oversight

Audit of the Federal Housing Admininstration's Financial Statements for Fiscal Years 2010 and 2009

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-05.

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

                                                                          Issue l)ate
                                                                                 November 5, 2010
                                                                          Audit Case \urnber
                                                                                  201 l-FO-0002
    ud
  repor
TO:   David 1-1. Stevens. Assistant Secretary for Housing-Federal housing Commissioner. 1-1

                               :w4/’
FROM:      Thofnas R. \lcEnanlv. Dir tor, Financial Audits Division. GAF


SUBJECT:       Audit of the Federal Housing Administration’s Financial Statements for Fiscal
                 Years 2010 and 2009

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 Clifton
Gunderson (CG) to audit fiscal year 2010 financial statements of the Federal Housing
Administration (FHA). FHA’s financial statements as of and for the fiscal year ended September
30, 2009 ere audited by Urbach Kahn & Werlin LLP, which was acquired by CG on March 22,
2010. The contract required that the audit be performed according to generally accepted
government auditing standards (GAGAS).

CG is responsible for the attached Independent Auditor’s Report dated November 3, 2010 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 3, 2010 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 tiscal year 2010 that
conforms to FASAB standards.

The report contains two significant deficiencies in Fl-lA’s internal controls and one reportable
instance of noncompliance with laws and regulations. The report contains eight new
recommendations. Within 120 days of the 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 eight new recommendation(s) in the Department’s
Audit Resolution and Corrective Action Tracking system (ARCATS). We will also endeavor to
work ith FHA to reach a mutually acceptable management decision prior to the mandated
deadline. The proposed management decision and corrective action plan will he reviewed and
evaluated with concurrence from the 01G.

We appreciate the courtesies and cooperation extended to CG and OIG audit stalls during the
conduct of t11e audit.
(THIS PAGE LEFT BLANK INTENTIONALLY)
____________________________________________________________________________________
                                                                        2010-FO-0002




                                       Table of Contents
   OIG Transmittal Memorandum........................................................................................1

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

            Appendix A – Significant Deficiencies ............................................................ 11

            Appendix B – Management's Response ........................................................... 17

            Appendix C – CG’s Assessment of Management's Response ........................ 19

            Appendix D – Status of Prior Year Findings and Recommendations ............. 20

   Principal Financial Statements ...................................................................................... 23

            Consolidated Balance Sheets ............................................................................. 25

            Consolidated Statements of Net Cost ................................................................ 26

            Consolidated Statements of Changes in Net Position ....................................... 27

            Combined Statement of Budgetary Resources .................................................. 28

            Notes to Financial Statements ............................................................................ 30

            Required Supplementary Information ............................................................... 69




                                                         3
2011-FO-0002
____________________________________________________________________________________




                   (THIS PAGE LEFT BLANK INTENTIONALLY)




                                         4
  ____________________________________________________________________________________
                                                                          2011-FO-0002



    a1
                                    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 sheet 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, 2010 and
    the related consolidated statements of net cost, changes in net position, and the combined
    statement of budgetary resources (Principal Financial Statements) for the year 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:

         •     Effective monitoring of modernization efforts and existing systems are necessary to
               mitigate near-term financial reporting risks
         •     Economic conditions and inherent model design increase risks to management’s
               Liability for Loan Guarantee credit reform estimates

    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.




                                                                                         h
4250 N. Fairfax Drive, Suite 1020
Arlington, Virginia 22203
tel: 571.227.9500                       Offices in 17 states and Washington DC
fax: 571.227.9552
www.cliftoncpa.com
                                                              5
2011-FO-0002
____________________________________________________________________________________

                    INDEPENDENT AUDITOR’S REPORT, Continued


   Opinion on the Principal Financial Statements

   In our opinion, the Principal Financial Statements referred to above present fairly, in all
   material respects, the financial position of FHA as of September 30, 2010, and its net cost,
   changes in net position, and combined budgetary resources for the year then ended, in
   conformity with accounting principles generally accepted in the United States of America.
   The financial statements of FHA as of and for the year ended September 30, 2009 were
   audited by Urbach Kahn & Werlin LLP, of which practice was acquired by Clifton
   Gunderson LLP (CG) by merger on March 22, 2010. Urbach Kahn & Werlin LLP’s report
   dated November 9, 2009 expressed an unqualified opinion on those financial statements.

   As discussed in the footnotes to the Principal Financial Statements, the Loan Guarantee
   Liability (LGL) is an actuarially determined 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 regional house price appreciation forecasts to develop assumptions about future
   portfolio performance. Nearly 75% of the losses included in this reserve for the Mutual
   Mortgage Insurance (MMI) Fund are projected to be incurred in the next twenty four
   months and are based on the current volume of delinquent insured loans. Changes from
   the historical loss rates for these delinquent loans could have a material impact on this
   estimate.

   The MMI Fund includes a Capital Reserve account from which increases in funding to
   cover accrued claim losses are drawn. As of September 30, 2010, this Capital Reserve
   account had $11.3 billion available to cover further increases in the LGL. The Credit
   Reform Act of 1990 provides for permanent, indefinite budget authority should future
   increases in the LGL 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 (OMB) audit guidance, but not for the purpose of expressing an opinion on the
   effectiveness of FHA’s internal control. Accordingly, we do not express an opinion on
   FHA’s internal control.

   Our consideration of internal control over financial reporting was for the limited purpose
   described in the preceding paragraph and would not necessarily identify all deficiencies in
   internal control over financial reporting that might be significant deficiencies or material
   weaknesses. However, as described below, we identified deficiencies in internal control
   that we consider to be significant deficiencies.

   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 material weakness is a deficiency,
   or a combination of deficiencies, in internal control such that there is a reasonable
   possibility that a material misstatement of the entity’s financial statements will not be
   prevented, or detected and corrected on a timely basis. A significant deficiency is a
   deficiency, or a combination of deficiencies in internal control that is less severe than a
   material weakness, yet important enough to merit attention by those charge with

                                               6
____________________________________________________________________________________
                                                                        2011-FO-0002



                  INDEPENDENT AUDITOR’S REPORT, Continued


 governance. We noted two matters, summarized below and more fully described in
 Appendix A, involving the internal control and its operation that we consider to be
 significant deficiencies:

    Effective monitoring of modernization efforts and existing systems are necessary
    to mitigate near-term financial reporting risks

    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. These 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
    modernization efforts are completed. In FY2010, FHA initiated a multi-year
    systems modernization effort that will replace, as well as enhance, a number of
    critical FHA business systems and operational processes. Overall project plans
    have been developed but those plans will require additional detail as the project
    moves to its next phase. Furthermore, modernization project plans need to
    consider and incorporate the sustainability and scalability of the current systems
    until they are replaced.

    Economic conditions and inherent model design increase risks to management’s
    Liability for Loan Guarantee credit reform estimates

    FHA’s process for estimating the Liability for Loan Guarantee 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 significantly driven by historical claim payment
    patterns and numerous economic and portfolio variables. During FY2010, FHA
    and its independent actuary made significant improvements to the models.
    However, the current economic environment and the depressed housing market
    are causing changes in mortgage loan behavior that continue to strain the
    forecasting ability of the models. In the current extreme environment, the models
    do not have sufficient experience to confidently predict the effects of delays in
    foreclosures and claims, the increased use of FHA loss mitigation programs, and
    the risk of redefaults on mitigated loans.

    The design of the current models does not provide an effective way to
    communicate risks and the precision of the model estimates. The FHA financial
    statements may not effectively present the relative risks in management’s
    estimates in this challenging economic environment.

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

 Our consideration of internal control was for the limited purpose described in the first
 paragraph above and would not necessarily identify all significant deficiencies in internal
 control that are also considered to be material weaknesses. However, we believe neither
 of the significant deficiencies described above is a material weakness.



                                               7
2011-FO-0002
____________________________________________________________________________________

                   INDEPENDENT AUDITOR’S REPORT, Continued



   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 OMB Bulletin No. 07-04, Audit Requirements for
   Federal Financial Statements, as amended, as described below. Providing an opinion on
   compliance with laws and regulations 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 remained below the required two percent through FY2010.

   Supplementary Information

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

   Management Responsibilities

   Management is responsible for the information in the Annual Management Report,
   including the preparation of: 1) the Principal Financial Statements in conformity with
   accounting principles generally accepted in the United States of America, 2)
   Management’s Discussion and Analysis (including the performance measures), and 3)
   Required Supplementary Information. Management is also responsible for 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.




                                               8
____________________________________________________________________________________
                                                                        2011-FO-0002



                  INDEPENDENT AUDITOR’S REPORT, Continued


 Objectives, Scope and Methodology

 Our responsibility is to express an opinion on FHA’s Principal Financial Statements based
 on our audit. We conducted our audit in accordance with auditing standards generally
 accepted in the United States of America, the standards applicable to financial audits
 contained in Government Auditing Standards issued by the Comptroller General of the
 United States, and OMB Bulletin No. 07-04, as amended. Those standards and OMB
 Bulletin No. 07-04 require that we plan and perform the audit to obtain reasonable
 assurance about whether the Principal Financial Statements are free of material
 misstatement. An audit also includes examining, on a test basis, evidence supporting the
 amounts and disclosures in the financial statements, assessing the accounting principles
 used and significant estimates made by management, as well as evaluating the overall
 financial statement presentation. We believe our audit provides a reasonable basis for our
 opinion.

 In planning and performing our audit, 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 OMB 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
        material effect on the financial statements, and (3) any other laws,
        regulations, and government-wide policies identified by OMB audit guidance.
 We did not test all internal controls relevant to operating objectives as broadly defined by
 FMFIA, such as those controls relevant to preparing statistical reports and ensuring
 efficient operations. Because of inherent limitations in internal control, misstatements due
 to error or fraud may nevertheless occur and not be detected. We also caution that
 projecting our evaluation to future periods is subject to the risk that controls may become
 inadequate because of changes in conditions or that the degree of compliance with
 controls may deteriorate.
 We are also responsible for testing compliance with selected provisions of laws,
 regulations and government-wide policies that have a direct and material effect on the
 financial statements. We limited our tests of compliance to those laws and regulations
 required by OMB audit guidance that we deemed applicable to the financial statements for
 the fiscal year ended September 30, 2010. 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.


                                                9
2011-FO-0002
____________________________________________________________________________________

                    INDEPENDENT AUDITOR’S REPORT, Continued


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

   We also noted other less significant matters involving FHA’s internal control and its
   operation, which we have reported to the management of FHA in a separate letter, dated
   November 3, 2010.

   Distribution

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




   a1
   Arlington, Virginia
   November 3, 2010




                                             10
____________________________________________________________________________________
                                                                        2011-FO-0002


                                      Appendix A
                                Significant Deficiencies

 In our report dated November 3, 2010, we described the results of our audit of the
 consolidated balance sheet 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, 2010, and the related consolidated
 statements of net cost, changes in net position, and the combined statements of
 budgetary resources (Principal Financial Statements) for the year then ended. The
 objective of our audit was to express an opinion on these financial statements. In
 connection with our audit, 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. Many 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 2002, 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 during that period, few systems were replaced
 through 2008 and only two multifamily systems were replaced in FY2009. The
 subsequent housing crisis, several new housing program initiatives and the rebound in
 business volume illustrated the need for a comprehensive reassessment of FHA’s
 business processes in addition to the need for a systems upgrade. The 2009 Office of
 Housing’s IT Strategy and Improvement Plan served as the first entity-level systems risk
 assessment and provided the initial framework for the modernization effort currently
 underway. The Plan recommended 33 technology and architecture approaches and 25
 specific initiatives, including replacement of several of FHA’s largest and most key
 business systems. Critical objectives of the initiatives were to “improve fraud detection,
 improve risk management and loss mitigation, improve program operations and 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.

 1. Effective monitoring of modernization efforts and existing systems are
 necessary to mitigate near-term financial reporting risks

 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 current modernization efforts are completed. FHA needs to be

                                              11
2011-FO-0002
____________________________________________________________________________________
                                       Appendix A
                           Significant Deficiencies, Continued

   diligent in its oversight of the modernization effort and ensure the project considers the
   evolving risks to the existing infrastructure during the transition.

   By the end of FY2009, FHA had established a modernization project management office
   with a core leadership team. This team developed a modernization project plan and a
   concept of operations document, identified certain overarching needs and requirements,
   and awarded several contracts for system development risk assessment, requirements
   and design support services. They also issued a modernization risk management plan
   document that will be used to monitor systems development risks.

   The modernization project plan is a high-level summary plan of numerous tasks to be
   completed across each of the major phases of the project. This can be a useful oversight
   tool for general project management and enables the project to be broken down into
   specific steps with critical dependencies and timelines identified.

   The modernization project team also worked with the HUD Office of the Chief
   Information Officer to define the future computing environment within which the new
   systems will operate. They subsequently established that a modular, standard financial
   industry structure would be most practical given the current architecture and
   programmatic needs. They also completed a concept of operations plan and an OMB-
   required business case for the modernization project. Upon establishing this framework,
   the team developed an overarching risk management plan document which serves as a
   risk inventory that highlights potential delays or failures in the systems migration
   process.

   In order to begin work on the most critical initiatives, FHA awarded several multi-million
   dollar blanket purchase contracts for system development risk assessment,
   requirements determination, and design support services. This will allow FHA to begin
   the needs definition and design phases on the fraud mitigation, business intelligence,
   and counterparty risk management initiatives. FHA is scheduled to complete their risk
   assessment documents related to these initiatives in FY2011.

   The modernization project team also verbally highlighted several potential steps to
   upgrade key existing applications in the short term to ensure they continue to meet
   FHA’s needs until the modernization efforts are fully implemented.

   While FHA has made notable progress over the current year to get the modernization
   project started, the current overarching project plan will require more detail to define a
   fully-functioning governance structure for the overall project going forward.

   The project’s next phase will be more comprehensive and challenging. Given the
   magnitude of the recent contract awards, the personnel and financial resources
   dedicated to the modernization will increase dramatically in FY2011 and 2012. We
   believe that the existing documents (i.e. the overarching project plan, the risk
   management plan, and the initiative-level risk assessment) will require more detail to
   properly coordinate the many consultant teams throughout the next phase of the project.

   In addition, management has not provided documentation covering the sustainability of
   the existing systems during the modernization project. Such sustainability plans are not
   integrated into the overall project plan or the modernization risk management plan to



                                              12
____________________________________________________________________________________
                                                                        2011-FO-0002


                                     Appendix A
                         Significant Deficiencies, Continued

 ensure that they receive the necessary resources and do not lose visibility during the
 modernization life cycle.

 OMB Circular No. A-130, Management of Federal Information Resources, states in
 Section 8, Policy, that “Agencies must plan in an integrated manner for managing
 information throughout its life cycle. Agencies will:...(e)Integrate planning for information
 systems with plans for resource allocation and use, including budgeting, acquisition and
 use of information technology;…” It further states that “Agencies must establish and
 maintain a capital planning and investment control process that links mission needs,
 information, and information technology in an effective and efficient manner….The
 agency’s capital planning and investment control process must build from the agency’s
 Enterprise Architecture (EA) and its transition from current architecture to target
 architecture.”

 Recommendations

 We recommend that the Chair, FHA Transformation:

     1a. Further refine the risk management plan for the FHA Infrastructure
         Transformation Initiative to include formal risk mitigation strategies, key metrics,
         milestones, and monitoring and reporting requirements. The risk management
         plan should also include any potential risks associated with achievement of the
         strategic objectives related to the modernization plan. (New)
     1b. Continue developing the initiative specific risk assessment plans and ensure they
         address the risks inherent in the comprehensive nature of the modernization
         project. (Updated)
     1c. Define a project governance structure and key success factors (KSFs) for
         monitoring the consultants and measuring the success and achievement of the
         KSFs for the systems transformation project over the next phase as well as the
         next three years. (New)
     1d. Perform a formal documented risk assessment on the sustainability and
         scalability of the current systems and processes during the modernization
         project. Based on the risk assessment, develop a risk management plan
         incorporating the risk identified for the sustainability of the legacy environment
         over the next five years. (New)

 2. Economic conditions and inherent model design increase                         risks   to
 management’s Liability for Loan Guarantee credit reform estimates

 The Cranston-Gonzales National Affordable Housing Act of 1990 requires HUD to
 conduct an independent annual evaluation of the economic value and capital ratio of the
 Mutual Mortgage Insurance (MMI) fund. FHA uses the actuarially calculated
 assumptions regarding future claims, prepayments and recoveries in its cash flow
 models to estimate the net present value of future cash flows that make up the Single
 Family Liability for Loan Guarantee.

 FHA’s current contracted actuary has been conducting this evaluation of the MMI fund
 since 2004 and over that time has integrated numerous enhancements to their actuarial


                                               13
2011-FO-0002
____________________________________________________________________________________
                                       Appendix A
                           Significant Deficiencies, Continued

   model to more effectively account for key risk factors, changes in the macroeconomic
   environment, program policies and the composition of the portfolio. Some of these
   changes include:

      •   Inclusion of a credit score variable
      •   Consideration of the effect of seller-funded down payment assistance
      •   Increased loan limits
      •   Recognition of home price dispersion from regional averages
      •   Expansion of loss mitigation programs
      •   Incorporation of new policies and programs (e.g. Hope for Homeowners)
      •   Recognition of the changing geographic distribution of the portfolio
      •   Incorporation of an econometric recovery model
      •   Use of enhanced stress testing

   In FY2009, we reported that the inherent structure of the actuarial model used by the
   actuary might understate near-term claim levels in the current challenging economic
   environment. We recommended that management:
       • Incorporate Metropolitan Statistical Area (MSA)-level forecast data in the
           models.
       • Analyze delinquency data, default causes, recoveries and other potential leading
           indicators to determine whether they would better predict near-term claim costs.
       • Document their analyses and conclusions.

   Through FY2010, FHA expanded their analysis of performance data and included this
   information in their HERA Quarterly Reports to Congress. The independent actuary’s
   current year models incorporate MSA-level house price forecast data to better account
   for the wider dispersion of projected house price appreciation across the US. FHA also
   enhanced their analysis of streamlined refinanced loans to more accurately identify the
   original source loan, so the actuary could carry forward the original loan characteristics
   and more accurately estimate the borrower’s current equity position. Also for FY2010,
   the actuary developed a delinquency “transition” model to better account for the recent
   delays in foreclosure processing and claim filings, and to better estimate the impact of
   the significant increases in volume and duration of delinquent loans that have not yet
   “developed” into claims. They also incorporated new premium rate structures for FY2011
   and forward as enacted by Congress in late September 2010.

   The dramatic shift in the mortgage market in response to the economic crisis and the
   resulting fundamental changes in loan behavior continue to strain the econometric
   functionality of the actuarial model. These fundamental behavioral and programmatic
   changes include:

      •   Projecting claim levels beyond all but the most extreme FHA program experience
      •   Making changes in the predominant cause of defaults
      •   Recognizing loans with negative equity positions in excess of 40%
      •   Increasing delays in the time to process foreclosures and related claim filings
      •   Increasing use of loss mitigation programs
      •   Excessively restrictive credit market
      •   Continuing protracted weakness in the housing market




                                              14
____________________________________________________________________________________
                                                                        2011-FO-0002



                                     Appendix A
                         Significant Deficiencies, Continued

 In normal market environments, the actuarial models are now designed to reasonably
 forecast the insured mortgage claim liability. In the current extreme environment, the
 models do not have sufficient experience to predict the cash flow effects of delays in
 completing foreclosures and claims, the increased use of loss mitigation, and the
 potential for redefaults on mitigated loans.

 We noted that the default transition model was calibrated with historical claim experience
 from the latest 20-year period, which did not include a period of prolonged economic
 downturn. Furthermore, we think that delays in processing foreclosures and claims may
 cause the default transition model to understate near-term forecasted claims. These
 delays may also affect the longer-term claim payment model results.

 In FY2011 and beyond, management expects that a large number of the currently
 delinquent loans will take part in various FHA loss mitigation programs. FHA has not
 performed a comprehensive analysis of the risk of redefault on mitigated loans and the
 delinquency transition model does not identify a specific redefault risk. FHA also has not
 analyzed the impact of recent loss mitigation efforts on its overall future claim
 projections.

 The independent actuary’s report stated that consistent and reliable model results are
 based on the constancy of the relationships among the loan variables in the model.
 However, when a quantum change in the mortgage market occurs, these predictive
 relationships break down and the models may be slow to adapt to the changes. The
 independent actuary concluded that they did not see evidence that such a shift had
 occurred. However, we believe such a quantum change has occurred and that it
 potentially affects the predictiveness of the default transition model, future claim
 payment, and prepayment models for FY2011 and FY2012. We noted a number of
 counterintuitive model results that suggest that such a shift has occurred. Management’s
 documentation of their review of the actuarial report did not include an analysis or
 explanation of these counterintuitive results.

 FASAB Technical Release 6, Preparing Estimates for Direct Loans and Loan Guarantee
 Subsidies states, “The cash flow estimation process, including all underlying
 assumptions, should be reviewed and approved at the appropriate level including
 revisions and updates to the original model. Cash flow models should be tested for
 reliability as part of the approval process by comparing estimated cash flows to actual
 cash flows and assessing the model’s ability to replicate a credit program’s
 performance.”

 The design of the current model does not provide an effective way to communicate risks
 as well as the precision of the model estimates. The FHA financial statements may not
 effectively present the relative risks in management’s estimates in this challenging
 economic environment.

 Recommendations

 We recommend that FHA’s Deputy Assistant Secretary for Finance and Budget and
 Deputy Assistant Secretary for Risk Management and Regulatory Affairs:



                                              15
2011-FO-0002
____________________________________________________________________________________
                                      Appendix A
                          Significant Deficiencies, Continued

      2a. Document their specific review and acceptance of the key assumptions, including
          key variables, in conjunction with their acceptance of the actuarial study. (New)
      2b. Document the final overall management conclusion on whether the analyses
          performed suggest whether adjustments to the model, calculated assumptions,
          or projected cash flows are warranted, and if so, how those adjustments are
          determined and their resulting value. (Updated)
      2c. Review and monitor the potential impact of delayed claims and the growth in loss
          mitigation programs on the counterintuitive model results to ensure the
          anticipated variable relationships will continue. (New)
      2d. Analyze the risk of redefaults and claims on loans that have undergone loss
          mitigation. (New)
      2e. Investigate potential enhancements to the actuarial model to better communicate
          the precision of its estimates. (New)
      2f. Ensure the Annual Report and financial statements effectively present critical
          factors that may impact current estimates and management’s views on the
          probability of significant changes in these factors. (New)




                                             16
____________________________________________________________________________________
                                                                        2011-FO-0002




                               Appendix B
                          Management’s Response




                                        17
2011-FO-0002
____________________________________________________________________________________
                                 Appendix B
                       Management’s Response, Continued




                                         18
____________________________________________________________________________________
                                                                        2011-FO-0002
                                 Appendix C
                   CG’s Assessment of Management’s Response
   CG has obtained and reviewed FHA management’s response to the findings and
   recommendations made in connection with our audit of FHA’s 2010 Principal Financial
   Statements, which is included as Appendix B. We did not perform audit procedures on
   FHA’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 No. 1:

   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 the recommendations.

   Assessment of management’s response to significant deficiency No. 2:

   As indicated in Appendix B, FHA management concurred with our findings and
   recommendations. The specific actions proposed appear to adequately respond to each
   recommendation.




                                            19
2011-FO-0002
____________________________________________________________________________________
                                      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 2010
           FY 2009 Finding/Recommendation                            Type
                                                                                     Status
    1a. The HUD Office of the Chief Information Officer in        Significant   Resolved
        coordination with the Assistant Secretary for             Deficiency
        Housing,       FHA       Commissioner          continue   2009
        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)
    2a. The HUD Office of Chief Information Officer, in           Significant   Partially resolved
        coordination with the FHA Commissioner, Assistant         Deficiency    (See Significant
        Secretary for Housing should conduct a risk               2009          Deficiency 1)
        assessment of the various system initiatives and
        required corrective actions in connection with the
        OCIO Strategic Plan and the IT Strategy and
        Improvement Plan. (Updated)
    2b. Develop a prioritized plan of activities, including the   Significant   Partially resolved
        development        of   the    required      enterprise   Deficiency    (See Significant
        architecture, into a detailed implementation plan to      2009          Deficiency 1)
        support the IT Strategy and Improvement Plan
        presented to Congress. (New)

    3a. Continue to analyze trend data on seriously               Significant   Partially resolved
        delinquent aged loans and determine whether a             Deficiency    (See Significant
        statistical correlation exists to support this metric     2009          Deficiency 2)
        as a leading indicator for short-term claim payment
        trends. (New)
    3b. Continue to track and report the reasons for default      Significant   Resolved
        and as long as “loss of income” remains a major           Deficiency
        factor for default, determine whether another             2009
        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          Significant   Resolved
        order to better support near-term projected               Deficiency
        recovery rates. (New)                                     2009
    3d. Expand management’s financial cash flow model             Significant   Resolved
        validation documentation to include expanded              Deficiency
        analyses of seriously delinquent aged loans data,         2009
        case level historical recovery data, and other
        leading indicators as appropriate. (New)
    3e. Conduct research into available information on            Significant   Resolved
        inventories and sales of “distressed” properties and      Deficiency
        consider whether such an indicator can be used to         2009
        assist in supporting near-term trends in historical




                                                 20
____________________________________________________________________________________
                                                                        2011-FO-0002




                                  Appendix D
       Status of Prior Year Findings and Recommendations, Continued

                                                                           Fiscal Year 2010
         FY 2009 Finding/Recommendation                         Type
                                                                                Status
     and projected recovery rates. (New)
  3f. Document the final overall management conclusion Significant         Partially resolved
      whether the analyses performed suggest whether Deficiency            (See Significant
      adjustments to the projected cash flows are 2009                     Deficiency 2)
      warranted, and if so, how those adjustments are
      determined and their resulting value. (New)

  4a. The Director, Office of Financial Analysis and         Significant   Resolved
      Reporting, Office of the Comptroller should            Deficiency
      coordinate with the Multifamily Insurance              2009
      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        Significant   Resolved
      develop automated edit checks in FHASL to              Deficiency
      prevent the same person from performing                2009
      conflicting functions on the same transaction.
      (New)
  4c. Terminate the parallel deployment of the Revenue       Significant   Resolved
      Management and MFIS/F47 modules and restrict           Deficiency
      access to the development environment of FHASL         2009
      to only those individuals with development
      responsibilities. (New)
  4d. Limit developers’ access to the production             Significant   Resolved
      environment to read-only, and ensure any support       Deficiency
      or training is completed in a test environment.        2009
      (New)
  4e. Ensure proper implementation of the PeopleSoft         Significant   Resolved
      application audit logging by identifying the data      Deficiency
      elements and the actions to capture, selecting the     2009
      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        Significant   Resolved
      of the audit logs by updating policies and             Deficiency
      procedures to incorporate the generation of the        2009
      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           Significant   Resolved
      manual account reviews to ensure disabling of          Deficiency
      accounts that have been inactive for 90 days           2009
      consistent with HUD’s Security Policy. (New)




                                              21
2011-FO-0002
____________________________________________________________________________________




                   (THIS PAGE LEFT BLANK INTENTIONALLY)




                                         22
____________________________________________________________________________________
                                                                        2011-FO-0002




                               PRINCIPAL
                               FINANCIAL
                              STATEMENTS




                                        23
2011-FO-0002
____________________________________________________________________________________




                   (THIS PAGE LEFT BLANK INTENTIONALLY)




                                         24
  ____________________________________________________________________________________
                                                                          2011-FO-0002


                          FEDERAL HOUSING ADMINISTRATION
          (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                            CONSOLIDATED BALANCE SHEETS
                              As of September 30, 2010 and 2009
                                     (Dollars in Millions)

                                                                                       FY 2010           FY 2009
ASSETS
  Intragovernmental
    Fund Balance with U.S. Treasury (Note 3)                                       $        39,078   $      30,130
    Investments (Note 4)                                                                     4,150          10,635
    Other Assets (Note 7)                                                                        5             16
  Total Intragovernmental                                                                   43,233          40,781

  Investments (Note 4)                                                                         136            145
  Accounts Receivable, Net (Note 5)                                                             16             16
  Loans Receivable and Related Foreclosed Property, Net (Note 6)                             6,136           4,446
  Other Assets (Note 7)                                                                         76            129
TOTAL ASSETS                                                                       $        49,597   $     45,517


LIABILITIES
  Intragovernmental
    Borrowings from U.S. Treasury (Note 9)                                         $         4,749   $       4,420
    Other Liabilities (Note 10)                                                              1,165           1,913
  Total Intragovernmental                                                                    5,914           6,333

  Accounts Payable (Note 8)                                                                    647            639
  Loan Guarantee Liability (Note 6)                                                         34,958          34,022
  Debentures Issued to Claimants (Note 9)                                                       10             14
  Other Liabilities (Note 10)                                                                  427            416
TOTAL LIABILITIES                                                                           41,956         41,424


NET POSITION
  Unexpended Appropriations (Note 16)                                                          880            832
  Cumulative Results of Operations                                                           6,761           3,261
TOTAL NET POSITION                                                                           7,641          4,093


TOTAL LIABILITIES AND NET POSITION                                                 $     49,597      $     45,517




                         The accompanying notes are an integral part of these statements.




                                                       25
   2011-FO-0002
   ____________________________________________________________________________________


                            FEDERAL HOUSING ADMINISTRATION
           (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                         CONSOLIDATED STATEMENTS OF NET COST
                         For the Periods Ended September 30, 2010 and 2009
                                         (Dollars in Millions)




                                                    MMI/CMHI                GI/SRI         H4H            Total
FY 2010
Intragovernmental Gross Costs (Note 12)              $          160     $       144    $          2   $       306
Less: Intragovernmental Earned Revenue (Note 13)              2,135             412               -         2,547
Intragovernmental Net Costs                                   (1,975)          (268)              2        (2,241)


Gross Costs with the Public (Note 12)                         (2,543)         3,359              10           826
Less: Earned Revenue from the Public (Note 13)                   63              70               -           133
Net Costs with the Public                                     (2,606)         3,289              10           693
NET PROGRAM COST (SURPLUS)                           $        (4,581)   $     3,021    $         12   $    (1,548)




                                                    MMI/CMHI                GI/SRI         H4H            Total
FY 2009
Intragovernmental Gross Costs (Note 12)              $          167     $       131    $          5   $       303
Less: Intragovernmental Earned Revenue (Note 13)              1,756             392               -         2,148
Intragovernmental 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 PROGRAM COST (SURPLUS)                           $        7,436     $     4,970    $         17   $    12,423




                       The accompanying notes are an integral part of these statements.




                                                         26
 ____________________________________________________________________________________
                                                                         2011-FO-0002


                           FEDERAL HOUSING ADMINISTRATION
          (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                      CONSOLIDATED STATEMENTS OF NET POSITION
                        For the Periods Ended September 30, 2010 and 2009
                                        (Dollars in Millions)




                                                 FY 2010             FY 2010             FY 2009             FY 2009
                                                Cumulative                              Cumulative
                                                Results of        Unexpended            Results of        Unexpended
                                                Operations       Appropriations         Operations       Appropriations

BEGINNING BALANCES                          $         3,261      $         832      $        10,347      $         411


BUDGETARY FINANCING SOURCES
 Appropriations Received (Note 16)                           -           1,231                       -           7,554
 Other Adjustments (Note 16)                                 7             (47)                      -             (59)
 Appropriations Used (Note 16)                          981               (981)               6,929              (6,929)
 Transfers-Out (Note 15 and Note 16)                   (559)              (155)                (347)              (145)


OTHER FINANCING SOURCES
 Transfers In/Out (Note 15)                           1,504                     -            (1,260)                   -
 Imputed Financing (Note 12)                               19                   -                  15                  -
TOTAL FINANCING SOURCES                     $         1,952      $             48   $         5,337      $         421


NET (COST) SURPLUS OF OPERATIONS                      1,548                     -           (12,423)                   -


ENDING BALANCES                             $         6,761      $         880      $         3,261      $         832




                        The accompanying notes are an integral part of these statements.




                                                        27
     2011-FO-0002
     ____________________________________________________________________________________


                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                               For the Period Ended September 30, 2010
                                         (Dollars in Millions)


                                                                   FY 2010          FY 2010               FY 2010
                                                                  Budgetary      Non-Budgetary             Total
BUDGETARY RESOURCES
Unobligated Balance, brought forward, October 1               $        11,401    $       26,799       $       38,200
Recoveries of prior year unpaid obligations                                58                70                  128
Budget Authority:
   Appropriations                                                       1,231                   7              1,238
   Borrowing authority                                                     10                 790                800
   Spending authority from offsetting collections (gross):
      Earned
         Collected (Note 18)                                            3,970            28,185               32,155
         Change in receivables from Federal sources                       (62)               (3)                 (65)
      Change in unfilled customer order w/o advance                         -                (1)                  (1)
Nonexpenditure transfers, net (Note 19)                                   (72)                -                  (72)
Permanently not available                                                (262)             (449)                (711)
TOTAL BUDGETARY RESOURCES                                     $       16,274     $      55,398        $      71,672

STATUS OF BUDGETARY RESOURCES
Obligations incurred, Direct (Note 20)                        $        11,017    $       20,749       $       31,766
Unobligated balance-Apportioned                                           513             4,064                4,577
Unobligated balance-Not available                                       4,744            30,585               35,329
TOTAL STATUS OF BUDGETARY RESOURCES                           $       16,274     $      55,398        $      71,672

Change in Obligated Balances
Obligated balance, net:
   Unpaid obligations, brought forward, October 1             $          840     $           1,464    $        2,304
   Uncollected customer payments from Federal sources,                   (86)                   (3)              (89)
   brought forward, October 1
Total, unpaid obligated balance, brought forward, net                     754             1,461                2,215
Obligations incurred (Note 20)                                         11,017            20,749               31,766
Gross outlays                                                         (11,027)          (20,252)             (31,279)
Recoveries of prior-year unpaid obligations, actual                       (58)              (70)                (128)
Change in uncollected customer payments-Federal sources                    62                 3                   65
Total, unpaid obligated balance, net, end of period                       748             1,891                2,639
Obligated balance, net, end of period:
   Unpaid obligations (Note 17)                                          772                 1,891             2,663
   Uncollected customer payments from Federal sources                    (24)                    -               (24)
Total, unpaid obligated balance, net, end of period                      748                 1,891             2,639
Net outlays:
   Gross outlays                                              $        11,027    $       20,252       $       31,279
   Offsetting collections (Note 18)                                    (3,970)          (28,185)             (32,155)
   Less: Distributed offsetting receipts                                  619                 -                  619
NET OUTLAYS                                                   $        6,438     $      (7,933)       $      (1,495)




                           The accompanying notes are an integral part of these statements




                                                             28
   ____________________________________________________________________________________
                                                                           2011-FO-0002


                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                               For the Period Ended September 30, 2009
                                         (Dollars in Millions)


                                                                       FY 2009          FY 2009            FY 2009
                                                                      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)
      Change in unfilled customer order w/o advance                             -                -                  -
Nonexpenditure transfers, net (Note 19)                                       (58)               -                (58)
Permanently not available                                                    (364)            (883)            (1,247)
TOTAL BUDGETARY RESOURCES                                         $       28,916     $     38,979      $      67,895

STATUS 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.




                                                             29
      2011-FO-0002
      ____________________________________________________________________________________



                    NOTES TO THE FINANCIAL STATEMENTS
                                             September 30, 2010

Note 1. Significant Accounting Policies

Entity and Mission

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

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

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

FHA supports its insurance 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 MMI fund that
are not required for operating expenses and losses or to build equity. The Cooperative Management Housing
Insurance fund (CMHI), another mutual fund, provides mortgage insurance for management-type cooperatives.
The General Insurance fund (GI), provides a large number of specialized mortgage insurance activities, including
insurance of loans for property improvements, cooperatives, condominiums, housing for the elderly, land
development, group practice medical facilities, nonprofit hospitals, and reverse mortgages. The Special Risk
Insurance fund (SRI) provides mortgage insurance on behalf of mortgagors eligible for interest reduction
payments who otherwise would not be eligible for mortgage insurance. Activities related to most Single Family
programs, including HECM, endorsed in Fiscal Year 2009 and going forward, are in the MMI 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 required FHA to modify existing programs and initiated the
H4H program.

In fiscal year 2010, FHA received appropriations for the Energy Innovation and Transformation Initiative
programs. The Energy Innovation program is intended to catalyze innovations in the residential energy efficiency
sector that have the ability to be replicated and to help create a standardized home energy efficient retrofit market.
The appropriation for the Transformation Initiative is for combating mortgage fraud.




                                                            30
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Basis of Accounting

The principal financial statements are presented in conformity with accounting principles generally accepted in
the United States of America (GAAP) applicable to Federal agencies as promulgated by the Federal Accounting
Standards Advisory Board (FASAB). The recognition and measurement of budgetary resources and their status
for purposes of preparing the Combined Statements of Budgetary Resources (SBR), is based on concepts and
guidance provided by Office of Management and Budget (OMB) Circular A-11, Preparation, Submission, and
Execution of the Budget 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 principal program funds, revolving funds, 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 OMB Circular A-136, Financial Reporting
Requirements.

Fund Balance with U.S. Treasury

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

Investments

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

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

In connection with an Accelerated Claims Disposition Demonstration program (the 601 program), FHA transfers
assigned mortgage notes to private sector entities in exchange for cash and equity interest. FHA uses the equity
method of accounting to measure the value of its investments in these entities.

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 the claim amount paid by FHA on defaulted insured loans.




                                                        31
      2011-FO-0002
      ____________________________________________________________________________________


Credit Reform Accounting

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

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

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

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

Loans Receivable and Related Foreclosed Property, Net

FHA’s loans receivable include mortgage notes assigned (MNA), also described as Secretary-held notes, purchase
money mortgages (PMM), and notes related to partial claims. Under the requirements of the FCRA, PMM notes
are considered to be direct loans while MNA notes are considered to be defaulted guaranteed loans. The PMM
loans are generated from the sales on credit of FHA’s foreclosed properties to qualified non-profit organizations.
The MNA notes are created when FHA pays the lenders for claims on defaulted guaranteed loans and takes
assignment of the defaulted loans 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. Partial claims notes arise when FHA pays a loss mitigation amount to keep a borrower
current on their loan. FHA, in turn, records a loan receivable which takes a second position to the primary
mortgage.




                                                          32
    ____________________________________________________________________________________
                                                                            2011-FO-0002


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

Loan Guarantee Liability

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

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

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

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

Use of Estimates

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

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

To estimate the Allowance for Subsidy 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. FHA
develops the assumptions based on historical performance and management's judgments about future loan
performance.



                                                        33
      2011-FO-0002
      ____________________________________________________________________________________


General Property, Plant and Equipment

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

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

Appropriations

FHA receives annual appropriations for certain operating expenses for its MMI/CMHI, GI/SRI, and H4H program
activities, some of which are transferred to HUD. Additionally, FHA receives appropriations for GI/SRI positive
subsidy, upward reestimates, and permanent indefinite authority to cover any shortage of resources in the
liquidating account. With the Energy Innovation appropriation of $50 million, Congress directed HUD to target
$25 million to the single family market and $25 million to the multifamily market. The entire appropriation for
the Transformation Initiative, $20 million, is for combating mortgage fraud.

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. HUD allocates each responsibility segment’s share of the program costs or resources provided by
other Federal agencies. As a responsibility segment of HUD, FHA’s portion of these costs was $19 million for
fiscal year 2010 and $15 million for fiscal year 2009, 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.

Distributive Shares

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

Liabilities Covered by Budgetary Resources

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




                                                            34
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Statement of Budgetary Resources

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

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

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




                                                       35
     2011-FO-0002
     ____________________________________________________________________________________


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, 2010 and 2009 are as follows:

               (Dollars in Millions)                                      FY 2010       FY 2009
               Intragovernmental:
                           Fund Balance with U.S. Treasury               $       668   $       202
                           Investments in U.S. Treasury Securities                 -             4
               Total Intragovernmental                                           668           206

                          Other Assets                                            70            92
               Total Non-entity Assets                                           738           298
               Total Entity Assets                                            48,859        45,219
               Total Assets                                              $   49,597    $   45,517



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

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

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




                                                            36
    ____________________________________________________________________________________
                                                                            2011-FO-0002


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, 2010 and 2009:

             (Dollars in Millions)                                    FY 2010               FY 2009
              Fund Balances:
                     Revolving Funds                              $       37,404        $       29,141
                     Appropriated Funds                                      790                   750
                     Other Funds                                             884                   239
              Total                                               $      39,078         $      30,130

              Status of Fund Balance with U.S. Treasury:
                     Unobligated Balance:
                                   Available                      $        4,577        $        6,450
                                   Unavailable                            31,838                21,376
                     Obligated Balance not yet Disbursed                   2,663                 2,304
              Total                                               $      39,078         $      30,130


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 annual or multi-year program accounts that expire at the end of the time
period specified in the authorizing legislation. For the subsequent five fiscal years after expiration, the resources
are available only to liquidate valid obligations incurred during the unexpired period. Adjustments are allowed to
increase or decrease valid obligations incurred during the unexpired period that were not previously reported. At
the end of the fifth expired year, the annual and multi-year program accounts are cancelled and any remaining
resources are returned to the U.S. Treasury.

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


                                                           37
     2011-FO-0002
     ____________________________________________________________________________________


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, 2010 were as follows:
                                                                        Amortized
                                                                        (Premium)/            Investment,
          (Dollars in Millions)                   Cost                 Discount, Net              Net             Market Value

          MMI/CMHI Investments           $               4,086         $             41       $          4,127    $          5,117
          GI/SRI Investments                                 -                        -                      -                   -
                             Subtotal    $               4,086         $             41       $          4,127    $          5,117

          MMI/CMHI Accrued Interest                        -                       -          $            23     $            23
          Total                          $             4,086           $          41          $         4,150     $         5,140

The cost, net amortized premium/discount, net investment, and market values as of September 30, 2009 were as
follows:
                                                                         Amortized
                                                                        (Premium)/                Investment,
         (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

         MMI/CMHI Accrued Interest                       -                            -       $            84     $            84
         Total                           $          10,468             $             83       $        10,635     $        11,948

Investments in Private-Sector Entities

Investments in Section 601 and Risk Sharing Debentures as of September 30, 2010 and 2009 were as follows:

                                                                 Share of
                                  Beginning           New        Earnings  Return of                                      Ending
        (Dollars in Millions)      Balance         Acquisitions or Losses Investment Redeemed                             Balance
         FY 2010
         601 Program             $         12      $              -        $     -        $        (3) $           - $           9
         Risk Sharing Debentures          133                    38             -                    -           (44)          127
        Total                    $       145       $             38        $    -         $        (3) $         (44) $        136

        FY 2009
         601 Program             $           18    $               -       $    (4) $               (2) $          - $          12
         Risk Sharing Debentures             30                  137             -                   -           (34)          133
        Total                    $           48    $             137       $    (4) $               (2) $        (34) $        145



The reporting period for the Section 601 Program investments was from December 1, 2008 to December 31,
2009. The condensed, audited financial statements reported $51 million in assets, $51 million in liabilities and
partner’s capital, and $1.5 million in net loss for these investments.


                                                                           38
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 5. Accounts Receivable, Net

Accounts receivable, net, as of September 30, 2010 and 2009 are as follows:

                                          Gross                   Allowance                      Net
      (Dollars in Millions)         FY 2010    FY 2009       FY 2010     FY 2009      FY 2010          FY 2009
      With the Public:
       Receivables Related to       $     11     $    17     $     (3)   $      (7)   $      8         $    10
       Credit Program Assets
       Premiums Receivable                 1           2            -           -            1               2
       Generic Debt Receivables          103          75         (103)        (75)           -               -
       Miscellaneous Receivables           7           4            -           -            7               4
      Total                         $    122     $    98     $   (106)   $    (82)    $     16         $    16


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.




                                                       39
     2011-FO-0002
     ____________________________________________________________________________________


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


  Direct Loan and Loan Guarantee Programs Administered by FHA Include:

  MMI/CMHI Direct Loan Program
  GI/SRI Direct Loan Program
  MMI/CMHI Loan Guarantee Program
  GI/SRI Loan Guarantee Program
  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 FHA 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
     MMI                      203(b)                            203(b), 234(c), HECM

FHA Direct Loan and Loan Guarantee Programs and the related loans receivable, foreclosed property, and Loan
Guarantee Liability as of September 30, 2010 and 2009 are as follows:

Direct Loan Program

                        (Dollars in Millions)
                        FY 2010                                            Total
                        Direct Loans
                               Loans Receivable                      $              20
                                Interest Receivable                                 10
                                Allowance                                          (16)
                        Total Direct Loans                           $             14

                        FY 2009                                            Total
                        Direct Loans
                               Loans Receivable                      $              13
                                Interest Receivable                                  5
                                Allowance                                          (13)
                        Total Direct Loans                           $               5




                                                       40
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):
          (Dollars in Millions)
          FY 2010                                      MMI/CMHI         GI/SRI          Total
          Guaranteed Loans
              Single Family Forward
                 Loans Receivable                  $          16 $                7 $            23
                 Interest Receivable                            -                 1               1
                 Allowance for Loan Losses                     (9)               (5)            (14)
                 Foreclosed Property                          16                  2              18
              Subtotal                             $          23 $                5 $           28
              Multifamily
                 Loans Receivable                  $              - $        2,571 $         2,571
                 Interest Receivable                              -            213             213
                 Allowance for Loan Losses                        -         (1,825)         (1,825)
              Subtotal                             $              - $         959 $           959
              HECM*
                 Loans Receivable                  $              - $             4 $             4
                 Interest Receivable                              -               1               1
                 Allowance for Loan Losses                        -              (1)             (1)
                 Foreclosed Property                              -               2               2
              Subtotal                             $              - $             6 $             6

          Total Guaranteed Loans                   $          23    $        970    $           993



          (Dollars in Millions)
          FY 2009                                      MMI/CMHI         GI/SRI          Total
          Guaranteed Loans
              Single Family Forward
                 Loans Receivable                  $           19 $               8 $            27
                 Interest Receivable                            3                 3               6
                 Allowance for Loan Losses                    (12)               (7)            (19)
                 Foreclosed Property                           16                 2              18
              Subtotal                             $          26 $                6 $           32
              Multifamily
                 Loans Receivable                  $              - $        2,668 $         2,668
                 Interest Receivable                              -            199             199
                 Allowance for Loan Losses                        -         (2,162)         (2,162)
              Subtotal                             $              - $         705 $           705
              HECM*
                 Loans Receivable                  $              - $             5 $             5
                 Interest Receivable                              -               2               2
                 Allowance for Loan Losses                        -              (1)             (1)
                 Foreclosed Property                              -               2               2
              Subtotal                             $              - $             8 $             8

          Total Guaranteed Loans                   $          26    $        719    $           745


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



                                                   41
    2011-FO-0002
    ____________________________________________________________________________________


Defaulted Guaranteed Loans from Post-1991 Guarantees:
          (Dollars in Millions)
          FY 2010                                      MMI/CMHI         GI/SRI          Total
          Guaranteed Loans
              Single Family Forward
                 Loans Receivable                  $           728 $           39 $            767
                 Interest Receivable                             -              2                2
                 Foreclosed Property                         6,833            379            7,212
                 Allowance for Subsidy Cost                 (4,282)          (241)          (4,523)
              Subtotal                             $        3,279 $          179 $          3,458
              Multifamily
                 Loans Receivable                  $              - $         641 $              641
                 Allowance for Subsidy Cost                       -          (353)              (353)
              Subtotal                             $              - $        288 $              288
              HECM*
                 Loans Receivable                  $              - $        1,103 $         1,103
                 Interest Receivable                              -            524             524
                 Foreclosed Property                              -             44              44
                 Allowance for Subsidy Cost                       -           (288)           (288)
              Subtotal                             $              - $       1,383 $         1,383

          Total Guaranteed Loans                   $        3,279   $       1,850   $       5,129


          (Dollars in Millions)
          FY 2009                                      MMI/CMHI         GI/SRI          Total
          Guaranteed Loans
              Single Family Forward
                 Loans Receivable                  $           560 $           31 $            591
                 Interest Receivable                             -              1                1
                 Foreclosed Property                         4,875            281            5,156
                 Allowance for Subsidy Cost                 (3,165)          (187)          (3,352)
              Subtotal                             $        2,270 $          126 $          2,396
              Multifamily
                 Loans Receivable                  $              - $         594 $              594
                 Allowance for Subsidy Cost                       -          (292)              (292)
              Subtotal                             $              - $        302 $              302
              HECM*
                 Loans Receivable                  $              - $         772 $              772
                 Interest Receivable                              -           418                418
                 Foreclosed Property                              -            31                 31
                 Allowance for Subsidy Cost                       -          (223)              (223)
              Subtotal                             $              - $        998 $              998

          Total Guaranteed Loans                   $        2,270   $       1,426   $       3,696



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




                                                    42
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Guaranteed Loans Outstanding:

                                                         Outstanding
   (Dollars in Millions)
                                                         Principal of      Amount of
                                                         Guaranteed        Outstanding
                                                         Loans, Face        Principal
   Loan Guarantee Programs                                  Value          Guaranteed

   Guaranteed Loans Outstanding (FY 2010):
      MMI/CMHI
        Single Family Forward                            $  925,016         $  878,209
        Multifamily                                             420                403
      MMI/CMHI Subtotal                                  $ 925,436          $ 878,612

        GI/SRI
         Single Family Forward                                22,931             20,028
         Multifamily                                          76,709             69,294
        GI/SRI Subtotal                                  $   99,640         $   89,322

        H4H
         Single Family - 257                                      24                24
        H4H Subtotal                                     $        24        $       24

        FY 2010 Total                                    $ 1,025,100        $ 967,958

   Guaranteed Loans Outstanding (FY 2009):
      MMI/CMHI
        Single Family Forward                            $  711,426         $  674,263
        Multifamily                                             401                375
      MMI/CMHI Subtotal                                  $ 711,827          $ 674,638

        GI/SRI
         Single Family Forward                                25,898             23,088
         Multifamily                                          66,463             59,515
        GI/SRI Subtotal                                  $   92,361         $   82,603

        H4H
         Single Family - 257                                       4                 4
        H4H Subtotal                                     $         4        $        4

        FY 2009 Total                                    $ 804,192          $ 757,245




                                             43
   2011-FO-0002
   ____________________________________________________________________________________


New Guaranteed Loans Disbursed:

                                                         Outstanding
   (Dollars in Millions)
                                                         Principal of      Amount of
                                                         Guaranteed        Outstanding
                                                         Loans, Face        Principal
   Loan Guarantee Programs                                  Value          Guaranteed

   New Guaranteed Loans Disbursed (FY 2010):
      MMI/CMHI
        Single Family Forward                             $  296,418        $  293,710
        Multifamily                                               68                68
      MMI/CMHI Subtotal                                   $ 296,486         $ 293,778

        GI/SRI
         Single Family Forward                                    230               228
         Multifamily                                           14,760            14,711
        GI/SRI Subtotal                                   $   14,990        $   14,939

        H4H
         Single Family - 257                                      20                20
        H4H Subtotal                                      $       20        $       20

        FY 2010 Total                                     $ 311,496         $ 308,737

   New Guaranteed Loans Disbursed (FY 2009):
      MMI/CMHI
        Single Family Forward                             $  330,342        $  328,054
        Multifamily                                               43                43
      MMI/CMHI Subtotal                                   $ 330,385         $ 328,097

        GI/SRI
         Single Family Forward                                    234               232
         Multifamily                                            6,708             6,690
        GI/SRI Subtotal                                   $    6,942        $    6,922

        H4H
         Single Family - 257                                       4                 4
        H4H Subtotal                                      $        4        $        4

        FY 2009 Total                                     $ 337,331         $ 335,023




                                            44
    ____________________________________________________________________________________
                                                                            2011-FO-0002


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, FHA has insured 650,591HECM loans with a maximum claim amount of $144
billion. Of these 650,591 HECM loans insured by FHA, 510,144 loans with a maximum claim amount of $119
billion are still active. As of September 30, 2010 the insurance-in-force (the outstanding balance of active loans)
was $73 billion. The insurance in force includes balances drawn by the mortgagee; interest accrued on the
balances drawn, service charges, and mortgage insurance premiums. The maximum claim amount is the dollar
ceiling to which the outstanding loan balance can grow before being assigned to FHA.

Home Equity Conversion Mortgage Loans Outstanding (not included in the balances in the previous table)

     (Dollars in M illions)
                                                                                   Cumulative

                                      Current Year                 Outstanding                      Potential
     Loan Guarantee Programs          Endorsements                  Balance                         Liability

     FY 2010 MMI/CMHI                  $       21,023             $       28,351                $        49,388
             GI/SRI                                 -                     44,906                         69,407
                              Total    $      21,023              $      73,257                 $      118,795

     FY 2009 MMI/CMHI                  $       30,080             $       15,524                $        29,442
             GI/SRI                                 -                     44,353                         73,058
                              Total    $      30,080              $      59,877                 $      102,500




                                                        45
    2011-FO-0002
    ____________________________________________________________________________________


Loan Guarantee Liability, Net:

(Dollars in M illions)

 FY 2010                                 MMI/CMHI              GI/SRI            H4H           Total
    LLR
      Single Family Forward             $           10 $                 1 $           - $              11
      Multifamily                                     -                 42             -                42
    Subtotal                            $           10     $            43   $         - $              53

    LLG
      Single Family Forward             $     23,362 $              609 $              5 $        23,976
      Multifamily                                    (7)            (429)              -               (436)
      HECM                                        2,673            8,692               -          11,365
    Subtotal                            $    26,028        $      8,872      $         5   $     34,905

Loan Guarantee Liability Total          $    26,038        $      8,915      $         5   $     34,958


 FY 2009                                 MMI/CMHI              GI/SRI            H4H           Total
    LLR
      Single Family Forward             $           14 $                 1 $           - $              15
      Multifamily                                     -             121                -               121
    Subtotal                            $           14     $        122      $         - $             136

    LLG
      Single Family Forward             $     27,301 $              838 $              1 $        28,140
      Multifamily                                    (5)            (158)              -               (163)
      HECM                                        1,156            4,753               -           5,909
    Subtotal                            $    28,452        $      5,433      $         1   $     33,886

Loan Guarantee Liability Total          $    28,466        $      5,555      $         1   $     34,022




                                             46
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Subsidy Expense for Loan Guarantees by Program and Component:

        (Dollars in millions)
        FY 2010                             MMI/CMHI           GI/SRI           H4H           Total
          Single Family Forward
               Defaults                     $     9,601 $            11 $              4 $        9,616
               Fees and Other Collections       (15,522)            (12)              (1)      (15,535)
               Other                              3,376               1                -          3,377
          Subtotal                          $   (2,545) $             - $              3 $      (2,542)


          Multifamily
              Defaults                      $           2 $         428 $             -   $        430
              Fees and Other Collections               (3)         (856)              -           (859)
              Other                                     1             -               -              1
          Subtotal                          $           - $       (428) $             -   $      (428)


          HECM
              Defaults                      $     1,078 $               -   $         -   $      1,078
              Fees and Other Collections         (1,184)                -             -         (1,184)
          Subtotal                          $     (106) $               -   $         -   $      (106)


        Total                               $   (2,651) $         (428) $             3   $    (3,076)


        FY 2009                             MMI/CMHI           GI/SRI           H4H           Total
          Single Family Forward
              Defaults                      $     9,990 $            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                      $           1 $         193 $             -   $        194
              Fees and Other Collections               (2)         (338)              -           (340)
              Other                                     -             -               -              -
          Subtotal                          $          (1) $      (145) $             -   $      (146)


          HECM
              Defaults                      $     1,043 $               -   $         -   $      1,043
              Fees and Other Collections         (1,457)                -             -         (1,457)
          Subtotal                          $     (414) $               -   $         -   $      (414)


        Total                               $        (566) $      (146) $             1   $      (711)




                                                47
  2011-FO-0002
  ____________________________________________________________________________________


Subsidy Expense for Modifications and Reestimates:

                     (Dollars in millions)
                                                  Total           Technical
                     FY 2010                   Modifications    Reestimate
                          MMI/CMHI             $           -    $     (2,161)
                          GI/SRI                          (5)          3,195
                     Total                     $          (5)   $     1,034

                     FY 2009
                          MMI/CMHI              $       (362)   $      7,275
                          GI/SRI                          (6)          3,139
                     Total                      $      (368)    $    10,414




Total Loan Guarantee Subsidy Expense:

                     (Dollars in millions)
                                                  FY 2010         FY 2009
                          MMI/CMHI              $     (4,812)   $      6,347
                          GI/SRI                       2,762           2,987
                          H4H                              3               1
                     Total                      $    (2,047)    $     9,335




                                                 48
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Subsidy Rates for Loan Guarantee Endorsements by Program and Component:

                                                                                Fees and
                                                                                 Other
        (Percentage)                                                Defaults   Collections    Other     Total

        Budget Subsidy Rates for FY 2010 Loan Guarantees:

         MMI/CMHI
          Single Family - Forward (10/1/2009 - 4/4/2010)                3.22         (4.97)     1.13      (0.62)
          Single Family - Forward (4/5/2010 - 9/30/2010)                3.23         (5.50)     1.14      (1.13)
          Single Family - HECM                                          5.11         (5.61)      -        (0.50)
          Multifamily - Section 213 (10/1/2009 - 4/4/2010)              3.22         (4.96)     1.12      (0.62)
          Multifamily - Section 213 (4/5/2010 - 9/30/2010)              3.23         (5.50)     1.14      (1.13)

         GI/SRI
          Multifamily - Section 221(d)(4)                               4.23         (5.86)      -        (1.63)
          Multifamily - Section 207/223(f)                              1.45         (5.32)      -        (3.87)
          Multifamily - Section 223(a)(7)                               1.45         (5.32)      -        (3.87)
          Multifamily - Section 232                                     3.67         (5.96)      -        (2.29)
          Section 242                                                   1.55         (5.83)      -        (4.28)

         H4H
          Single Family - Section 257 (10/1/2009 - 12/31/2009)         24.26         (1.91)     0.37      22.72
          Single Family - Section 257 (1/1/2010 - 9/30/2010)           22.26         (5.89)     0.54      16.91


                                                                                Fees and
                                                                                 Other
        (Percentage)                                                Defaults   Collections    Other     Total

        Budget Subsidy Rates for FY 2009 Loan Guarantees:

         MMI/CMHI
          Single Family - Forward (10/1/2008 - 6/30/2009)               3.03         (4.13)     1.06      (0.04)
          Single Family - Forward (7/1/2009 - 9/30/2009)                3.04         (4.13)     1.03      (0.06)
          Single Family - HECM                                          3.45         (4.82)      -        (1.37)
          Multifamily - Section 213 ((10/1/2008 - 6/30/2009)            3.03         (4.13)     1.06      (0.04)
          Multifamily - Section 213 (7/1/2009 - 9/30/2009)              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)
          Section 242                                                   2.63         (5.14)      -        (2.51)

         H4H
          Single Family - Section 257                                  22.40        (8.41)     (0.61)    13.38




                                                               49
    2011-FO-0002
    ____________________________________________________________________________________


Schedule for Reconciling Loan Guarantee Liability Balances:

(Dollars in Millions)                                            FY 2010                        FY 2009
                                                               LLR     LLG                    LLR     LLG
Be ginning Balance of the Loan Guarantee Liability           $   136 $ 33,886               $   182 $ 19,304
Add: Subsidy Expense for guaranteed loans disbursed
     during the reporting fiscal years by component:
                Default Costs (Net of Recoveries)                               11,124                     11,238
                Fees and Other Collections                                     (17,578)                   (15,446)
                Other Subsidy Costs                                              3,378                      3,497
     Total of the above subsidy expense compone nts                            (3,076)                      (711)
Adjustments:
     Fees Received                                                              10,082                      8,771
     Foreclosed Property and Loans Acquired                                      6,814                      3,907
     Claim Payments to Lenders                                                 (16,478)                   (10,481)
     Interest Accumulation on the Liability Balance                              1,344                      1,079
     Other                                                                          16                       (254)
Ending Balance before Re estimates                                  136        32,588            182      21,615
Add or Subtract Subsidy Reestimates by Component:
     Technical/Default Reestimate
                Subsidy Expense Component                            (83)       (2,607)          (46)       5,364
                Interest Expense Component                                       1,113                      1,367
     Adjustment of prior years' credit subsidy reestimates                       3,811                      5,540
Total Technical/De fault Ree stimate                                 (83)       2,317            (46)     12,271

Ending Balance of the Loan Guarantee Liability               $       53     $ 34,905        $    136    $ 33,886




Administrative Expense:


             (Dollars in M illions)
                                                                   FY 2010                  FY 2009
             MMI/CMHI                                            $       543              $       275
             GI/SRI                                                       30                      294
             H4H                                                           9                       16
             Total                                               $       582              $       585




                                                      50
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Pre-Credit Reform Valuation Methodology

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

The majority of FHA’s Pre-Credit Reform liability relates to the Mark-to-Market program. A separate analysis was
conducted to adjust the loan loss estimate for anticipated reductions for these project-based Section 8 rental
assistance subsidies administered by the Office of Affordable Housing Preservation (OAHP). In fiscal year 2010,
an assumption was implemented that only fifty percent of Mark-to-Market eligible projects would enter the
program to better represent the historical pattern that not all eligible projects would opt to enter the program. All
projects that are required to submit financial statements and have submitted annual financial statements within the
past two years, received Section 8 assistance, expected to expire in the next five years, and had contract rents
exceeding 100 percent of fair market value were included. In the analysis, the gross rent for these projects was
reduced to bring the contract rent for assisted units to fair market levels. The effects of this rent reduction on
projects’ financial health was assessed and a revised loan principal balance was computed based on a sustainable
debt service level. A potential claim was calculated based on this reduction of loan principal.

Credit Reform Valuation Methodology

FHA values its Credit Reform LLG and related receivables from 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.




                                                         51
      2011-FO-0002
      ____________________________________________________________________________________


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)
and Moody’s Analytics. OMB provides other economic assumptions used, such as discount rates.

Actuarial Review: An independent actuarial review of the MMI fund each year produces conditional claim and
prepayment rates and loss severity 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. OMB provides these rates to all Federal agencies for use in preparing credit
subsidy estimates and requires their use under OMB Circular A-11, Part 4, “Instructions on Budget Execution.”
The basket of zeros discount factors are also disbursement weighted.

Analysis of Change in the Liability for Loan Guarantees

FHA has estimated and applied credit subsidy rates to each FHA loan guarantee program since fiscal year 1992.
Over this time FHA’s credit subsidy rates have varied. The variance is caused by three factors: (1) additional loan
performance data underlying the credit subsidy rate estimates, (2) revisions to the calculation methodology used
to estimate the credit subsidy rates, and (3) revisions on expected claims and prepayments derived from the
revised Actuarial Review of the MMI Fund. Loan performance data, which reflect mortgage market performance
and FHA policy direction, are added as they become available. Revisions to the estimation methodology result
from legislative direction and technical enhancements.
FHA estimated the credit subsidy rates for the 2010 cohort in December 2008. 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 2010 business. These
descriptions highlight the factors that contributed to changing credit subsidy rates and the credit subsidy
reestimates. Overall, FHA’s liability increased slightly from the fiscal year 2009 estimates.




                                                          52
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Mutual Mortgage Insurance (MMI) – During fiscal year 2010, FHA experienced better than anticipated credit
quality of borrowers and an improved house price appreciation forecast in the short term. Higher quality
borrowers and a more optimistic short term house price appreciation forecast caused the liability for MMI to
decrease from $28,456 million at the end of fiscal year 2009 to $26,035 million at the end of fiscal year 2010.

GI/SRI Home Equity Conversion Mortgage (HECM) - The HECM activity from fiscal years 1992-2008 remains
in the GI/SRI fund. The HECM liability for these years increased from $4,753 million at the end of fiscal year
2009 to $8,692 million at the end of fiscal year 2010. The increase in the liability is primarily due to a less
optimistic house price appreciation forecast for HECM properties in the long term and new estimates of current
and future tax and insurance default cases. The HECM liability is driven more by long term house price
appreciations forecasts than short term forecasts. The drop in the long term forecast results in lower recoveries
from future HECM assigned assets and the new estimates of current and future tax and insurance default cases
increases the unpaid balance of these loans which increases the liability.

GI/SRI Section 221(d)(4) - The Section 221(d)(4) program was established to provide mortgage insurance for the
construction or substantial rehabilitation of Multifamily rental properties with five or more units. Under this
program, HUD may insure up to 90 percent of the total project cost and is prohibited from insuring loans with
HUD-subsidized interest rates. The Section 221(d)(4) program is the largest Multifamily program in the GI/SRI
fund. The Section 221(d)(4) liability decreased by $19 million in FY 2010.
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 2010, the M2M liability decreased primarily due to the new
assumption that only fifty percent of Mark-to-Market eligible projects would enter the program which decreased
the forecasted amount of loans in the program.
GI/SRI 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 FHA’s mortgage
insurance programs is to encourage lenders to make affordable mortgage credit available for non-conventional
forms of ownership. Condominium ownership, in which the separate owners of the individual units jointly own
the development’s common areas and facilities, is one particularly popular alternative. Like the MMI single
family program, in fiscal year 2010 the Section 234(c) had lower claim rates due to the higher quality of
borrowers, which resulted in decreased claims and an improved house price appreciation forecast for future years
that resulted in higher proceeds from the sale of foreclosed properties. This resulted in a decrease in the liability
from $694 million at the end of fiscal year 2009 to $467 million at the end of fiscal year 2010 in the GI/SRI fund.




                                                         53
     2011-FO-0002
     ____________________________________________________________________________________


Note 7. Other Assets

The following table presents the composition of Other Assets held by FHA as of September 30, 2010 and 2009:

        (Dollars in Millions)
                                                                            FY 2010            FY 2009
        Intragovernmental:
         Advances to HUD for Working Capital Fund Expenses              $             5    $         16
        Total                                                           $             5    $         16

        With the Public:
         Escrow Monies Deposited at Minority-Owned Banks                 $        70       $         92
         Deposits in Transit                                                       6                 37
        Total                                                            $        76       $        129


Advances to HUD for Working Capital Fund Expenses

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

Escrow Monies Deposited at Minority-Owned Banks

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

Deposits in Transit

Deposits in Transit is cash that has not been confirmed as being received by the U.S. Treasury. Once the U.S.
Treasury has confirmed that this cash has been received, the cash will be moved from Deposits in Transit to Fund
Balance with U.S. Treasury.




.




                                                        54
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 8. Accounts Payable

Accounts Payable as of September 30, 2010 and 2009 are as follows:

               (Dollars in Millions)
                                                                      FY 2010          FY 2009
               With the Public:
                Claims Payable                                    $        351     $        331
                Premium Refunds                                            143              173
                Single Family Property Disposition Payable                 128              105
                Miscellaneous Payables                                      25               30
               Total                                              $        647     $        639


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

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.

Single Family Property Disposition Payable

Single family property disposition payable includes management and marketing contracts and other property
disposition expenses related to foreclosed property.

Miscellaneous Payables

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




                                                       55
      2011-FO-0002
      ____________________________________________________________________________________


Note 9. Debt

The following tables describe the composition of Debt held by FHA as of September 30, 2010 and 2009:


      (Dollars in Millions)                                FY 2009                                FY 2010
                                             Beginning       Net           Ending           Net           Ending
                                              Balance     Borrowing        Balance        Borrowing       Balance

      Agency Debt:
            Debentures Issued to Claimants   $       52   $         (38)   $         14   $         (4)   $         10
      Other Debt:
            Borrowings from U.S. Treasury         4,832            (412)       4,420                329       4,749
      Total                                  $    4,884   $        (450)   $   4,434      $         325   $   4,759


                                                                                              FY 2010     FY 2009
      Classification of Debt:
             Intragovernmental Debt                                                       $       4,749   $   4,420
             Debt held by the Public                                                                 10          14
      Total                                                                               $       4,759   $   4,434



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 13.375 percent in fiscal year 2010 and 4.00 percent to 10.375
percent in fiscal year 2009. 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, as of September 30th was $10 million in
fiscal year 2010 and $14 million in fiscal year 2009. The fair values for fiscal years 2010 and 2009 were $21 and
$15 million, respectively.

Borrowings from U.S. Treasury

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

During fiscal year 2010, FHA’s U.S. Treasury borrowings carried interest rates ranging from 1.68 percent to 7.59
percent. In fiscal year 2009, they carried interest rates ranged from 3.71 percent to 7.34 percent. The maturity
dates for these borrowings occur from September 2017 – September 2029. Loans may be repaid in whole or in
part without penalty at any time prior to maturity.




                                                              56
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 10. Other Liabilities

The following table describes the composition of Other Liabilities as of September 30, 2010 and 2009:

                         (Dollars in Millions)

                         FY 2010                                               Current
                         Intragovernmental:
                          Receipt Account Liability                        $        1,165
                         Total                                             $       1,165

                         With the Public:
                         Trust and Deposit Liabilities                     $         120
                         Disbursements in Transit                                     74
                         Miscellaneous Liabilities                                   233
                         Total                                             $         427

                         FY 2009                                               Current
                         Intragovernmental:
                          Receipt Account Liability                        $        1,913
                         Total                                             $       1,913

                         With the Public:
                         Trust and Deposit Liabilities                     $         116
                         Disbursements in Transit                                     64
                         Miscellaneous Liabilities                                   236
                         Total                                             $         416



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.

Disbursements in Transit

Disbursements in Transit is cash that has not been confirmed as being disbursed by the U.S. Treasury. Once the
U.S. Treasury has confirmed that this cash has been disbursed, the cash will be removed from Disbursements in
Transit and taken out of Fund Balance with U.S. Treasury.

Miscellaneous Liabilities

Miscellaneous liabilities mainly include unearned revenue generated from Multifamily notes. 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.


                                                         57
      2011-FO-0002
      ____________________________________________________________________________________


Note 11. Commitments and Contingencies

Litigation

FHA is party in various legal actions and claims brought by or against it. In the opinion of management and
general counsel, the ultimate resolution of these legal actions will not have an effect on FHA’s consolidated
financial statements as of September 30, 2010. As a result, no contingent liability has been recorded.


Pending Litigation Against FHA

(Dollars in Millions)
                           FY 2010           FY 2009
Expected Outcome        Estimated Loss    Estimated Loss
Probable                      -                 -
Reasonably Possible           -                $23
Remote                        -                 -




                                                       58
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 12. Gross Costs

Gross costs incurred by FHA for the period ended September 30, 2010 and 2009 are as follows:

     (Dollars in Millions)                              FY 2010                      FY 2009
                                      MMI/CMHI          GI/SRI       H4H        MMI/CMHI GI/SRI         H4H
     Intragovernmental:
      Interest Expense                 $      140 $          144 $         -    $    160 $     123 $          -
      Imputed Costs                            19              -           -           7         8            -
      Other Expenses                            1              -           2           -         -            5
     Total                             $      160 $          144 $         2    $    167 $     131 $          5

     With the Public:
     Salary and Administrative Expenses $      542 $          30 $          7   $     275 $     294 $         11
     Subsidy Expense                        (4,812)        2,762            3       6,347     2,987            1
     Interest Expense                          595           695            -       1,568       294            -
     Interest Accumulation Expense           1,076           268            -         830       269            -
     Bad Debt Expense                           (7)         (342)           -          (7)    1,438            -
     Loan Loss Reserve Expense                  (4)          (79)           -          (5)      (44)           -
     Other Expenses                             67            25            -          64        64            -
     Total                              $   (2,543) $      3,359 $         10   $   9,072 $   5,302 $         12


Interest Expense

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

Interest Accumulation Expense

Interest accumulation expense is the net of interest expense on borrowing and interest revenue in the financing
accounts for MMI/CMHI and GI/SRI.

Imputed Costs/Imputed Financing

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

Salary and Administrative Expenses

Salary and administrative expenses include FHA’s reimbursement to HUD for FHA personnel costs and FHA’s
payments to third party contractors for administrative contract expenses. Beginning in fiscal year 2010 and going
forward, FHA is only using the MMI annual program fund to record salaries and related expenses other than those
relating to the H4H program.


                                                             59
      2011-FO-0002
      ____________________________________________________________________________________


Subsidy Expense

Subsidy expense, positive and negative, consists of credit subsidy expense from new endorsements,
modifications, and annual credit subsidy reestimates and the subsidy expense incurred by the Church Arson
program. Credit subsidy expense is the estimated long-term cost to the U.S. Government of a direct loan or loan
guarantee, calculated on a net present value basis of the estimated future cash flows associated with the direct loan
or loan guarantee.

Bad Debt Expense

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

Loan Loss Reserve Expense

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

Other Expenses

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




                                                           60
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 13. Earned Revenue

Earned revenues generated by FHA for the period ended September 30, 2010 and 2009 are as follows:

             (Dollars in Millions)                               FY 2010                    FY 2009
                                                            MMI/CMHI GI/SRI            MMI/CMHI GI/SRI

             Intragovernmental:
              Interest Revenue from Deposits at U.S. Treasury $        1,215 $   412   $     990 $   392
              Interest Revenue from MMI/CMHI Investments                 366       -         633       -
              Gain on Sale of MMI/CMHI Investments                       554       -         133       -
                                                              $        2,135 $   412   $   1,756 $   392

             With the Public:
             Insurance Premium Revenue                       $           28 $    16    $     16 $    20
             Income from Notes and Properties                            35      54          31      31
             Other Revenue                                                -       -           -      20
             Total                                           $           63 $    70    $     47 $    71


Interest Revenue

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

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

Gain on Sale of MMI/CMHI 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.

Premium Revenue

According to the FCRA accounting, FHA’s premium revenue includes only premiums associated with the pre-
1992 loan guarantee business. Premiums for post-1991 guarantee loans are included in the balance of the LLG.
The FHA premium structure includes both up-front premiums and annual periodic premiums.




                                                                  61
     2011-FO-0002
     ____________________________________________________________________________________


Up-front Premiums

The up-front premium rates vary according to the mortgage type and the year of origination. The FHA up-front
premium rates in fiscal year 2010 were:

                                                 Upfront Premium Rates
                       Single Family       1.75%, 2.25% (As of April 5th)
                       Multifamily         0.45 %, 0.50%, 0.57% or 0.80%
                       HECM                2.00% (Based on Maximum Claim Amount)

Annual Periodic Premiums

The periodic premium rate is used to calculate monthly or annual premiums. These rates also vary by mortgage
type and program. The FHA annual periodic premium rates in fiscal year 2010 were:

                                             Annual Periodic Premium Rates

                       Single Family       0.50% or 0.55%
                       Multifamily         0.45 %, 0.50%, 0.57% or 0.80%
                       HECM                0.50%

For Title I, the maximum insurance premium paid for guaranteed cases endorsed in years 1992 through 2001 is
equal to 0.50 percent of the loan amount multiplied by the number of years of the loan term. The annual
insurance premium for a Title I Property Improvement loan is 0.50 percent of the loan amount until the maximum
insurance charge is paid. The annual insurance premium of a Title I Manufactured Housing loan is calculated in
tiers by loan term until the maximum insurance charge is paid. For guaranteed cases endorsed in fiscal year 2010,
the Title I annual insurance premium is 1.00 percent of the loan amount until maturity.

Income from Notes and Property

Income from Notes and Property includes revenue associated with FHA pre-1992 loan guarantees. This income
includes revenue from Notes and Properties held, sold, and gains associated with the sale.

Other Revenue

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




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

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




                                                        62
    ____________________________________________________________________________________
                                                                            2011-FO-0002



Note 15. Transfers

Transfers in/out incurred by FHA for the period ended September 30, 2010 and 2009 are as follows:

           (Dollars in Millions)
           FY 2010
           Budgetary Financing Sources   Cumulative Results        Unexpended
                                           of Operations          Appropriations             Total
           Treasury                      $            (559)     $              (83)      $           (642)
           HUD                                           -                    (72)                     (72)
           Total                         $            (559)     $            (155)       $           (714)


           Other Financing Sources       Cumulative Results          Unexpended              Total
                                           of Operations            Appropriations
           Treasury                      $           1,020      $                    -   $       1,020
           HUD                                         484                           -             484
           Total                         $           1,504      $                    -   $       1,504




           FY 2009
           Budgetary Financing Sources   Cumulative Results        Unexpended                Total
                                           of Operations          Appropriations
           Treasury                      $            (347)     $              (86)      $           (433)
           HUD                                           -                     (59)                   (59)
           Total                         $            (347)     $             (145)      $           (492)


           Other Financing Sources       Cumulative Results          Unexpended              Total
                                           of Operations            Appropriations
           Treasury                      $          (1,730)     $                    -   $      (1,730)
           HUD                                         470                           -             470
           Total                         $          (1,260)     $                    -   $      (1,260)


Transfers Out to U.S. Treasury

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

Transfers In/Out From HUD

FHA does not receive an appropriation for salaries and expense; instead the FHA amounts are appropriated
directly to HUD. In order to recognize these costs in FHA’s Statement of Net Cost, a Transfer In from HUD is
recorded based on amounts computed by HUD. FHA continues to make a non-expenditure Transfer Out to HUD
for Working Capital Fund expenses.




                                                      63
      2011-FO-0002
      ____________________________________________________________________________________


Note 16. Unexpended Appropriations

Unexpended appropriation balances at September 30, 2010 and 2009 are as follows:


       (Dollars in Millions)
                               Beginning Appropriations    Other    Appropriations Transfers-Out    Ending
       FY 2010                  Balance    Received     Adjustments     Used                        Balance
       Positive Subsidy    $         478    $        9    $          -    $      (19)   $      -    $     468
       Working Capital and           272           259             (47)          (96)        (72)         316
        Contract Expenses
       Reestimates                     -           863               -         (863)           -            -
       GI/SRI Liquidating             82           100               -           (3)         (83)          96
       Total               $         832    $    1,231    $        (47)   $    (981)    $   (155)   $     880

       FY 2009
       Positive Subsidy    $          15    $      470    $          -    $      (7)    $      -    $     478
       Working Capital and           310           195             (59)        (115)         (59)         272
        Contract Expenses
       Reestimates                     -         6,793               -        (6,793)          -            -
       GI/SRI Liquidating             86            96               -           (14)        (86)          82
       Total               $         411    $    7,554    $        (59)   $   (6,929)   $   (145)   $     832




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 program accounts for administrative and contract expenses. The GI/SRI and
H4H no-year program accounts also receive appropriations for positive credit subsidy and upward reestimates.
Additionally, FHA obtains permanent indefinite appropriations to cover any shortfalls for its GI/SRI pre-1992
loan guarantee operations.

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




                                                              64
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 17. Budgetary Resources

The SF-133 and the Statement of Budgetary Resources for fiscal year 2009 have been reconciled to the fiscal year
2009 actual amounts included in the Program and Financing Schedules presented in the Budget of the United
States Government. There were no significant reconciling items. Information from the fiscal year 2010
Statement of Budgetary Resources will be presented in the fiscal year 2012 Budget of the U.S. Government. The
Budget will be transmitted to Congress on the first Monday in February 2012 and will be available from the
Government Printing Office and online at that time.

Obligated balances as of September 30, 2010 and 2009 are as follows:

       Unpaid Obligations

                   (Dollars in Millions)
                   Undelivered Orders                     FY 2010              FY 2009
                    MMI/CMHI                            $      1,139         $        638
                    GI/SRI                                       454                  475
                    H4H                                            1                    1
                   Undelivered Orders Subtotal          $      1,594         $      1,114
                   Accounts Payable
                    MMI/CMHI                            $          719       $          857
                    GI/SRI                                         350                  333
                   Accounts Payable Subtotal            $        1,069       $        1,190

                   Unpaid Obligations Total             $        2,663       $        2,304




                                                      65
     2011-FO-0002
     ____________________________________________________________________________________


Note 18. Budgetary Resources - Collections

The following table presents the composition of FHA’s collections for the period ended September 30, 2010 and
2009:

        (Dollars in Millions)
        FY 2010                            MMI/CMHI               GI/SRI                      H4H                   Total
        Collections:
         Premiums                          $    9,282         $            768       $               1       $            10,051
         Notes                                      9                      490                       -                       499
         Property                               5,038                      269                       -                     5,307
         Interest Earned from U.S Treasury      2,238                      412                       -                     2,650
         Subsidy                                2,651                       15                       3                     2,669
         Reestimates                            9,894                      863                       -                    10,757
         Other                                     48                      165                       9                       222
        Total                              $   29,160         $          2,982       $              13       $            32,155

        (Dollars in Millions)
        FY 2009                            MMI/CMHI               GI/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 $                       1     $            33,596


Note 19. Budgetary Resources – Non-expenditure Transfers

The following table presents the composition of FHA’s non-expenditure transfers for the period ended September
30, 2010 and 2009:

                (Dollars in Millions)
                FY 2010                                  MMI/CMHI                        EI                Total
                Transfers:
                 Working Capital and Contract Expenses   $        (71)           $             (1) $               (72)
                Total                                    $        (71)           $             (1) $               (72)

                (Dollars in Millions)
                FY 2009                                  MMI/CMHI                        EI                Total
                Transfers:
                 Working Capital and Contract Expenses   $        (58)           $              - $                (58)
                Total                                    $        (58)           $              - $                (58)




                                                             66
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Note 20. Budgetary Resources – Obligations

The following table presents the composition of FHA’s obligations for the period ended September 30, 2010 and
2009:

      (Dollars in Millions)
      FY 2010                                        MMI/CMHI            GI/SRI         H4H           Total
      Obligations:
       Claims                                         $     14,017   $      2,007   $         -   $     16,024
       Single Family Property Management Contracts             808             21             -            829
       Contract Obligations                                    112              6             -            118
       Subsidy                                               2,651            521             3          3,175
       Downward Reestimates                                     26            164             -            190
       Upward Reestimates                                    9,868            863             -         10,731
       Interest on Borrowings                                  139            151             -            290
       Other                                                   257            150             2            409
       Total                                          $    27,878    $     3,883    $         5   $    31,766



      (Dollars in Millions)
      FY 2009                                        MMI/CMHI            GI/SRI         H4H           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                                          $    20,647    $     9,042    $         6   $    29,695




                                                      67
     2011-FO-0002
     ____________________________________________________________________________________


Note 21. Reconciliation of Net Cost of Operations to Budget

This note (formerly the Statement of Financing) links the proprietary data to the budgetary data. Most
transactions are recorded in both proprietary and budgetary accounts. However, because different accounting
bases are used for budgetary and proprietary accounting, some transactions may appear in only one set of
accounts. The Reconciliation of Net Cost of Operations to Budget is as follows for the period ended September
30, 2010 and 2009:

    (Dollars in Millions)                                                                            FY 2010        FY 2009
    RESOURCES USED TO FINANCE ACTIVITIES
     Obligations Incurred                                                                        $  31,766 $ 29,695
     Spending Authority from Offsetting Collections and Recoveries                                 (32,217)  (33,481)
     Offsetting Receipts                                                                              (619)     (183)
     Transfers In / Out                                                                              1,504    (1,260)
     Imputed Financing from Costs Absorbed by Others                                                    19        15
    TOTAL RESOURCES USED TO FINANCE ACTIVITIES                                                   $     453 $ (5,214)

    RESOURCES THAT DO NOT FUND THE NET COST OF OPERATIONS
    Undelivered Orders and Adjustments                                                           $    (468) $     209
    Revenue and Other Resources                                                                     30,073     31,343
    Purchase of Assets                                                                             (21,497)   (10,903)
    Appropriation for prior year Re-estimate                                                       (10,731)   (17,176)
    TOTAL RESOURCES NOT PART OF NET COST OF OPERATIONS                                           $ (2,623) $    3,473

    TOTAL RESOURCES USED TO FINANCE THE NET COST (SURPLUS) OF OPERATIONS $                             (2,170) $      (1,741)

    COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL NOT
    REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD
    Upward Re-estimate of Credit Subsidy Expense                                                 $      8,183 $       14,054
    Downward Re-estimate of Credit Subsidy Expense                                                     (5,865)        (1,784)
    Changes in Loan Loss Reserve Expense                                                                  (83)           (49)
    Changes in Bad Debt Expenses Related to Uncollectible Pre-Credit Reform Receivables                  (349)         1,431
    Reduction of Credit Subsidy Expense from Endorsements and Modifications of Loan Guarantees         (3,100)        (1,084)
    Gains or Losses on Sales of Credit Program Assets                                                      46             73
    Other                                                                                               1,790          1,523
    TOTAL COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL
    NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD                                      $        622   $     14,164

    NET COST (SURPLUS) OF OPERATIONS                                                             $     (1,548) $      12,423




                                                                     68
    ____________________________________________________________________________________
                                                                            2011-FO-0002


Required Supplementary Information

Schedule A: Intragovernmental Assets

FHA's Intragovernmental assets, by federal entity, are as follows on September 30, 2010 and 2009:

                 (Dollars in Millions)     Fund Balance       Investments in
                                             with U.S.         U.S. Treasury
                                                                                Other Assets
                 Agency                      Treasury            Securities
                 FY 2010
                  U.S. Treasury            $       39,078     $        4,150    $               -
                  HUD                                   -                  -                   5
                 Total                     $       39,078     $        4,150    $              5

                 FY 2009
                  U.S. Treasury            $       30,130     $      10,635     $             -
                  HUD                                   -                 -                 16
                 Total                     $       30,130     $      10,635     $           16




Schedule B: Intragovernmental Liabilities

FHA's Intragovernmental liabilities, by federal entity, are as follows on September 30, 2010 and 2009:

                   (Dollars in Millions)
                                               Borrowings from
                   Agency                                                  Other Liabilities
                                                U.S. Treasury
                   FY 2010
                    U.S. Treasury              $            4,749          $           1,165
                   Total                       $            4,749          $           1,165

                   FY 2009
                    U.S. Treasury              $            4,420          $           1,913
                   Total                       $            4,420          $           1,913




                                                       69
  2011-FO-0002
  ____________________________________________________________________________________


Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program
September 30, 2010:

       (Dollars in Millions)
                                                                 MMI/CMHI           GI/S RI             Other             Total


       BUDGETARY RESOURCES
        Unobligated Balance Carried Forward
            Beginning of period                                  $   30,622     $      7,113        $       465       $    38,200
        Recoveries of Prior Year Obligations                             98               30                     -            128
        Budget Authority:
           Appropriations received                                      189              979                70              1,238
           Borrowing Authority                                             1             799                     -            800
        Spending Authority from Offsetting Collections:
           Earned
               Collected                                             29,160            2,982                13             32,155
               Receivable from Federal Sources                           (64)                 (1)                -             (65)
           Unfilled Customer Orders                                        -                  (1)                -                (1)
        Net Transfers                                                    (71)                  -                (1)            (72)
        Permanently Not Available                                      (285)            (426)                    -           (711)
       TOTAL BUDGETARY RES OURCES                                $   59,650     $     11,475        $       547            71,672


       STATUS OF BUDGETARY RESOURCES
        Obligations Incurred                                     $   27,878     $      3,883        $           5     $    31,766
        Unobligated Balance-Apportioned                               4,021              173                383             4,577
        Unobligated Balance Not Available                            27,751            7,419                159            35,329
       TOTAL S TATUS OF BUDGETARY RES OURCES                     $   59,650     $     11,475        $       547            71,672


       CHANGE IN OBLIGATED BALANCES
        Obligated Balance, Net, Beginning of Period:
          Unpaid Obligations Carried Forward                     $    1,498     $        805        $           1     $     2,304
          Receivable from Federal Sources Carried Forward                (86)                 (3)                -             (89)
          Obligations Incurred                                       27,878            3,883                    5          31,766
          Gross Outlays                                              (27,419)          (3,855)                  (5)       (31,279)
        Obligated Balance Transfers, Net:
        Recoveries of Prior Year Obligations                             (98)             (30)                   -           (128)
        Change in Receivable from Federal Sources                        63                   2                  -                65
        Obligated Balance, Net, End of Period:
          Unpaid Obligations                                          1,859              803                    1           2,663
          Receivable from Federal Sources                                (23)                 (1)                -             (24)
        Outlays:
              Disbursements                                      $   27,419     $      3,855        $           5     $    31,279
              Collections                                            (29,160)          (2,982)              (13)          (32,155)
              Subtotal                                                (1,741)            873                    (8)          (876)
        Less: Offsetting Receipts                                          -             619                     -            619
       NET OUTLAYS                                               $    (1,741) $          254        $           (8)   $     (1,495)




                                                            70
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program
September 30, 2009:

       (Dollars in Millions)
                                                             MMI/CMHI               GI/S RI             Other             Total


       BUDGETARY RESOURCES
        Unobligated Balance Carried Forward
            Beginning of period                                  $   26,833     $        853        $           9     $    27,695
        Recoveries of Prior Year Obligations                             17               19                     -                36
        Budget Authority:
           Appropriations received                                      146            6,947                461             7,554
           Borrowing Authority                                           85              385                     -            470
        Spending Authority from Offsetting Collections:
           Earned
               Collected                                             24,980            8,615                    1          33,596
               Receivable from Federal Sources                         (147)                  (4)                -           (151)
           Unfilled Customer Orders                                        -                   -                 -                 -
        Net Transfers                                                    (58)                  -                 -            (58)
        Permanently Not Available                                      (586)            (661)                    -          (1,247)
       TOTAL BUDGETARY RES OURCES                                $   51,270     $     16,154        $       471       $    67,895


       STATUS OF BUDGETARY RESOURCES
        Obligations Incurred                                     $   20,647     $      9,042        $           6     $    29,695
        Unobligated Balance-Apportioned                               5,644              341                465             6,450
        Unobligated Balance Not Available                            24,979            6,771                     -         31,750
       TOTAL S TATUS OF BUDGETARY RES OURCES                     $   51,270     $     16,154        $       471       $    67,895


       CHANGE IN OBLIGATED BALANCES
        Obligated Balance, Net, Beginning of Period:
          Unpaid Obligations Carried Forward                     $    1,589     $        870        $            -    $     2,459
          Receivable from Federal Sources Carried Forward              (234)                  (6)                -           (240)
          Obligations Incurred                                       20,647            9,042                    6          29,695
          Gross Outlays                                              (20,721)          (9,088)                  (5)       (29,814)
        Obligated Balance Transfers, Net:
        Recoveries of Prior Year Obligations                             (17)             (19)                   -            (36)
        Change in Receivable from Federal Sources                       147                   4                  -            151
        Obligated Balance, Net, End of Period:
          Unpaid Obligations                                          1,498              805                    1           2,304
          Receivable from Federal Sources                                (87)                 (2)                -            (89)
        Outlays:
              Disbursements                                      $   20,721     $      9,088        $           5     $    29,814
              Collections                                            (24,980)          (8,615)                  (1)       (33,596)
              Subtotal                                                (4,259)            473                    4           (3,782)
        Less: Offsetting Receipts                                          -             183                     -            183
       NET OUTLAYS                                               $    (4,259) $          290        $           4     $     (3,965)




                                                            71
    2011-FO-0002
    ____________________________________________________________________________________


Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by Appropriation for the MMI/CMHI
Program
September 30, 2010:

   (Dollars in Millions)
                                                                                                 Capital MMI/CMHI
                                                       Program Liquidating Financing             Reserve   Total

   BUDGETARY RESOURCES
    Unobligated Balance Carried Forward
       Beginning of period                             $       48       $   30     $   19,940    $   10,604    $   30,622
    Recoveries of Prior Year Obligations                        6           30             62             -            98
    Budget Authority:
       Appropriations received                                189             -            -              -           189
       Borrowing Authority                                      -             -            1              -             1
    Spending Authority from Offsetting Collections:
       Earned
          Collected                                              -          20          25,440        3,700         29,160
          Receivable from Federal Sources                        -           -              (2)         (62)           (64)
       Unfilled Customer Orders                                  -           -               -            -              -
    Net Transfers                                            9,796           -               -       (9,867)           (71)
    Permanently Not Available                                  (25)          -            (260)           -           (285)
   TOTAL BUDGETARY RESOURCES                           $   10,014 $         80     $   45,181 $      4,375 $       59,650

   STATUS OF BUDGETARY RESOURCES
    Obligations Incurred                               $     9,979      $   44     $    17,855 $          -    $    27,878
    Unobligated Balance-Apportioned                              5          13           4,003            -          4,021
    Unobligated Balance Not Available                           30          23          23,323        4,375         27,751
   TOTAL STATUS OF BUDGETARY RESOURCES                 $   10,014       $   80     $   45,181 $      4,375     $   59,650

   CHANGE IN OBLIGATED BALANCES
    Obligated Balance, Net, Beginning of Period:
     Unpaid Obligations Carried Forward                $        88 $        200 $        1,210 $          - $        1,498
     Receivable from Federal Sources Carried Forward             -            -             (2)         (84)           (86)
     Obligations Incurred                                    9,979           44         17,855            -         27,878
     Gross Outlays                                          (9,929)         (45)       (17,445)           -        (27,419)
    Obligated Balance Transfers, Net:
    Recoveries of Prior Year Obligations                          (6)       (30)          (62)           -             (98)
    Change in Receivable from Federal Sources                      -          -             2           61              63
    Obligated Balance, Net, End of Period:
     Unpaid Obligations                                       132           169         1,558             -          1,859
     Receivable from Federal Sources                            -             -             -           (23)           (23)
    Outlays:
          Disbursements                                $     9,929      $    45 $       17,445 $           - $      27,419
          Collections                                            -          (20)       (25,440)       (3,700)      (29,160)
          Subtotal                                           9,929           25         (7,995)       (3,700)       (1,741)
    Less: Offsetting Receipts                                    -            -              -             -             -
   NET OUTLAYS                                         $    9,929       $   25 $       (7,995) $     (3,700) $     (1,741)




                                                             72
   ____________________________________________________________________________________
                                                                           2011-FO-0002



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

    BUDGETARY RESOURCES
     Unobligated Balance Carried Forward
        Beginning of period                             $        48    $   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         2,051        24,980
           Receivable from Federal Sources                        -         -             -          (147)         (147)
        Unfilled Customer Orders                                  -         -             -             -             -
     Net Transfers                                           10,326         -             -       (10,384)          (58)
     Permanently Not Available                                  (23)        -          (563)            -          (586)
    TOTAL BUDGETARY RESOURCES                           $   10,506 $       65   $   30,095 $      10,604 $      51,270

    STATUS OF BUDGETARY RESOURCES
     Obligations Incurred                               $    10,456    $   35   $    10,156   $         -   $    20,647
     Unobligated Balance-Apportioned                             16        19         5,609             -         5,644
     Unobligated Balance Not Available                           34        11        14,330        10,604        24,979
    TOTAL STATUS OF BUDGETARY RESOURCES                 $   10,506     $   65   $   30,095    $   10,604    $   51,270

    CHANGE IN OBLIGATED BALANCES
     Obligated Balance, Net, Beginning of Period:
      Unpaid Obligations Carried Forward                $        66 $      205 $    1,318 $             - $       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 of Prior Year Obligations                        (9)         -         (8)              -           (17)
     Change in Receivable from Federal Sources                    -          -          -             147           147
     Obligated Balance, Net, End of Period:                       -          -          -               -             -
      Unpaid Obligations                                         88        200      1,210               -         1,498
      Receivable from Federal Sources                             -          -         (2)            (85)          (87)
     Outlays:                                                     -          -          -               -             -
           Disbursements                                $    10,425 $       40 $   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                                    -          -          -               -             -
    NET OUTLAYS                                         $   10,425 $        25 $ (12,658) $       (2,051) $     (4,259)




                                                            73
  2011-FO-0002
  ____________________________________________________________________________________


Required Supplementary Information

Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GI/SRI Program
September 30, 2010:

    (Dollars in Millions)
                                                                                                          GI/SRI
                                                            Program      Liquidating      Financing        Total

    BUDGETARY RESOURCES
     Unobligated Balance Carried Forward
        Beginning of period                             $         67 $           187 $          6,859 $        7,113
     Recoveries of Prior Year Obligations                         19               3                8             30
     Budget Authority:
       Appropriations received                                    871            101               7            979
       Borrowing Authority                                          -             10             789            799
     Spending Authority from Offsetting Collections:
       Earned
           Collected                                                -             241           2,741          2,982
           Receivable from Federal Sources                          -               -              (1)            (1)
       Unfilled Customer Orders                                     -               -              (1)            (1)
     Net Transfers                                                  -               -               -              -
     Permanently Not Available                                    (23)           (214)           (189)          (426)
    TOTAL BUDGETARY RESOURCES                           $        934 $           328 $        10,213 $       11,475

    STATUS OF BUDGETARY RESOURCES
     Obligations Incurred                               $        877 $           112 $          2,894 $        3,883
     Unobligated Balance-Apportioned                               9             107               57            173
     Unobligated Balance Not Available                            48             109            7,262          7,419
    TOTAL STATUS OF BUDGETARY RESOURCES                 $        934 $           328 $        10,213 $       11,475

    CHANGE IN OBLIGATED BALANCES
     Obligated Balance, Net, Beginning of Period:
      Unpaid Obligations Carried Forward                $          82 $           470 $           253 $          805
      Receivable from Federal Sources Carried Forward               -              (1)             (2)            (3)
      Obligations Incurred                                        877             112           2,894          3,883
      Gross Outlays                                              (913)           (136)         (2,806)        (3,855)
     Obligated Balance Transfers, Net:
     Recoveries of Prior Year Obligations                         (19)             (3)            (8)              (30)
     Change in Receivable from Federal Sources                      -               -              2                 2
     Obligated Balance, Net, End of Period:
      Unpaid Obligations                                          27             443             333            803
      Receivable from Federal Sources                              -              (1)              -             (1)
     Outlays:
           Disbursements                                $        913 $            136 $         2,806 $        3,855
           Collections                                             -             (241)         (2,741)        (2,982)
           Subtotal                                              913             (105)             65            873
     Less: Offsetting Receipts                                     -                -               -            619
    NET OUTLAYS                                         $        913 $          (105) $            65 $         254




                                                            74
   ____________________________________________________________________________________
                                                                           2011-FO-0002



Required Supplementary Information

Schedule E: Comparative Combining Budgetary Resources by Appropriation for the GI/SRI Program
September 30, 2009:

    (Dollars in Millions)
                                                                                                          GI/SRI
                                                            Program     Liquidating      Financing         Total

    BUDGETARY RESOURCES
     Unobligated Balance Carried Forward
        Beginning of period                             $            88 $        269 $           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)
       Unfilled Customer Orders                                       -            -               -               -
     Net Transfers                                                    -            -               -               -
     Permanently Not Available                                      (36)        (305)           (320)           (661)
    TOTAL BUDGETARY RESOURCES                           $        6,910 $        362 $         8,882 $        16,154

    STATUS OF BUDGETARY RESOURCES
     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 OF BUDGETARY RESOURCES                 $        6,910 $        362 $         8,882 $        16,154

    CHANGE IN OBLIGATED BALANCES
     Obligated Balance, Net, Beginning of Period:
      Unpaid Obligations Carried Forward                $            98 $        494 $            278 $          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 of Prior Year Obligations                            (8)          (8)              (3)           (19)
     Change in Receivable from Federal Sources                        -            5               (1)             4
     Obligated Balance, Net, End of Period:                           -            -                -              -
      Unpaid Obligations                                             82          470              253            805
      Receivable from Federal Sources                                 -            -               (2)            (2)
     Outlays:                                                         -            -                -              -
           Disbursements                                $         6,851 $        191 $          2,046 $        9,088
           Collections                                                -         (298)          (8,317)        (8,615)
           Subtotal                                               6,851         (107)          (6,271)           473
     Less: Offsetting Receipts                                        -            -                -            183
    NET OUTLAYS                                         $        6,851 $       (107) $        (6,271) $         290




                                                            75
  2011-FO-0002
  ____________________________________________________________________________________


Required Supplementary Information

Schedule F: Comparative Combining Budgetary Resources by Appropriation for the H4H Program
September 30, 2010:

     (Dollars in Millions)
                                                                                                    H4H
                                                              Program           Financing           Total

     BUDGETARY RESOURCES
      Unobligated Balance Carried Forward
         Beginning of period                              $             464 $               1 $             465
      Recoveries of Prior Year Obligations                                -                 -                 -
      Budget Authority:
        Appropriations received                                          -                   -                -
        Borrowing Authority                                              -                   -                -
      Spending Authority from Offsetting Collections:
        Earned
            Collected                                                 9                     4                13
            Receivable from Federal Sources                           -                     -                 -
        Unfilled Customer Orders                                      -                     -                 -
        Anticipated for rest of year                                  -                     -                 -
      Net Transfers                                                   -                     -                 -
      Permanently Not Available                                       -                     -                 -
     TOTAL BUDGETARY RESOURCES                            $         473 $                   5 $             478

     STATUS OF BUDGETARY RESOURCES
      Obligations Incurred                                $           5 $                   - $               5
      Unobligated Balance-Apportioned                               309                     5               314
      Unobligated Balance Not Available                             159                     -               159
     TOTAL STATUS OF BUDGETARY RESOURCES                  $         473 $                   5 $             478

     CHANGE IN OBLIGATED BALANCES
      Obligated Balance, Net, Beginning of Period:
       Unpaid Obligations Carried Forward                 $               1 $                - $              1
       Receivable from Federal Sources Carried Forward                    -                  -                -
       Obligations Incurred                                               5                  -                5
       Gross Outlays                                                     (5)                 -               (5)
      Obligated Balance Transfers, Net:
      Recoveries of Prior Year Obligations                               -                   -                -
      Change in Receivable from Federal Sources                          -                   -                -
      Obligated Balance, Net, End of Period:
       Unpaid Obligations                                                1                   -                1
       Receivable from Federal Sources                                   -                   -                -
      Outlays:
            Disbursements                                 $              5 $                 - $              5
            Collections                                                 (9)                 (4)             (13)
            Subtotal                                                    (4)                 (4)              (8)
      Less: Offsetting Receipts                                          -                   - -
     NET OUTLAYS                                          $             (4) $               (4) $            (8)




                                                         76
   ____________________________________________________________________________________
                                                                           2011-FO-0002


Required Supplementary Information

Schedule F: Comparative Combining Budgetary Resources by Appropriation for the H4H Program
September 30, 2009:

      (Dollars in Millions)
                                                                                                     H4H
                                                               Program           Financing           Total

      BUDGETARY RESOURCES
       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                           -                     -                 -
          Unfilled Customer Orders                                     -                     -                 -
          Anticipated for rest of year                                 -                     -                 -
       Net Transfers                                                   -                     -                 -
       Permanently Not Available                                       -                     -                 -
      TOTAL BUDGETARY RESOURCES                           $          470 $                   1 $             471

      STATUS OF BUDGETARY RESOURCES
       Obligations Incurred                               $            6 $                   - $               6
       Unobligated Balance-Apportioned                               464                     1               465
       Unobligated Balance Not Available                               -                     -                 -
      TOTAL STATUS OF BUDGETARY RESOURCES                 $          470 $                   1 $             471

      CHANGE IN OBLIGATED 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 of Prior Year Obligations                                -                  -                -
       Change in Receivable from Federal Sources                           -                  -                -
       Obligated Balance, Net, End of Period:
        Unpaid Obligations                                                1                   -                1
        Receivable from Federal Sources                                   -                   -                -
       Outlays:
             Disbursements                                $               5 $                 - $              5
             Collections                                                  -                  (1)              (1)
             Subtotal                                                     5                  (1)               4
       Less: Offsetting Receipts                                          -                   -                -
      NET OUTLAYS                                         $               5 $                (1) $             4




                                                          77
    2011-FO-0002
    ____________________________________________________________________________________


Required Supplementary Information

Schedule G: Comparative Combining Budgetary Resources by Appropriation for the Energy Innovation
Program and the Transformation Initiative Program
September 30, 2010:
                  (Dollars in Millions)
                                                                       EI Total     TI Total

                  BUDGETARY RESOURCES
                    Unobligated Balance Carried Forward
                       Beginning of period                             $       -    $      -
                    Recoveries of Prior Year Obligations                       -           -
                    Budget Authority:
                      Appropriations received                                50          20
                      Borrowing Authority                                      -           -
                    Spending Authority from Offsetting Collections:
                      Earned
                          Collected                                            -           -
                          Receivable from Federal Sources                      -           -
                      Unfilled Customer Orders                                 -           -
                      Anticipated for rest of year                             -           -
                    Net Transfers                                             (1)          -
                    Permanently Not Available                                  -           -
                  TOTAL BUDGETARY RESOURCES                            $     49     $    20


                  STATUS OF BUDGETARY RESOURCES
                    Obligations Incurred                                       -           -
                    Unobligated Balance-Apportioned                          49            -
                    Unobligated Balance Not Available                          -         20
                  TOTAL STATUS OF BUDGETARY RESOURCES                  $     49     $    20


                  CHANGE IN OBLIGATED BALANCES
                    Obligated Balance, Net, Beginning of Period:
                     Unpaid Obligations Carried Forward                $       -    $      -
                     Receivable from Federal Sources Carried Forward           -           -
                     Obligations Incurred                                      -           -
                     Gross Outlays                                             -           -
                    Obligated Balance Transfers, Net:
                    Recoveries of Prior Year Obligations                       -           -
                    Change in Receivable from Federal Sources                  -           -
                    Obligated Balance, Net, End of Period:
                     Unpaid Obligations                                        -           -
                     Receivable from Federal Sources                           -           -
                    Outlays:
                         Disbursements                                 $       -    $      -
                         Collections                                           -           -
                         Subtotal                                              -           -
                    Less: Offsetting Receipts                          -            -
                  NET OUTLAYS                                          $       -    $      -




                                                             78