurred                                        4,603           65          7,540            -         12,208
  Gros s Outlays                                             (4,595)         (49)        (7,361)           -        (12,005)
 Obligated Balance Trans fers , Net:
 Recoveries of Prior Year Obligations                          (13)           (23)         (13)            -            (49)
 Change in Receivable from Federal Sources                       -              -            -            29             29
 Obligated Balance, Net, End of Period:
  Unpaid Obligations                                              66         205         1,318             -          1,589
  Receivable from Federal Sources                                  -           -            (2)         (232)          (234)
 Outlays :
         Dis burs ements                              $       4,595 $          49 $       7,361 $           - $      12,005
         Collections                                              -           (13)      (12,185)       (1,289)      (13,487)
         Subtotal                                             4,595            36        (4,824)       (1,289)       (1,482)
 Les s : Offs etting Receipts                                     -             -             -             -             -
NET OUTLAYS                                           $      4,595 $          36 $      (4,824) $     (1,289) $     (1,482)




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Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by Appropriation for the MMI/CMHI Program
September 30, 2007

(Dollars in M illions )                                                               86x4587
                                                                                         &                      M M I/CM HI
                                                          86 0183        86x4070      86x4242        86x0236         Total

BUDGETARY RESOURCES
 Unobligated Balance Carried Forward
    Beginning of period                               $           43 $        47 $       4,318 $       21,959 $       26,367
 Recoveries of Prior Year Obligations                             16          26            85              -            127
 Budget A uthority:
    A ppropriations received                                   413              -            -              -           413
    Borrowing A uthority                                         -              -            2              -             2
 Spending A uthority from Offs etting Collections :
    Earned
       Collected                                                  -           59          7,221          1,724         9,004
       Receivable from Federal Sources                            -             -             -             63            63
    Unfilled Cus tomer Orders                                     -             -             -              -             -
 Net Trans fers                                                981              -             -         (1,350)         (369)
 Permanently Not A vailable                                     (17)            -        (1,902)             -        (1,919)
TOTAL BUDGETARY RES OURCES                            $      1,436 $         132 $       9,724 $       22,396 $      33,688

STATUS OF BUDGETARY RESOURCES
 Obligations Incurred                                 $       1,390 $         68 $        6,732 $            - $       8,190
 Unobligated Balance-A pportioned                                 4           15            518              -           537
 Unobligated Balance Not A vailable                              42           49          2,474         22,396        24,961
TOTAL S TATUS OF BUDGETARY RES OURCES                 $      1,436 $         132 $       9,724 $       22,396 $      33,688

CHANGE IN OBLIGATED BALANCES
 Obligated Balance, Net, Beginning of Period:
  Unpaid Obligations Carried Forward                  $          82 $        233 $        1,161 $           - $        1,476
  Receivable from Federal Sources Carried Forward                 -           (1)            (2)         (200)          (203)
  Obligations Incurred                                        1,390           68          6,732             -          8,190
  Gros s Outlays                                             (1,385)         (62)        (6,654)            -         (8,101)
 Obligated Balance Trans fers , Net:
 Recoveries of Prior Year Obligations                          (16)           (26)         (85)             -           (127)
 Change in Receivable from Federal Sources                       -              -            -            (63)           (63)
 Obligated Balance, Net, End of Period:
  Unpaid Obligations                                              71         212         1,152              -          1,435
  Receivable from Federal Sources                                  -           -            (2)          (261)          (263)
 Outlays :
         Dis burs ements                              $       1,385            62         6,654              -         8,101
         Collections                                              -           (59)       (7,221)        (1,724)       (9,004)
         Subtotal                                             1,385             3           (567)       (1,724)         (903)
 Les s : Offs etting Receipts                                -                   -       -                   -             -
NET OUTLAYS                                           $      1,385 $            3 $        (567) $     (1,724) $       (903)




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Required Supplementary Information

Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GI/SRI Program
September 30, 2008:

(Dollars in M illions )                                                               86x4077
                                                                                         &          GI/SRI
                                                          86 0200       86x4072       86x4105        Total

BUDGETARY RESOURCES
 Unobligated Balance Carried Forward
    Beginning of period                               $        102 $         235 $        1,084 $      1,421
 Recoveries of Prior Year Obligations                            9            27              6           42
 Budget A uthority:
   A ppropriations received                                    407           113             -           520
   Borrowing A uthority                                          -             3           705           708
 Spending A uthority from Offs etting Collections :
   Earned
       Collected                                                  -          334          1,975         2,309
       Receivable from Federal Sources                            -            4            (42)          (38)
   Unfilled Cus tomer Orders                                      -            -              -             -
 Net Trans fers                                                 (16)           -              -           (16)
 Permanently Not A vailable                                     (32)        (244)          (456)         (732)
TOTAL BUDGETARY RES OURCES                            $        470 $        472 $        3,272 $       4,214

STATUS OF BUDGETARY RESOURCES
 Obligations Incurred                                 $        383 $        203 $         2,776 $       3,362
 Unobligated Balance-A pportioned                               33          269             496           798
 Unobligated Balance Not A vailable                             54             -              -            54
TOTAL S TATUS OF BUDGETARY RES OURCES                 $        470 $        472 $        3,272 $       4,214

CHANGE IN OBLIGATED BALANCES
 Obligated Balance, Net, Beginning of Period:
  Unpaid Obligations Carried Forward                  $         100 $        571 $          190 $         861
  Receivable from Federal Sources Carried Forward                 -            -            (44)          (44)
  Obligations Incurred                                          383          203          2,776         3,362
  Gros s Outlays                                               (376)        (253)        (2,682)       (3,311)
 Obligated Balance Trans fers , Net:
 Recoveries of Prior Year Obligations                           (9)          (27)           (6)           (42)
 Change in Receivable from Federal Sources                       -            (5)           43             38
 Obligated Balance, Net, End of Period:
  Unpaid Obligations                                            98           494           278           870
  Receivable from Federal Sources                                -            (5)           (1)           (6)
 Outlays :
         Dis burs ements                              $        376 $         253 $        2,682 $       3,311
         Collections                                             -          (334)        (1,975)       (2,309)
         Subtotal                                              376           (81)           707         1,002
 Les s : Offs etting Receipts                                    -             -              -         1,511
NET OUTLAYS                                           $        376 $         (81) $        707 $        (509)




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    2009-FO-0002




Required Supplementary Information

Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GI/SRI Program
September 30, 2007:

(Dollars in Millions)                                                              86x4077
                                                                                      &          GI/SRI
                                                         86 0200      86x4072      86x4105       Total

BUDGETARY RESOURCES
 Unobligated Balance Carried Forward
    Beginning of period                             $         182 $        160 $      2,713 $       3,055
 Recoveries of Prior Year Obligations                          11           36           39            86
 Budget Authority:
    Appropriations received                                   426          413            2          841
    Borrowing Authority                                         -           15          600          615
 Spending Authority from Offsetting Collections:
    Earned
       Collected                                                -          274        1,883         2,157
       Receivable from Federal Sources                          -           (6)          41            35
    Unfilled Customer Orders                                    -            -           (4)           (4)
 Net Transfers                                               (240)           -            -          (240)
 Permanently Not Available                                   (101)        (173)        (413)         (687)
TOTAL BUDGETARY RESOURCES                           $         278 $        719 $      4,861 $       5,858

STATUS OF BUDGETARY RESOURCES
 Obligations Incurred                               $         175 $        484 $      3,777 $       4,436
 Unobligated Balance-Apportioned                               28          140          475           643
 Unobligated Balance Not Available                             75           95          609           779
TOTAL STATUS OF BUDGETARY RESOURCES                 $         278 $        719 $      4,861 $       5,858

CHANGE IN OBLIGATED BALANCES
 Obligated Balance, Net, Beginning of Period:
  Unpaid Obligations Carried Forward                $         102 $        564 $         215 $        881
  Receivable from Federal Sources Carried Forward               -           (6)           (5)         (11)
  Obligations Incurred                                        175          484         3,777        4,436
  Gross Outlays                                              (165)        (442)       (3,765)      (4,372)
 Obligated Balance Transfers, Net:
 Recoveries of Prior Year Obligations                         (11)         (36)         (39)          (86)
 Change in Receivable from Federal Sources                      -            6          (37)          (31)
 Obligated Balance, Net, End of Period:
  Unpaid Obligations                                          100          571          190          861
  Receivable from Federal Sources                               -            -          (44)         (44)
 Outlays:
       Disbursements                                $         165          442         3,765        4,372
       Collections                                              -         (274)       (1,883)      (2,157)
       Subtotal                                               165          168         1,882        2,215
 Less: Offsetting Receipts                                      -            -             -        2,759
NET OUTLAYS                                         $         165 $        168 $       1,882 $       (544)




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                                                                            2009-FO-0002




Required Supplementary Information

Schedule F: Comparative Combining Budgetary Resources by Appropriation for the H4H Program
September 30, 2008:

    (Dollars in M illions )
                                                                                        H4H
                                                                   86x0343              Total

    BUDGETARY RESOURCES
     Unobligated Balance Carried Forward
        Beginning of period                                    $               -    $             -
     Recoveries of Prior Year Obligations                                      -                  -
     Budget A uthority:
        A ppropriations received                                             30                 30
        Borrowing A uthority                                                  -                  -
     Spending A uthority from Offs etting Collections :
        Earned
           Collected                                                           -                  -
           Receivable from Federal Sources                                     -                  -
        Unfilled Cus tomer Orders                                              -                  -
     Net Trans fers                                                            -                  -
     Permanently Not A vailable                                                -                  -
    TOTAL BUDGETARY RES OURCES                                 $             30     $           30

    STATUS OF BUDGETARY RESOURCES
     Obligations Incurred                                      $             20     $           20
     Unobligated Balance-A pportioned                                        10                 10
     Unobligated Balance Not A vailable                                        -                  -
    TOTAL S TATUS OF BUDGETARY RES OURCES                      $             30     $           30

    CHANGE IN OBLIGATED BALANCES
     Obligated Balance, Net, Beginning of Period:
      Unpaid Obligations Carried Forward                       $               -    $             -
      Receivable from Federal Sources Carried Forward                          -                  -
      Obligations Incurred                                                    20                 20
      Gros s Outlays                                                         (20)               (20)
     Obligated Balance Trans fers , Net:
     Recoveries of Prior Year Obligations                                      -                  -
     Change in Receivable from Federal Sources                                 -                  -
     Obligated Balance, Net, End of Period:
      Unpaid Obligations                                                       -                  -
      Receivable from Federal Sources                                          -                  -
     Outlays :
             Dis burs ements                                                 20     $           20
             Collections                                                       -                  -
             Subtotal                                                        20                 20
     Les s : Offs etting Receipts                                              -                  -
    NET OUTLAYS                                                $             20     $           20




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