Issue I)ate
November 13. 2009
Audit Case Number
201 0-F’O-0002
TO: David H. Stevens. Assistant Secretary for Housing-Federal Housing Commissioner, I-I
FROM: Ticomas R. McEnanLyl Director. Financial Audits Division, GAF
ci
SUBJECT: Audit of the Federal Housing Administration’s Financial Statements for Fiscal
Years 2009 and 2008
In accordance with the Government Corporation Control Act as amended (31 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 year 2009 and 2008 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 November 9. 2009 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 November 9, 2009 regarding other less significant matters
that came to its attention during the audit.
This report includes both the Independent Auditor’s Report and FHA’s 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 in this report. FHA plans to separately publish an annual report for fiscal year 2009 that
conforms to FASAB standards.
The report contains four significant deficiencies in FHA’s internal controls and one
reportable instance of noncompliance with laws and regulations. The report contains 15 new
recommendations. Within 1 20 days oithe report issue date, FHA is required to provide its final
management decision which included a corrective action plan for each recommendation. As part
of the audit resolution process. we will record 15 new recommendation(s) in the Departments
Audit Resolution and Correctise Action Tracking System (ARCATS). We will also endeavor to
work with EHA to reach a mutually acceptable management decision prior to the mandated
deadline. The proposed management decision and correcti\e action plan will he reiewed and
ealuated w itli 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
O1G Transmittal Memorandum 1
Independent Auditor’s Report 5
Appendix A — Significant Deficiencies 11
Appendix B — Management’s Response 21
Appendix C — UKW’s Assessment of Management’s Response 29
Appendix D — Status of Prior Year Findings and Recommendations 33
Principal Financial Statements 35
Consolidated Balance Sheets 37
Consolidated Statements of Net Cost 38
Consolidated Statements of Changes in Net Position 39
Combined Statement of Budgetary Resources 40
Notes to the Financial Statements 42
Required Supplementary Information 82
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UK Lirbach Kahn &Werlin LLP
&W CERTIFIED PUBLIC ACCOUNTANTS
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, 2009 and
2008, 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
matters being identified as significant deficiencies:
• Financial system capacity limitations could impact business processing
• Effective FHA modernization is critical to address systems risks
• Economic conditions and inherent model design increase risks to management
estimates
• FHA should enhance the general ledger system user access management
processes
We identified one reportable instance of noncompliance with laws and regulations related
to the capital requirements for the Mutual Mortgage Insurance Fund.
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
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INDEPENDENT AUDITOR’S REPORT, Continued
material respects, the financial position of FHA as of September 30, 2009 and 2008, 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.
As discussed in the footnotes to the Principal Financial Statements, the Loan Guarantee
Liability (LGL) is a management estimate of the net present value of future claims, net of
premiums and recoveries, from loans insured as of the end of the fiscal year. This
estimate is developed using econometric models, which integrate historical data with
national house price forecasts to develop assumptions about future portfolio performance.
Endorsements in the last two years make up over half of FHA’s insured single family
mortgage loans in the Mutual Mortgage Insurance (MMI) Fund. These loans have very
limited claims experience to support management’s assumptions regarding their future
performance. Because of this limited experience and the impact of the current economy
on the housing market, the reliability of the LGL estimate for single family mortgages may
be significantly affected.
The MM! Fund includes a Capital Reserve account from which increases in funding to
cover accrued claim losses are drawn. As of September 30, 2009, this Capital Reserve
account had $2.6 billion available to cover further increases in the MM! Fund’s Loan
Guarantee Liability. The Credit Reform Act of 1990 provides for permanent, indefinite
budget authority should future increases in the Loan Guarantee Liability exceed funds
available in the Capital Reserve account.
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 audit procedures that
are appropriate in the circumstances and complying with Office of Management and
Budget (0MB) 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 four
matters, summarized below and more fully described in Appendix A, involving the internal
control and its operation that we consider to be significant deficiencies:
Financial system capacity limitations could impact business processing
The collapse of the commercial subprime mortgage industry has resulted in
significant increases in FHA’s business volume that strained FHA information
technology (IT) system resources. During FY2009, FHA’s Office of the
Comptroller and the HUD Office of Chief Information Officer (OCIO) upgraded
system capacity and developed an informal written short term capacity
management plan that identified the actions that had been taken and future
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INDEPENDENT AUDITOR’S REPORT, Continued
activities required. A new mainframe is also scheduled to be installed in FY2O1O.
However, the reliability of FHA’s financial reporting systems are still at risk and
the capacity management plan does not document 1) critical mainframe or
application utilization benchmarks and required responses and 2) clear
organizational and staff roles and responsibilities for ongoing capacity
management planning.
Effective FHA modernization is critical to address systems risks
The rapid growth in FHA’s business volume, market share and new housing
program initiatives have highlighted the impact of FHA’s minimal investment in
new systems development over the last ten years. HUD recently commissioned a
study that identified numerous deficiencies in the current operating environment
and prioritized a long list of system modernization initiatives, including the
replacement of a number of critical FHA business systems. Given their current
state, FHA’s financial systems will continue to require expensive maintenance
and monitoring and are likely to pose increasing risk to the reliability of FHA’s
financial reporting until replacement efforts are completed. FHA and the HUD
OCIC should commit to a prioritized plan of activities, affirm the enterprise
architecture required to support the modernization effort, provide resources to the
modernization efforts, and develop a more detailed modernization
implementation plan.
Economic conditions and inherent model design increase risks to management
estimates
FHA’s process for estimating the Loan Guarantee Liability for single family
programs uses assumptions developed through an annual independent actuarial
study of the Mutual Mortgage Insurance fund. The econometric models
developed for this study are driven by historical claim payment patterns and
numerous economic and portfolio variables. The projections for future claim
payments for endorsements made in the last two years, which represent over
half of the total liability, are based on very limited direct claim performance.
Notable changes in the composition of these loans relative to past history and
drastic changes in the housing market may impact the model’s ability to fully
incorporate the impact of these changes. Due to significant declines in house
prices, the liability estimates are also acutely sensitive to small changes in house
price projections.
Currently, FHA does not have an effective process to assess and document the
impact of other potential risk factors or leading indicators, such as delinquencies
or unemployment data, that may impact program performance and either support
the reliability of management estimates based on the model, or provide evidence
to support an adjustment of the model estimates. Federal accounting standards
allows an agency to integrate management assumptions when current models
may not be reliable.
FHA should enhance the general ledger system user access management
processes
FHA granted general ledger access rights to system developers and certain
users to support the implementation of two new Multifamily business systems
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INDEPENDENT AUDITOR’S REPORT, Continued
during FY2009. FHA’s control to detect this access was not effective because the
FHASL audit logging capability was not properly configured. Inactive user
accounts were also not removed timely. FHA’s system modernization efforts will
require ongoing access to FHASL by programmers and non-standard users,
increasing the risk of inappropriate or unauthorized information being introduced
or deleted from the agency’s primary financial system of record without adequate
compensating controls. FHA is developing an enhanced audit log reporting and
monitoring process.
Additional detail and the related recommendations for these findings 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.
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. However, we believe none of the
significant deficiencies described above is a material weakness.
Compliance with Laws and Regulations
The results of our tests of compliance with laws, regulations and government-wide policies
disclosed one instance of noncompliance that is required to be reported under
Government Auditing Standards and 0MB Bulletin No. 07-04, Audit Requirements for
Federal Financial Statements, as amended, as described below. Providing an opinion on
compliance with laws and regulations and government-wide policies was not an objective
of our audit and, accordingly, we do not express such an opinion.
The Cranston-Gonzales National Affordable Housing Act of 1990 required
that FHA’s Mutual Mortgage Insurance Fund maintain a minimum level of
capital sufficient to sustain a moderate recession. This capital requirement,
called the Capital Ratio, is defined as capital resources (assets minus
current liabilities) less the liability for future claim costs (net of future
premiums and recoveries), divided by the value of insurance-in-force. The
Act required FHA to maintain a minimum Capital Ratio of two percent and
conduct an annual independent actuarial study to calculate this ratio. The
Housing and Economic Recovery Act of 2008 requires that the Secretary
submit a report annually to the Congress describing the results of such
study, assess the financial status of the Fund, recommend adjustments and
evaluate of the quality control procedures and accuracy of information used
in the process of underwriting loans guaranteed by the Fund. As of the date
of our audit, this report had not yet been submitted, but FHA data indicated
that this ratio fell to 0.53% based on September 30, 2009 amortized loan
balances.
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
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INDEPENDENT AUDITOR’S REPORT, Continued
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 1) 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, 2) ensuring that FHA’s financial management systems substantially comply with the
Federal Financial Management Improvement Act of 1996 (FFMIA), and 3) 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 0MB Bulletin No. 07-04, as amended. Those standards and 0MB
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 its internal control over financial reporting (including safeguarding of
assets) and compliance with laws, regulations and government-wide policies (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 0MB Bulletin No. 07-04 and Government Auditing Standards, which include
ensuring:
• 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.
• 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
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INDEPENDENT AUDITOR’S REPORT, Continued
material effect on the financial statements, and (3) any other laws,
regulations, and government-wide policies identified by 0MB 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 0MB audit guidance that we deemed applicable to the financial statements for
the fiscal year ended September 30, 2009. 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 concurred with three of our four findings and their related
recommendations. FHA management did not concur that additional information is
necessary to support the estimate of the Liability for Loan Guarantees. The HUD OCIO did
not concur that the capacity management controls represented a significant deficiency to
FHA’s controls over financial reporting. 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
November 9, 2009.
Distribution
This report is intended solely for the information and use of the HUD OIG, the
management of HUD and FHA, 0MB, 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.
)LJJ LLP
Arlington, Virginia
November 9, 2009
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Independent Auditor’s Report
Appendix A-Significant Deficiencies
In our report dated November 9, 2009, 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, 2009 and 2008, 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 sections present additional detail on the internal
control matters discussed in that report.
Background
FHA’s current financial system is comprised of numerous aging information systems
developed independently over the last thirty years and integrated with the general ledger
through electronic interfaces. Most of these systems are COBOL-based applications on
either an IBM or Unisys mainframe. Substantially all of FHA’s source transaction data is
entered by and transmitted from lenders via electronic data interchange or web
interfaces. Many of FHA’s business systems are owned by the Office of Single Family
Housing or the Office of Multifamily Housing and support both HUD and FHA program
activities. Infrastructure and general support of FHA and HUD systems are provided by
HUD’s Office of the Chief Information Officer. When FHA’s general ledger system, the
FHA Subsidiary ledger (FHASL), was implemented in 2003, FHA planned to integrate
new business applications as modules that would be on the same platform and language
as FHASL. Due in part to FHA’s declining single family mortgage loan market share and
reduced IT systems development budgets, few systems were replaced through 2008
and only two multifamily systems were replaced in FY2009. As a result, the aging
technologies are becoming more expensive to maintain and these systems are at higher
risk of not being able to adequately support FHA’s financial reporting needs.
The collapse of the commercial subprime mortgage loan market and the related credit
crisis has resulted in a dramatic rise in FHA’s market share and endorsement levels for
its single family mortgage programs, straining FHA’s information systems’ storage and
response capabilities. In response, HUD commissioned a study of the market
environment’s impact on FHA’s loan application and endorsement systems and
processes. This study, issued in February 2009, not only identified system capacity
concerns but noted inadequate levels of processing staff to support the expanded
endorsement and oversight processes. Most of this study’s recommendations were
aimed at improving business processes and reducing the human capital limitations.
In addition, new housing initiatives enacted by the Hope for Homeowners Act of 2008
and the Housing and Economic Reform Act of 2008 have required significant
programming changes in FHA systems that cost in excess of $20 million during FY2009.
These efforts further illustrated the inflexibility of the current system architecture. The
following risks to the reliability of FHA’s financial reporting identified during our audit are
largely due to the recent growth and change in FHA programs and activities.
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Appendix A
Significant Deficiencies, Continued
1. Financial system capacity limitations could impact business processing
As a result of increased loan application and endorsement volume, the Unisys
mainframe began to approach its operating capacity in the fall of 2008. To address the
degradation on processing performance and high workload on business critical Housing
systems, HUD increased capacity on the Unisys host platform. In addition, HUD
upgraded network circuits and expanded internet capacity critical to supporting FHA
business activities.
HUD also planned to migrate several large applications from the Unisys mainframe
platlorm to an Open Systems platform in 2009; however, the implementation did not
occur as scheduled. Additional application and processing changes (e.g. improved batch
process scheduling and search databases) were also implemented to optimize the use
of the processing resources.
Throughout 2009, FHA and HUD closely monitored system utilization levels and
increased data/processing capacity as needed. HUD also recently contracted for the
delivery of a new, larger mainframe (scheduled for full implementation on November 30,
2009) to replace the existing IBM mainframe. FHA believes the system utilization levels
are now within acceptable levels and management projects gradual declines in business
volume for the next few years.
The Office of the Chief Information Officer developed an informal written short term
capacity management plan at the end of FY 2009 that identifies the actions that have
been taken and future activities required. However, because this growth in volume
developed so quickly, the plan does not document 1) utilization benchmarks and
required responses and 2) clear organizational and staff roles and responsibilities.
Without a formalized plan, FHA and OCIO may not be able to sufficiently address further
capacity issues timely or effectively, which may impact FHA’s ability to process and
record financial transactions timely and reliably.
Recommendation
We recommend the HUD Office of the Chief Information Officer in coordination with the
Assistant Secretary for Housing, FHA Commissioner:
1 a. Continue implementing the short term capacity management plan and further refine
the plan to address 1) utilization benchmarks and required responses and 2) clear
organizational and staff roles and responsibilities. (New)
2. Effective FHA modernization is necessary to address systems risks
In 2009, HUD commissioned a study to develop an IT Strategy and Improvement Plan
that would identify strategic IT solutions to meet the agency’s long-term programmatic
objectives. This study served as a comprehensive IT systems risk assessment for FHA
and thoroughly illustrates the numerous inefficiencies and limitations of the current
system architecture. It examined operations at other federal agencies and several
mortgage, banking, and mortgage insurance operations. The study recommended 33
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Appendix A
Significant Deficiencies, Continued
technology and architecture approaches and 25 specific initiatives, including
replacement of several of FHA’s largest and most critical business systems. Critical
objectives of the initiatives were to:
• Improve fraud detection
• Improve risk management and loss mitigation
• Improve program operations
• Limit mission constraints related to dated technology
Each initiative was reviewed, evaluated and prioritized based on established risk criteria.
The efforts to address these system recommendations are expected to take several
years and cost hundreds of millions of dollars. FHA has taken a first step by appointing a
full time project management officer. In FY2010, FHA plans to perform a comprehensive
risk assessment to ensure this plan is consistent with the current OCIO Strategic Plan.
Given their current state, FHA’s financial systems will continue to require expensive
maintenance and monitoring and are likely to pose increasing risks to the reliability of
FHA’s financial reporting and business operations until the modernization efforts are
completed. The proposed plan should include an effective implementation plan and
leadership team to ensure that the current systems are replaced within a timeframe that
does not put FHA’s financial operations and reporting at further risk.
Recommendations
We recommend the HUD Office of Chief Information Officer, in coordination with the
FHA Commissioner, Assistant Secretary for Housing:
2a. Conduct a risk assessment of the various system initiatives and required
corrective actions in connection with the OClO Strategic Plan and the IT Strategy
and Improvement Plan. (Updated)
2b. Develop a prioritized plan of activities, including the development of the required
enterprise architecture, into a detailed implementation plan to support the IT
Strategy and Improvement Plan presented to Congress. (New)
3, Economic conditions and inherent model design increase risks to
management estimates
Management’s current year estimate of the Liability for Loan Guarantee (LLG) for the
Mutual Mortgage Insurance (MMI) Fund (a) may be optimistic due to an inherent design
assumption, (b) may not fully reflect the potential impact of recent events, and (c) is
extremely sensitive to changes in house price forecasts. These factors increase the risk
of error in the estimate, which could be mitigated by additional data analysis.
This LLG estimate is based on actuarially developed long term historical claim payment
patterns over time and is not intended to precisely predict cash flows for any given policy
year, as the estimate projects cash flows over a thirty-year period. Accordingly,
management’s estimate is uniquely dependent on the presumption that the performance
of current loans will be consistent with historical experience, accounting for changes in
established loan and economic variables, However, FHA has experienced deteriorating
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Appendix A
Significant Deficiencies, Continued
portfolio performance over the Last eight years, resulting in persistent upward revisions to
its liability estimates. The rapid growth in endorsements makes this year’s estimate even
more dependent on this historical relationship than in prior years, and increases the risk
of continued optimistic cash flow projections.
Although the estimation methodology is designed to compensate for changes in
identified loan characteristics and future house price appreciation, it only incorporates a
limited amount of current year data. Recent changes in the composition, loss severity
and delinquency performance of recent loans relative to past history, and the rapidly
changing housing market environment raise questions about the model’s ability to fully
respond to these changes and provide a reliable estimate of future cash flows with the
same precision as in more stable economic periods.
The model design also projects claims relative to the borrower’s negative equity position
and the current declining house price environment results in claim projections that are
more sensitive to small changes in projected house price indices than in periods of more
stable or increasing house prices.
Impact of model design: The Cranston-Gonzales National Affordable Housing Act of
1990 required that FHA’s MMI Fund obtain an independent actuarial study to assess the
financial soundness of the fund. FHA’s process for estimating their LLG on single family
programs uses assumptions developed by this independent actuarial study performed
each year. The econometric models developed for this study have been tailored to
address specific factors unique to FHA’s business and are heavily driven by historical
claim payment patterns, economic projections related to house price appreciation, and
numerous loan level attributes, such as borrower credit score, age, loan-to-value ratio,
loan type and seasonality. We examined analyses of portfolio data prepared by FHA
throughout FY2009 to assess whether this information supported the cash flows
projected for FY2O1O. We also examined other potential indicators, such as initial
unemployment claims, which did support the projected level of FY2OIO mortgage claims,
partly because a large portion of FHA’s defaults are attributable to loss of income, which
is not the case in more stable economic environments. However, the results were not
always consistent since the independent actuarial model is based on claims paid and is
not intended to integrate short term market variations that might be evident through
leading indicators (e.g. delinquency or unemployment data). This model design
combined with a quickly changing economic environment impacts the agency’s ability to
reliably estimate future cash flows. The long term impact of this design is illustrated
below.
FHA’s premium rates are designed to be sufficient to meet the claim costs to be paid,
net of recoveries, on a net present value basis. This net surplus, is referred to a negative
subsidy, in that the taxpayers are not “subsidizing” the cost of loans endorsed by FHA.
These subsidy rates are recalculated each year and published in a special Appendix to
the President’s Budget. The historical data in this Appendix indicates that the net
surpluses, or negative credit subsidy, of FHA’s MMI fund program endorsements have
been lower than originally budgeted for 15 of the last 16 years and frequently rise
notably for the first three years after the year the loans are endorsed. The FY2009
subsidy reestimate continues this trend. The following chart shows the original budget
credit subsidy rate, the current credit subsidy rate and the increase attributable to
macroeconomic or programmatic factors, rather than interest costs, through FY2008.
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Appendix A
Significant Deficiencies, Continued
Budgeted vs. Current Credit Subsidy Rates by Cohort
5.00
—
— Budgeted
Subsidy Rate
* current
Reestimated
Rate
Technical
Reestimate
Source: Federal Credit Supplement. Budget of the United States
Our analysis found that this bias appears to take three years to correct. On average, the
first reestimate (made in the year after endorsement) was an upward reestimate of 0.92
percentage points. In the next year, another upward reestimate of 0.24 percentage
points is made (on average). In the third and subsequent years, an additional upward
reestimate is made that, on average, is 1.25 percentage points roughly equal to the
—
first two year’s reestimate combined.
The upward bias for the 2004 2008 cohorts can be largely attributed to the impact of
—
seller-funded downpayment assistance loans, the effect of which was not fully integrated
into projections for future claims until 2007 when the weaker performance was
segregated and quantified during the FY2007 actuarial study. The current year and prior
year upward reestimates were also impacted by the unexpected and deep recession.
The cause for the smaller, but consistent, bias in prior cohorts is less clear but may be
due to a general trend in the mortgage industry during the I 990s toward loosened credit
standards through lower acceptable loan-to-value ratios and expanded reliance on
electronic underwriting systems. Accordingly, the model’s dependence on long-term
historical experience results in optimistic projections given the consistently declining
portfolio performance.
This reliance on historical performance may have a significant impact on the most
current cohorts, Due to the dramatic growth in endorsements over the last two years, the
projections for future claim payments for these recent loans are based on very limited
direct claim history of loans endorsed during this time period. The MMI fund’s FY2009
and FY2008 cohorts comprise almost 62% of the MMI fund’s insurance-in-force and
53% of FHA’s total insurance-in-force agency-wide. In contrast, the two most current
cohorts of the MMI fund represented only 27% of the agency’s portfolio at September
30, 2007. The aggregate projected cash flows for these two cohorts make up almost
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Appendix A
Significant Deficiencies, Continued
70% of the total cash flows comprising the September 30, 2009 Liability for Loan
Guarantees. In contrast, the amount of paid claims for these two cohorts through March
31, 2009 totaled only $231 million, or less than 0.1% of the $61 billion in total projected
claims to be paid over the life of these cohorts.
Impact of recent events: Financial reporting timelines also restrict the amount of
current year data which can be used in the calculations, but late changes in economic
forecasts or portfolio performance could result in unexpected relationships between
actual and projected results.
A major enhancement to the current year actuarial model was a dynamic loss severity
model, which used several years of property disposition data to develop varying
recovery rates by cohort and future policy year. The actuaries did not use any recovery
data from FY2009 in their analysis. However, FHA recovery rates have dropped over
20% in FY2009, which is a steeper decline than can be supported solely by the weak
housing market and changes in house price indices or down payment assistance trends.
We noted no statistical variables that could isolate the cause of this decline. The
omission of this recent data resulted in forecasted recovery rates for FY2O1O and
FY2O1 1 that are significantly higher than FY2009 rates and exceed any forecasted
rebound in home prices. We would expect to observe improvements in the recovery
rates in later policy years but believe this recovery should be more gradual. One current
market study suggested that the market values of distressed properties are more volatile
than the general market because of the high concentration of properties within a
geographic area. We believe further evaluation of the correlation of distressed market
values and FHA’s disposition data could result in improved support for the projected
trends in recovery rates. Similar analysis by FHA was instrumental in identifying an error
in the independent actuarial study model that resulted in a $1.6 billion downward
correction to projected cash flows from future asset dispositions. The accompanying
financial statements have been corrected for this error.
Current model sensitivity: In an environment of declining house prices, small changes
in housing prices can have a profound impact on projected claims because the model
projects borrowers’ propensity to default based on the level of a borrower’s negative
home equity. Thus, the projected claim costs can increase dramatically with relative
small declines in home prices. This can be illustrated by the 27% overestimate ($9.7
billion vs. $13.3 billion projected) of FY2009 claims caused by the prior year’s overly
pessimistic forecast for house price declines in the latter half of 2008.
The Housing and Economic Recovery Act of 2008 requires FHA to submit quarterly
reports to Congress specifying endorsement volume, composition, variances from
projections of claims, prepayments and recovery rates, and projected credit subsidy
rates. We believe documenting management’s conclusions regarding this reporting,
along with additional analyses by management of certain current and leading indicators,
would provide additional support for the reasonableness of the near term cash flows or
identify whether manual modifications to management’s estimate of the LLG are
necessary to account for recent changes in internal, policy or economic factors not
integrated into the model or its assumptions.
UK
16
Appendix A
Significant Deficiencies, Continued
Recommendations
We recommend that the Assistant Secretary for Housing, FHA Commissioner, in
coordination with the FHA Comptroller and the Office of Evaluation:
3a. Continue to analyze trend data on seriously delinquent aged loans and determine
whether a statistical correlation exists to support this metric as a leading indicator for
short-term claim payment trends. (New)
3b. Continue to track and report the reasons for default and as long as “loss of income”
remains a major factor for default, determine whether another economic indicator,
such as initial unemployment claims, may be useful to support near term estimates
for claim payments. (New)
3c. Continue to analyze property disposition data in order to better support near-term
projected recovery rates. (New)
3d. Expand management’s financial cash flow model validation documentation to
include expanded analyses of seriously delinquent aged loans data, case level
historical recovery data, and other leading indicators as appropriate. (New)
3e. Conduct research into available information on inventories and sales of “distressed”
properties and consider whether such an indicator can be used to assist in
supporting near-term trends in historical and projected recovery rates. (New)
3f. Document the final overall management conclusion whether the analyses performed
suggest whether adjustments to the projected cash flows are warranted, and if so,
how those adjustments are determined and their resulting value. (New)
4. FHA should enhance the general ledger system user access management
processes
As indicated in the FHA Office of Housing IT Strategy and Improvement Plan, “FHA IT
systems are a significant constraint on FHA’s ability to rapidly and effectively adjust to
this new environment. Over the last decade, little investment has been made in
modernizing FHA’s technology.” An initial step of system modernization was
implemented in FY2009, with the integration of the Multifamily Endorsement/Premium
and Claims processes into FHASL. During this implementation, additional developers
and end-users were provided access to FHASL environments to perform various
development activities, testing and training functions. We noted that developers had
access to the production environment in a greater than read-only capacity and end-users
had access to the development environment. Additionally, we noted that four employees
had excessive rights within the Multifamily Premiums module of FHASL (i.e.,
endorsement entry, premium reviewer, termination clerk, and mortgage servicer role)
and compensating controls preventing the same user from performing incompatible
functions on the same transaction were not effective. While granting these access levels
UK
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Appendix A
Significant Deficiencies, Continued
may appear to improve the efficiency of system implementation, it increases the risk of
transactions being inappropriately authorized and processed.
The monitoring of user business process functions within an application, audit logging, is
essential in ensuring that only personnel with proper access rights are performing job
functions. During FY2009, we noted that limited audit logging is performed over
business functions; and the data elements that are being logged do not appear to be
consequential to the process. Additionally, the audit logs produced are not reviewed to
ensure appropriate actions have been taken as required by HUD policy. A plan has been
developed by the system owner that incorporates identifying the data elements to be
audited, selecting the capture mechanism, defining reports and filters and establishing
the review process; however, this has not been implemented completely. The recording
of auditable events and the periodic review of audit logs is essential to mitigate the risk
of unauthorized access attempts or inappropriate personnel actions.
A final component of user access management is the process of removing access no
longer required by users. One method for completing this process is the disabling or
removal of accounts after a specified period of inactivity. HUD policy mandates that
inactive users be deleted after 90 days of inactivity. We noted that approximately 30
user accounts with active access to FHASL had not logged into the application in more
than 90 days. FHASL is configured to have passwords automatically expire after 90
days of inactivity; however, these accounts are not permanently locked and can be reset
by the user contacting the Help Desk. Accounts are manually deleted if they have been
inactive for more than twelve months since the beginning of the previous year. In this
situation, users do not have the ability to contact the Help Desk to reactivate their
accounts. We noted that this process is manual because FHASL does not have an
automated mechanism for disabling or removing accounts. By not disabling unused
accounts timely, there is an increased risk that accounts may be used to gain
unauthorized access to FHASL.
Recommendations
We recommend the Director, Office of Financial Analysis and Reporting, Office of the
Comptroller:
4a. Coordinate with Multifamily Insurance Operations Branch to enforce least privilege
by restricting access only to modules that are needed for the performance of
specified tasks. (New)
4b. Identify system roles that are incompatible and develop automated edit checks in
FHASL to prevent the same person from performing conflicting functions on the
same transaction. (New)
4c, Terminate the parallel deployment of the Revenue Management and MFIS/F47
modules and restrict access to the development environment of FHASL to only
those individuals with development responsibilities. (New)
4d. Limit developers’ access to the production environment to read-only, and ensure
any support or training is completed in a test environment. (New)
UK
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Appendix A
Significant Deficiencies, Continued
4e. Ensure proper implementation of the PeopleSoft application audit logging by
identifying the data elements and the actions to capture, selecting the capture
mechanism and defining the filters and reports to be generated to ensure accurate
and relevant information is produced. (New)
4f. Establish and implement a formal review process of the audit logs by updating
policies and procedures to incorporate the generation of the audit logs, the periodic
review of the logs, and the actions to be taken based on the results in accordance
with HUD’s Security Policy and NIST standards. (New)
4g. Implement automated mechanisms or mitigating manual account reviews to ensure
disabling of accounts that have been inactive for 90 days consistent with HUD’s
Security Policy. (New)
UK
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20
Appendix B
Management’s Response
US. DEPARTMENT OF HOUSING ANI) URBAN DEVELOPMENT
* idUI * WASHINGTON, DC 20410-5000
ASSISTANT SECRETARY FOR HOUSING-
FEDERAL HOUSING COMMISSIONER
OCT 272009
MEMORANDUM FOR: Urbach Kahn & Werlin LLP
FROM: George Tomchi III, Acting Deputy Assistant Secretary for
Finance and Budget, HW
SUBJECT: Response to UKW’s Fiscal Year 2009 FHA Audit Report
Thank you for providing us the opportunity to respond to FHA’s Independent Auditor’s
Report. I am pleased to present Federal Housing Administration’s (FHA) response to this
report.
General Comments
FHA is pleased that UKW has noted progress in many areas. With regards to findings 1, 2 and
4, FHA has already or will shortly, begin addressing these recommendations. FHA does not
agree with the third finding regarding the estimate of the Liability for Loan Guarantees. FHA
believes its current practices for estimating and reviewing the Liability for Loan Guarantees
provides the best possible mechanism for estimation.
Report on Internal Controls — Significant Deficiencies
1. Financial system capacity limitations could impact business processing
We will continue to coordinate with the Office of the Chief Information Officer (OCIO)
to implement a short term capacity management plan and to address 1) established utilization
benchmarks and required responses and 2) clearly identified organizational and staff roles and
responsibilities.
2. Effective FHA modernization is necessary to address systems risks
We concur that effective FHA modernization is necessary to address systems risks and
with your recommendations. We will continue to implement our IT Strategy and Improvement
Plan using resources that the Congress and 0MB make available. We have constituted a team
to develop all of the analyses and documents required to support this major IT investment,
including a risk assessment and a prioritized plan of activities, Working with the OCIO, we
will coordinate system initiatives, corrective action plans, OCIO’s Strategic Plan, HUD and
federal enterprise architectures, and FHA’s IT Strategy and Improvement Plan.
www.hud.Rov espanol.hud.gov
UK
21
Appendix B
Management’s Response, Continued
3. Management should support the estimate of the Liability for Loan Guarantees with
additional analysis
UKW presents a concern that the Liability for Loan Guarantee (LLG) item in the FHA
financial statements for single-family mortgage insurance:
“(a) may be optimistic due to an inherent (actuarial study) design assumption, (b)
may not fully reflect the potential impact of recent events, and (c) is extremely
sensitive to changes in house price forecasts.”
UKW believes that these asserted risk factors “could be mitigated by additional data analysis”
provided by FHA and used to adjust the LLG from what is otherwise produced using inputs from
the annual, independent actuarial study. UKW concludes with six recommendations, all of which
point to a request that FHA consider adding a management adjustment to the LLG calculation
that ostensibly captures analysis on the most recently available information on delinquencies and
property dispositions, at the time that the annual financial statements are prepared.
FHA disagrees with the premise of the UKW recommendation, that the actuarial studies used as
a basis for the LLG calculations are missing vital information that creates a significant deficiency
for FHA. FHA also disagrees with the notion that it would be prudent to adjust long-term
estimates with short-term dynamics.
Actuarial Study Model Design
UKW’s criticisms of the modeling approach used by the independent actuarial contractor reflect
a lack of understanding of basic economic modeling techniques. This misunderstanding occurs
in two primary areas: the use of historical data in forecasting future events, and behavioral
modeling as opposed to time-series analysis.
The use ofhistorical data inforecastingfuture events. Past experience is used to estimate how
borrowers with different financial, property, and loan characteristics respond to changes in
economic conditions. Such behavioral responses must then be applied to current and future
loans and borrowers, and to forecasts of future economic conditions (especially, interest rates
and house prices). Resulting predictions of insurance claims and loss can be vastly different from
and inconsistent with historical experience.
Behavioral parameters that come out of the econometric models developed by the independent
actuarial contractor have proved quite accurate, even for short-run forecasting. In the process of
developing the FY 2009 econometric model, the contractor undertook extensive testing and
comparison of actual experience and previously predicted claim and prepayment experience in
FY 2009. The contractor examined detailed quarterly performance of loans for all insurance
cohorts and activity periods since FY 2004, and found that the models did not systematically
under- or over-estimate claim probabilities. Differences between actual claim and prepayment
rates and those estimated using the FY 2008 econometric model could be explained by two
factors: (1) differences between the Global Insight house price appreciation and interest rate
UK
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Appendix B
Management’s Response, Continued
forecasts and the actual performance of the U.S. economy in early FY 2009; and (2) the limited
loan data available for determining the composition of the FY 2009 insured portfolio (two
quarters) at the time data tabulations were provided to the contractor. In the first case, Global
Insight predicted a much greater decline in home prices than actually occurred, and a smaller
drop in interest rates than occurred. Additional comparisons were developed for all cohorts and
time periods back to FY 2004, to confirm that deviations of predictions from actuals for all
cohorts in early FY 2009 were affected by deviation of actual economic outcomes from what had
been predicted by Global Insight in the summer of 2008.
The use ofbehavioral modeling techniques versus time series modeling. UKW states several
times in its report that the use of so-called “leading indicators,” such as serious delinquencies and
reasons for default, would improve the accuracy of the LLG estimates over what is provided by
the actuarial model. The belief is that changing economic conditions require real-time
information for accurate forecasts. UKW is concerned that the actuarial contractor has a data cut
off date of March 31, and thus must use predictions for the second half of the fiscal year in
question.
The use of such leading indicators is typical in time-series econometric models that are designed
for making very short-run forecasts. These models do not explain behavior, based on the
underlying factors, but simply capture stylized pool-level trend patterns. Indeed, a time-series
model would itself be subject to errors, and especially because it would fail to capture the
nuanced differences among borrowers, loan types, and financial incentives that behavioral
models capture.
The modeling approach used for the actuarial study does not need “leading indicators” because
they are included as the exact factors that lead to insurance claims. In developing the
econometric models, the contractor spent a great deal of time and effort assessing the impact of
including the exact variables suggested by UKW. In each instance, they did not improve the
accuracy of the final model. Using judgment rather than statistical evidence, would bias the
forecasts.
Econometric Models and Budget Forecasts. UKW shows data on FHA’s budget re-estimates to
make its point that the econometric models used to estimate the LLG are inherently biased
toward over-valuing the FHA portfolio. The initial budget estimates provided by FHA to 0MB
for inclusion in the President’s Budget are made nearly two years before a cohort of loans has
actually taken shape. With such lead time, they will naturally miss changes in portfolio
composition and economic conditions. As UKW points out, the budget re-estimation process is
designed to bring the original estimates in-line both with the characteristics and size of the actual
insurance cohort, and with the dynamics of actual economic conditions through the life of the
cohort. HUD is aware of historical, systematic over-valuations of expected budget receipts in the
initial estimates made for the President’s Budget. Those over-valuations can be explained by a
number of factors. These factors are subjects for study in the actuarial analysis each year, and
changes are made to the actuarial models when possible and appropriate.
First is the design of econometric models used prior to 2004 to predict loan performance (claims
and prepayments). Previous actuarial contractors used a single house-price path without
UK
23
Appendix B
Management’s Response, Continued
adequate consideration of the dispersion of actual, individual house price paths around the
average. Without a full measure of such dispersion, claim-rate predictions are too low and
prepayment predictions too high. That problem was corrected when the current contractor was
engaged for the FY 2004 actuarial study.
Next was the continued growth of seller-funded downpayments for FHA-insured homebuyers.
They started in 1999 and grew to over 35 percent of all FHA-insured homepurchase loans by
FY 2007. The differential claim experience of such loans could not be included in statistical
models until there was sufficient data to prove that such a differential existed and was not simply
the result of other factors. A behavioral factor for downpayment source was added in the FY
2005 actuarial study, and it proved extremely valuable in identifying the heightened risk of
seller-funded-downpayment loans. Even then, FHA did not predict the continued growth of that
sub-portfolio as a share of overall insurance endorsements. Thus, LLG and budget calculations
involved lags for a number of years. The share of downpayment assisted loans among FHA
endorsements finally peaked in FY 2007, declined somewhat in FY 2008, and then was reduced
to zero by the second quarter of FY 2009. UKW itself identifies the seller-funded-downpayment
assisted loans as a primary source of any over-estimate of value in the 2004-2007 period. The
continuous growth of that business into FY2007 is something that is only known with hindsight.
The final factor identified by FHA as having caused a positive bias in budget estimates for a
number of years was the changing geographic concentration of FHA insurance during the recent
housing boom. That boom was fueled by easy conventional mortgage credit, which relegated
FRA to an ever-smaller share of a growing mortgage market. FHA was virtually shut out of
major markets like California, missing both the extreme run-up of prices in those markets, and
the resulting, precipitous decline in prices in the same localities. This phenomenon affected FHA
budget and LLG estimates because the house price forecasts being used were national forecasts,
Home values in FHA’s portfolio did not grow as fast as did national price indices during the
boom, and they did not fall as hard when national price indices came back down. The result was
an over-valuation of the FHA portfolio through FY 2007, but then an undervaluation in FY 2008.
For FY 2009, FHA and the actuarial consultant began the process of migrating to use of local,
metropolitan area home price forecasts, which are now available for purchase from private
vendors. That process will be completed in the FY 2010 cycle. For now, what prevents any
material undervaluation is that, each year, the entire outstanding portfolio is marked-to-market at
the beginning of the forecast period. That process uses a combination of metropolitan area and
non-metropolitan area home price indices from the Federal Housing Finance Agency. Also, the
FY 2009 cohort is a dominant force in the FHA portfolio because of its sheer size. That cohort
represents the national housing market, as FHA is now playing a significant role in all markets.
It is not possible to anticipate or pre-emptively correct for all changes that occur either within the
portfolio, or in the broader economy. FHA works diligently with the actuarial contractor to
identify and understand deviations between projected performance and actual performance each
year. This is a dynamic process that leads to continuous improvements in modeling techniques.
When factors causing these deviations are identified and measured, they are factored into the
actuarial model and resulting LLG calculations.
UK
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Appendix B
Management’s Response, Continued
Accounting for the Impact of Recent Events
UKW suggests that there is information in near-term movements in seriously delinquent rates
and property recoveries that may require adjustments to the LLG calculations. Again, this
presumes that there is something in short-term fluctuations that should override the behavioral
basis of the econometric-model forecasts. There might be some basis for this approach, were the
LLG calculation akin to private sector loss reserve accounting. The LLG calculation, however, is
not a short-run liability. It represents the net present value of expected net losses over a 30-year
time period, Thus, it would be imprudent to adjust it for short-run phenomena that may or may
not provide any actual, independent information from what is produced by the actuarial models.
Because the LLG accounts for 30-years of forecasted claims and prepayments, it can provide for
measured loss reserves that are far greater than what would be required under private sector
standards, The fact that it is forward looking over a 30-year period means that any deviations of
actual performance from predicted in the first year of the forecast period are not meaningful in
determining whether FHA has enough dedicated reserves to pay for claims before the next
annual LEG calculation. The LLG calculation will nearly always over-reserve for any near-term
events.
As the national housing market continued to show signs of distress this past year, FHA
commissioned its actuarial contractor to build an econometric model of the expected losses from
insurance claims. That model captures borrower, property, and loan characteristics, and thus
provides forecasts that are consistent with the claim and prepayment projections. Results portend
historically high loss seventies in the near term, with movement back to more normal rates in the
future. Using instead some indicators from recent property disposition recoveries and losses
would be a mistake of the same order as would using short-term delinquency statistics for
predicting claim rates.
Sensitivity to flouse Price Forecasts
UKW is also concerned that the econometric models at the heart of the actuarial study and LEG
calculations is sensitive to economic forecasts, FHA insures a portfolio of loans with much less
equity than does the conventional mortgage market. FHA has also, historically, served a lower-
income clientele than does the prime, conventional mortgage market. The issue with the over
prediction of claims in FY 2009 from the FY 2008 actuarial study was primarily due to the
severe decline in home prices that had been predicted by Global Insight in the summer of 2008,
A national house price decline of any magnitude is indeed an event not seen since the Great
Depression. It in itself is a stressful situation for a national mortgage insurance portfolio and so
the FHA portfolio should have been sensitive to a national house price decline of over 8 percent
UKW would be concerned if the econometric model predictions were not sensitive to economic
forecasts.
This year, IHS Global Insight is again forecasting a one year house price decline of over 8
percent, essentially moving last year’s forecast ahead by one year. If the national average home
price declines by 8 percent, there will be many communities with declines on the order of 10 to
20 percent. Those are significant events that will, if they transpire, result in high levels of
insurance claims.
UK
&w___ 25
Appendix B
Management’s Response, Continued
Operational Problems with the UKW Recommendations
FHA and its actuarial-study and financial-analysis contractors work under very tight timeframes
to provide inputs for the LLG calculations. The annual financial statements have hard deadlines,
and the auditors require significant amounts of data, analysis, documentation, and discussion in
the process. Adding any process of management review of additional data sources would be
difficult from a process standpoint given the tight timeframes.
Conclusion
While FHA management will continue to track and analyze trend data on delinquencies,
foreclosures, REO dispositions and recoveries, and general economic conditions, it does not
agree additional management judgment based on short-term analyses should be in the calculation
of the LLG for the annual financial statements. FHA continues to prefer working with the
actuarial study contractor to identify research and study issues that could improve the
econometric modeling and forecasting each year.
4. FHASL user access management processes need to be enhanced
We concur that user access management processes need to be enhanced and with your
recommendations. The Office of the Financial Analysis and Reporting, working with the Office
of Systems and Technology in the Office of FHA Comptroller, will develop and execute plans to
correct the conditions noted in your recommendations.
UK
&w 26
Appendix B
Management’s Response, Continued
U.s. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
* *
WASKNOTON, DC 204 0.3B)O
OFFiCE OF THE CFIFFF \FORMAflON OFF ICER
NDY 0 2 2009
MEMORANDUM FOR: Urbach Kahn & Werlin LLP
FROM: eiiis, Chief In?ormation Officer, Q
SUBJECT: Response to Draft Independent Auditors’ Report on FHA Financial
Statement Internal Controls
Thank you for giving us the opportunity to respond to the Draft Independent Auditor’s
Report on FHA Financial Statement Internal Controls. The Office of the Chief Information
Officer has reviewed the report and provides the comments below on the recommendation
addressed to us.
Report on Internal Controls — Significant Deficiencies
1. Financial system capacity limitations could impact business processing
The Office of the Chief Information Officer (OCIO) does not concur with characterization of
this recommendation as a “significant deficiency.” The need for proactive system capacity
management is acknowledged; however OCIO has capacity benchmarks in place and conducts
ongoing reviews. Infrastructure contractors, as part of contract deliverables, provide reports on
systems capacity metrics. Trends are routinely presented to senior OCIO management and with
direction provided to address particular concerns. OCIO has designated a specific IT modernization
team which is already coordinating closely with FT-IA on its transformation effort. This team, in
conjunction with Housing’s office of Systems and Technology is addressing issues, setting
priorities, and making decisions to move forward. The process integration with FHA’s overall
effort, throughout all levels of OCTO, is established and functioning.
We look forward to working with you and your staff to resolve and close-out this
recommendation. Should you have any questions or need additional information please contact
Steve Hill at 2O24O2-8346.
Attachment
UK
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28
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 2009 Principal Financial
Statements, which is included as Appendix B. We did not perform audit procedures on
FHA or HUD’s written response to the findings and recommendations and accordingly,
we express no opinion on them. Our assessment of management’s responses is
discussed below.
Assessment of management’s response to significant deficiency Nos. 1, 2 and 4:
As indicated in Appendix B, FHA management concurred with our findings 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.
The HUD OCIO did not concur with our assessment of the finding related to capacity
management as a significant deficiency. Our audit assessment of control findings is not
limited to the status as of the end of the fiscal year. We believe the FHA systems
presented a significant risk to the reliability of FHA’s financial reporting throughout
FY2009 due to the dramatic growth in business volume in endorsements. Extraordinary
efforts by FHA systems staff were required to ensure the continuity of operations,
including the acquisition of a new mainframe computer. We believe that until the new
mainframe computer is fully operational, the system environment, inclusive of the
deficiencies in the capacity management plan, presents a significant risk to the
continuing operation of critical FHA business systems.
Assessment of management’s response to significant deficiency No. 3:
We appreciate management’s thorough discussion of FHA’s risks in the current market
and how those risks were considered in the Liability for Loan Guarantees (LLG).
However, management’s response indicates that they may have misinterpreted the
intent of our finding and recommendations. Management appears to be concerned that
we recommend the models be changed to incorporate short term indicators. The
purpose of our recommendations was to encourage management to better document its
consideration of the extraordinary economic environment affecting the housing market
and how those risks affect the reliability of the resulting calculated liability. This is
consistent with the guidance in Federal Financial Accounting and Auditing Technical
Release 6, which states that “In certain limited instances, informed opinion may be used
to support cash flow projections in the absence of historical data.”
The following paragraphs contain our assessment of the specific disagreements in
management’s response.
Actuarial Study Model Design The use of historical data in forecasting future events
—
We agree that the independent actuarial study methodology has been enhanced over
the last seven years. Inclusion of credit scores and additional loan attribute variables,
especially seller-funded downpayment assistance, has improved the predictiveness of
claim and prepayment rates. However, we are concerned that the actuarial study’s
reliance on historical data to forecast borrower behavior may not sufficiently reflect the
uncertainties in the current economic conditions. We continue to believe it is prudent for
UK
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Appendix C
UKW’s Assessment of Management’s Response, Continued
FHA management to thoroughly document its considerations that validate and
supplement the results of the actuarial study and other calculated assumptions in light of
the economic environment. Management’s response itself is the kind of analytical
documentation being recommended. For example, the response states that the
independent actuarial contractor “undertook extensive testing and comparison of actual
experience and previously predicted claim and prepayment experience in FY
2009... ,and found that the models did not systematically under- or over-estimate claim
probabilities.” Formalizing the documentation of the results of that testing and
management’s consideration of the results would provide additional validation of the
results of the model’s estimation.
Actuarial Study Model Design The use of behavioral modeling techniques versus time
—
series modeling
Management’s response states that leading indicators are typically used in time-series
models for making short-run forecasts and that the actuarial study model incorporates
such factors. It further states that “In developing the econometric models, the contractor
spent a great deal of time and effort assessing the impact of including the exact
variables suggested by UKW. In each instance, they did not improve the accuracy of the
final model.” Once again, documenting the results and conclusions of such analysis
would better support management’s reliance of the model’s assumptions and output. We
emphasize and concur with FHA’s comment that the FY2009 cohort should correlate
better with national house price forecasts due to its large size and relative market share,
but claim and recovery cash flows from this cohort will not be significant in the near term.
Actuarial Study Model Design Econometric models and budget forecasts
—
Management’s response explains that the historical, systematic over-valuations of
expected budget receipts in the initial Presidential Budget estimates were caused by 1)
the pre-2004 econometric model’s use of a single house price path, 2) the growth of
seller-funded downpayment loans without a specific behavioral factor in the model, and
3) the changing geographic concentration of FHA insurance during the housing boom.
The response concludes that “It is not possible to anticipate or preemptively correct for
all changes that occur either within the portfolio, or in the broader economy,. .When
factors causing these deviations are identified and measured, they are factored into the
actuarial model and resulting LLG calculations.” This approach to improving the
econometric model is appropriate. However, as noted by management, it results in a
model that lags portfolio and economic changes. In the current, fast-changing
environment, our recommendations would provide a way for management to document
their consideration of such changes in a more prospective manner.
Accounting for the Impact of Recent Events
Management’s response asserts that the LLG calculation of the net present value of
expected net losses over a 30-year period is superior to a calculation using the near-
term movements in seriously-delinquent rates and property recoveries. As we explained
above, our concern is that the actuarial study’s reliance on historical data to forecast
borrower behavior may not sufficiently reflect the uncertainties in the current economic
conditions. Changes in the timing of claims, as may be indicated by seriously-delinquent
rates, and the amount of property recoveries do affect net present value calculations
even for a 30-year calculation period.
UK
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Appendix C
UKW’s Assessment of Management’s Response, Continued
!2piationaI Problems with UKW Recommendations
We recognize that our recommendations may require some additional analyses that
would require more work. However, as we point out in several examples above,
management is already performing such analyses and would need only to better
document their consideration. Furthermore, as the economy and the housing market
stabilize, the necessity for additional analytics should recede.
UK
31
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32
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:
Fiscal Year 2009
FY 2008 Finding/Recommendation Type Status
la. The FHA Commissioner, Assistant Secretary for Significant Partially
Housing, coordinate with the HUD Secretary and Deficiency Resolved. FHA
the HUD Gb to conduct a risk assessment of the 2008 plans to perform
various systems initiatives and required corrective risk assessment
actions in connection with the OCIO Strategic Plan of modernization
and document how HUD’s/FHA’s IT resources will in FY2O1O. See
be appropriately allocated in fiscal year 2009 to significant
address the Department’s and FHA’s highest deficiency 1.
system_priorities.
lb. The FHA Comptroller document the revised Significant Resolved.
Multifamily business processes, identify and Deficiency
assess key internal controls and perform tests of 2008
those controls commensurate with the inherent risk
for a new system in conjunction with the agency’s
0MB Circular No. A-123 Management Control
Program and ensure the system’s compliance with
0MB Circular No. A-130, Management of Federal
Information_Resources.
lc. The FHA Comptroller develop an automated Significant Partially
process for HECM claims and establish an Deficiency Resolved. See
automated interface with FHASL and ensure such 2008 Management
interfaces are included in the overall system Letter
functional_requirements_document.
id. The FHA Comptroller should ensure the identified Significant Resolved.
deficiencies in the controls over the HECM notes Deficiency
servicing system are corrected before proceeding 2008
with the Type II review.
le.The FHA Comptroller should ensure the control Significant Resolved.
testing of the HECM notes system to be performed Deficiency
under AICPA SAS No. 70, Type II is expanded to 2008
test for compliance with systems requirements
unique_to_the_federal_government.
if. The FHA Comptroller should ensure that any Significant Partially
HECM system replacement is initiated in Deficiency Resolved.
accordance with HUD system development life 2008 Contract awarded
cycle guidelines and established program to outsource all
timelines. HECM data
processing. See
Management
Letter.
1g. The FHA Comptroller should work with OClO to Significant Not yet resolved.
correct the Generic Debt system interfaces to Deficiency See Management
ensure FHASL properly balances the financing 2008 Letter.
accounts at the cohort level. (New)
UK
&w 33
Appendix D
Status of Prior Year Findings and Recommendations, Continued
Fiscal Year 2009
FY 2007 FindinglRecommendation Type Status
lb. Coordinate with HUD’s Acting Chief Information Material Resolved.
Officer and the Acting Deputy Assistant Secretary Weakness
for Single Family Housing to establish a 2007
comprehensive system functional requirements
document in accordance with HUD guidance for
the new HECM system based on anticipated future
volumes_of transactions.
ld. Complete a full assessment of the effectiveness of Material Resolved.
the existing controls (including an Independent Weakness
Type II review of the service provider under AICPA 2007
Statement on Auditing Standards No. 70, Service
Organizations) over the notes database given the
sensitivity of the data and the anticipated growth in
reported_assigned_note_balances_and_transactions.
le. Develop and implement automated system Material Partially resolved.
interfaces between the current HECM claims and Weakness HECM claims
notes systems and FHASL, if the new system(s) 2007 interface not
cannot be implemented timely. developed due to
outsourcing of
processing. See
Management
Letter.
UK
&w 34
Principal Financial Statements
PRINCIPAL
FINANCIAL
STATEMENTS
35
Principal Financial Statements
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36
_________
Principal Financial Statements
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED BALANCE SHEETS
As of September 30, 2009 and 2008
(Dollars in Millions)
FY2009 FY2008
ASSETS
Intragovernmental
Fund Balance with U.S. Treasury (Note 3) $ 30,130 $ 12,590
Investments (Note 4) 10,635 19,254
Other Assets (Note 7) 16 21
Total Intragovernmental 40,781 31,865
Investments (Note 4) 145 48
Accounts Receivable, Net (Note 5) 16 128
Loans Receivable and Related Foreclosed Property, Net (Note 6) 4,446 5,506
Other Assets (Note 7) 129 134
TOTAL ASSETS $ 45,517 $ 37,681
LIABILITIES
Intragovernmental
Borrowings from U.S. Treasury (Note 9) S 4,420 $ 4,832
Other Liabilities (Note 10) 1,913 1,530
Total Intragovernmental 6,333 6,362
Accounts Payable (Note 8) 639 585
Loan Guarantee Liability (Note 6) 34,022 19,486
Debentures Issued to Claimants (Note 9) 14 52
Other Liabilities (Note 10) 416 438
TOTAL LIABILITIES 41,424 26,923
NET POSITION
Unexpended Appropriations (Note 16) 832 411
Cumulative Results of Operations 3,261 10,347
TOTAL NET POSITION 4,093 10,758
TOTAL LIABILITIES AND NET POSITION $ 45,517 $ 37,681
The accompanying notes are an integral part of these statements.
37
Principal Financial Statements
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED STATEMENTS OF NET COST
As of September 30, 2009 and 2008
(Dollars in Millions)
MMI/CMHI GI/SRI 11411
FY2009
lntragovernniental Gross Costs (Note 12) $ 167 $ 131 $ 5 $ 303
Less: lntragovernmental Earned Revenue (Note 13) 1,756 392 - 2,148
Intragoverninental Net Costs (1,589) (261) 5 (1,845)
Gross Costs with the Public (Note 12) 9,072 5,302 12 14,386
Less: Earned Revenue from the Public (Note 13) 47 71 - 118
Net Costs with the Public 9,025 5,231 12 14,268
NET PROG RAM COST (SURPLUS) S 7,436 $ 4,970 $ 17 $ 12,423
MMIJCMHI Cl/SRI H4H Total
FY2008
lntragovernrnental Gross Costs (Note 12) $ 175 $ 138 $ - S 313
Less: Intragovernmental Earned Revenue (Note 13) 1,320 73 - 1.393
lntragovernrnental Net Costs (1,145) 65 - (1,080)
Gross Costs with the Public (Note 12) 9,495 1,569 11,064
Less: Earned Revenue from the Public (Note 13) 9 68 77
Net Costs with the Public 9,486 1.501 - 10,987
NET PROGRAM COST (SURPLUS) $ 8,341 S 1,566 $ - $ 9,907
The accompanying notes are an integral part of these statements.
38
Principal Financial Statements
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED STATEMENTS OF NET POSITION
As of September 30, 2009 and 2008
(Dollars in Millions)
FY2009 FY2009 FY2008 FY2008
Cumulative Cumulative
Results of Unexpended Results of Unexpended
Operations Appropriations Operations Appropriations
BEGINNING BALANCES $ 10,347 $ 411 $ 20,031 $ 544
BUDGETARY FINANCING SOURCES
Appropriations Received (Note 16) 7,554 627
Other Adjustments (Note 16) - (59) - (49)
Appropriations Used (Note 16) 6,929 (6,929) 435 (435)
Transfers-Out (Note 15 and Note 16) (347) (145) (613) (276)
OTHER FINANCING SOURCES
Transfers In/Out (Note 15) (1,260) - 387 -
Imputed Financing (Note 12) 15 - 14 -
TOTAL FINANCING SOURCES S 5,337 $ 421 $ 223 $ (133)
NET (COST) SURPLUS OF OPERATIONS (12,423) - (9,907) -
ENDING BALANCES $ 3,261 $ 832 $ 10,347 $ 411
The accompanying notes are an integral part of these statements.
39
_______________ _______________ _______________
Principal Financial Statements
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
COMBINED STATEMENT OF BUDGETARY RESOURCES
As of September 30, 2009
(Dollars in Millions)
FY2009 FY2009 FY2009
Budgetary Non-Budgetary Total
BUDGETARY RESOURCES
Unobligated Balance, brought forward, October 1 $ 19,547 $ 8,148 $ 27,695
Recoveries of prior year unpaid obligations 26 10 36
Budget Authority:
Appropriations 7,554 7,554
Borrowing authority 470 470
Spending authority from offsetting collections (gross):
Earned
Collected (Note 18) 2,363 31,233 33,596
Change in receivables from Federal sources (152) 1 (151)
Nonexpenditure transfers, net (Note 19) (58) - (58)
Permanently not available (364) (883) (1,247)
TOTAL BUDGETARY RESOURCES $ 28,916 $ 38,979 $ 67,895
STA TUS OF BUDGETARY RESOURCES
Obligations incurred, Direct (Note 20) $ 17,515 $ 12,180 $ 29,695
Unobligated balance-Apportioned 575 5,875 6,450
Unobligated balance-Not available 10,826 20,924 31,750
TOTAL STATUS OF BUDGETARY RESOURCES $ 28,916 $ 38,979 $ 67,895
Change in Obligated Balances
Obligated balance, net:
Unpaid obligations, brought forward, October 1 $ 863 $ 1,596 $ 2,459
Uncollected customer payments from Federal sources, (238) (2) (240)
brought forward, October 1
Total, unpaid obligated balance, brought forward, net 625 1,594 2,219
Obligations incurred (Note 20) 17,515 12,180 29,695
Gross outlays (17,512) (12,302) (29,814)
Recoveries of prior-year unpaid obligations, actual (26) (10) (36)
Change in uncollected customer payments-Federal sources 152 (1) 151
Total, unpaid obligated balance, net, end of period 754 1,461 2,215
Obligated balance, net, end of period:
Unpaid obligations (Note 17) 840 1,464 2,304
Uncollected customer payments from Federal sources (86) (3) (89)
Total, unpaid obligated balance, net, end of period 754 1,461 2,215
Net outlays:
Gross outlays 17,512 12,302 $ 29,814
Offsetting collections (Note 18) (2,363) (31,233) (33,596)
Less: Distributed offsetting receipts 183 - 183
NET OUTLAYS $ 14,966 $ (18,931) $ (3,965)
The accompanying notes are an integral part of these statements
40
___________
____ ___________
____ ___________
____
Principal Financial Statements
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)
FY2008 FY2008 FY2008
Budgetary Non-Budgetary Total
BUDGETARY RESOURCES
Unobligated Balance, brought forward, October 1 S 22,843 S 4,077 $ 26,920
Recoveries of prior year unpaid obligations 72 19 91
Budget Authority:
Appropriations 627 627
Borrowing authority 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)
Nonexpenditure transfers, net (Note 19) (41) - (41)
Permanently not available (294) (690) (984)
TOTAL BUDGETARY RESOURCES $ 24,821 $ 18,464 $ 43,285
STA TUS OF BUDGETARY RESOURCES
Obligations incurred, Dfrect (Note 20) S 5,274 $ 10,316 S 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 5 954 $ 1,342 $ 2,296
Uncollected customer payments from Federal sources, (263) (44) (307)
brought_forw
ard,_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 (Note 17) 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 S 5,293 $ 10,043 $ 15,336
Offsetting collections (Note 18) (1,636) (14.160) (15,796)
Less: Distributed offsetting receipts 1,511 - 1,511
NETOUTLAYS S 2,146 S (4,117) S (1.971)
The accompanying notes are an integral part of these statements.
41
Principal Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2009
Note 1. Significant Accountin2 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 1-lousing 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 Mortgages (HECM). The objectives of the activities
carried out by FHA relate directly to developing affordable housing.
FHA categorizes its programs as Single Family (including Title I), 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 supports its operations through five 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 MM! 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. Beginning in Fiscal Year 2009, activities
related to most Single Family programs, including HECM, endorsed in Fiscal Year 2009 and going forward, are
now in the MM! fund. The Single Family activities in the GI fund from Fiscal Year 2008 and prior remain in the
GI fund. The HOPE for Homeowners (H4H) program began on October 1, 2008 for Fiscal Year 2009 as a result
of The Housing and Economic Recovery Act of 2008. This legislation requires FHA to modify existing programs
and initiated the H4H program.
42
Principal Financial Statements
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 (0MB) Circular A-Il, Preparation, Submission, and
Execution of the Budget and the Federal Credit Reform Act of 1990. The format of the SBR is based on the SF
133, Report on Budget Execution and Budgetary Resources.
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 required by 0MB 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
ith 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 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%. IIUD 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 FRA a
43
Principal Financial Statements
debenture for the amount of the settlement at thc 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 Gl/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 G/SRl liquidating account can receive permanent indefinite authority
to cover any resource shortages.
Loans Receivable and Related Foreclosed Property, Net
FIIA’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 hile 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
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 ith 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
44
Principal financial Statements
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 FFIA’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 Gl/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 Gl/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.
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. FIIA
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 Ilousing activities.
45
Principal Financial Statements
Current HUD policy concerning SFFAS No. 10, Accounting for Internal Use Software, indicates that IIUD 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.
Appropriations
FHA receives annual appropriations for Working Capital and Administrative Contract expenses for its
MMI/CMHI, Gl/SRI, and H4H program activities. Additionally. FHA receives appropriations for G1/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, FRA’s portion of these costs was $15 million for fiscal year 2009 and $14 million for fiscal
year 2008, 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.
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 0MB 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. FRA’s budgetary resources include current
46
Principal Financial Statements
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 offetting 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.
47
Principal Financial Statements
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, 2009 and 2008 are as follows:
(Dollars in Millions) FY 2009 FY 2008
lntragovernmental:
Fund Balance with U.S. Treasury $ 202 $ 1,551
Investments in U.S. Treasury Securities 4 8
Total Intragovernmental 206 1,559
Other Assets 92 103
Total Non-entity Assets 298 1,662
Total Entity Assets 45,219 36,019
Total Assets $ 45,517 $ 37,681
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 Gl/SRJ 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.
48
Principal Financial Statements
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. 2009 and 2008:
(Dollars in Millions) FY 2009 FY 2008
Fund Balances:
Revolving Funds S 29.141 $ 10,746
Appropriated Funds 750 308
Other Funds 239 1,536
Total $ 30,130 $ 12,590
Status of Fund Balance with U.S. Treasury:
U nobligated Balance:
Available $ 6.450 $ 2,987
Unavailable 21,376 7,144
Obligated Balance not yet Disbursed 2.304 2,459
Total $ 30,130 $ 12,590
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
FRA’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 0MB
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.
49
Principal Financial Statements
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. 2009 were as follows:
Amortized
(Pre mium)/ Inve stme nt,
(Dollars in Millions) Cost Discount, Net Net Market Value
MMI/CMHI Investments $ 10,464 $ 83 $ 10,547 $ 11,860
GI/SRI Investments 4 - 4 4
Subtotal $ 10,468 $ 83 $ 10,551 $ 11,864
?vLMIICMHI Accrued Interest - - $ 84 $ 84
Total $ 10,468 $ 83 $ 10,635 $ 11,948
The cost, net amortized premium/discount, net investment, and market values as of September 30, 2008 were as
follows:
Amortized
(Pre mium)! Investme nt,
(Dollars in Millions) Cost Discount, Net Net Market Value
MMIICMHI 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
50
Principal Financial Statements
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, 2009 and 2008:
Share of
Beginning New Earnings Return of Ending
(Dollars in ii11ions) Balance Acquisitions or Losses Investment Redeemed Balance
FY 2009
601 Program $ 18 $ - $ (4) $ (2) $ - S 12
Risk Sharing Debentures 30 137 - - (34) 133
Total $ 48 $ 137 $ (4) $ (2) $ (34) $ 145
FY2008
601 Program $ 41 $ - $ (4) $ (19) $ - S 18
Risk Sharing Debentures 80 - - - (50) 30
Total $ 121 $ - $ (4) S (19) $ (50) $ 48
The fiscal year for the Section 601 Program investments is from December Ito November 30 for 2008. The
condensed, audited financial statements reported $58 million in assets. $58 million in liabilities and partner’s
capital. and ($17) million in net income for these investments.
51
Principal Financial Statements
Note 5. Accounts Receivable, Net
Accounts receivable. net. as of September 30, 2009 and 2008 are as follows:
Gross Allowance Net
(Dollars in Millions) FY 2009 FY 2008 FY 2009 FY2008 FY 2009 FY 2008
With the Public:
Receivables Related to S 17 $ 55 $ (7) $ (3) $ 10 $ 52
Credit Program Assets
Premiums Receivable 2 2 - - 2 2
Generic Debt Receivables 75 72 (75) - - 72
Miscellaneous receivables 4 2 - - 4 2
Total $ 98 $ 131 $ (82) $ (3) $ 16 $ 128
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 Indemnifications, 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.
Reclassification of HECM Credit Reform Asset Receivables and Generic Debt Allowance
In Fiscal Year 2009. HECM Fee Receivables were reclassified from the Accounts Receivable in Note 5 to the
Defaulted Guaranteed Loans in Note 6 to better reflect the nature of the receivables. The Generic Debt Allowance
was reclassified from the Allowance for Subsidy in Note 6 to the Allowance for Loss in Note 5 to better reflect
the value of the Generic Debt Receivables.
52
Principal Financial Statements
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. 2009 and 2008 are as follows:
1)irect Loan and Loan Guarantee Programs Administered by FHA Include:
MMJ/CMHI Direct Loan Program
G1/SRI Direct Loan Program
MMI/CMHI Loan Guarantee Program
GI/SRI Loan Guarantee Program
H4H 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. The H4H fund only contains Single Family activity.
To comply with the FHA Modernization Act of 2008, activities related to most Single Family programs, including
HECM and Section 234(c), endorsed in Fiscal Year 2009 and going forward, are now in the MMI fund. The
Single Family activities in the GI fund from Fiscal Year 2008 and prior remain in the GI fund. The following
table illustrates how the primary Single Family program activities for Fl-IA are now distributed between
MMI/CMHI and GI/SRI funds based on the year of endorsement:
Fund Loans Endorsed in Fiscal Years Loans Endorsed in Fiscal Years
2008 and Prior 2009 and Onward
GI 234(c), HECM N/A
MM! 203(b) 203(b), 234(c), HECM
Direct Loan Program
(Dollars in Millions) MMI/CMHI - Cl/SRI-
FY2009 Single Family
- Multifamily Total
Direct Loans
Loan Receivables $ - $ 13 $ 13
Interest Receivables 1 4 5
Allowance (4) (9) (13)
Total Direct Loans $ (3) $ 8 $ 5
FY2008 Total
Direct Loans
Loan Receivables S 1 $ 13 $ 14
Interest Receivables - 4 4
Allowance (4) (5l (9)
Total Direct Loans S (3) S 12 $ 9
53
Principal Financial Statements
Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):
(Dollars in Millions)
FY2009 MMI/CMIII Cl/SRI Total
Guaranteed Loans
Single Family (Excluding HECM)
Loan Receivables $ 19 $ 8 $ 27
Interest Receivables 3 3 6
Allowance forLoan Losses (12) (7) (19)
Foreclosed Property 16 2 18
Subtotal $ 26 S 6 $ 32
Multifamily
Loan Receivables $ - $ 2,668 $ 2,668
Interest Receivables - 199 199
Allowance for Loan Losses - (2,162) (2,162)
Subtotal $ - $ 705 $ 705
HECM*
Loan Receivables $ - $ 5 $ 5
Interest Receivables - 2 2
Allowance for Loan Losses - (1) (1)
Foreclosed Property - 2 2
Subtotal $ - $ 8 $ 8
Total GuaranteedLoans $ 26 $ 719 $ 745
(Dollars in Millions)
FY2008 MMIJCMHI Cl/SRI Total
Guaranteed Loans
Single Family (Excluding HECM)
Loan Receivables $ 16 $ 9 $ 25
Interest Receivables 3 3 6
Allowance for Loan Losses (2) (6) (8)
Foreclosed Property 9 6 15
Subtotal $ 26 $ 12 $ 38
Multifamily
Loan Receivables $ - $ 2,787 $ 2,787
Interest Receivables 179 179
Allowance for Loan Losses - (738) (738)
Subtotal $ - $ 2,228 $ 2,228
HECM*
Loan Receivables $ - $ 5 $ 5
Interest Receivables - 2 2
Allowance for Loan Losses - - -
Foreclosed Property - I
Subtotal $ - $ 8 $ 8
Total Guaranteed Loans $ 26 $ 2,248 $ 2,274
*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to
FRA,
54
Prinçjpa/Financial Statements
Defaulted Guaranteed Loans from Post-1991 Guarantees:
(Dollars in Millions)
FY2009 MMI/CMIH CL/SRI Total
Guaranteed Loans
Single Family (Excluding HECM)
Loan Receivables $ 560 S 31 $ 591
Interest Receivables
Foreclosed Property 4,875 281 5,156
Allowance for Subsidy Cost (3,165) (187) (3,352)
Subtotal $ 2,270 S 126 $ 2,396
Multifamily
Loan Receivables $ - $ 594 $ 594
Foreclosed Property - - -
Allowance for Subsidy Cost - (292) (292)
Subtotal $ - $ 302 $ 302
HECM*
Loan Receivables $ - S 772 S 772
Interest Receivables - 418 418
Foreclosed Property - 31 31
Allowance for Subsidy Cost - (223) (223)
Subtotal $ - $ 998 $ 998
Total Guaranteed Loans $ 2,270 $ 1,426 $ 3,696
(Dollars in Millions)
P12008 MMJ/CMHI GI/SRI Total
Guaranteed Loans
Single Family (Excluding HECM)
Loan Receivables $ 403 $ 39 $ 442
Interest Receivables - 1 1
Foreclosed Property 4,053 398 4,451
Allowance for Subsidy Cost (2,219) (313) (2,532)
Subtotal $ 2,237 $ 125 $ 2,362
Multifamily
Loan Receivables $ - $ 356 $ 356
Foreclosed Property - 2 2
Allowance for Subsidy Cost - (263) (263)
Subtotal $ - $ 95 $ 95
HECM*
Loan Receivables S - $ 565 $ 565
Interest Receivables - 277 277
Foreclosed Property - 13 13
Allowance törSubsidv Cost - (89) (89)
Subtotal $ - $ 766 $ 766
Total Guaranteed Loans $ 2,237 $ 986 $ 3,223
*HECM loans, while not defaulted, have reached 98% of the maximum claim amount
and have been assigned to
FHA.
55
Principal Financial Statements
Guaranteed Loans Outstanding:
(Dollars in Millions) Outstanding Amount of
Principal of Outstanding
Loan Guarantee Programs Guaranteed Loans, Principal Guaranteed
Guaranteed Loans Outstanding (FY 2009)
MMI/CMHI
Single Family $ 711,426 $ 674,263
Multifamily 401 375
MMI/CMHI Subtotal $ 711,827 $ 674,638
GI/SRI
Single Family 25,898 23,088
Multifamily 66,463 59,515
G1/SRI Subtotal $ 92,361 $ 82,603
H4H
Single Family 257 - 4 4
H4H Subtotal $ 4 S 4
FY2009 Total $ 804,192 $ 757,245
Guaranteed Loans Outstanding (FY 2008)
MMI/CMHI
Single Family $ 479,579 $ 447,299
Multifamily 416 353
MMI/CMHI Subtotal S 479,995 $ 447,652
01/SRI
Single Family 30,346 27,685
Multifamily 62,855 56,384
GI/SRI Subtotal $ 93,201 $ 84,069
FY2008 Total $ 573,196 $ 531,721
56
-
Principal Financial Statements
New Guaranteed Loans Disbursed:
(Dollars in Millions) Outstanding Amount of
Principal of Outstanding
Loan Guarantee Programs Guaranteed Loans, Principal Guaranteed
New Guaranteed Loans Disbursed (FY 2009)
MMI/CMHI
Single Family $ 330,342 $ 328,054
Multifamily 43 43
MMIJCMHI Subtotal $ 330,385 $ 328,097
G1/SRI
Single Family 234 232
Multifamily 6,708 6,690
GI/SRI Subtotal $ 6,942 $ 6,922
H4H
Single Family 257- 4 4
114H Subtotal $ 4 $ 4
FY 2009 Total $ 337,331 $ 335,023
New Guaranteed Loans Disbursed (FY 2008)
MMI/CMHI
Single Family $ 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
G1/SRI Subtotal $ 12,907 $ 12,650
FY2008 Total $ 184,732 $ 180,002
57
Principal Financial Statements
Home Equity Conversion Mortgage (HECM)
HECM (reverse mortgages) are not included in the previous tables due to the unique nature of the program. Since
the inception of the program. Fl-IA has insured 571,709 HECM loans with a maximum claim amount of $123
billion. Of these 571,709 HECM loans insured by FHA. 452,196 loans with a maximum claim amount of $103
billion are still active. As of September 30, 2009 the insurance in force (the outstanding balance of active loans)
was $60 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 Fl-IA.
home Equity Conversion Mortgage Loans Outstanding (not included in the balances in the previous table)
(Dollars in Millions)
I Cumulative
Current Year Outstanding Potential
Loan Guarantee Programs Endorsements Balance Liability
FY 2009 MMI/CMHI $ 30,080 $ 15,524 $ 29,442
GI/SRJ $ - $ 44,353 $ 73,058
Total $ 30,080 $ 59,877 $ 102,500
FY 2008 GI/SRI $ 24,166 $ 43,741 $ 77,736
Total $ 24,166 S 43,741 $ 77,736
58
Principal Financial Statements
Loan Guarantee Liability, Net:
(Dollars in Millions)
FY2009 MMI/CMHI Cl/SRI H4H Total
LLR
Single Family (Excluding HECM) S 14 S 1 $ - S 15
Multifamily - 121 - 121
Subtotal $ 14 $ 122 $ - $ 136
LLG
Single Family (Excluding KECM) $ 27,301 $ 838 $ I $ 28,140
Multifamily (5) (158) - (163)
HECM 1,156 4,753 - 5,909
Subtotal $ 28,452 $ 5,433 $ 1 S 33,886
Loan Guarantee Liability Total $ 28,466 $ 5,555 $ 1 $ 34,022
FY2008 MMIICMHI GIISRI 1-1411 Total
LLR
Single Family (Excluding HECM) $ 20 S 2 5 - $ 22
Multifamily - 160 - 160
Subtotal $ 20 $ 162 S - $ 182
LLG
Single Family (Excluding HECM) $ 17,384 $ 757 S - $ 18,141
Multifamily (4) (354) - (358)
HECM - 1,521 - 1,521
Subtotal S 17,380 $ 1,924 $ - $ 19,304
Loan Guarantee Liability Total $ 17,400 $ 2,086 $ - $ 19,486
59
Principal Financial Statements
Subsidy Expense for Loan Guarantees by Program and Component:
(Dollars in millions)
FY2009 MMI/CMIH GIISRI H4H Total
Single Family (Excluding HECM)
Defaults S 9,990 S 10 $ 1 $ 10,001
Fees and Other Collections (13,637) (12) - (13,649)
Other 3,496 1 - 3,497
Subtotal $ (151) $ (1) $ 1 $ (151)
Multifamily
Defaults S I S 193 S - $ 194
Fees and Other Collections (2) (338) - (340)
Other - - - -
Subtotal $ (1) $ (145) $ - S (146)
HECM
Defaults $ 1,043 $ - $ - $ 1,043
Fees and Other Collections (1,457) - - (1,457)
Other - - - -
Subtotal $ (414) S - $ - $ (414)
Total $ (566) $ (146) $ 1 S (711)
FY2008 MMI/CMHI Cl/SRI H4H Total
Single Family (Excluding HECM)
Defau Its $ 4.545 $ 284 S - $ 4,829
Fees and Other Collections (6,600) (339) - (6.939)
Other 1,620 - - 1,620
Subtotal $ (435) $ (55) $ - $ (490)
Multifamily
Defaults $ 1 S 151 $ - $ 152
Fees and Other Collections (1) (227) - (228)
Other - - - -
Subtotal S - $ (76) $ - S (76)
HECM
Defaults $ - S 486 $ - $ 486
Fees and Other Collections - (948) - (948)
Other - - - -
Subtotal $ - $ (462) $ - $ (462)
Total $ (435) S (593) $ - $ (1,028)
60
Principal Financial Statements
Subsidy Expense for Modifications and Reestimates:
(Dollars in millions)
Tee h iiical
FY2009 Total Modifications Rees ti mate
MMI/cMHI $ (362) $ 7,275
Gl/SRI (6) 3,139
Total $ (368) $ 10,414
FY2008
MMI/CMHI $ - $ 8,650
GIJSRI -
1,709
Total $ - $ 10,359
Total Loan Guarantee Subsidy Expense:
(Dollars in millions) FY2009 FY2008
MMJ/CMHI $ 6,347 $ 8,215
Gl/SRI 2,987 1,116
H4K I -
Total $ 9,335 $ 9,331
61
Principal Financial Statements
Subsidy Rates for Loan Guarantee Endorsements by Program and Component:
Fees and
Other
(Percentage) Dethults Collections Other Total
Budget Subsidy Rates for FY 2009 Loan Guarantees:
MMI/CMHI
Single Family Forward (October 1 June 30)
- - 3.03 (4.13) 1.06 (004)
Single Family Forward (July 1 September 30)
- - 3.04 (4.13) 1.03 (0.06)
Single Family- HECM 3.45 (4.82) - (1.37)
Multifamily Section 213 (October I June 30)
- - 3.03 (4.13) 1.06 (0.04)
Multifamily Section 213 (July 1 September 30)
- - 3.04 (4.13) 1.03 (0.06)
GI/SRI
Multifamily - Section 221(d)(4) 4.14 (5.24) - (1,10)
Multifamily - Section 207/223(f) 1.47 (4.76) - (3.29)
Multifamily - Section 223(a)(7) 1.47 (4.76) - (3.29)
Multifamily - Section 232 3.39 (5.48) - (2.09)
Section242 2.63 (5.14) - (2.51)
H4H
Single Family Section 257 - 22.40 (8.41) (0.61) 13.38
Fees and
Other
(Percentage) Defiiults Collections Other Total
Budget Subsidy Rates for FY2008 Loan Guarantees:
MMI/CMHI
Single Family Section 203(b) (October 1 July 13)
- - 2.45 (3.71) 0.95 (0.31)
Single Family Section 203(b) (July 14- September 30)
- 2.99 (4.07) 0.93 (0.15)
Multifamily Section 213
- 1.96 (3.86) 1.00 (0.90)
GI/SRI
Multifamily Section 22l(d)(4)
- 4.46 (5.29) - (0.83)
Multifamily Section 207/23(f)
- 1.98 (4.73) - (2.75)
Multifamily Section 223(a)(7)
- 1.98 (4.73) - (2.75)
Multifamily- Section 232 3.73 (5.31) - (1.58)
Section 242 2.33 (4.99) - (2.66)
Single Family- HECM 2.00 (3.90) - (1.90)
Single Family Section 234(c)
- 2.68 (3.56) - (0.88)
62
Principal Financial Statements
Schedule for Reconciling Loan Guarantee Liability Balances:
(Dollars in Millions) FY 2009 FY 2008
LLR LLG LLR LLG
Beginning Balance of the Loan Guarantee Liability S 182 $ 19,304 S 371 S 7,060
Add: Subsidy Expense for guaranteed loans disbursed
during the reporting fiscal years by component:
Default Costs (Net of Recoveries) - 11,238 - 5,467
Fees and Other Collections - (15,446) (8,1 15)
Other Subsidy Costs - 3,497 - 1,620
Total of the above subsidy expense components - (711) - (1,028)
Adjustments:
Fees Received 8,771 5,468
Foreclosed Property and Loans Acquired 3,907 4,683
Claim Payments to Lenders (10,481) (8,486)
Interest Accumulation on the Liability Balance 1,079 161
Other (254) (66)
Ending Balance before Reestimates 182 21,615 371 7,792
Add or Subtract Subsidy Reestimates by Component:
i’echnicaVDefault Reestimate
Subsidy Expense Component (46) 5,364 (189) 10,369
Interest Expense Component - 1,367 1,141
Adjustment of prior years’ credit subsidy reestimates - 5,540 - 2
Total Technical/Default Reestimate (46) 12,271 (189) 11,512
Ending Balance of the Loan Guarantee Liability $ 136 $ 33,886 $ 182 $ 19,304
Administrative Expense:
(Dollars in Millions) FY 2009 FY 2008
MMI/CMHI $ 275 S 228
Gl/SRI 294 277
H4H 16 -
Total $ 585 $ 505
Other Information on Foreclosed Property:
Additional information on FHA foreclosed property as of September 30, 2009 and 2008 is as follows:
FY2009 FY2008
Number of properties in the foreclosure process 66 67
Number of properties held 39.671 37.890
Average holding period for properties held 7 Months 7 Months
63
Principal Financial Statements
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. In fiscal year 2009, FHA refined the methodology
used to value its Multifamily G1/SRI Pre-Credit Reform notes to better reflect the Allowance for Loan Losses.
Prior to 2009, FHA used one loss rate for all Multifamily notes to calculate the allowance. Beginning in 2009, a
separate loss rate was used for the Mark-to-Market program notes. This change in rate resulted with a much
larger allowance these notes.
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
FRA 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. For activity
related to fiscal years 1992-2008, the MMI fund has one risk category and for activity related to fiscal years 2009
and onward, the MMI fund has two risk categories. The 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:
• 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.
• Recovery Rates: The estimated percentage of a claim payment that is recovered through disposition of a
mortgage note or underlying property.
• Claim Amount: The estimated amount of the claim payment relative to the unpaid principal balance at the
time the claim occurs.
64
Principal Financial Siatenients
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.
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. 0MB 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 Single Family 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 its portfolio will continue to perform
consistently with its historical experience given a set of forecasted economic conditions throughout 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. 0MB provides these rates to all Federal agencies for use in preparing credit
subsidy estimates and requires their use under 0MB Circular A-li, Part 4, “Instructions on Budget Execution.”
The basket of zeros discount factors are also disbursement weighted.
Impact of Economic Conditions on the LLG
Projections of future economic conditions directly impact the valuation of FHA’s Credit Reform LLG. As
identified and described in the FY 2009 Actuarial Review of MMIF Excluding HECMs, different future economic
paths create different expectations for the performance of the MMI Fund over time. The Actuarial Review
presents a base case and five alternative economic scenarios, each with different outcomes for the economic value
of the MMI Fund. This economic sensitivity analysis illustrates the risks involved in estimating the value of the
Fund in a declining economic environment. FHA management recognizes the potential for alternative outcomes
from what is represented in the Credit Reform LLG value represented here. The LLG was derived using the
Actuarial Review base case scenario, which uses IHS Global Insighfs August 2009 economic forecasts.
Analysis of Change in the Liability for Loan Guarantees
Fl-IA 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: (I) 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.
65
Principal Financial Statements
FHA estimated the credit subsidy rates for the 2009 cohort in December 2007. 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 2009 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 2008 estimates.
Mutual Mortgage Insurance (MM —During fiscal year 2009, 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 HECM and 234(c) programs moving from Gl/SRI to
MMI and shrinkage of capital availability in the conventional mortgage market, the MM! fund has experienced a
surge in new endorsements during fiscal year 2009. This caused a significant increase in the volume of insurance-
in-force, coupled with the increase in expected claims and lowered sales proceeds. the liability for MM! increased
from $17,384 million at the end of fiscal year 2008 to $28,456 million at the end of fiscal year 2009.
GI/SRJ Home Equity Conversion Mortgage (HECM) The HECM activity from fiscal years 1992-2008 remains
-
in the G1/SRI fund, The HECM liability for these years increased from $1 ,52 I million at the end of fiscal year
2008 to $4,753 million at the end of fiscal year 2009. This increase in liability is primarily due to the drop in
house price appreciation projections. The drop in house price appreciation projections results in lower recoveries
from future HECM assigned assets which increases the liability.
GI/SRI Section 22](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 G1/SR1
fund. The Section 221 (d)(4) liability increased by $26 million in FY 2009.
Mark-to-Market The Mark to Market (M2M) 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 M2M 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 M2M 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. During fiscal year 2009, the M2M liability increased primarily due to an increase in
the active insurance in force for the program.
GI/SRJ Section 234(’c,) The Section 234(c) program insures loans for condominium purchases. Like HECM. the
-
activity from fiscal year 1992-2008 remains in the GI/SRI fund. One of the many purposes of EHA’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. In fiscal year 2009.
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. This
resulted in an increase in the liability from $502 million at the end of fiscal year 2008 to $694 million at the end
of fiscal year 2009 in the GI/SRI fund.
66
Principal Financial Statements
Note 7. Other Assets
The following table presents the composition of Other Assets held by FHA as of September 30. 2009 and 2008:
(Dollars in Millions)
FY2009 FY2008
Intragovernmental:
Advances to HUD for Working Capital Fund Expenses $ 16 $ 21
Total S 16 S 21
With the Public:
Escrow Monies Deposited at Minority-Owned Banks $ 92 $ 103
Undistributed Charges 37 31
Total S 129 $ 134
Advances to EIUD 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 HLJD 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 G1/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.
67
Principal Financial Statements
Note 8. Accounts Payable
Accounts Payable as of September 30. 2009 and 2008 are as follows:
(Dollars in Millions)
FY2009 FY2008
With the Public:
Claims Payable $ 331 $ 316
Premium Reftinds and Distributive Shares Payable 173 174
Miscellaneous Pavables 135 95
Total $ 639 $ 585
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 Paya bles
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.
68
Principal Financial Statements
Note 9. Debt
The following tables describe the composition of Debt held by FHA as of September 30. 2009 and 2008:
(Dollars in Millions) FY2008 FY2009
Beginning Net Ending Net Ending
Balance Borrowing Balance Borrowing Balance
Agency Debt:
Debentures Issued to Claimants $ 70 $ (18) $ 52 $ (38) $ 14
Other Debt:
Borrowings from U.S. Treasury 4.573 259 4.832 (412) 4.420
Total $ 4,643 $ 241 $ 4,884 S (450) $ 4,434
FY2009 FY2008
Classification of Debt:
Intragovemmental Debt S 4,420 $ 4,832
Debt held by the Public 14 52
Total S 4,434 $ 4,884
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 10.375 percent in fiscal year 2009 and 4.00 percent to 12.875
percent in fiscal year 2008. 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 $14 million in
fiscal year 2009 and $51 million in fiscal year 2008. The fair values for fiscal years 2009 and 2008 were $15 and
$74 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 GIJSRI 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 Gl/SRI receipt account or when available cash is less than
claim payments due.
During fiscal year 2009. FHA’s U.S. Treasury borrowings carried interest rates ranging from 3.71 percent to 7.34
percent. In fiscal year 2008. they carried interest rates ranged from 2.33 percent to 7.34 percent. The maturity
dates for these borrowings occur from September 2017 September 2028. Loans may be repaid in whole or in
—
part without penalty at any time prior to maturity.
69
Principal Financial Statements
Note 10. Other Liabilities
The following table describes the composition of Other Liabilities as of September 30, 2009 and 2008:
(Dollars in Millions)
FY2009 Current Non-Current Total
Intragove rnmental:
Receipt Account Liability $ 1,913 $ - $ 1,913
Total $ 1,913 $ - $ 1,913
With the Public:
Trust and Deposit Liabilities $ 116 $ - S 116
Undistributed Credits 64 - 64
Miscellaneous Liabilities 236 - 236
Total $ 416 $ - $ 416
FY2008 Current Non-Current Total
Intragove rnme ntal:
Receipt Account Liability $ 1,530 $ - $ 1,530
Total $ 1,530 $ - $ 1,530
With the Public:
Trust and Deposit Liabilities $ 152 $ - $ 152
Undistributed Credits 49 - 49
Miscellaneous Liabilities 224 13 237
Total $ 425 $ 13 $ 438
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.
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.
70
Principal Financial Statements
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
Bankrupt Mortgagees
On August 24. 2009, one of FHA’s largest mortgage lenders and servicers filed for Chapter 11 bankruptcy
protection. The organization was seized on August 4. 2009 by the Federal Bureau of Investigation and other
federal and state regulators. The organization originated about 7.5% of FHA’s nearly 2.5 million endorsements
during FY 2008 and the first ten months of FY2009. A review of the lender’s endorsement files by FHA’s
Quality Assurance Division (QAD) completed in July 2009 detected 28 types of loan origination deficiencies that
will be presented to the FHA Mortgagee Review Board. As of May 31, 2009, over 28% of their portfolio was in
default, significantly higher than other lenders. Other federal investigators are continuing their review of
allegations of corporate and loan file fraud. The ultimate resolution of these actions cannot be determined at this
time and the accompanying financial statements do not include any specific provisions related to this closure.
During FY2009, various financial institutions, mortgage brokers and servicers ceased operations due to their weak
financial condition. The mortgage loans held by these institutions are transferred to other accredited servicers
without material cost to FHA.
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 will not have a material effect on FHA’s
consolidated financial statements as of September 30, 2009. However, there are pending or threatened legal
actions where judgment against FHA is reasonably possible with an estimated potential loss of $23 million.
Pending or Threatened Litigation Against FHA
(Dollars in millions)
FY 2009 FY 2008
Expected Outcome Estimated Loss Estimated Loss
Probable - -
Reasonably Possible $23 $3
71
Principal Financial Staeinenls
Note 12. Gross Costs
2008 are as follows:
Gross costs incurred by FHA for the fiscal years ended September 30, 2009 and
(Dollars in Millions) FY 2009 FY 2008
MMIJCMHI GI/SRI H4H MMI/CMHI G1/SRI H411
Intragovemmental:
$ 160 $ 123 $ $ 167 $ 127 $ -
Interest Expense -
7 8 6 8 -
Imputed Costs -
5 2 3 -
Other Expenses - -
$ 167 $ 131 $ 5 $ 175 $ 138 $ -
Total
With the Public:
275 $ 294 5 II $ 226 $ 274 5
Salaiy and Administrative Expenses $
-
6.347 2.987 1 8.215 1.116 -
Subsidy Expense
2,398 563 1,108 251 -
Interest Expense -
(7) 1.438 5 (49) -
Bad Debt Expense -
(5) (44) (69) (123) -
Loan Loss Reserve Expense -
64 64 10 100 -
Other Expenses -
$ 9,072 $ 5,302 $ 12 $ 9,495 $ 1,569 $ -
Total
Interest Expense
ings from the U.S. Treasury in the
Intragovernmental interest expense includes interest expense on borrow
the interest rates provided by the
financing account. Interest expense is calculated annually for each cohort using
e on debentures issued to claimants to
U.S Treasury. Interest expense with the public consists of interest expens
ates.
settle claim payments and interest expense on the annual credit subsidy reestim
imputed Costs/Imputed Financing
ted and allocated to Fl-IA by the
Imputed costs represent FHA’s share of the departmental imputed cost calcula
erial Cost Accounting Concepts and
HUD CFO office. Federal agencies are required by SFFAS No. 4, Manag
behalf. The HUD CFO receives
Standards, to account for costs assumed by other Federal organizations on their
costs, federal employee health
its imputed cost data from the Office of Personnel Management (OPM) for pension
receives Federal Employees’ Compe nsation Act (FECA) costs
benefits (FEHB) and life insurance costs. It also
uently , using its internally develo ped allocation basis. HUD CFO
from the Department of Labor (DOL). Subseq
offices. The impute d costs reported by FHA in its
allocates the imputed cost data to each of its reporting
financi ng in its Statem ents of Changes in Net
Statements of Net Cost are equal to the amounts of imputed
Position.
Salary and Administrative Expenses
for FHA personnel costs and FHAs
Salary and administrative expenses include EHA’s reimbursement to HUD
payments to third party contractors for administrative contract expenses.
Subsidy Expense
expense from new endorsements.
Subsidy expense, positive and negative. consists of credit subsidy
e incurred by the Church Arson
modifications, and annual credit subsidy reestimates and the subsidy expens
Government of a direct loan or loan
program. Credit subsidy expense is the estimated long-term cost to the U.S.
flows associated with the direct loan
guarantee, calculated on a net present value basis of the estimated future cash
the expense of a HUD program
or loan guarantee. Subsidy expense incurred by the Church Arson program is
72
Principal Financial Statements
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 FRA 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.
73
Principal Financial Statements
Note 13. Earned Revenue
Earned revenues generated by FHA for the fiscal years ended September 30, 2009 and 2008 are as follows:
(Dollars in Millions) FY 2009 FY 2008
NI M i/CM HI Cl/SRI NI M I/CM III GI/SRI
intragove rumental:
Interest Revenue from Deposits at U.S. Treasury $ 990 $ 392 $ 424 $ 73
Interest Revenue from MMI/CMHI Investments 633 - 896 -
Gain on Sale ofMMI/CMHI Investments 133 - - -
S 1,756 $ 392 S 1,320 $ 73
With the Public:
Insurance Premium Revenue $ 16 $ 20 $ 10 $ 21
Income from Notes and Properties 31 31 (1) 41
Other Revenue * 20 - 6
Total $ 47 $ 71 $ 9 $ 68
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/CMH1 liquidating accounts and of escrow monies collected from borrowers in the
G1/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.
Cain on Sale of MMIICMHI Investments
This gain occurred as a result of the sale of investments before maturity in the MMI/CMHI Capital Reserve
account because the sales price of the investments was greater than the book value of the investments at the time
of the sale.
74
Principal Financial Statements
The FHA up-front premium rates in fiscal year
2009 were:
Premium Rate
Single Family 1.75%
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 calcu
late monthly or annual premiums receivabl
also legislated, vary by mortgage type and e. These rates. which are
program. The FHA periodic premium rate
Single Family and Multifamily were: in fiscal year 2009 for
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 prem
ium paid for guaranteed cases endorsed in
equal to 0.50 percent of the loan amount years 1992 through 2001 is
multiplied by the number of years of the
insurance premium for a Title I Property Impr loan term. The annual
ovement loan is 0.50 percent of the loan
insurance charge is paid. The annual insu amo unt until the maximum
rance premium of a Title I Manufactured Hou
tiers by loan term until the maximum insuranc sing loan is calculated in
e charge is paid. For guaranteed cases endo
the Title 1 annual insurance premium is 1.00 rsed in fiscal year 2009.
percent of the loan amount until maturity.
Income from Notes and Property
Income from Notes and Property includes reve
nue associated with FHA pre-1992 loan guar
includes revenue from Notes and Properties antees. This income
held, sold, and gains associated with the sale.
Other Revenue
Other revenue includes revenue associated
with FHA pre-1992 loan guarantees. FHA
late charges and penalty revenue, fee inco ’s other revenue consists of
me, 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 unde
classification (BFC) for Mortgage Credit (371 r the budget functional
). All FHA U.S. Treasury account sym
department code 86” for Department of Hou bols found under the
sing and Urban Development appear with
the Mortgage Credit BFC.
75
Principal Financial Statements
Note 15. Transfers
Transfers in/out incurred by FHA for the fiscal years ended September 30, 2009 and 2008 are as follows:
(Dollars in Millions)
FY 2009
Budgetary Financing Sources Cumulative Results Unexpended
of Ope rations Appropriations Total
Treasury S (347) $ (86) S (433)
HUD - (59) (59)
Total $ (347) $ (145) $ (492)
Other Financing Sources Cumulative Results Unexpended Total
of Ope rations Appropriations
JreasLuy S (1,730) $ - $ (1.730)
HUD 470 - 470
Total $ (1,260) $ - $ (1,260)
FY2008
Budgetary Financing Sources Cumulative Results Unexpended Total
of Ope rations Appropriations
Treasury S (613) $ (235) $ (848)
HUD - (41) (41)
Total $ (613) $ (276) $ (889)
Other Financing Sources Cumulative Results Unexpended Total
of Operations Appropriations
Treasury $ (19) $ - $ (19)
RU!) 406 - 406
Total $ 387 $ - $ 387
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 Gl/SRI general fund receipt account, and the prior year unobligated balance of
budgetary resources in the 01/SRI liquidating account.
Transfers In/Out From HUD
FHA does not receive an appropriation for S&E: instead the FHA amounts are appropriated directly to HUD. In
order to recognize the S&E in FHA’s Statement of Net Cost, a Transfer In from HUD is recorded with the
recognition of FHA S&E costs. FHA continues to make a non-expenditure Transfer Out to HLJD for Working
Capital Fund Expenses.
76
I’rincipal Financial Statements
Note 16. Unexpended Appropriations
Unexpended appropriation balances at September 30, 2009 and 2008 are as follows:
(Dollars in Millions)
Beginning Appropriations Other Appropriations Transfers-Out Ending
FY 2009 Balance Received Adjustments Used Balance
Positive Subsidy $ 15 $ 470 $ - $ (7) $ - $ 478
Working Capital and 310 195 (59) (1 15) (59) 272
Contract Expenses
Reestimates - 6,793 - (6,793) - -
GIISRI Liquidating 86 96 - (14) (86) 82
Total S 411 $ 7,554 S (59) S (6,929) $ (145) S 832
FY2008
Positive Subsidy $ 28 $ 8 $ - $ (21) $ - $ 15
Working Capital and 293 205 (49) (98) (41) 310
Contract Expenses
Reestimates - 301 - (301) - -
G1/SRI Liquidating 223 113 - (15) (235) 86
Total $ 544 $ 627 $ (49) $ (435) S (276) $ 411
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
Gl/SRI no-year program account also receives appropriations for positive credit subsidy and upward reestimates.
Additionally, FRA 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.
77
Principal Financial Statements
Note 17. Budgetary Resources
The SF-133 and the Statement of Budgetar
y Resources for fiscal year 2008 have
2008 actual amounts included in the Prog been reconciled to the fiscal year
ram and Financing Schedules presented
States Government. There were no sign in the Budget of the United
ificant reconciling items. Informati
Statement of Budgetary Resources will on from the fiscal year 2009
be presented in the fiscal year 2011 Bud
Budget will be transmitted to Congress get of the U.S. Government. The
on the first Monday in February 2011
Government Printing Office and online and will be available from the
at that time.
Obligated balances for the period ended
September 30, 2009 and 2008 are as follo
ws:
Unpaid Obligations
(Dollars in Millions)
Undelivered Orders FY 2009 FY 2008
MMI/CMH1 S 638 $ 795
G1/SRI
475 526
H4H
1
Undelivered Orders Subtotal $
-
1,114 $ 1,321
Accounts Payable
MMI/CMHI $ 857 $ 793
GI/SRI
333 345
Accounts Payable Subtotal $ 1,190 S 1,138
Unpaid Obligations Total
$ 2,304 $ 2,459
78
Principal Financial Siaiements
Note 18. Budgetary Resources - Collections
The following table presents the composition of FHAs collections for the period ended September 30. 2009 and
2008:
(Dollars in Millions)
FY2009 MMIJCMHI G1/SRI H4H Total
Collections:
Premiums $ 8.084 $ 664 $ - $ 8.748
Notes 9 378 - 387
Property 3.418 180 - 3,598
Interest Earned from U.S Treasury 2,008 392 - 2,400
Subsidy 926 13 1 940
Reestimates 10,491 6,793 - 17,284
Other 44 195 - 239
Total $ 24,980 $ 8,615 S 1 $ 33,596
(Dollars in Millions)
FY2008 MMIJCMHI GI/SRI H4H Total
Collections:
Premiums $ 4.239 S 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
Reestirnates 4,560 301 - 4,861
Other 71 211 - 282
Total S 13,487 $ 2,309 $ - S 15,796
Note 19. Budgetary Resources — Non-expenditure Transfers
The following table presents the composition of FHA’s non-expenditure transfers through September 30, 2009
and 2008:
(Dollars in Millions)
FY2009 MMIICMHI Cl/SRI Total
Transfers:
Working Capital Expenses $ (58) $ - $ (58)
Total $ (58) $ - S (58)
(Dollars in Millions)
FY2008 MMIJCMHI Cl/SRI Total
Transfers:
Working Capital Expenses $ (25) $ (16) $ (41)
Total $ (25) $ (16) S (41)
79
Principal Financial Statements
Note 20. Budgetary Resources — Obligations
The following table presents the composition of FHA’s obligations for the period ended September 30, 2009 and
2008:
(Dollars in Millions)
FY 2009 MMIICMLII Cl/SRI 11411 Total
Obligations:
Claims $ 8,780 $ 1,685 $ - $ 10,465
Single Family Property Management Contracts 166 7 - 173
Contract Obligations 73 52 5 130
Subsidy 926 205 1 1,132
Downward Reestimates 108 19 - 127
Upward Reestimates 10,384 6,793 - 17,177
Interest on Borrowings 160 125 - 285
Other 50 156 - 206
Total S 20,647 S 9,042 $ 6 S 29,695
(Dollars in Millions)
FY2008 MMIICMHI Cl/SRI 11411 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 5 12,208 S 3,362 $ 20 5 15,590
80
Principal Financial Statements
Note 21. Reconciliation of Net Cost of Operations to Bud2et
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, 2009 and 2008:
(Dollars in Millions) FY 2009 FY 2008
RESOURCES USED TO FINANCE A CT! VITIES
Obligations Incurred $ 29.695 $ 15.590
Spending Authority from Offsetting Collections and Reco\eries (33.481) (15.820)
OflettingReceipis (183) (L511)
Transfersln/Out (1.260) 387
Imputed Financing from Costs Absorbed by Others 15 14
TOTAL RESOURCES USED TO FINANCE ACTIVITIES S (5,214) S (1,340)
RESOURCES THA TDO NOT FUND THE NET COST OF OPERA TIONS
Undelivered Orders and Adjustments $ 209 $ (87)
Revenue and Other Resources 31,343 15,784
Purchase ofAssets (10.903) (10,419)
Appropriation for prior year Re-estimate (17,176) (4,856)
TOTAL RESOURCES NOT PART OF NET COST OF OPERATIONS $ 3,473 $ 422
TOTAL RESOURCES USED TO FINANCE THE NET COST (SURPLUS) OF OPERATIONS S (1,741) $ (918)
COMPONENTS OF THE NET COST (SURPLUS) OF OPERA TIONS THAT WILL NOT
REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD
Upward Re-estimate of Credit Subsidy Expense S 14.054 $ 11.6 11
Downward Re-estimate ofCredit Subsidy Expense (1.784) (99)
Changes in Loan Loss Reserve Expense (49) (192)
Changes in Bad Debt Expenses Related to Uncollectible Pre-Credit Reform Receivables 1,431 (44)
Reduction of Credit Subsidy Expense from Endorsements and Modifications of Loan Guarantees (1,084) (1,047)
Gains or Losses on Sales ofCredit Program Assets 73 101
Other 1,523 495
TOTAL COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT VILL
NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD S 14,164 $ 10,825
NET COST (SURPLUS) OF OPERATIONS S 12,423 $ 9,907
81
Principal Financial Statements
Required Supplementary Information
Schedule A: Intragovernmental Assets
FHAs lntragovernmental assets, by federal entity. are as follows for the periods ending September 30. 2009 and
2008:
(Dollars in millions) Fund Balance Investments in
with U.S. U.S. Treasury
Other Assets
Agency Treasury Secunties
FY2009
U.S. Treasury $ 30,130 $ 10,635 $ -
HUD -
- 16
Total $ 30,130 $ 10,635 $ 16
FY2008
U.S. Treasury $ 12,590 $ 19,254 $ -
HUD - - 21
Total $ 12,590 $ 19,254 $ 21
Schedule B: Intragovernmental Liabilities
FHA’s Intragovernmental liabilities, by federal entity. are as follows on September 30, 2009 and 2008:
(Dollars in Millions)
Borrowings fmm
Agency Other Liabilities
U.S. Treasury
FY2009
U.S. Treasury $ 4,420 $ 1,913
Total $ 4,420 $ 1,913
FY2008
U.S. Treasury $ 4,832 $ 1.530
Total $ 4,832 $ 1,530
82
Principal Financial Statements
Required Supplementary Information
Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program
September 30, 2009 and 2008:
(Dollars in Millions) MNIIJCMHI GI/SIU 11411 Total
2009 2008 2009 2008 2009 2008 2009 2008
BUDGETAR YRESOUR (ES
Unoblisated Balance Carried Forward
Beginning ofperiod $26833 $25,499 $ 853 $ 1.421 $ 9 $ - $27,695 $26,920
Recoveries of Prior Year Obligations 17 49 19 42 -
36 91
Budget Authority:
Appropriations received 146 77 6,947 520 461 30 7,554 627
Borrowing Authority 85 235 385 708 - - 470 943
Spending Authority from Offsetting Collections:
Earned
Collected 24.980 13,487 8,615 2,309 I 33.596
- 15,796
Receivable from Federal Sources (147) (29) (4) (38) - - (151) (67)
Net Transfers (58) (25) (16) - - - (58) (41)
Permanently Not Available (586) (252) (661) (732) - - (1,247) (984)
TOTALBUDGETARY RESOURCES S5l,270 $39,041 S16,154 $ 4.214 S 471 $ 30 567,895 $43,285
STA TUS OF BUDGETAR YRESOURCES
Obligations Incurred $20,647 $12,208 $ 9,042 $ 3,362 $ 6 $ 20 $29,695 $15,590
Unobligated Balance-Apportioned 5.644 2,179 341 798 465 10 6,450 2,987
Unobligated Balance Not Available 24,979 24,654 6,771 54 - - 31,750 24,708
TOTALSTATUS OFBUDGE’I’ARYRESOURCES $51,270 $39,041 $16,154 $ 4,214 S 471 $ 30 $67,895 $43,285
CIL4NGE IN OBLIGA TED BAL4NCES
Obligated Balance. Net, Beginning of Period:
Unpaid Obligations Carried Forward $ 1,589 $ 1,435 $ 870 $ 861 $ - $ - $ 2,459 $ 2,296
Receivable from Federal Sources Carried Forward (234) (263) (6) (44) -
- (240) (307)
Obligations Incurred 20,647 12,208 9,042 3,362 6 20 29,695 15,590
Gross Outlays (20,721) (12,005) (9,088) (3,311) (5) (20) (29,814) (15,336)
Obligated Balance Transfers, Net:
RecoveriesofPriorYearObligations (17) (49) (19) (42) - - (36) (91)
Change in Receivable from Federal Sources 147 29 4 38 - - 151 67
Obligated Balance, Net, End of Period:
Unpaid Obligations 1,498 1,589 805 870 1 - 2,304 2,459
Receivable from Federal Sources (87) (234) (2) (6) - - (89) (240)
Outlays:
Disbursements $20,721 $12,005 $ 9,088
$ 3,311 $ 5 20
$ $29,814 $15,336
Collections (24.980) (13,487)
(8,615) (2,309) (1) - (33,596) (15,796)
Subtotal (4,259) (1.382) 473 1.002 4 20 (3.782) (460)
Less: OffsettingReceipts 183 1.511
- - - - 183 1,511
NE’f OUTLAYS $ (4,259) $ (1,482) S 290 $ (509) S 4 20
S S (3965) $ (1,971)
83
Principal Financial Statements
Required Supplementary Information
Schedule D: Comparative Combining Budgetary Resources by Appropriation for the MMI/CMHI
Program
September 30, 2009:
(Dollars in Millions)
Capital MMI/CMHI
Program Liquidating Financing Reserve Total
BUDGE TAR YRESOURCES
Unobligated Balance Carried Forward
Beginning of period $ 48 S 50 $ 7,651 $ 19,084 $ 26,833
Recoveries of Prior Year Obligations 9 - 8 - 17
Budget Authority:
Appropriations received 146 - 146
Borrowing Authority -
- 85 85
Spending Authority from Offsetting Collections:
Earned
Collected 15 22,914 2,05I 24,980
Receivable from Federal Sources -
- (147) (147)
Net Transfers 10.326 -
- (10.384) (58)
Permanently Not Available (23) - (563) - (586)
TOTAL BUDGEFARY RESOURCES $ 10,506 $ 65 $ 30,095 $ 10,604 S 51,270
STA TUS OFBUDGETARYRESOURES
Obligations Incurred $ 10,456 $ 35 $ 10,156 S - $ 20,647
Unobligated Balance-Apportioned 16 19 5,609 - 5,644
Unob ligated Balance Not Available 34 I1 14.330 10.604 24.979
TOTALSTATUS OFBUDGEFARYRISOURCES $ 10,506 $ 65 $ 30,095 $ 10,604 $ 51,270
CHANGE IN OBLIGA TED BA LANCES
Obligated Balance. Net, Beginning of Period:
Unpaid Obligations Carried Forward S 66 S 205 $ 1,318 $ - 5 1,589
Receivable from Federal Sources Carried Forward - - (2) (232) (234)
Obligations Incurred 10,456 35 10,156 - 20,647
Gross Outlays (10,425) (40) (10,256) - (20,721)
Obligated Balance Transfers, Net:
Recoveries ofPrior Year Obligations (9) - (8) - (17)
Change in Receivable from Federal Sources - - - 147 147
Obligated Balance. Net. End of Period:
Unpaid Obligations 88 2(X) 1,210 - 1.498
Receivable from Federal Sources - - (2) (85) (87)
Outlays:
Disbursements $ 10,425 $ 40 S 10,256 $ - $ 20.721
Collections - (15) (22.914) (2,051) (24,980)
Subtotal 10,425 25 (12,658) (2,051) (4.259)
Less: Offsetting Receipts - - - - -
NFTO1J[LAYS $ 10,425 $ 25 $ (12,658) $ (2,051) $ (4,259)
84
Principal Financial Statements
Required Supplementary Information
Schedule D: Comparative Combining Budgetary Resources by Appropriation for the
MMI/CMHI
Program
September 30. 2008:
(Dollars in Millions)
Capital MMIICMHI
Program Liquidating Financing Reserve Total
BUDGETAR YRESOLIRCES
Unobligated Balance Carried Forward
Beginning of period $ 47 S 64 2.993
$ 5 22,395 $ 25,499
Recoveries of Prior Year Obligations 13 23 13 49
Budget Authority:
Appropriations received 77 77
Borrowing Authority 235 235
Spending Authority from Offsetting Collections:
Earned
Collected 13 12.185 1,289
-
13,487
Receivable from Federal Sources - *
- (29) (29)
Net Transfers 4.531 15 - (4,571) (25)
Permanently Not Available (17) (235)
-
- (252)
TOTAL BUDGETARY RESOURCES 5 4,651 $ 115 $ 15,191 $ 19,084 $ 39,041
STA TUS OF BUDGETARYRESOURCES
Obligations Incurred 5 4,603 5 65 $ 7.540 $ - $ 12,208
Unobligated Balance-Apportioned 4 50 2,125 - 2,179
Unob ligated Balance Not Available 44 5.526 19.084
-
24.654
TOTALSTATUSOFBUDGETARYRESOURCES $ 4,651 $ 115 $ 15,191 19,084
$ $ 39,041
CHANGE IN OBLIGA TED BALA N(’ES
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
Gross Outlays (4.595) (49) (7,361) - (12.005)
Obligated Balance Transfers. 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)
Outla\ s:
Disbursements $ 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)
Less: Offsetting Receipts - - - - -
NEOUTLAYS S 4,595 $ 36 $ (4,824) $ (1,289) $ (1,482)
85
Principal Financial Statements
Required Supplementary Information
Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GIJSRI Program
September 30, 2009:
(Dollars in Millions)
GI/SRI
Program Liquidating Financing Total
B UD GETAR YRESOURCES
Unobligated Balance Carried Forward
Beginning of period $ 88 $ 269 S 496 $ 853
Recoveries of Prior Year Obligations 8 8 3 19
Budget Authority:
Appropriations received 6,850 97 - 6,947
Borrowing Authority - 385 385
Spending Authority from Offsetting Collections:
Earned
Collected 298 8,317 8,615
Receivable from Federal Sources (5) 1 (4)
Net Transfers
Permanently Not Available (36) (305) (320 (661)
TOTAL BUDGEFARYRFS OURCIS S 6,910 $ 362 $ 8,882 $ 16,154
STA TUS OFBUDGETARYRESOURCES
Obligations Incurred $ 6,843 $ 175 $ 2,024 $ 9,042
Unobligated Balance-Apportioned 20 56 265 341
Unobligated Balance Not Available 47 131 6,593 6,771
TOTAL STATUS OFBUDGE[ARYRESOURCFS $ 6,910 $ 362 $ 8,882 $ 16,154
CHA NGE IN OBLIGA TED BA LANCES
Obligated Balance. Net. Beginning of Period:
Unpaid Obligations Carried Forward $ 98 $ 494 $ 278 S 870
Receivable from Federal Sources Carried Forward - (5) (1) (6)
Obligations Incurred 6,843 175 2,024 9,042
Gross Outlays (6,851) (191) (2,046) (9,088)
Obligated Balance Transfers, Net:
Recoveries ofPrior Year Obligations (8) (8) (3) (19)
Change in Receivable from Federal Sources - 5 (1) 4
Obligated Balance, Net, End ofPeriod:
Unpaid Obligations 82 470 253 805
Receivable from Federal Sources - - (2) (2)
Outlays:
Disbursements $ 6,851 S 191 $ 2,046 $ 9,088
Collections - (298) (8,317) (8,615)
Subtotal 6,851 (107) (6.271) 473
Less: OlYsetting Receipts - - - 183
NETOUTLAYS $ 6,851 S (107) $ (6,271) $ 290
86
Principal Financial Statements
Required Supplementary Information
Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GIJSRI Program
September 30, 2008:
(Dollars in Millions)
GIISRI
Program Liquidating Financing Total
B UDGE TA R YRESOURCES
Unobligated Balance carried Forward
Beginning of period $ 102 S 235 $ 1.084 S 1,421
Recoveries of Prior Year Obligations 9 27 6 42
Budget Authority:
Appropriations received 407 113 - 520
Borrowing Authority - 3 705 708
Spending Authority from Offsetting Collections:
Earned
Collected - 334 1,975 2,309
Receivable from Federal Sources - 4 (42) (38)
Net Transfers (16) - - (16)
Permanently Not Available (32) (244) (456) (732)
TOTALBUDGE[ARYR1SOURCES $ 470 S 472 S 3,272 S 4,214
STA TUS OF B UDGE TA R YRESOIIRCES
Obligations Incurred S 383 $ 203 $ 2,776 $ 3,362
Unobligated Balance-Apportioned 33 269 496 798
Unobligated Balance Not Available 54 - - 54
TOTALSTATUSOFBUDGKfARYRESOURCES $ 470 5 472 $ 3,272 $ 4,214
CHANGE IN OBLIGA TED BALANCES
Obligated Balance. Net, Beginning ofPeriod:
Unpaid Obligations Carried Forward $ 100 $ 571 $ 190 $ 861
Receivable from Federal Sources Carried Forward - - (44) (44)
Obligations Incurred 383 203 2,776 3.362
Gross Outlays (376) (253) (2,682) (3.311)
Obligated Balance Transfers. 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) ( I) (6)
Outlays:
Disbursements S 376 $ 253 $ 2.682 $ 3,311
Collections - (334) (1.975) (2.309)
Subtotal 376 (81) 707 1.002
Less: Offsetting Receipts - - - 1,511
NEI’ OUTLAYS $ 376 $ (81) $ 707 $ (509)
87
______
Principal Financial State,nents
Required Supplementary Information
Schedule F: Comparative Combining Budgetary Resources by Appropriation for the H4H Program
September 30. 2009:
(Dollars in Millions)
114H
Program Financing Total
B (IDGE TAR YRESOURCES
Unobligated Balance carried Forward
Beginning of period $ 9$ 9
Recoveries of Prior Year Obligations
Budget Authority:
Appropriations received 461 461
Borrowing Authority
Spending Authority from Offsetting Collections:
Earned
Collected 1 1
Receivable from Federal Sources
Net Transfers
Permanently Not Available
TOTAL BUDGEFARY RESOURCES $ 470 S I $ 471
STATUS OFBUDGETARYRESOURCES
Obligations Incurred $ 6 $ - $ 6
Unobligated Balance-Apportioned 464 1 465
Unobligated Balance Not Available - - -
TOTALSTATUSOFBUDGEFARYRESOURCFS $ 470 $ 1 $ 471
CHANGE IN OBLIGA TED BALANCES
Obligated Balance, Net. Beginning of Period:
Unpaid Obligations Carried Forward $ - $ - $
Receivable from Federal Sources Carried Forward - - -
Obligations Incurred 6 - 6
Gross Outlays (5) - (5)
Obligated Balance Transfers, Net:
Recoveries ofPrior Year Obligations -
-
Change in Receivable from Federal Sources - - -
Obligated Balance, Net, End of Period:
Unpaid Obligations I -
Receivable from Federal Sources - - -
Outlays:
Disbursements $ 5 $ - S 5
Collections — (I) (1)
Subtotal 5 (1) 4
Less:Offsetting Receipts - - -
NFTOITLAYS $ 5 $ (1) S 4
88
Principal Financial Statements
Required Supplementary Information
Schedule F: Comparative Combining Budgetary Resources by Appropriation for the H4H Program
September 30, 2008:
(Do1lai in Millions)
H411
Program Financing Total
BUD GE TAR YRESOIJRCES
Unobhgated Balance Carried Forward
Beginning ofpcriod s -s -s
Recoveries ofPrior Year Obligations
Budget Authority:
Appropriations received 30 30
Borrowing Authority
Spending Authority from Offsetting Collections:
Earned
Collected
Receivable from Federal Sources
Net Transfers
Permanently Not Available
TOTAL BU GETARV ROURC $ 30 $ - $ 30
STA TUS OF BUDGE TAR YRESOURCES
Obligations Incurred S 20 $ - $ 20
Unobligated Balance-Apportioned 10 - 10
Unobligated Balance Not Available -
TOTAL STATUS OFBUDGEFARYRfSOURC S 30 S - $ 30
CHANGE IN OBLIGA TED BALANCES
Obligated Balance, Net. Beginning of Period:
Unpaid Obligations Carried Forward S - $ - S -
Receivable from Federal Sources Carried Forward - - -
Obligations Incurred 20 - 20
Gross Outlays (20) - (20)
Obligated Balance Transfers, Net:
Recoveries ofPrior Year Obligations - - -
Change in Receivable from Federal Sources - - -
Obligated Balance, Net. End of Period:
Unpaid Obligations - - -
Receivable from Federal Sources - - -
Outlays:
Disbursements $ 20 S - $ 20
Collections - - -
Subtotal 20 - 20
Less: Offsetting Receipts .. - -
NC[ OUTlAYS S 20 S - S 20
89
Audit of the Federal Housing Administration's Financial Statements for Fiscal Years 2009 and 2008
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-11-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)