oversight

Audit of the Federal Housing Administration's Financial Statements for Fiscal Years 2014 and 2013

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-11-14.

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

        Federal Housing Administration
               Washington, DC
                       Fiscal Years 2014 and 2013

                       Financial Statements Audit




Office of Audit, Financial Audits Division   Audit Report Number: 2015-FO-0001
Washington, DC                                               November 14, 2014
To:            Biniam Gebre, Acting Assistant Secretary for Housing and Acting Federal
               Housing Administration Commissioner, H
                      \signed\
From:          Thomas R. McEnanly, Director, Financial Audits Division, GAF
Subject:       Audit of the Federal Housing Administration’s Financial Statements for Fiscal
               Years 2014 and 2013


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our audits of Federal Housing Administration’s fiscal years 2014
and 2013 financial statements.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
202-402-8216.
                    Audit Report Number: 2015-FO-0001
                    Date: November 14, 2014

                    Audit of Federal Housing Administration’s Financial Statements for Fiscal
                    Years 2014 and 2013




Highlights

What We Audited and Why
The Chief Financial Officers Act of 1990 (Public Law 101-576), as amended, requires the Office
of Inspector General (OIG) or an independent auditor, as determined by the OIG to annually
audit the financial statements of the Federal Housing Administration (FHA). We contracted with
the independent certified public accounting firm of CliftonLarsonAllen LLP to audit FHA’s
fiscal year 2013 principal financial statements. CliftonLarsonAllen LLP was responsible for its
audit reports and the conclusions expressed on those reports. OIG audited FHA’s fiscal year
2014 principal financial statements, which are comprised of the balance sheets and the related
statements of net cost and changes in net position and the combined statements of budgetary
resources for the year then ended. We conducted these audits in accordance with generally
accepted government auditing standards.
The following is our report on the results of our audits of FHA’s principal financial statements
for the fiscal years ending September 30, 2014 and 2013. Also provided are assessments of
FHA’s internal controls and our findings with respect to FHA’s compliance with applicable laws
and regulations. In addition, we plan to issue a letter to management describing other issues of
concern that came to our attention during the audit.

What We Found
In our opinion, FHA’s fiscal year 2014 and 2013 financial statements were presented fairly, in all
material respects, in accordance with the generally accepted accounting principles for the Federal
government. Our opinion is reported in FHA’s Fiscal Year 2014 Annual Management Report.
Our audit disclosed one material weakness, two significant deficiencies in internal controls, and
one instance of noncompliance with applicable laws and regulations.

What We Recommend
Recommendations are after each finding. One open recommendation from a prior year audit is
in the Follow-up on Prior Audits section of this report. We identified the lack of policies and
procedures to accrue $722.2 million in accounts receivables and $217.5 million in liabilities and
a reclassification on the balance sheet in the net amount of $703.2 million.
Table of Contents
Independent Auditor’s Report................................................................................3

Material Weakness .................................................................................................10
         Finding 1: FHA Did Not Establish Appropriate Receivables for Legal Settlements
         and Partial Claims Notes ................................................................................................ 10

Significant Deficiencies ..........................................................................................14
         Finding 2: Liabilities Were Not Recognized for Unearned Premium Collections or
         Unpaid Supplemental Claims ........................................................................................ 14

         Finding 3: Weaknesses Identified in Selected FHA Information Technology
         Systems ............................................................................................................................. 18

Scope and Methodology .........................................................................................21

Follow-up on Prior Audits.....................................................................................23

Appendixes ..............................................................................................................24
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 24

         B. Auditee Comments and OIG’s Evaluation ............................................................. 25

         C. FHA Fiscal Years 2014 and 2013 Financial Statements and Notes ...................... 28




                                                                      2
                                            U.S. DEPARTMENT OF
                                HOUSING AND URBAN DEVELOPMENT
                                       OFFICE OF INSPECTOR GENERAL



                              Independent Auditor’s Report

Commissioner
Federal Housing Administration


In our audits of fiscal years 2014 and 2013 financial statements of the Federal Housing
Administration (FHA), a component of the U.S. Department of Housing and Urban Development
(HUD), we found

       The financial statements are presented fairly, in all material respects, in accordance with
        U.S. generally accepted accounting principles;

       One material weakness in internal control over financial reporting;

       Two significant deficiencies in internal control over financial reporting; and

       One instance of reportable noncompliance with certain provisions of laws and regulations
        tested.
The following sections and appendixes discuss in more detail: (1) our conclusions, including a
matter of emphasis related to the potential range of estimate for the Single Family liability for loan
guarantee and changing of the accounting method for sweeping FHA’s receipt account, (2)
management’s discussion and analysis, other required supplementary information, and additional
information included with the financial statements, (3) management’s responsibilities, (4) our
responsibilities, (5) the current status of prior-year findings, (6)schedule of questioned costs and
funds to be put to better use, and (7) management’s response to findings.

Report on the Financial Statements
We have audited the accompanying financial statements of FHA, which comprise the balance sheets
as of September 30, 2014 and 2013, and the related statements of net cost and changes in net
position, the combined statements of budgetary resources for the years then ended, and the related
notes to the financial statements. The independent certified public accounting firm of
CliftonLarsonAllen LLP, under contract with OIG, audited FHA’s fiscal year 2013 principal
financial statements. CliftonLarsonAllen LLP was responsible for its audit report and the
conclusions expressed on that report. OIG audited FHA’s fiscal year 2014 principal financial
statements.

Management’s Responsibilities
FHA management is responsible for the preparation and fair presentation of these financial
statements in accordance with U.S. generally accounting principles (GAAP). This includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair


                                                   3
presentation of financial statements that are free from material misstatement, whether due to fraud
or error.
Management is also responsible for (1) evaluating the effectiveness of internal control over financial
reporting, (2) providing a statement of assurance on the overall effectiveness of internal control over
financial reporting, including providing reasonable assurance that the broad control objectives of
Federal Managers’ Financial Integrity Act are met, and (3) ensuring compliance with other
applicable laws and regulations.

Auditor’s Responsibilities
Our responsibility is to express an opinion on these financial statements based on our audits. We
and the previous auditor conducted our audits in accordance with U.S. generally accepted auditing
standards and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. These standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. We also conducted our audits in accordance with Office of
Management and Budget (OMB) Bulletin No. 14-02, Audit Requirements for Federal Financial
Statements. An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to FHA’s preparation and fair presentation of the financial statements to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such
opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We are also responsible for (1) obtaining a sufficient understanding of internal control over financial
reporting to assess the risk of material misstatements and to design the nature, timing and extent of
audit procedures, (2) testing compliance with selected provisions of laws and regulations that have a
direct and material effect on the financial statements and applicable laws for which OMB Bulletin
14-02 requires testing, and (3) applying certain limited procedures with respect to the required
supplementary information and all other accompanying information included with the financial
statements.
We did not evaluate all internal controls relevant to operating objectives as broadly established by
the Federal Managers’ Financial Integrity Act, such as those controls relevant to preparing statistical
reports and ensuring efficient operations. We limited our internal control testing to testing controls
over financial reporting. Because of inherent limitations in internal control, misstatements due to
error or fraud, losses, or noncompliance may still occur and not be detected. We also caution that
projecting our audit results to future periods is subject to risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with controls may deteriorate. In
addition, we caution that our internal control testing may not be sufficient for other purposes.




                                                   4
We did not test compliance with all laws and regulations applicable to FHA. We limited our tests of
compliance to certain provisions of laws and regulations that have a direct and material effect on the
financial statements and those required by OMB Bulletin 14-02 that we deemed applicable to
FHA’s financial statements for the fiscal year ended September 30, 2014. We caution that
noncompliance with laws and regulations may occur and not be detected by these tests and that such
testing may not be sufficient for other purposes.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.

Opinion on the Financial Statements
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Federal Housing Administration as of September 30, 2014 and 2013, and
its net costs, changes in net position, and budgetary resources for the years then ended, in
accordance with U.S. generally accepted accounting principles.

Emphasis of Matter
As discussed in Notes 1 and 6 to the financial statements, the loan guarantee liability is an
actuarially determined estimate of the net present value of future claims, future premiums and future
recoveries, from loans insured as of the end of the fiscal year. This estimate is developed using
econometric models that integrate historical loan-level program and economic data with regional
house price appreciation forecasts to develop assumptions about future portfolio performance. This
year’s estimate is the mean value from a series of projections using many economic scenarios and
FHA’s Single Family liability for loan guarantee estimates reported as of September 30, 2014 could
change depending on which economic outcome ultimately prevails. This forecast method helps
project how the estimate will be affected by different economic scenarios but does not address the
risk that the models may not accurately reflect current borrower behavior or contain technical errors.
Our opinion is not modified with respect to this matter.
As discussed in Note 1 to the financial statements, FHA has elected to change its method of
accounting for sweeping its receipt accounts and changed the timing from October 1 to September
30 in fiscal year 2014. Our opinion is not modified with respect to this matter.

Other Matters
Required Supplementary Information
U.S GAAP requires that FHA’s management’s discussion and analysis and other required
supplementary information be presented to supplement the financial statements. Such information,
although not a part of the financial statements, is required by the Federal Accounting Standards
Advisory Board, which considers it to be an essential part of financial reporting for placing the
financial statements in an appropriate operational, economic, or historical context. We have applied
certain limited procedures to the management discussion and analysis and other required
supplementary information in accordance with U.S. generally accepted government auditing
standards. These procedures consisted of inquiries of management about the methods of preparing


                                                    5
the information and comparing the information for consistency with management's responses to our
inquiries, the financial statements, and other knowledge we obtained during our audit of the
financial statements. We do not express an opinion or provide any assurance on this information
because the limited procedures do not provide us with sufficient evidence to express an opinion or
provide any assurance.

Other Information
The Message from the Commissioner and the Schedule of Spending are presented for purposes of
additional analysis and are not a required part of the financial statements or required supplementary
information. This information has not been subjected to the auditing procedures applied in the audit
of the financial statements, and accordingly, we do not express an opinion or provide any assurance
on it.

Prior Period Financial Statements Audited by a Predecessor Auditor

FHA’s financial statements as of September 30, 2013, were audited by other auditors whose
report, dated December 9, 2013, expressed an unqualified opinion on those statements. The
audit report on those statements also included an emphasis of matter paragraph, which described
the actuarially determined estimate for the loan guarantee liability.

Report on Internal Control over Financial Reporting and on Compliance Based on an
Audit of Financial Statements Performed in Accordance with Government Auditing
Standards

Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered FHA’s internal
control over financial reporting to determine the audit procedures that are appropriate in the
circumstances for the purpose of expressing our opinion on the financial statements, 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 the effectiveness of FHA’s internal control.
A deficiency in internal control 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 and correct, 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 FHA’s financial statements will not be prevented, or detected and
corrected in a timely basis. A significant deficiency is a deficiency, or combination of deficiencies,
in internal control that is less severe than a material weakness, yet important enough to merit
attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of
this section and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies. Therefore, material weaknesses or significant
deficiencies may exist that were not identified. We identified three deficiencies in internal control,



                                                   6
which are described below. We considered one to be a material weakness and two to be significant
deficiencies.
FHA Did Not Establish Appropriate Receivables for Legal Settlements and Partial Claims Notes
FHA did not record an accrual in its accounts receivables from settled legal claims. Instead, it
accounted for the settlement funds collected on a cash basis. GAAP requires receivables which
represent claims for cash from settled legal claims to be recognized at the point of legal settlement
rather than when the cash was received. FHA had not established or implemented formal policies
and procedures to identify, accrue, record, and report amounts due as a result of the legal settlement
agreements. FHA received and reported a total of $466.4 million in collections for fiscal year 2014.
An additional $722.2 million was anticipated because of four settlement agreements reached during
fiscal year 2014 and a remaining amount due from a 2012 settlement. However, the cash had not
been collected by FHA as of September 30, 2014.
FHA could not provide the promissory notes to support $1.5 billion (gross) of the net loans
receivable balance outstanding reported in its balance sheet as of September 30, 2014. The $1.5
billion represented 57,164 partial claims (subordinated liens) for which payments were made by
FHA to mortgagees on delinquent loans as part of FHA’s loss mitigation efforts to bring these
delinquent loans current. An increase in the number of partial claims filed, a backlog of
unprocessed documents received by the contractor, and the discrepancies between FHA’s policy
and the regulations resulted in an increased number of partial claims for which FHA was unable to
provide documentation and for which it did not demand reimbursement from delinquent
mortgagees. As of September 30, 2014, adjustments were needed to recognize $722.2 million in
uncollected legal settlements and reclassify $703.2 million from loans receivables to accounts
receivables.

Liabilities Were Not Recognized for Unearned Premium Collections or Unpaid Supplemental
Claims
Prior to endorsing and providing insurance of Single Family forward loans, FHA recognized the
premiums collected prior to loan endorsement as earned, and not as deferred revenue. Recognition
of revenue at this point is a departure from GAAP. OIG estimated that FHA did not properly defer
$175.6 million of collected premiums as unearned as of September 30, 2014. This condition
occurred because FHA’s policy is to recognize the cash collection as an inflow in the Single-Family
Liability for Loan Guarantee (LLG) when received. The inclusion of premium collections in the
LLG balance for loans closed but not endorsed causes the balance to be overstated and the annual
re-estimate expense to be understated. As a result, FHA made adjustments to recognize $174.4
million in other deferred revenue for premium collections on unendorsed loans as of September 30,
2014.
In addition, FHA did not have a process to accrue the estimated liability for unpaid Single Family
suspended supplemental claims filed. FHA assumed the liability for supplemental claims was
accounted for under the LLG. Under that assumption, FHA’s accrual process excluded an accrual
for unpaid supplemental claims filed but not processed or approved and understated the liability.
We estimated that FHA’s reported liability in its balance sheet may have been understated by at
least $41.9 million at fiscal year-end because of the lack of accruals for suspended supplemental


                                                   7
claims. FHA agreed and recorded an accrual of $56.8 million to reflect the suspended supplemental
claims liability as of September 30, 2014.

Weaknesses Identified in Selected FHA Information Technology Systems
The Single Family Housing Enterprise Data Warehouse contains critical single family business data
from several data sources, mostly from FHA single family automated systems. We found that (1)
access to some of the sensitive personally identifiable information in the data warehouse was not
sufficiently limited to individuals as necessary to perform their duties, (2) reconciliations of data
from some of the source systems that interface with the data warehouse were not sufficiently
performed, (3) passwords for the data warehouse user accounts were also not changed to the
frequency specified by HUD policy, and (4) web server software was not kept up to date.

The FHA subsidiary ledger (subsidiary ledger) is FHA’s official system of record for financial
transactions. We found that some of the controls over the subsidiary ledger user accounts were
inadequate. Specifically, (1) inactive user accounts and temporary accounts were not always
deactivated and removed in a timely manner, (2) HUD’s standardized user IDs were not always
assigned to STAT1 users, and (3) one user was inappropriately granted access to the system
administration account. Not all subsidiary ledger audit tables with the audit configuration features
turned on were included in the subsidiary ledger audit plan. Also, audit data in these tables were not
reviewed and analyzed by FHA officials for unusual user access activities. FHA had not developed
a memorandum of agreement/understanding and interconnection security agreement for the
external interfaces between the subsidiary ledger and U.S. Department of Treasury systems. FHA
officials did not fully implement adequate controls over information within the subsidiary ledger
test environment. User IDs and passwords for the test environment with subsidiary ledger
production data were not encrypted. The implementation status of some security controls was not
accurately reflected in the subsidiary ledger system security documents. In addition, certain
configuration management controls over the subsidiary ledger were inadequately documented.

Report on Compliance
To obtain reasonable assurance that FHA's financial statements are free from material misstatement,
we performed tests of its compliance with certain provisions of laws and regulations,
noncompliance with which could have a direct and material effect on the determination of financial
statement amounts. However, providing an opinion on compliance with those provisions was not
an objective of our audits, and accordingly, we do not express such an opinion. The results of our
tests disclosed one instance of noncompliance, described below, which is required to be reported in
accordance with Government Auditing Standards, issued by the Comptroller General of the United
States.

        Capital ratio: For the sixth consecutive year, the FHA fund has failed to meet its
        legislatively mandated capital ratio requirement. The Cranston-Gonzales National
        Affordable Housing Act of 1990 required that FHA’s Mutual Mortgage Insurance Fund

1
 STAT – is a PeopleSoft account that is used for performing release migrations from one PeopleSoft environment to
another using the Quest STAT configuration management tool.



                                                        8
       maintain a minimum capital ratio of 2 percent. The capital ratio is defined as the ratio of
       capital to unamortized insurance-in-force. The Act requires FHA to conduct an annual
       independent actuarial study to, among other things, calculate this ratio. The Housing and
       Economic Recovery Act of 2008 requires that the HUD Secretary submit a report
       annually to the Congress describing the results of the study, assess the financial status of
       the MMI fund, recommend program adjustments, and evaluate the quality control
       procedures and accuracy of information used in the process of underwriting loans
       guaranteed by the Mutual Mortgage Insurance Fund. As of the date of our audit, this
       report for fiscal year 2014 had not yet been submitted to Congress, but preliminary FHA
       data indicated that this ratio remained below the required 2 percent throughout fiscal year
       2014.


This report is intended for the information and use of the management of FHA, OMB, the U.S.
Government Accountability Office, and Congress and is not intended to be and should not be
used by anyone other than these specified parties. However, this report is a matter of public
record, and its distribution is not limited. The purpose of the Report on Internal Control over
Financial Reporting and the Report on Compliance sections of this report was solely to describe
the scope of our testing of internal control and compliance and the result of that testing, and not
to provide an opinion on the effectiveness of FHA’s internal control or compliance. These
reports are an integral part of an audit performed in accordance with Government Auditing
Standards in considering FHA’s internal control and compliance. Accordingly, these reports are
not suitable for any other purpose. In addition to a separate report detailing the internal control
and compliance issues included in this report and providing specific recommendations to FHA
management, we noted other matters involving internal control over financial reporting and
FHA’s operation that we are reporting to FHA management in a separate management letter.




     \signed\
Randy W. McGinnis
Assistant Inspector General for Audit
November 14, 2014




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Material Weakness

Finding 1: FHA Did Not Establish Appropriate Receivables for
Legal Settlements and Partial Claims Notes
FHA was awarded seven2 cash settlements totaling $1.2 billion and collected $466.4 million of
those settlements, in fiscal year 2014. Additionally, during fiscal year 2014, as part of its loss
mitigation efforts to bring delinquent loans current, FHA paid $4.4 billion to mortgagees for
partial claims; however, FHA did not receive promissory notes from the mortgagee for $1.5
billion of the claim payments. Mortgagees were required to provide FHA with promissory notes
for the payments made or return the claim payment back to FHA. Due to the non-routine nature
of legal settlements for FHA and the contractor’s backlog for recording promissory notes for
partial claim payments, FHA did not properly recognize their receivables. As a result, as of
September 30, 2014, adjustments were needed to (1) recognize FHA’s anticipated collections of
$722.2 million in settlement fees and (2) reclassify $703.2 million in net loans receivables
related to partial claims paid without the corresponding promissory notes.
Accounts Receivables Were Not Accrued for Settlement Agreements
FHA did not record an accrual in its accounts receivables for settled legal claims. Instead, FHA
accounted for the settlement funds collected on a cash basis. GAAP requires receivables which
represent claims for cash from settled legal claims to be recognized at the point of legal
settlement rather than when cash was received. Federal financial accounting standards require
that a receivable should be recognized when a Federal entity establishes a claim to cash or other
assets against other entities, either based on legal provisions, such as a payment due date, such
as, taxes not received by the date they are due, or goods or services provided. If the exact
amount is unknown, a reasonable estimate should be made.

In March 2012, FHA began receiving cash through the National Servicing Settlement Agreement
from lenders, including the nation’s five largest loan servicers, as a result of increased
monitoring and enforcement actions. In fiscal year 2012, FHA reported over $1.1 billion in
collections related to the settlement agreements. One of the settlements reached in FHA’s favor
in fiscal year 2012 was for $490.9 million. However, FHA only collected $485.4 million, and
the remaining $5.5 million had not been collected or recorded as an account receivable as of
September 30, 2014. No collections were reported for fiscal year 2013. FHA received and
reported a total of $466.4 million in collections for fiscal year 2014. An additional $716.7
million is anticipated from four settlement agreements reached during fiscal year 2014, for which
the cash had not been collected by FHA as of September 30, 2014.

As FHA was not always the only party named and awarded in the settlement agreements, some
of the settlements do not contain FHA’s portion of the total settlement amount. This resulted in

2
 A subsequent event was noted for the seventh settlement, which was reached on September 30, 2014, in the
amount of $291 million.



                                                        10
FHA not having a reasonable estimate to accrue. Additionally, FHA's accounting division often
did not know of the settlement until just before the collection of the cash. Moreover, as a non-
routine transaction, FHA may not have considered accruing the receivables from settled legal
claims at the point of legal settlement because legal settlements are uncommon for a credit
reform program. Therefore, the policy in place was to record the collection of the cash.

FHA had not established formal policies and procedures to identify, accrue, record, and report
amounts due as a result of the legal settlement agreements. Consequently, when legal cases are
settled and approved by the court near or at the end of the current fiscal year, FHA will not
recognize the asset until the next fiscal year, when the cash is received. As a result, FHA’s
accounts receivable balances may be understated and the asset may be recognized in an incorrect
accounting period.
Single Family Loans Receivable Balances Were Not Supported With Second Mortgage
Notes
FHA could not provide the promissory notes to support $1.5 billion (gross) of the net loans
receivable balance outstanding reported in its Balance Sheet as of September 30, 2014.3 The
$1.5 billion represented 57,164 partial claims (subordinated liens) for which payments were
made by FHA to mortgagees on delinquent loans as part of FHA’s loss mitigation efforts to bring
these delinquent loans current. An increase in the number of partial claims filed, a backlog of
unprocessed documents received by the contractor, and the discrepancies between FHA’s policy
and the regulations resulted in an increased number of partial claims for which FHA was unable
to provide documentation and for which they did not demand reimbursement from delinquent
mortgagees.
The borrower eligible for the partial claim loss mitigation option was required to sign a second
promissory note and a second mortgage or deed of trust with HUD as the beneficiary, reflecting
the partial claim terms. The partial claim promissory note contained the borrower’s promise to
repay the amount borrowed and established the existence of the loans receivable recorded by
FHA. The current regulations for partial claims require that the “original credit instrument”
(promissory note) be provided by the lender to HUD no later than 60 days after execution. On a
monthly basis, the contractor maintaining the Single-Family Mortgage Asset Recovery
Technology (SMART) system generates the Missing Documents’ Report (MDR) and sends it to
FHA staff at the National Servicing Center in Oklahoma. The MDR identifies partial claims for
which the promissory note or mortgage have not been provided by the mortgagee to HUD and
for which payment for the partial claim has been made by FHA to the mortgagee.
We reviewed the MDR for September 2014 and determined that 94,179 partial claims were
included in the report with a total claim amount of $2.4 billion. Of the 94,179 partial claims, we
identified 48,181 partial claims with claim amounts of $1.3 billion and 8,983 partial claims with
claim amounts of $216.2 million were missing the promissory note more than 60 days after the




3
 An allowance for subsidy of $783.3 million was recognized against the $1.5 billion gross loans receivable,
resulting in $703.2 million, net loans receivable.



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loan claims origination date as of September 30, 2014, and September 30, 2013, respectively,
totaling 57,164 loans and $1.5 billion in claims. 4
FHA experienced an increase in partial claims filed in fiscal years 2013 and 2014. FHA’s
contractor responsible for processing and documenting the receipt of the partial claim promissory
notes and mortgages did not have the capacity to keep up with the increase. This resulted in a
backlog of unopened, unprocessed documents. Because of the backlog, the MDR did not
accurately reflect all documents received because not all of the documents had been entered into
SMART by the contractor.
Another contributing factor was the difference between FHA’s current policy regarding partial
claims and the regulatory requirements. Although the regulations require that the promissory
note be provided to HUD no later than 60 days after execution, and that the second mortgage be
provided to HUD no later than six months following the date of execution, FHA’s policy allowed
mortgagees to deliver both the second note and second mortgage to HUD’s loan servicing
contractor no later than six (6) months from the execution date of the partial claim note and
security instrument.5 The regulations also require the mortgagee to reimburse the amount of the
claim paid, including the incentive, if the original of the note and security instrument are not
provided within the prescribed deadlines. However, prior to July 30, 2013, the effective date of
Mortgagee Letter 2013-19, Partial Claim Documentation and Delivery Requirements, which
established FHA’s current policy of issuing demand letters for the full reimbursement of all
amounts associated with overdue partial claim documents, FHA only enforced reimbursement of
the incentive fee. Following the effective date of Mortgagee Letter 2013-19, FHA made a
determination to cease follow-up procedures and only issue demand letters after the backlog of
partial claims had been properly inventoried and updated in SMART.
According to FHA staff, a new loan servicing contract was awarded in July 2014. The new loan
servicing contractor would be responsible for working through the backlog, updating SMART,
and sending the demand letters for both the claim and incentive fees paid starting in October
2014.
Conclusion
FHA has recognized the need to implement a policy to determine the total amount of settlement
funds due to FHA and to ensure all settlement agreement funds due to FHA are collected in full.
In addition, FHA has contracted with a new loan servicing contractor to accurately record the
status of the promissory notes and second mortgages in SMART for partial claims and to
demand reimbursement from delinquent mortgagees for partial claims and incentive fees
previously paid. The court settlements and demand letters establish a legally enforceable claim
to cash which should be recorded by FHA as an account receivable in accordance with GAAP.


4
  OIG used the loan claims origination date because the execution date has to be obtained from the promissory note,
which was unavailable. The Partial Claim Documentation and Delivery Requirements state that mortgagees file the
claims after the execution of the promissory note and mortgage. Therefore, the loan claims origination date should
be subsequent to the execution date.
5
  Mortgagee Letter 2000-05: Loss Mitigation Program – Comprehensive Clarification of Policy and Notice of
Procedural Changes, effective January 19, 2000, established the six-month document delivery policy.



                                                         12
As of September 30, 2014, adjustments were needed to recognize $722.2 million in uncollected
legal settlements and reclassify $703.2 million from loans receivables to accounts receivables.
Recommendations
We recommend that the FHA Office of the Comptroller

       1A.    Establish and implement policies and procedures to (a) determine the total amount
              of settlement funds due to FHA, based upon the settlement agreements or
              addendums (b) ensure all settlement agreement funds due to FHA are collected in
              full, and (c) record and account for non-routine transactions related to the accrual
              of settlement funds in accordance with GAAP and credit reform accounting.

       1B.    Follow-up on the collection of the $5.5 million from the fiscal year 2012
              settlement agreement and determine whether an accrual for the funds due is
              necessary.

       1C.    Determine the loans receivable with missing notes that are over 60 days old at the
              end of fiscal year 2013 and 2014 and reclassify that balance to an appropriate
              receivable account at the end of their respective fiscal years.

We recommend that the Director of Single Family Asset Management

       1D.    In conjunction with the loan servicing contractor, review the supporting
              documentation for all partial claim notes to ensure that SMART accurately
              reflects the status of the second notes and second mortgages.

       1E.    Align its current policy on partial claim document delivery with FHA’s regulatory
              requirements.

       1F.    Initiate the billing process for the claims paid, plus incentive, where the lender has
              not provided the original of the note and security instrument within the prescribed
              deadlines for the $1.5 billion.




                                                13
Significant Deficiencies

Finding 2: Liabilities Were Not Recognized for Unearned Premium
Collections or Unpaid Supplemental Claims
Prior to endorsing and providing insurance of Single Family forward loans, FHA recognized the
premiums collected prior to loan endorsement as earned, and not as deferred revenue.
Recognition of revenue at this point is a departure from GAAP. This condition occurred because
FHA’s policy is to recognize the cash collection as an inflow in the Single-Family Liability for
Loan Guarantee (LLG) when received. The inclusion of premium collections in the LLG
balance for loans closed but not endorsed causes the balance to be overstated and the annual re-
estimate expense to be understated.

In addition, FHA did not have a process to accrue the estimated liability for unpaid Single
Family suspended supplemental claims filed. FHA assumed the liability for supplemental claims
was accounted for under the LLG. Under that assumption, FHA’s accrual process excluded an
accrual for unpaid supplemental claims filed but not processed or approved and understated the
liability.
Improper Recognition of Premiums Collected Prior to Insurance Coverage
OIG estimated that FHA did not properly defer $175.6 million of collected premiums as
unearned as of September 30, 2014. FHA recognizes a loan guarantee commitment6 and provides
insurance coverage upon its endorsement of the loan and not upon disbursement of the loan.
According to the regulations,7 the mortgage is insured from the date of issuance of a Mortgage
Insurance Certificate, from the date of endorsement of the credit instrument, or from the date of
HUD’s acknowledgement to the mortgagee that the mortgage is insured. A Mortgage Insurance
Certificate is issued upon successful processing of the insurance application and subsequent
endorsement.
One-time or up-front mortgage insurance premiums are required within ten calendar days after
the date of loan closing or the date of disbursement of the mortgage proceeds as a condition of
endorsement. Periodic mortgage insurance premiums are required beginning in the month the
mortgagor is required to make the first monthly mortgage payment. The periodic mortgage
insurance premium is billed and collected on a monthly basis whether a loan is endorsed or not.
Federal GAAP require that premium collections for loan guarantee liabilities subject to the
Federal Credit Reform Act (FCRA) be recognized as a cash inflow to the LLG when the loan is
disbursed. It is assumed that the disbursement takes place after the loan guarantee commitment

6
  Loan guarantee commitment means a binding agreement by a Federal agency to make a loan
guarantee when specified conditions are fulfilled by the borrower, the lender, or any other party to the
guarantee agreement.
7
  Code of Federal Regulations: Title 24: Housing and Urban Development PART 203—Single Family Mortgage
Insurance Subpart B—Contract Rights and Obligations §203.257 Creation of the contract



                                                     14
is made. For non-credit reform programs, insurance premium fees are exchanged for insurance
coverage and are recognized as revenue when they are realized or earned, or when the insurance
coverage is provided. However, for Single Family Forward loan guarantees subject to FCRA,
FHA recognized premium collections as a cash inflow to the LLG prior to endorsement, prior to
its guarantee of insurance coverage, and prior to earning the collections. The premium fees
collected prior to the insurance coverage were unearned, and FHA should have recorded the
collections for the unendorsed loans as deferred revenue until the loan was endorsed.
When premiums are initially collected, FHA, through an automated process, records the cash
collection as an inflow to the LLG in the current cohort8 year. Once the case is endorsed, the
initial transaction is reversed and the premiums are then recorded in the cohort year in which the
case was endorsed. In most instances, the premiums are received and the loan is endorsed in the
same cohort year. However, due to process timing, many of the loans associated with premiums
received during September are not endorsed until the following fiscal year. Premiums collected
during September for unendorsed cases included in the current cohort year causes the re-estimate
expense to be understated since cash will include premiums for cases not included as part of the
LLG. In the following cohort year, when the cases are endorsed and included in the LLG, the re-
estimate expense is overstated because it also includes the cash collected during September.
Using a data extract of Single Family Forward loans from the Single Family Enterprise Data
Warehouse as of May 28, 2014, we calculated an average of 28 days between the closing date
and the endorsement date for loans that were endorsed as of May 28, 2014. We also calculated
the average monthly premium collection for FHA using data extracts of the upfront premiums
collected during fiscal year 2014. Based on our review, we determined that an average of $175.6
million in upfront premiums per month was collected by FHA in fiscal year 2014. However, at
or close to fiscal year end, the monthly premiums collected are not earned until the following
fiscal year when the associated loans are endorsed.
FHA’s Claims Payable Accrual Process was Incomplete
FHA’s claims payable only included claims approved but not paid as of the end of the fiscal year
and potential claims for single family properties sold for which no claim request had been filed.
Prior to 2005, FHA accrued accounts payable for supplemental claims using the average
supplemental claim amount paid. The General Ledger Division stopped accruing any accounts
payable amount for suspended supplemental claims in 2005 because the assumption was that the
amount of the supplemental claims was accounted for under the Loan Guarantee Liability
balance. However, for supplemental claims associated with conveyance or Accelerated Claims
Disposition claims, once the note or property is sold, any further claim payments are not
accounted for either in the Loan Guarantee Liability balance or the Allowance for Subsidy.
GAAP requires recognition of liability when the future outflow of resources is both probable and
measurable.
FHA relies on a contractor to review supplemental claim requests and prepare them for approval.
According to FHA staff, the funding for the contract has been insufficient to allow FHA to keep


8
 Cohort year refers to the fiscal year of obligation for direct loan obligations, or loan guarantee commitments of a
program.



                                                           15
up with the increasing volume of supplemental claims. The insufficient funding has led to a
backlog in processing the supplemental claims for approval.
Once the supplemental claims have been imaged and uploaded to the claims system, a contractor
manually reviews each claim for payment. The contractor reviews the documentation from the
original claim paid to ensure that the request for the supplemental claim payment was not already
paid with the original claim payment. Once the contractor completes its review, the results of the
review are forwarded to FHA staff, with a recommendation for payment or denial of the claim.
HUD’s Government Technical Monitor performs a final review of a sample of such claims to
ensure the recommendations are valid.
Based upon the Single Family Claims Monthly Average report for September 2014, OIG noted
that during fiscal year 2014, 34,410 supplemental claims were paid in the amount of $32.6
million. Based on the Suspended Cases Summary report as of September 30, 2014, and other
information provided by FHA staff, we determined the number of suspended Single Family
supplemental claims that would be subject to accrual. Of the 60,133 cases included in the report,
we determined that 54,372 of the cases were for supplemental claims; an additional 5,073
supplemental claims had been received but not imaged. The total number of supplemental
claims filed during fiscal year 2014 was 52,110. The remaining 7,335 were carried over from a
backlog in prior years. Due to the impact of the backlog, which is approximately 1.7 times the
amount of claims paid during the fiscal year, we determined that the recognition of estimated
liability for the unpaid supplemental claims would be appropriate. Using the Single Family
Claims Monthly Average report for September 2014 provided by FHA staff, we identified an
average claim amount per supplemental claim of $947.41 and an estimated liability for the
supplemental claims of at least $41.9 million as of September 2014.
Conclusion
FHA’s current policy is to recognize all premiums as cash inflows to the LLG when they are
received. If the loan is not endorsed until the following fiscal year, the inclusion of the
premiums in the LLG causes the re-estimate expense to be understated. Since FHA does not
endorse the loans when the loans are disbursed, it should record all premiums received as
deferred revenue until the loans are endorsed. Accordingly, FHA should recognize $175.6
million in other deferred revenue for premium collections on unendorsed loans as of September
30, 2014.
Due to the lack of accruals for suspended supplemental claims, we estimated that FHA’s
reported liability in its balance sheet may be understated by at least $41.9 million at fiscal year-
end. FHA agreed that an accrual to reflect the suspended supplemental claims liability at year-
end was necessary and recorded an accrual in the amount of $56.8 million.
Recommendations
We recommend that the FHA Comptroller

       2A.     Develop and implement a methodology to defer the recognition of all premium
               collections prior to endorsement from the Liability for Loan Guarantee.




                                                  16
2B.   Develop and implement a methodology for estimating the appropriate amount of
      liability to accrue from suspended supplemental claims.

2C.   Record an adjusting entry to report the appropriate amount of suspended
      supplemental claims liability to accrue at year-end based on the methodology
      developed in recommendation number 2B.




                                      17
Finding 3: Weaknesses Identified in Selected FHA Information
Technology Systems
We reviewed the general and application controls over the FHA Single Family Housing
Enterprise Data Warehouse and the FHA subsidiary ledger system as part of the internal control
assessments of FHA’s principal financial statements for fiscal year 2014. We found weaknesses
in the data warehouse and the FHA subsidiary ledger information systems. These conditions
occurred because some application controls were not sufficient. As a result, the appropriate
confidentiality, integrity, and availability of critical information may be negatively impacted.
The information used to provide input to the FHA financial statements could be adversely
affected.
Information System Control Weaknesses Were Identified in the Single Family Data
Warehouse
The data warehouse contains critical single family business data from several data sources,
mostly from FHA single-family automated systems. The data warehouse helps FHA manage its
$1.2 trillion portfolio of single family mortgages. The data warehouse maintains Web pages on
HUD’s Intranet that, as of May 2014, contained data query tools for approximately 400
registered users. The data warehouse was created for HUD personnel to extract financial
information to prepare financial statement line items, and to obtain other financial and non-
financial data. The information in the data warehouse can also be used to assess the potential
impact of a disaster. For example, the data warehouse can be used to identify the number of
FHA loans and servicing lenders affected by the disaster. This capability would allow managers
in Headquarters to make decisions regarding potential moratoriums or other special initiatives.
Further, it would give the HUD Secretary background information from the data warehouse to
advise the President.

We found that access to some of the sensitive personally identifiable information in the data
warehouse was not sufficiently limited to individuals as necessary to perform their duties. This
condition occurred because procedures were not sufficient to determine who required access to
the sensitive information in the system. As a result, some of the sensitive information in the data
warehouse could be vulnerable to unauthorized access and disclosure.

Reconciliations of data from some of the source systems that interface with the data warehouse
were not sufficiently performed. This condition occurred because data from the source systems
to the data warehouse were assumed to be valid and some interfaces transferring information to
the data warehouse did not provide adequate data to reconcile the information processed. As a
result, data may not have been processed accurately because of errors, inconsistencies in data,
system interruptions, or communication failures.

Passwords for the data warehouse user accounts were not changed to the frequency specified by
HUD policy. This condition occurred because the system has a limitation where users cannot
change their own passwords. As a result, the sensitive information in the system could be
vulnerable to unauthorized access and modification.




                                                 18
Web server software was not kept up to date. This condition occurred because the former acting
Chief Information Officer granted a waiver to continue using the outdated server software
because of application dependencies. As a result, the data warehouse may have been exposed to
known security vulnerabilities.
Information System Control Weaknesses Were Identified in the FHA Subsidiary Ledger
The FHA subsidiary ledger (subsidiary ledger) is FHA’s official system of record of financial
transactions. It is a commercial-off-the-shelf PeopleSoft accounting package and was certified
by the Financial Systems Integration Office as compliant with Federal government financial
accounting processing. The subsidiary ledger relies on 19 interfaces to translate commercial
accounting transactions to code values consistent with Federal rules and regulations in
accordance with the U.S. Standard General Ledger. FHA financial data feeder systems are on
various hardware and software platforms. The transactions are rolled-up and summarized in the
FHA subsidiary ledger’s Financial Transaction Repository and then interfaced into the FHA
subsidiary ledger’s PeopleSoft General Ledger (GL) module for journal processing. FHA
subsidiary ledger maintains budgetary, proprietary and memorandum U.S. Standard General
Ledger accounts. Currently, the FHA subsidiary ledger GL consists of approximately 200,000
summarized transactions (rows) per reporting period.
We found that some of the controls over the subsidiary ledger user accounts were inadequate.
Specifically, inactive user accounts and temporary accounts were not always deactivated or
removed in a timely manner and HUD’s standardized user IDs were not always assigned to
STAT users. These conditions occurred because FHA did not always follow National Institute
of Standards and Technology and the Department’s account management policies when granting
and monitoring those user accounts. Inadequate access controls diminish the reliability of
computerized data and increase the risk of destruction or inappropriate disclosure of subsidiary
ledger data.
Not all subsidiary ledger audit tables with the audit configuration features turned on were
included in the subsidiary ledger audit plan. Also, audit data of these tables were not reviewed
and analyzed by FHA officials for unusual user access activities. These conditions occurred
because subsidiary ledger audit plans and the tables with audit log turned on have not been
reviewed periodically by FHA officials to ensure audit configurations reflect risk inherent in
current operations. As a result, FHA officials cannot ensure inappropriate user access to all
subsidiary ledger audit tables will be identified in a timely manner.
FHA had not developed a Memorandum of Agreement/Understanding (MOA/U) and
Interconnection Security Agreement (ISA) for the external interfaces between the subsidiary
ledger and Treasury systems because the subsidiary ledger moved back to HUD’s data center in
fiscal year 2013. This condition occurred because FHA did not always comply with the Federal
security requirements to ensure a MOA/U and ISA were developed before connecting FHA
systems to external systems. Without developing the ISA and MOA/U before connecting
systems to external systems, FHA management cannot ensure equipment operates properly and
controls are tested for the planned interconnections.
FHA officials did not fully implement adequate controls over information within the subsidiary
ledger test environment. User IDs and passwords for the test environment with subsidiary ledger


                                                 19
production data were not encrypted. This condition occurred because HUD’s password
encryption policy was not enforced and FHA management was not aware that the subsidiary
ledger contains Personally Indentifable Information (PII) data that needed to be protected from
unauthorized individuals. Unauthorized individuals can surreptitiously read and copy the PII
data for malicious purposes or personal gain.
The implementation status of some security controls was not accurately reflected in the
subsidiary ledger system security documents. This condition occurred because implementation
statements for the subsidiary ledger security controls were not closely reviewed for accuracy. As
a result, it increases the risk that subsidiary ledger security controls might not be properly
assessed and consequently, inadequate security controls over the application could be
implemented.
Certain configuration management (CM) controls over the subsidiary ledger were inadequately
documented. These conditions occurred because subsidiary ledger management did not ensure
certain information required by HUD’s CM policy and procedures were included in the
subsidiary ledger CM plan. Without adequate policies, procedures, and techniques, FHA risks
that security features can be inadvertently omitted or that processing irregularities are introduced.
Conclusion
FHA must improve its information security controls over the data warehouse and subsidiary
ledger to fully comply with Federal requirements and its own security policies to prevent an
increased risk of unauthorized disclosure or modification of FHA data.
Recommendations
Recommendations were included in separate OIG audit reports9. Therefore, no
recommendations are reported here.




9
 This work was performed under separate audits of the data warehouse and subsidiary ledger which are reported in
Audit Report Number 2015-DP-0001, Federal Housing Commissioner Single Family Housing Enterprise Data
Warehouse, issued October 21, 2014 and Audit Report 2015-DP-0003, Federal Housing Administration FHA
Subsidiary Ledger, issued November 7, 2014.



                                                        20
Scope and Methodology
In accordance with the Chief Financial Officers Act of 1990 (Public Law 101-576), as amended,
OIG is responsible for the conduct of the annual financial statement audit of FHA. The scope of
this work includes the audit of FHA’s balance sheets as of September 30, 2014 and 2013, and the
related statements of net costs and changes in net position, the combined statements of budgetary
resources for the years then ended, and the related notes to the financial statements. We
conducted this audit in accordance with U.S. generally accepted government audit standards and
OMB Bulletin 14-02, as amended, Audit Requirements for Federal Financial Statements. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
To fulfill these responsibilities, we
      Examined, on a test basis, evidence supporting the amounts and disclosures in the
       principal financial statements;
      Assessed the accounting principles used and the significant estimates made by
       management;
      Evaluated the overall presentation of the principal financial statements;
      Obtained an understanding of internal controls over financial reporting, including
       safeguarding assets and compliance with laws and regulations, including the execution of
       transactions in accordance with budget authority;
      Tested and evaluated the design and operating effectiveness of relevant internal controls
       over significant cycles, classes of transactions, and account balances;
      Tested FHA’s compliance with certain provisions of laws and regulations, government
       wide policies, noncompliance with which could have a direct and material effect on the
       determination of financial statement amounts, and certain other laws and regulations
       specified in OMB Bulletin 14-02, including the requirements referred to in FMFIA;
      Considered compliance with the process required by FMFIA for evaluating and reporting
       on internal controls and accounting systems; and
      Performed other procedures we considered necessary in the circumstances.
We considered internal controls over financial reporting by obtaining an understanding of the
design of FHA’s internal controls, determined whether these internal controls had been placed
into operation, assessed control risk, and performed tests of controls to determine our auditing
procedures for the purpose of expressing our opinion on the principal financial statements. We
also tested compliance with selected provisions of applicable laws, regulations, and government
policies that may materially affect the principal financial statements.



                                                 21
Regarding internal controls related to performance measures to be reported in FHA’s Fiscal Year
2014 Annual Management Report, we obtained an understanding of the design of significant
internal controls as described in OMB Bulletin 14-02. We performed limited testing procedures
as required by AU-C Section 730, Required Supplementary Information, and OMB Bulletin 14-
02. Our procedures were not designed to provide assurance on internal controls over reported
performance measures, and, accordingly, we do not provide an opinion on such controls.
We did not evaluate the internal controls relevant to operating objectives as broadly defined by
FMFIA. We limited our internal controls testing to those controls that are material to FHA’s
financial statements. Because of inherent limitations in any internal control structure,
misstatements may occur and not be detected. We also caution that projection of any evaluation
of the structure to future periods is subject to the risk that controls may become inadequate
because of changes in conditions or that the effectiveness of the design and operation of policies
and procedures may deteriorate.
Our consideration of the internal controls over financial reporting would not necessarily disclose
all matters in the internal controls over financial reporting that might be material weaknesses or
significant deficiencies. We noted one material weakness and two significant deficiencies that
are reportable under AICPA and OMB Bulletin 14-02, as amended.
Under standards issued by the American Institute of Certified Public Accountants, 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 charged with
governance.
A material weakness is a deficiency or combination of deficiencies in internal controls, such that
there is a reasonable possibility that a material misstatement of the financial statements will not
be prevented or detected and corrected on a timely basis.




                                                  22
Follow-up on Prior Audits
A recommendation from a prior year report on FHA’s financial statements that has not been fully
implemented based on the status reported in the Audit Resolution and Corrective Action
Tracking System (ARCATS) is included below. FHA should continue to track this
recommendation under the prior year’s report number in accordance with departmental
procedures. The open recommendation and the status are shown below.
Federal Housing Administration Fiscal Years 2013 and 2012 Financial Statements Audit,
2014-FO-0002

1. The FHA Comptroller should review and de-obligate, as appropriate, the $43 million in
expired property-related contracts once they have been closed out by the contracts office. (Final
action target date was September 30, 2014, reported in ARCATS as 1C)




                                                 23
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
              Recommendation                         Funds to be put
                                  Unsupported 1/      to better use 2/
                  number
                       1B.                                   $5,500,000
                       1F.           $1,486,544,478

                     Totals          $1,486,544,478          $5,500,000



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified.




                                              24
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               25
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3


Comment 4




                               26
                         OIG Evaluation of Auditee Comments


Comment 1   OIG recognizes the influence of the Federal Credit Reform Act of 1990 (FCRA)
            on FHA’s accounting. Additionally, OIG recognizes the need to record on an
            accrual basis, consistent with GAAP. As FHA continues to evaluate its processes
            surrounding settlements and improve the tracking of settlement funds, OIG will
            continue to review those processes for the proper recognition in the financial
            statements.
Comment 2   OIG has a responsibility to gather sufficient appropriate evidence in order to
            report on the assertions in account balances in FHA’s financial statements.
            FHA’s efforts to work through processing the partial claims backlog and aligning
            its policy with regulatory requirements should result in FHA being able to
            produce the evidence to support the loans receivable balances in its financial
            statements.
Comment 3   OIG has reviewed FHA’s actions taken to properly recognize liabilities in its
            balance sheet as of September 30, 2014. Based upon our review, the actions
            taken resulted in adjustments which adequately recognized FHA’s liabilities for
            unearned premiums and unpaid supplemental claims.
Comment 4   OIG accepts the response of concurrence for recommendations identified in both
            the report on the Single Family Data Warehouse and the report on the FHA
            Subsidiary Ledger. We agree that FHA has initiated actions to resolve the
            conditions identified. However, we maintain that collectively the conditions
            identified warrant a significant deficiency. A significant deficiency is defined as
            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 charged
            with governance. OIG identified a combination of deficiencies in the FHA
            Subsidiary Ledger and the Single Family Data Warehouse that could adversely
            affect the reporting of financial data and merit the attention of management. We
            look forward to working with the office on the recommendations to reach a
            mutually acceptable corrective action plan.




                                              27
Appendix C
        FHA Fiscal Years 2014 and 2013 Financial Statements and Notes




                                      28
 PRINCIPAL
 FINANCIAL
STATEMENTS




    29
                        FEDERAL HOUSING ADMINISTRATION
        (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                          CONSOLIDATED BALANCE SHEETS
                            As of September 30, 2014 and 2013
                                   (Dollars in Millions)


                                                                              FY 2014         FY 2013
ASSETS
  Intragovernmental
    Fund Balance with U.S. Treasury (Note 3)                             $       50,232   $      63,481
    Investments (Note 4)                                                          6,379               3
    Other Assets (Note 7)                                                             1               1
  Total Intragovernmental                                                $       56,612   $      63,485

  Investments (Note 4)                                                   $           41   $          56
  Accounts Receivable, Net (Note 5)                                               1,459              13
  Loans Receivable and Related Foreclosed Property, Net (Note 6)                  8,507           7,276
  Other Assets (Note 7)                                                              47             379
TOTAL ASSETS                                                             $       66,666   $      71,209

LIABILITIES
   Intragovernmental
    Accounts Payable (Note 8)                                            $            3   $           8
    Borrowings from U.S. Treasury (Note 9)                                       27,528          25,940
    Other Liabilities (Note 10)                                                   1,689           3,983
   Total Intragovernmental                                               $       29,220   $      29,931

  Accounts Payable (Note 8)                                               $         459   $         404
  Loan Guarantee Liability (Note 6)                                              33,473          41,465
  Other Liabilities (Note 10)                                                       629             424
TOTAL LIABILITIES                                                        $       63,781   $      72,224

NET POSITION
  Unexpended Appropriations (Note 16)                                     $         872   $         869
  Cumulative Results of Operations                                                2,013          (1,884)
TOTAL NET POSITION                                                                2,885          (1,015)

TOTAL LIABILITIES AND NET POSITION                                       $       66,666   $      71,209

                    The accompanying notes are an integral part of these statements.




                                                  30
                      FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                   CONSOLIDATED STATEMENTS OF NET COST
                   For the Periods Ended September 30, 2014 and 2013
                                    (Dollars in Millions)
                                                            FY 2014  FY 2013
     Single Family Forward
       Intragovernmental Gross Costs (Note 12)            $      736 $   727
      Less: Intragovernmental Earned Revenue (Note 13)           1,340         1,720
      Intragovernmental Net Costs                                 (604)         (993)

       Gross Costs With the Public (Note 12)                    (6,350)     (5,840)
       Less: Earned Revenues (Note 13)                              17          28
       Net Costs With the Public                                (6,367)     (5,868)
     Single Family Forward Net Cost (Surplus)             $    (6,971)    $(6,861)

     HECM
      Intragovernmental Gross Costs (Note 12)             $        59     $      53
      Less: Intragovernmental Earned Revenue (Note 13)            711           823
      Intragovernmental Net Costs                                (652)         (770)

      Gross Costs With the Public (Note 12)                      2,673        (565)
      Less: Earned Revenues (Note 13)                                1           2
      Net Costs With the Public                                  2,672        (567)
     HECM Net Cost (Surplus)                              $     2,020     $(1,337)

     Multifamily/Healthcare
      Intragovernmental Gross Costs (Note 12)             $       168     $     142
      Less: Intragovernmental Earned Revenue (Note 13)             67            62
      Intragovernmental Net Costs                                  101           80

      Gross Costs With the Public (Note 12)               $     (1,024)   $ (1,927)
      Less: Earned Revenues (Note 13)                               45          46
      Net Costs With the Public                                 (1,069)     (1,973)
     Multifamily/Healthcare Net Cost (Surplus)            $       (968)   $(1,893)

     Salaries and Administrative Expenses
       Intragovernmental Gross Costs (Note 12)            $         17    $      22
      Less: Intragovernmental Earned Revenue (Note 13)               -             -
      Intragovernmental Net Costs                                   17           22

      Gross Costs With the Public (Note 12)                        613           671
      Less: Earned Revenues (Note 13)                                -             -
      Net Costs With the Public                                    613           671
     Adminstrative Expenses Net Cost (Surplus)            $       630     $     693

     Net Cost of Operations                                $   (5,289)    $ (9,398)

            The accompanying notes are an integral part of these statements.



                                              31
                         FEDERAL HOUSING ADMINISTRATION
        (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                    CONSOLIDATED STATEMENTS OF NET POSITION
                      For the Periods Ended September 30, 2014 and 2013
                                      (Dollars in Millions)



                                         FY 2014     FY 2014       FY 2013     FY 2013
                                        Cumulative                Cumulative
                                        Results of Unexpended     Results of Unexpended
                                        Operations Appropriations Operations Appropriations

BEGINNING BALANCES                      $     (1,884)    $        869     $    (15,966)    $     862

Budgetary Financing Sources
 Appropriations Received (Note 16)                 -               367                -         7,604
 Other Adjustments (Note 16)                       -               (37)               -           (39)
 Appropriations Used (Note 16)                   327              (327)           7,490        (7,490)
 Transfers-Out (Note 15 and Note 16)               -                 -                -           (68)

Other Financing Sources
 Transfers In/Out (Note 15)                       497                -              550            -
 Imputed Financing (Note 12)                       15                -               18            -
 Other                                         (2,231)               -           (3,374)           -
Total Financing Sources                 $     (1,392)    $           3    $      4,684     $       7

Net (Cost) Surplus of Operations               5,289                 -           9,398              -

ENDING BALANCES                         $      2,013     $        872     $     (1,884)    $     869


                   The accompanying notes are an integral part of these statements.




                                                 32
                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                               For the Period Ended September 30, 2014
                                         (Dollars in Millions)

                                                                     FY 2014          FY 2014       FY 2014
                                                                    Budgetary      Non-Budgetary     Total
Budgetary Resources:
Unobligated balance brought forward, October 1                              837           57,855        58,692
Unobligated balance brought forward, October 1, as adjusted                 837           57,855        58,692
Recoveries of prior year unpaid obligations                                  71              765           836
Other changes in unobligated balance (+ or -)                              (271)              (1)         (272)
Unobligated balance from prior year budget authority, net                   637           58,618        59,255
Appropriations (discretionary and mandatory)                                367                -           367
Borrowing authority (discretionary and mandatory)                             -            8,769         8,769
Spending authority from offsetting collections (discretionary and        13,317           24,002        37,319
Total budgetary resources                                                14,321           91,389       105,710

Status of Budgetary Resources:
Obligations incurred                                                      6,169           45,820        51,989
Unobligated balance, end of year:
  Apportioned                                                                85           13,494        13,579
  Unapportioned                                                           8,067           32,075        40,142
Total unobligated balance, end of year                                    8,152           45,569        53,721
Total budgetary resources                                                14,321           91,389       105,710

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                      634            2,539         3,173
Uncollected customer payments from Federal sources, brought                  (3)               -            (3)
Obligated balance, start of year (net), before adjustments (+               631            2,539         3,170
Obligated balance, start of year (net), as adjusted                         631            2,539         3,170
Obligations incurred                                                      6,169           45,820        51,989
Outlays (gross) (-)                                                      (6,145)         (45,366)      (51,511)
Change in uncollected customer payments from Federal                         (6)               -            (6)
Recoveries of prior year unpaid obligations (-)                             (71)            (765)         (836)
Unpaid obligations, end of year (gross)                                     587            2,229         2,816
Uncollected customer payments from Federal sources, end of                   (9)               -            (9)
Obligated balance, end of year (net)                                        578            2,229         2,807

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                    13,684           32,771        46,455
Actual offsetting collections (discretionary and mandatory) (-)         (13,311)         (31,182)      (44,493)
Change in uncollected customer payments from Federal                         (6)               -            (6)
Budget authority, net (discretionary and mandatory)                         367            1,589         1,956
Outlays, gross (discretionary and mandatory)                              6,145           45,366        51,511
Actual offsetting collections (discretionary and mandatory) (-)         (13,311)         (31,182)      (44,493)
Outlays, net (discretionary and mandatory)                               (7,166)          14,184         7,018
Less Distributed offsetting receipts (-)                                  2,668                -         2,668
Agency outlays, net (discretionary and mandatory)                        (9,834)          14,184         4,350
                           The accompanying notes are an integral part of these statements




                                                            33
                             FEDERAL HOUSING ADMINISTRATION
             (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                       COMBINED STATEMENT OF BUDGETARY RESOURCES
                               For the Period Ended September 30, 2013
                                         (Dollars in Millions)

                                                                     FY 2013          FY 2013       FY 2013
                                                                    Budgetary      Non-Budgetary     Total
Budgetary Resources:
Unobligated balance brought forward, October 1                            4,074           40,275        44,349
Unobligated balance brought forward, October 1, as adjusted               4,075           40,275        44,350
Recoveries of prior year unpaid obligations                                  87              404           491
Other changes in unobligated balance (+ or -)                              (208)               -          (208)
Unobligated balance from prior year budget authority, net                 3,955           40,678        44,632
Appropriations (discretionary and mandatory)                              7,525                -         7,525
Borrowing authority (discretionary and mandatory)                             -           19,092        19,093
Spending authority from offsetting collections (discretionary and        22,922           54,696        77,618
Total budgetary resources                                                34,402          114,466       148,868

Status of Budgetary Resources:
Obligations incurred                                                     33,564           56,611        90,175
Unobligated balance, end of year:
   Apportioned                                                               77           24,999        25,076
   Unapportioned                                                            761           32,856        33,617
Total unobligated balance, end of year                                      838           57,855        58,693
Total budgetary resources                                                34,402          114,466       148,868

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                      732            2,472         3,204
Obligated balance, start of year (net), before adjustments (+               732            2,472         3,204
Adjustment to obligated balance, start of year (net) (+ or -)                (1)               -            (1)
Obligated balance, start of year (net), as adjusted                         731            2,472         3,203
Obligations incurred                                                     33,564           56,611        90,175
Outlays (gross) (-)                                                     (33,574)         (56,141)      (89,715)
Change in uncollected customer payments from Federal                         (1)               -            (1)
Recoveries of prior year unpaid obligations (-)                             (87)            (404)         (491)
Unpaid obligations, end of year (gross)                                     634            2,539         3,173
Uncollected customer payments from Federal sources, end of                   (3)               -            (3)
Obligated balance, end of year (net)                                        631            2,539         3,170

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                    30,448           73,788       104,236
Actual offsetting collections (discretionary and mandatory) (-)         (22,921)         (59,375)      (82,296)
Change in uncollected customer payments from Federal                         (1)               -            (1)
Budget authority, net (discretionary and mandatory)                       7,526           14,413        21,939
Outlays, gross (discretionary and mandatory)                             33,574           56,141        89,715
Actual offsetting collections (discretionary and mandatory) (-)         (22,921)         (59,375)      (82,296)
Outlays, net (discretionary and mandatory)                               10,653           (3,234)        7,419
Less Distributed offsetting receipts (-)                                  1,442                -         1,442
Agency outlays, net (discretionary and mandatory)                         9,211           (3,234)        5,977




                           The accompanying notes are an integral part of these statements.


                                                            34
                    NOTES TO THE FINANCIAL STATEMENTS
                                              September 30, 2014

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 (31 U.S.C.
§ 9101 et seq.), 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. To comply with the FHA Modernization
Act of 2008, 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 and fund.

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.



                                                          35
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

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.

Basis of Accounting

The principal financial statements are presented in conformity with accounting principles generally accepted in
the United States of America 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, Revised.

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 and Multifamily risk sharing debentures.
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 interest
method in accordance with the Statement of Federal Financial Accounting Standards (SFFAS) No. 1 Accounting
for Selected Assets and Liabilities, paragraph 71.




                                                         36
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.

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 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.

FHA has two general fund receipt accounts. FHA’s receipt accounts are general fund receipt accounts and
amounts are not earmarked for the FHA’s credit programs. The first 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.
They are available for appropriations only in the sense that all general fund receipts are available for
appropriations. Any assets in these accounts are non-entity assets and are offset by intragovernmental liabilities.
At the end of the fiscal year, the fund balance in the general fund receipt account is transferred to the U.S.
Treasury general fund.

The second general fund receipt account is used for the unobligated balance transferred from GI/SRI liquidating
account and loan modifications. Similar to the general fund receipt account used for the GI/SRI negative subsidy
and downward reestimates, the amounts in this account are not earmarked for FHA’s credit programs and are
returned to Treasury at the end of the fiscal year. Any assets in this account are non-entity assets and are offset by
intragovernmental liabilities. 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.


                                                         37
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.

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


                                                        38
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.

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 appropriations for certain operating expenses for its 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.

Full Cost Reporting

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards and SFFAS No. 30, Inter-Entity Cost
Implementation: Amending SFFAS 4, Managerial Cost Accounting Standards and Concepts to account for costs
assumed by other Federal organizations on their behalf, require 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 $15 million for fiscal year 2014
and $18 million for fiscal year 2013, 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. 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


                                                          39
loan guarantees) to satisfy the liabilities. Thus, all of FHA’s liabilities are considered covered by budgetary
resources.

Statement of Budgetary Resources

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

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

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


Change in Accounting Principle

In prior years, FHA swept (returned to Treasury) its GI/SRI receipt accounts on October 1st. Effective in fiscal
year 2014, FHA is changing the timing of sweeping its receipt accounts from October 1st to September 30th to be
consistent with the implementation of Treasury’s two new systems, the Governmentwide Treasury Account
Symbol Adjusted Trial Balance System (GTAS) and the Central Accounting Reporting System (CARS).

FHA is treating this change as a “Change in Accounting Principle”, prospectively. This change in FY 2014 has
no effect on prior years’ financial statements. FHA believes its numbers are accurate on its FY 2013 financial
statement based on inconsistent guidance regarding receipt accounts. This change impacts the balance sheet line
items Fund Balance with U.S. Treasury and Other Liabilities, and reduces both assets and liabilities but does not
impact FHA’s overall net position.




                                                        40
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, 2014 and 2013 are as follows:

             (Dollars in millions)
                                                                          FY 2014            FY 2013
             Intragovernmental:
                          Fund Balance with Treasury                  $             92   $       1,671
                          Investments in U.S. Treasury Securities                    -               3
             Total Intragovernmental                                                92           1,674

             Other Assets                                                        41                 47
             Total Non-Entity Assets                                            133              1,721
             Total Entity Assets                                             66,533             69,488
             Total Assets                                             $      66,666      $      71,209

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 and for the receipt of
bid deposits on asset sales.

According to the FCRA, FHA transfers GI/SRI negative credit subsidy from new endorsements, downward credit
subsidy re-estimates, loan modifications, and unobligated balances from the liquidating account to the GI/SRI
general fund receipt accounts. Effective FY 2014, fund balances in the GI/SRI general fund receipt accounts are
transferred into the U.S. Treasury’s general fund at the end of the fiscal year.

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.




                                                           41
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, 2014 and 2013:

                     (Dollars in millions)                                FY 2014        FY 2013
                     Fund Balances:
                       Revolving Funds                                $     48,448   $     61,084
                       Appropriated Funds                                      751            775
                       Other Funds                                           1,033          1,622
                            Total                                     $     50,232   $     63,481

                     Status of Fund Balance with U.S. Treasury:
                        Unobligated Balance
                             Available                                $     13,579   $     25,075
                             Unavailable                                    33,837         35,233
                        Obligated Balance Not Yet Disbursed                  2,816          3,173
                             Total                                    $     50,232   $     63,481
Revolving Funds
FHA’s revolving funds include the liquidating and financing accounts as required by the FCRA and deposit funds
for the receipt of bid deposit fund asset sales. 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 and the deposit funds
for the receipt of bid deposits for asset sales. As of 9/30, there was $73.9 million of bidder deposits. This is
because FHA conducted an asset sale on 9/30 and the unsuccessful bidders’ deposits were not returned until
October. It is like escrow or earnest money, so FHA felt it was already covered in Notes 2 and 10. Effective FY
2014, FHA sweeps its GI/SRI receipt accounts on September 30 and returns the funds to Treasury. Additionally,
the capital reserve account is included with these funds and 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


                                                           42
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.

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, 2014 were as follows:

(Dollars in millions)

                                                       Amortized (Premium)
FY 2014                                 Cost             / Discount, Net       Investments, Net           Market Value
MMI/CMHI Investments           $               6,371   $                 1   $              6,372       $           6,372
MMI/CMHI Accrued Interest                                                                       7                       7
Total                          $               6,371   $                1    $              6,379       $           6,379

The cost, net amortized premium/discount, net investment, and market values as of September 30, 2013 were as
follows. FHA had no MMI/CMHI investments in U.S. Treasury securities as of September 30, 2013.

                                                       Amortized (Premium)
FY 2013                                 Cost             / Discount, Net         Investments, Net           Market Value
GI/SRI Investments             $                   3   $                 -   $                      3   $                  -
Total                          $                   3   $                 -   $                      3   $                  -



Investments in Private-Sector Entities

Investments Risk Sharing Debentures as of September 30, 2014 and 2013 were as follows:


                                  Beginning       New                            Ending
(Dollars in millions)              Balance     Acquisitions     Redeemed         Balance
FY 2014
 Risk Sharing Debentures                  56               -           (15)                41
Total                         $           56   $           -    $      (15) $              41

FY 2013
 Risk Sharing Debentures                  57               1            (2)                56
Total                         $           57   $           1    $       (2) $              56




                                                           43
Note 5. Accounts Receivable, Net

Accounts receivable, net, as of September 30, 2014 and 2013 are as follows:

                                                   Gross                     Allowance                    Net
(Dollars in millions)                         FY 2014    FY 2013          FY 2014     FY 2013       FY 2014      FY 2013
With the Public:

Receivables related to                    $        8   $         1    $       (1) $        -    $        7   $        1
  credit program assets
Premiums receivable                                3              6            -           -             3            6
Partial Claims receivable                      1,486              -         (783)          -           703            -
Generic Debt Receivable                           85             96          (85)        (96)            -            -
Settlements receivable                           725              -            -           -           725            -
Miscellaneous receivable                          21              6            -           -            21            6
Total                                     $    2,328   $        109   $     (869) $      (96) $      1,459   $       13



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 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.

Partial Claims Receivable

Partial claims receivable represents partial claims paid by FHA to mortgagees as part of its loss mitigation efforts
to bring delinquent loans current for which FHA does not yet have the promissory note recorded.

Generic Debt Receivable

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.

Settlements Receivable

As of September 30, 2014, FHA received signed consent judgments that were approved by the courts for which
funds have not been received.

Miscellaneous Receivable

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.


                                                           44
Note 6. Direct Loans and Loan Guarantees, Non-Federal Borrowers

Direct Loan and Loan Guarantee Programs Administered by FHA include:

Single Family Mortgages
Multifamily/Healthcare Mortgages
Home Equity Conversion Mortgages

FHA reports its insurance operations in three overall program areas: Single Family Forward mortgages,
Multifamily/Healthcare mortgages, and Home Equity Conversion Mortgages (HECM). FHA operates these
programs primarily through four insurance funds: Mutual Mortgage Insurance (MMI), General Insurance (GI),
Special Risk Insurance (SRI), and Cooperative Management Housing Insurance (CMHI), with the MMI fund
being the largest. There is a fifth fund, Hope for Homeowners (H4H), which became operational in fiscal year
2009 which contains minimal activity.

FHA encourages homeownership through its Single Family Forward programs (Section 203(b), which is the
largest program, and Section 234) by making loans readily available with its mortgage insurance
programs. These programs insure mortgage lenders against losses from default, enabling those lenders to provide
mortgage financing on favorable terms to homebuyers. Multifamily Housing Programs (Section 213, Section
221(d)(4), Section 207/223(f), and Section223(a)(7)) provide FHA insurance to approved lenders to facilitate the
construction, rehabilitation, repair, refinancing, and purchase of multifamily housing projects such as apartment
rentals, and cooperatives. Healthcare programs (Section 232 and Section 242) enable low cost financing of health
care facility projects and improve access to quality health care by reducing the cost of capital. The HECM
program provides eligible homeowners who are 62 years of age and older access to the equity in their property
with flexible terms.




                                                       45
FHA Direct Loan and Loan Guarantee Programs and the related loans receivable, foreclosed property, and Loan
Guarantee Liability as of September 30, 2014 and 2013 are as follows:

Direct Loan Program
                             (Dollars in Millions)

                             FY 2014                                         Total
                             Direct Loans
                               Loan Receivables                                       14
                               Interest Receivables                                   13
                               Allowance                                             (12)
                             Total Direct Loans                                      15
                             (Dollars in Millions)

                             FY 2013                                         Total
                             Direct Loans
                               Loan Receivables                                       15
                               Interest Receivables                                   11
                               Allowance                                             (12)
                             Total Direct Loans                                      14




FHA’s Direct Loans are as a result of purchase money mortgages (PMMs). The Direct loan receivables are
primarily multifamily loans and are in the liquidating fund. In addition, FHA has a small amount of new PMMs that
are administered by Single Family Housing. Due to the small size, there is no subsidy associated with these loans.

FHA’s net direct loans receivable is not the same as the proceeds that would be anticipated from the sale of its
direct loans.




                                                        46
Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):

(Dollars in Millions)
FY 2014                                   MMI/CMHI            GI/SRI          Total
Guaranteed Loans
  Single Family Forward
        Loan Receivables                           21                    -               21
        Interest Receivables                        -                    -                -
        Allowance for Loan Losses                  (9)                  (4)             (13)
        Foreclosed Property                        11                    9               20
  Subtotal                                         23                    5               28

  Multifamily/Healthcare
       Loan Receivables                              -            2,078               2,078
       Interest Receivables                          -              231                 231
       Allowance for Loan Losses                     -             (857)               (857)
       Foreclosed Property                           -                1                   1
  Subtotal                                           -            1,453               1,453

  HECM
       Loan Receivables                              -                   4                4
       Interest Receivables                          -                   2                2
       Allowance for Loan Losses                     -                  (2)              (2)
       Foreclosed Property                           -                  (2)              (2)
  Subtotal                                           -                   2                2

Total Guaranteed Loans                             23             1,460               1,483

(Dollars in Millions)
FY 2013                                   MMI/CMHI            GI/SRI          Total
Guaranteed Loans
  Single Family Forward
        Loan Receivables                           18                    -               18
        Interest Receivables                        -                    -                -
        Allowance for Loan Losses                 (24)                 (10)             (34)
        Foreclosed Property                        22                    8               30
  Subtotal                                         16                   (2)              14

  Multifamily/Healthcare
       Loan Receivables                              -            2,225               2,225
       Interest Receivables                          -              228                 228
       Allowance for Loan Losses                     -             (935)               (935)
       Foreclosed Property                           -                1                   1
  Subtotal                                           -            1,519               1,519

  HECM
       Loan Receivables                              -                  5                5
       Interest Receivables                          -                  2                2
       Allowance for Loan Losses                     -                 (2)              (2)
       Foreclosed Property                           -                  7                7
  Subtotal                                           -                 12               12

Total Guaranteed Loans                             16             1,529               1,545
*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to FHA.



                                                         47
Defaulted Guaranteed Loans from Post-1991 Guarantees:

   (Dollars in Millions)
   FY 2014                                      MMI/CMHI          GI/SRI            H4H              Total
   Guaranteed Loans
     Single Family Forward
           Loan Receivables                            5,244             176                 2            5,422
           Foreclosed Property                         2,437              73                 1            2,511
           Allowance                                  (4,195)           (139)                2           (4,332)
     Subtotal                                         3,486             110                  5           3,601

     Multifamily/Healthcare
         Loan Receivables                                    -           818                 -                818
         Foreclosed Property                                 -             1                 -                  1
         Allowance                                           -          (319)                -               (319)
     Subtotal                                                -          500                  -               500

     HECM
         Loan Receivables                                996           2,510                 -            3,506
         Interest Receivables                            371           1,192                 -            1,563
         Foreclosed Property                               5              80                 -               85
         Allowance                                      (598)         (1,648)                -           (2,246)
     Subtotal                                           774           2,134                  -           2,908

   Total Guaranteed Loans                             4,260           2,744                  5           7,009

   FY 2013                                      MMI/CMHI          GI/SRI            H4H              Total
   Guaranteed Loans
      Single Family Forward
          Loan Receivables                              2,957             67                 -             3,024
          Interest Receivables                              8              2                 -                10
          Foreclosed Property                           4,499            149                 1             4,649
          Allowance                                    (4,729)          (147)                1            (4,875)
      Subtotal                                         2,735              71                 2            2,809

      Multifamily/Healthcare
          Loan Receivables                                   -           619                 -                619
          Foreclosed Property                                -             1                 -                  1
          Allowance                                          -          (212)                -               (212)
      Subtotal                                               -          408                  -               408

      HECM
          Loan Receivables                               530            2,038                -             2,568
          Interest Receivables                           155              951                -             1,106
          Foreclosed Property                              2               67                -                69
          Allowance                                     (228)          (1,015)               -            (1,243)
      Subtotal                                          459            2,041                 -            2,500

   Total Guaranteed Loans                              3,194           2,520                 2            5,717



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




                                                        48
Guaranteed Loans Outstanding:

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

       Guaranteed Loans Outstanding (FY 2014):
         MMI/CMHI
          Single Family Forward                               1,168,427       1,074,732
          Multifamily/Healthcare                                    492             477
         MMI/CMHI Subtotal                                   1,168,919       1,075,209

         GI/SRI
          Single Family Forward                                  12,301           9,303
          Multifamily/Healthcare                                109,296         101,132
         GI/SRI Subtotal                                       121,597         110,435

         H4H
          Single Family - 257                                      109             104
         H4H Subtotal                                              109             104

       Total                                                 1,290,625       1,185,748

       Guaranteed Loans Outstanding (FY 2013):
         MMI/CMHI
          Single Family Forward                               1,167,089       1,086,647
          Multifamily/Healthcare                                    449             432
         MMI/CMHI Subtotal                                   1,167,538       1,087,079

         GI/SRI
          Single Family Forward                                  14,323          11,265
          Multifamily/Healthcare                                100,911          93,416
         GI/SRI Subtotal                                       115,234         104,681

         H4H
          Single Family - 257                                      117             113
         H4H Subtotal                                              117             113

       Total                                                 1,282,889       1,191,873




                                                 49
New Guaranteed Loans Disbursed (FY 2014):

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


         MMI/CMHI
          Single Family Forward                                    135,187         133,907
          Multifamily/Healthcare                                        48              48
         MMI/CMHI Subtotal                                        135,235         133,955

         GI/SRI
          Single Family Forward                                        123             122
          Multifamily/Healthcare                                    14,104          14,026
         GI/SRI Subtotal                                           14,227          14,148

       Total                                                      149,462         148,103

       New Guaranteed Loans Disbursed (FY 2013):
         MMI/CMHI
          Single Family Forward                                    240,089         237,258
          Multifamily/Healthcare                                       187             185
         MMI/CMHI Subtotal                                        240,276         237,443

         GI/SRI
          Single Family Forward                                        138             137
          Multifamily/Healthcare                                    23,206          23,054
         GI/SRI Subtotal                                           23,344          23,191

       Total                                                      263,620         260,634




                                                   50
Home Equity Conversion Mortgage (HECM)

HECM (reverse mortgages) are not included in the previous tables due to the unique nature of the program. As
of September 30, 2014 the insurance-in-force (the outstanding balance of active loans) was $105 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 Millions)
                                                                                   Cumulative
                                                                    Current                         Maximum
                                    Current Year                   Outstanding                      Potential
Loan Guarantee Programs             Endorsements                    Balance                         Liability

FY 2014     MMI/CMHI               $        13,473             $          63,259                $         94,466
            GI/SRI                               -                        42,264                          55,419
                          Total    $       13,473              $        105,523                 $       149,885

FY 2013     MMI/CMHI               $        14,671             $          56,936                $         86,305
            GI/SRI                               -                        43,933                          59,613
                          Total    $       14,671              $        100,869                 $       145,918




                                                     51
Loan Guarantee Liability, Net:


(Dollars in Millions)
FY 2014                              MMI/CMHI         GI/SRI            H4H            Total
  LLR
   Single Family Forward         $              7 $            1 $             - $             8
   Multifamily/Healthcare                       -              1               -               1
  Subtotal                       $              7 $            2 $             - $             9

  LLG
  Single Family Forward          $        17,201 $             740 $          22 $         17,963
  Multifamily/Healthcare                     (23)           (2,957)            -           (2,980)
   HECM                                    7,447            11,034             -           18,481
  Subtotal                       $       24,625 $           8,817 $           22 $        33,464

Loan Guarantee Liability Total   $       24,632   $         8,819   $         22   $      33,473

FY 2013                              MMI/CMHI         GI/SRI            H4H            Total
  LLR
  Single Family Forward          $              6 $            - $             - $             6
  Multifamily/Healthcare                        -              2               -               2
  Subtotal                       $              6 $            2 $             - $             8

  LLG
  Single Family Forward          $        26,189 $             878 $          21 $         27,088
  Multifamily/Healthcare                     (20)           (2,446)            -           (2,466)
   HECM                                    6,038            10,797             -           16,835
  Subtotal                       $        32,207 $           9,229 $          21 $         41,457

Loan Guarantee Liability Total   $       32,213   $         9,231   $         21   $      41,465




                                                       52
Subsidy Expense for Loan Guarantees by Program and Component:

               (Dollars in millions)

               FY 2014                            MMI/CMHI        GI/SRI       Total
                  Single Family Forward
                     Defaults                            3,951           4       3,955
                     Fees and Other Collections        (13,741)         (5)    (13,746)
                     Other                                   -           -           -
                  Subtotal                              (9,790)         (1)     (9,791)

                   Multifamily/Healthcare
                     Defaults                                2        259          261
                     Fees and Other Collections             (7)      (866)        (873)
                     Other                                   -          -            -
                   Subtotal                                 (5)      (607)        (612)

                   HECM
                     Defaults                             878              -       878
                     Fees and Other Collections          (934)             -      (934)
                     Other                                  -              -         -
                   Subtotal                               (56)             -       (56)

               Total                                    (9,851)      (608)     (10,459)


               FY 2013                            MMI/CMHI        GI/SRI       Total
                  Single Family Forward
                     Defaults                            7,130           4       7,134
                     Fees and Other Collections        (24,191)         (5)    (24,196)
                     Other                                  (7)          -          (7)
                  Subtotal                             (17,068)         (1)    (17,069)

                   Multifamily/Healthcare
                     Defaults                                6         567         573
                     Fees and Other Collections            (16)     (1,479)     (1,495)
                     Other                                   -           -           -
                   Subtotal                                (10)       (912)       (922)

                   HECM
                     Defaults                             536              -       536
                     Fees and Other Collections          (902)             -      (902)
                     Other                                  -              -         -
                   Subtotal                              (366)             -      (366)

               Total                                   (17,444)      (913)     (18,357)




                                                  53
Subsidy Expense for Modification and Re-estimates:

                               (Dollars in millions)
                                                                  Technical
                               FY 2014                           Reestimate
                                  MMI/CMHI                             3,380
                                  GI/SRI                                 544
                               Total                                   3,924

                               FY 2013
                                  MMI/CMHI                              9,862
                                  GI/SRI                               (1,443)
                               Total                                    8,419



Total Loan Guarantee Subsidy Expense:


                       (Dollars in millions)
                                                            FY 2014        FY 2013
                          MMI/CMHI                               (6,470)       (7,582)
                          GI/SRI                                    (64)       (2,356)
                       Total                                     (6,534)       (9,938)




                                                       54
Subsidy Rates for Loan Guarantee Endorsements by Program and Component:

                                                                    Fees and Other
(Percentage)                                             Defaults       Collections   Other    Total

Budget Subsidy Rates for FY 2014 Loan Guarantees:

      MMI/CMHI
      Single Family
       Forward                                              2.91            (10.16)    -       (7.25)
       HECM                                                 6.49             (6.90)    -       (0.41)
       Short Refinance                                     11.36            (11.36)    -         -
      Multifamily
       Cooperatives                                          2.91           (10.16)    -       (7.25)

      GI/SRI
      Multifamily
       Apartments                                            2.52            (6.10)    -       (3.58)
       Apartments Refinance                                  0.43            (4.61)    -       (4.18)
      Healthcare
       Residential Care                                      2.78            (6.82)    -       (4.04)
       Hospitals                                             3.19            (7.28)    -       (4.09)


                                                                    Fees and Other
(Percentage)                                             Defaults       Collections   Other    Total

Budget Subsidy Rates for FY 2013 Loan Guarantees:

      MMI/CMHI
      Single Family
       Forward - 06/03/2013 - present                       2.96            (12.66)     -      (9.70)
       Forward - 04/01/2013 - 06/02/2013                    2.96             (9.29)     -      (6.33)
       Forward - 10/01/12 - 03/31/2013                      2.96             (8.94)     -      (5.98)
       HECM                                                 2.42             (6.19)     -      (3.77)
       Short Refinance                                     10.22             (7.65)   (2.57)     -
      Multifamily
       Cooperatives - 06/03/2013 - present                   2.96           (12.66)    -       (9.70)
       Cooperatives - 04/01/2013 - 06/02/2013                2.96            (9.29)    -       (6.33)
       Cooperatives - 10/01/12- 03/31/2013                   2.96            (8.94)    -       (5.98)

      GI/SRI
      Multifamily
       Apartments                                            4.40            (6.91)    -       (2.51)
       Apartments Refinance                                  1.10            (5.75)    -       (4.65)
       Apartments Refinance                                  1.10            (5.75)    -       (4.65)
      Healthcare
       Residential Care                                      3.08            (7.37)    -       (4.29)
       Hospitals                                             1.31            (7.72)    -       (6.41)




                                                    55
Schedule for Reconciling Loan Guarantee Liability Balances:

                                                                              FY 2014                    FY 2013
(Dollars in Millions)                                                      LLR       LLG              LLR       LLG
Beginning Balance of the Loan Guarantee Liability                        $     8 $ 41,457           $     17 $ 54,967
Add:         Subsidy Expense for guaranteed loans disbursed during the
             reporting fiscal years by component:
                          Default Costs (Net of Recoveries)                      -         5,094          -          8,243
                          Fees and Other Collections                             -       (15,553)         -        (26,593)
                          Other Subsidy Costs                                    -             -          -             (7)
             Total of the above subsidy expense components                       -       (10,459)         -        (18,357)
Adjustments:
             Fees Received                                                      -         12,227          -         12,022
             Foreclosed Property and Loans Acquired                             -         11,870          -         11,809
             Claim Payments to Lenders                                          -        (27,944)         -        (29,386)
             Interest Accumulation on the Liability Balance                     -          1,149          -          1,674
             Other                                                              -            532          -            (14)
Ending Balance before Reestimates                                               8         28,832         17         32,715
Add or Subtract Subsidy Reestimates by Component:
             Technical/Default Reestimate
                          Subsidy Expense Component                             1         4,345          (9)        1,705
                          Interest Expense Component                                        946                      (377)
             Adjustment of prior years' credit subsidy reestimates               -         (659)          -         7,414
Total Technical/Default Reestimate                                              1         4,632          (9)        8,742
Ending Balance of the Loan Guarantee Liability                           $      9    $   33,464     $     8    $   41,457




Administrative Expense:


                                     (Dollars in Millions)       FY 2014     FY 2013
                                     Total                            577         647




                                                               56
Other Information on Foreclosed Property:

Additional information on FHA foreclosed property as of September 30, 2014 and 2013 is as follows:

                                                                   FY 2014 FY 2013
Average number of days in Inventory for Sold Cases                      129     124
End of Fiscal Year Active Inventory                                  18,945  35,217


Defaulted Guaranteed Loans (Pre-92 and Post-91)

Restrictions on the use/disposal of foreclosed property:

The balance relating to foreclosures as of September 30, 2014 is comprised of only Single Family properties.
There are no Multi-family properties currently in inventory.

The Secretary has the authority under the National Housing Act (12 U.S.C 1710 (g)) to manage or dispose of
eligible HUD-owned property assets in a manner that will provide affordable, safe and sanitary housing to low-
wealth families, preserve and revitalize residential neighborhoods, expand homeownership opportunities,
minimize displacement of tenants residing in rental or cooperative housing, and protect the financial interest of
the Federal government.

Single Family properties may be sold to eligible entities (24 CFR 291.303) through public asset sales. Eligibility
of bidders will be determined by the Secretary and included in the bid package with a notice filed in the Federal
Register. In addition, HUD must ensure that its policies and practices in conducting the single family property
disposition program do not discriminate on the basis of disability (24 CFR 9.155(a)).




                                                           57
Credit Reform Valuation Methodology

FHA values its Credit Reform LLG and related receivables from notes and property inventories at the net present
value of their estimated future cash flows.

To apply the present value computations, FHA divides loans into cohorts and “risk” categories. Multifamily and
Health Care 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 into product groupings, which are referred to as risk categories in federal budget
accounting. Each risk category has characteristics that distinguish it from others, including loan performance
patterns, 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. That second category is for HECM loans, which joined the MMI Fund
group of programs in 2009. The single family GI/SRI loans are grouped into four risk categories. There are 15
different multifamily risk categories and six health care categories.

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

Significant Assumptions – FHA developed economic and financial models in order to estimate the present value
of future program cash flows. The models incorporate information on the expected magnitude and timing of each
cash flow. 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 the
                 start of that year.

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

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


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 internal business systems.

Economic assumptions: Independent forecasts of economic conditions are used in conjunction with loan-level
data to generate Single Family, Multifamily, and Health Care claim and prepayment rates. Sources of forecast
data include IHS Global Insight and Moody’s Analytics. OMB provides other economic assumptions used, such
as interest rates and the discount rates used against the cash flows.

Actuarial Review: An independent actuarial review of the MMI Fund each year produces conditional claim,
prepayment, and loss severity rates that are used as inputs to the Single Family LLG calculation, both for forward
and (post-2008) HECM loans.

Reliance on historical performance: FHA relies on the historical performance of its insured portfolio to generate
behavioral response functions that are applied to economic forecasts to generate future performance patterns for
the outstanding portfolio. Changes in legislation, program requirements, tax treatment, and economic factors all
influence loan performance. FHA assumes that its portfolio will continue to perform consistently with its


                                                          58
historical experience, respecting differences due to current loan characteristics and forecasted economic
conditions.

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. Such changes cannot be reflected in
LLG calculations because of uncertainty over their nature and outcome.

Discount rates: The disbursement-timing-weighted interest rate on U.S. Treasury securities of maturity
comparable to the guaranteed loans term creates 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 maturities
comparable to cash flow timing for the loan guarantee is used in the present value calculation. This latter
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, and “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 reported on LLG calculations since fiscal year 1992. Over this time, FHA’s reported LLG
values have shown measurable year-to-year variance. That variance is caused by four factors: (1) adding a new
year of insurance commitments each year; (2) an additional year of actual loan performance data used to calibrate
forecasting models, (3) revisions to the methodologies employed to predict future loan performance, and (4)
programmatic/policy changes that affect the characteristics of insured loans or potential credit losses.

Described below are the programs that comprise the majority of FHA’s loan guarantee business. These
descriptions highlight the factors that contributed to changing LLG estimates for FY 2014. Overall, FHA’s
liability decreased from the fiscal year 2013 estimates.

Mutual Mortgage Insurance (MMI) – On net, the MMI Fund LLG decreased from $31,010 million at the end of
fiscal year 2013 to $24,648 million at the end of fiscal year 2014. This decrease is the result of the decreases in
liability in the Forward loans exceeding the smaller increase in liability to HECM. There are two primary factors
at work this year in the forward-loan portfolio and two in the HECM (reverse mortgage) portfolio. The decrease
in liability in Forward loans is mainly due to the inclusion of the 2014 book-of-business which is forecast to add
almost $ 9 billion in negative liability to the MMI fund. The second major factor affecting the portfolio LLG is
the ramping up of the new policy requiring major loan servicers to facilitate Third Party Sale sales at foreclosure
auctions in order to reduce reliance upon costly REO activities. HUD ran a limited pilot program in 2012 and then
began national implementation in 2013 which has increased throughout the 2014 fiscal year. The first factor
affecting the HECM LLG calculation is that there are three new mortality tables used this year which show people
living longer. This causes the termination rates for HECM to be longer and thus increases the liability to the Fund.
The second factor is HECM recoveries as related to conveyance claim costs that were adjusted this year to reflect
increased maintenance and operation cost for projected conveyances. (Note: this increased cost will lower future
expected recoveries hence increase liability).

Premium revenues continue to reflect the impacts of five increases from April 2010 through June 2012. To
address the decline in portfolio value indicated by the 2012 actuarial study and the President’s 2014 Budget, FHA
raised forward-loan insurance premiums again in Fiscal Year 2013.

FHA continues to face delayed claim actions. This is a result from lender’s holding properties after foreclosure
auctions to assure they have good title to transfer to HUD, and because of significant foreclosure process
bottlenecks in so-called judicial States, where court approval is required to schedule foreclosure auctions. Those


                                                        59
delays are addressed in the loan performance forecasts. This year, the MMI Fund LLG includes an assumption
that 12,000 additional loans will go to claim in FY 2015, above those otherwise predicted by the forecasting
models. While such adjustments in past years have resulted in over-predictions of near term claims, the
adjustment number this year is much smaller than what was used in past years. In addition, HUD continues to
pursue the clearing of long foreclosure queues through its Distressed Asset Sale Program. That, alone, could
account for the 12,000 loans involved in the adjustment noted here.

GI/SRI Home Equity Conversion Mortgage (HECM) - HECM endorsements from fiscal years 1990-2008 remain
in the GI/SRI Fund. The liability for these loans increased from $10,796 million at the end of FY 2013 to $11,034
million at the end of FY 2014. This liability is driven more by long term house price appreciation forecasts than
short term forecasts. Also, for the FY2014 liability estimate, HECM recoveries as related to conveyance claim
costs were adjusted this year to reflect increased maintenance and operation cost for projected conveyances.
(Note: this increased cost will lower future expected recoveries hence increase liability). The HECM loans
remaining in the GI/SRI fund also benefited from slower UPB (Unpaid Principal Balance) growth due to lower
current and future (projected) interest rates for adjustable-rate mortgages. Over 99 percent of the remaining
GI/SRI HECM loans have adjustable interest rates.

GI/SRI Section 223(f) - Section 223(f) of the National Housing Act permits FHA mortgage insurance for the
refinance or acquisition of existing multifamily rental properties consisting of five or more units. Under this
program, FHA may insure up to 85 percent of the lesser of the project’s appraised value or its replacement cost.
Projects insured under the program must be at least three years old. The Section 223(f) program is the largest
multifamily program in the GI/SRI fund with an insurance-in-force of $28 billion. The Section 223(f) liability is
negative, meaning that the present value of expected future premium revenues is greater than the present value of
expected future (net) claim expenses. The 223(f) liability decreased this year by $297 million, from ($766)
million to ($1,063) million, due to lower prepayment and claims expectations as well as increased insurance-in-
force.

GI/SRI Section 221(d)(4) - Section 221(d)(4) of the National Housing Act authorizes FHA mortgage insurance for
the construction or substantial rehabilitation of multifamily rental properties with five or more units. Under this
program, FHA may insure up to 90 percent of the total project cost. This is the second largest multifamily
program in the GI/SRI fund with an insurance-in-force of $11.5 billion. The Section 221(d)(4) liability decreased
by $38 million this year, from ($48) million to ($86) million. This was due to lower claims and prepayments
predicted.

GI/SRI Section 232 Health Care New Construction - The Section 232 NC program provides mortgage insurance
for construction or substantial rehabilitation of nursing homes and assisted-living facilities. FHA insures a
maximum of 90 percent of the estimated value of the physical improvements and major movable equipment. The
Section 232 NC program has an insurance-in-force of $3.2 billion. The Section 232 NC liability decreased by
$13.9 million from ($44.6) million in FY 2013 to ($58.5) million in FY 2014 due to a diminished insurance-in-
force and decreased claim and prepayment expectations.

GI/SRI Section 232 Health Care Purchasing or Refinancing - The Section 232 Refinance program provides
mortgage insurance for two purposes: purchasing or refinancing of projects that do not need substantial
rehabilitation, and installation of fire safety equipment for either private, for-profit businesses or non-profit
associations. For existing projects, FHA insures a maximum of 85 percent of the estimated value of the physical
improvements and major movable equipment. The Section 232 Refinance program has an insurance-in-force of
$30 billion. The Section 232 Refinance liability decreased by $116 million from ($537) million in FY 2013 to
($653) million in FY 2014 due to a significant decrease in claims expectations coupled with a large increase in
insurance-in-force.




                                                        60
  GI/SRI Section 242 Hospitals - The Section 242 Hospitals program provides mortgage insurance for the
  construction, substantial rehabilitation, or refinance of hospitals and/or the purchase of major hospital equipment
  to either private, for-profit businesses or non-profit associations. FHA insures a maximum of 90 percent of the
  estimated replacement cost of the hospital, including the installed equipment. The Section 242 program has an
  insurance-in-force of $8.6 billion. The Section 242 liability decreased by $46 million from ($249) million in FY
  2013 to ($295) million in FY 2014 due to higher premium revenue caused by decreased prepayment expectations
  as well as lower claims expected.

  Risks to LLG Calculations

  LLG calculations for most major programs now use Monte Carlo simulations and stochastic economic forecasts.
  What is booked as an LLG value is the average or arithmetic “mean” value from a series of projections that view
  loan portfolio performance under a large variety of possible economic circumstances. The individual economic
  scenario forecasts are designed to mimic the types of movements in factors such as home prices, interest rates,
  and apartment vacancy rates that have actually occurred in the historical record. By creating a large number of
  these scenarios, each independent of the others, one creates a universe of potential outcomes that define the
  possible set of LLG values in an uncertain world. Using the mean value across all forecast scenarios is valuable
  for providing some consideration for “tail risk.” Tail risk occurs in most loan guarantee portfolios because
  potential losses under the worst scenarios are multiples of potential gains under the best scenarios. The inclusion
  of tail events in the mean-value calculation creates an addition to LLG, which is the difference between the mean
  value from the simulations and the median value. The median is the point at which half of the outcomes are worse
  and half are better. By booking a mean value rather than a median, FHA is essentially providing some additional
  protection in its loss reserves against adverse outcomes. At the same time, booking an LLG based on a mean
  value results in a better than even chance future revisions will be in the downward direction. Comparisons of
  mean-value results to indicators of the range of possible outcomes from the Monte Carlo simulations for Single
  Family forward and HECM mortgages in the MMI LLG are shown in the table below. The representative
  outcomes shown there are for the inter-quartile range (25th and 75th percentiles), and a standard indicator of
  “tail”outcomes (95th percentile).


                          Range of LLG Values Found in Monte Carlo Simulations
                                         (all dollars in millions)
   Program Area             25th Percentile         Mean        75th Percentile     95th Percentile
                                                MMI Fund
Single-Family Forward         $        10,990   $   17,201          $     21,795      $    39,829
Mortgages

Single Family Reverse              $     806    $      7,447          $   13,223      $    20,261
Mortgages (HECM)
Total                          $       11,796   $     24,648        $     35,018       $   60,090


  The uncertainty built into Monte Carlo forecasts is only for economic risk, and not for model risk. All LLG values
  are fundamentally dependent upon forecasts of insured-loan performance. Those forecasts are developed through
  models that apply statistical, economic, financial, or mathematical theories, techniques, and assumptions to create
  behavioral-response functions from historical data. All such models involve risk that actual behavior of borrowers
  and lenders in the future will differ from the historical patterns embedded in the forecasting models. Model risk
  also emanates from the possibility that the computer code used to create the forecasts has errors or omissions
  which compromise the integrity and reliability of projections.




                                                           61
Each year, HUD works with its contractors to evaluate the forecasting models for reasonableness of results on a
number of dimensions. Model risk is also addressed through a continuous cycle of improvement, whereby lessons
learned from the previous round of annual portfolio valuations—in the independent actuarial studies, LLG
valuations, and President’s Budget—are used as a basis for new research and model development in the current
year. Lastly, because of the critical importance of the FHA single-family programs for national housing policy,
and the uncertainty surrounding the final cost of credit expenses resulting from the recent, severe economic
recession, HUD has contracted for a second independent actuarial study of that portfolio. Such a second opinion
directly addresses potential model risk by seeing if a different modeling approach would produce a reasonably
similar economic value. This year, the results of that examination provide a reasonable assurance that any model
risk in the LLG calculations is within a tolerable range for accepting the primary contractor’s loan performance
projections.

At this point in the economic cycle, with demand for rental units high, and loans refinancing to historically low
interest rates, near term risks to the multifamily LLG calculation appear to be low. However, over the longer term,
risks come from many sources--changes in population growth and household formation, the supply of rental
housing in each market where FHA has a presence, and local employment conditions. Risks also come from
FHA’s policy of insuring loans pre-construction in its 221(d)(4) program, though that is a small share of new
endorsement activity today. To the extent 221(d)(4) projects come into each new cohort, LLG calculations are
subject to risk from their abilities to find viable markets when they do come on-line. New construction loans
approved in 2007 – 2009 have now gone through several annual rounds of rentals to prove market viability. The
combined 2010-2013 cohorts, which are just now starting to come into rent-up, are more than twice as large as
2007-2009, by dollar volume. Valuations of the newer portfolio are dependent upon continued trends in rental
vacancy rates and rental-price growth.

For Healthcare programs (Sections 232 and 242), LLG risk comes principally from health-care reimbursement
rates from Medicare and Medicaid. In addition, the financial health of State and Municipal government entities
also is a source of LLG risk, as many of the FHA-insured projects benefit, in part, from periodic cash infusions
from those entities. Risk also varies as does the quality of business management at each facility, and from the
supply of medical care in each community relative to demand and the abilities of facility management to adapt to
changing technologies and the competitive landscape. These are factors for which it is difficult to predict future
trends.




                                                        62
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.

MMI Single Family LLR - For the single family portfolio, the remaining insurance-in-force for pre-credit reform
loans is $2.4 billion. The aggregate liability for the remaining pre-credit reform loans in FY 2014 is $7.6 million,
which is a $1.6 million increase from the $6 million estimate in FY 2013.

GI/SRI Multifamily & Healthcare LLR - For the multifamily and healthcare portfolio, the remaining insurance-in-
force for pre-credit reform loans is $555 million. The aggregate liability for the remaining pre-credit reform loans
in FY 2014 is ($1.6) million, which is a $100 thousand increase from the ($1.7) million estimate in FY 2013. The
year-over-year increase in aggregate liability is due to a $291 million decline in insurance-in-force as both
measures move closer to zero.

GI/SRI Section 223(a)(7) - Section 223(a)(7) gives FHA authority to refinance FHA-insured loans. Under this
program, the refinanced principal amount of the mortgage may be the lesser of the original amount of the existing
mortgage or the remaining unpaid principal balance of the loan. Loans insured under any sections of the National
Housing Act may be refinanced under 223(a)(7), including those already under 223(a)(7). The Section 223(a)(7)
program has an insurance-in-force of $19.3 billion. The Section 223(a)(7) liability is negative, meaning that the
present value of expected future premium revenues is greater than the present value of expected future (net) claim
expenses. The 223(a)(7) liability decreased this year by $40 million, from ($600) million to ($640) million,
principally due higher premium revenue expectations resulting from decreased projected prepayment speeds.




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Note 7. Other Assets

The following table presents the composition of Other Assets held by FHA as of September 30, 2014 and 2013:

             (Dollars in millions)
                                                                              FY 2014           FY 2013
             Intragovernmental:
              Advances to HUD for Working Capital Fund Expenses           $             1   $             1
             Total                                                        $             1   $             1

             With the Public:
              Escrow Monies Deposited at Minority-Owned Banks             $         41      $         47
              Deposits in Transit                                                    6               332
             Total                                                         $        47      $        379


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 and for the bid deposits on asset sales. 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

A deposit 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.




.




                                                       64
Note 8. Accounts Payable

Accounts Payable as of September 30, 2014 and 2013 are as follows:

               (Dollars in millions)

                                                                           FY 2014           FY 2013
               Intragovernmental:
               Claims Payable to Ginnie Mae                                $        2    $        8
               Miscellaneous Payables to Other Federal Agencies                     1             -
               Total                                                       $        3    $        8


                                                                               FY 2014       FY 2013
               With the Public:
                Claims Payable                                             $      277    $      188
                Premium Refunds Payable                                           142           143
                Single Family Property Disposition Payable                         14            49
                Miscellaneous Payables                                             26            24
               Total                                                       $      459    $      404


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. This line item also includes estimated
claims on suspended supplemental claims.

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.




                                                         65
Note 9. Debt

The following tables describe the composition of Debt held by FHA as of September 30, 2014 and 2013:


(Dollars in millions)


                                                             FY 2014                                                             FY 2013

                                    Beginning Balance     Net Borrowings         Ending Balance          Beginning Balance       Net Borrowings   Ending Balance



Other Debt:

    Borrowings from U.S. Treasury               25,940                 1,588              27,528                      11,527               14,413          25,940
Total                               $          25,940 $                1,588 $            27,528 $ - $               11,527 $              14,413 $        25,940

                                                                                                                                    FY 2014           FY 2013
Classification of Debt:
    Intragovernmental Debt                                                                                                   $             27,528 $        25,940
Total                                                                                                                        $             27,528 $        25,940


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 2014, FHA’s U.S. Treasury borrowings carried interest rates ranging from 0.75 percent to 7.59
percent. In fiscal year 2013, they carried interest rates ranged from 1.68 percent to 7.59 percent. The maturity
dates for these borrowings occur from September 2017 – September 2030. Loans may be repaid in whole or in
part without penalty at any time prior to maturity.




                                                                                   66
Note 10. Other Liabilities

The following table describes the composition of Other Liabilities as of September 30, 2014 and 2013:


                            (Dollars in millions)

                            FY 2014                                        Current
                            Intragovernmental:
                             Receipt Account Liability                         1,689
                            Total                                      $       1,689

                            With the Public:
                             Trust and Deposit Liabilities             $          59
                             Multifamily Notes Unearned Revenue                  248
                             Premiums collected on unendorsed cases              174
                             Miscellaneous Liabilities                           148
                            Total                                      $         629


                            FY 2013                                        Current
                            Intragovernmental:
                             Receipt Account Liability                         3,983
                            Total                                      $       3,983

                            With the Public:
                             Trust and Deposit Liabilities             $         100
                             Multifamily Notes Unearned Revenue                  243
                             Miscellaneous Liabilities                            81
                            Total                                      $         424


Receipt Account Liability

The receipt account liability is created from negative credit subsidy from new endorsements, downward credit
subsidy reestimates, loan modifications, and unobligated balances from the liquidating account in the GI/SRI
receipt account. Effective FY 2014, FHA sweeps its GI/SRI receipt accounts on September 30 and returns the
funds to Treasury.

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.




                                                         67
Multifamily Notes Unearned Revenue

Multifamily Notes Unearned Revenue primarily includes the deferred interest revenue on Multifamily notes that
are based on work out agreements with the owners. The workout agreements defer payments from the owners for
a specified time but, the interest due on the notes is still accruing and will also be deferred until payments resume.

Premiums Collected on Unendorsed Cases

Premiums collected on unendorsed cases represent amounts collected by FHA for cases that have not yet been
endorsed. FHA’s policy is to collect upfront premiums prior to endorsing a case.

Miscellaneous Liabilities

Miscellaneous liabilities mainly include unearned premium revenue and may include loss contingencies that are
recognized by FHA for past events that warrant a probable, or likely, future outflow of measurable economic
resources.



Note 11. Commitments and Contingencies

Litigation

FHA is party in various legal actions and claims brought by or against it. In the opinion of management and
general counsel, the ultimate resolution of these legal actions will not have an effect on FHA’s consolidated
financial statements as of September 30, 2014. There are pending or threatened legal actions where judgment
against FHA is reasonably possible with an estimated potential loss of $24 million or more.


Activity with Ginnie Mae

As of September 30, 2014, the Government National Mortgage Association (“Ginnie Mae”) held defaulted FHA-
insured mortgage loans. These loans, acquired from defaulted mortgage-backed securities issuers, had the
following balances:

                                                                      FY 2014                     FY 2013
                                                                      (in Millions)               (in Millions)
Mortgages Held for Investment & Foreclosed Property (Pre-Claim)                           4,891                   5,780
Short Sale Claims Receivable                                                                 19                      44


“Ginnie Mae” may submit requests for claim payments to FHA for some or all of these loans. Subject to all
existing claim verification controls, FHA would pay such claims to Ginnie Mae, another component of HUD,
upon conveyance of the foreclosed property to FHA. Any liability for such claims, and offsetting recoveries, has
been reflected in the Liability for Loan Guarantees on the accompanying financial statements based on the default
status of the insured loans.




                                                         68
Note 12. Gross Costs

Gross costs incurred by FHA for the period ended September 30, 2014 and 2013 are as follows:
(Dollars in millions)


                                     Single Family                       Multifamily/ Administrative
September 30, 2014                      Forward            HECM          Healthcare     Expenses            Total
Intragovernmental:
  Interest Expense                   $         736 $              59 $           168 $             - $           963
  Imputed Cost                                   -                 -               -              15              15
  Other Expenses                                 -                 -               -               2               2
Total                                $         736 $              59 $           168 $            17 $           980

With the Public:
 Salary and Administrative Expense   $            - $               - $             - $          574 $              574
 Subsidy Expense                             (9,790)              (55)           (612)             -          (10,457)
  Re-estimate Expense                         2,636             1,580            (292)             -           3,924
 Interest Expense                              199                495             16              (1)               709
 Interest Accumulation Expense                 598                652            (101)             -           1,149
 Bad Debt Expense                               (19)                -             (78)             -                (97)
 Loan Loss Reserve                               2                  -              (1)             -                 1
 Other Expenses                                 24                  1             44              40                109
Total                                $       (6,350) $          2,673    $     (1,024) $         613    $     (4,088)


Total Gross Costs                    $       (5,614) $          2,732    $      (856) $          630    $     (3,108)



                                     Single Family                       Multifamily/ Administrative
September 30, 2013                      Forward            HECM          Healthcare     Expenses            Total
Intragovernmental:
  Interest Expense                   $         727     $          53     $       142     $         -    $        922
  Imputed Cost                                   -                 -               -              18              18
  Other Expenses                                 -                 -               -               4               4
Total                                $         727     $          53     $       142     $        22    $        944

With the Public:
 Salary and Administrative Expense   $            - $               - $             - $          644 $           644
 Subsidy Expense                            (17,069)             (366)           (922)              -        (18,357)
  Re-estimate Expense                         9,462              (636)           (407)              -          8,419
 Interest Expense                               758              (336)            (99)             (1)           322
 Interest Accumulation Expense                  985               770             (81)              -          1,674
 Bad Debt Expense                               (15)                -            (426)              -           (441)
 Loan Loss Reserve                               (5)                -              (4)              -             (9)
 Other Expenses                                  44                 3              12             28              87
Total                                $      (5,840) $           (565) $       (1,927) $          671 $       (7,661)

Total Gross Costs                    $       (5,113) $          (512) $       (1,785) $          693    $     (6,717)




                                                           69
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 calculated as the difference between interest revenue and interest expense. For
guaranteed loans, the liability for loan guarantees is adjusted with the offset to interest accumulation expense.

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 to report imputed costs under SFFAS No. 4, Managerial Cost
Accounting Concepts and Standards, and SFFAS No. 30, Inter-Entity Cost Implementation: Amending SFFAS 4,
Managerial Cost Accounting Standards and Concepts 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.

Re-estimate Expense

Re-estimate expense captures the cost associated with revisions to the liability for loan guarantee. A re-estimate
is calculated annually.

Subsidy Expense

Subsidy expense, positive and negative, consists of credit subsidy expense from new endorsements, and
modifications. 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.


                                                         70
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.




                                                        71
Note 13. Earned Revenue

Earned revenues generated by FHA for the period ended September 30, 2014 and 2013 are as follows:

(Dollars in millions)

                                                         Single Family                    Multifamily/
September 30, 2014                                         Forward             HECM       Healthcare              Total
Intragovernmental:
 Interest Revenue from Deposits at U.S. Treasury     $             1,334   $      711     $              67   $      2,112
 Interest Revenue from MMI/CMHI Investments                            6            -                     -              6
Total Intragovernmental                              $             1,340   $      711     $              67   $      2,118

With the Public:
 Insurance Premium Revenue                           $               (7) $            -   $               8   $            1
 Income from Notes and Properties                                    14               1                  37               52
 Other Revenue                                                       10               -                   -               10
Total With the Public                                $               17 $             1   $              45   $           63

Total Earned Revenue                                 $             1,357   $      712     $             112   $      2,181

                                                         Single Family                        Multifamily/
September 30, 2013                                         Forward             HECM           Healthcare          Total
Intragovernmental:
 Interest Revenue from Deposits at U.S. Treasury     $             1,712   $      823     $              62   $      2,597
 Interest Revenue from MMI/CMHI Investments                            8            -                     -   $          8
Total Intragovernmental                              $             1,720   $      823     $              62   $      2,605

With the Public:
 Insurance Premium Revenue                           $                -    $          -   $               8   $            8
 Income from Notes and Properties                                    27               2                  38   $           67
 Other Revenue                                                        1               -                   -   $            1
Total With the Public                                $               28    $          2   $              46   $           76

Total Earned Revenue                                 $             1,748   $      825     $             108   $      2,681

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 Capital Reserve account 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.




                                                         72
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.

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 2014 were:

                                                        Upfront Premium Rates
 Single Family:
 10/01/2013 - 9/30/2014                                 1.75%
 Multifamily                                            0.25%, 0.45%, 0.50%, 0.80% or 1.00%
 HECM Standard                                          2.00% (Based on Maximum Claim Amount)
 HECM Saver                                             0.01% (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 2014 were:

                                                        Annual Periodic Premium Rates
Single Family:
10/01/2013 - 9/30/2014                                  1.20%, 1.25% , 1.45% or 1.50%
10/01/2013 - 9/30/2014                                  1.30%, 1.35%, 1.50% or 1.55%
Multifamily                                             0.45%, 0.50%, 0.57% or 0.80%
HECM (Standard and Saver)                               1.25%

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 2013,
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.


                                                       73
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.




                                                     74
Note 15. Transfers Out and Other Financing Sources

Transfers in/out incurred by FHA for the period ended September 30, 2014 and 2013 are as follows:

              (Dollars in millions)

                                                   Cumulative
                                                                     Unexpended
                      September 30, 2014           Results of                          Total
                                                                    Appropriations
                                                   Operations
              Transfers Out:
              HUD                                             497                -             497
              Other Financing Sources:
              Treasury                         $            (2,231) $            - $       (2,231)


                                                   Cumulative
                                                                     Unexpended
                      September 30, 2013           Results of                          Total
                                                                    Appropriations
                                                   Operations
              Budgetary Financing Sources:
              HUD                                               -              (68)            (68)
              Transfers Out:
              HUD                                             550                -             550
              Other Financing Sources:
              Treasury                         $            (3,374) $            - $       (3,374)




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.

Other Financing Sources

Transfers out to U.S. Treasury consist of negative subsidy from new endorsements, modifications and downward
credit subsidy reestimates in the GI/SRI general fund receipt account.




                                                       75
Note 16. Unexpended Appropriations


Unexpended appropriation balances at September 30, 2014 and 2013 are as follows:

(Dollars in millions)
                                 Beginning    Appropriations     Other      Appropriations
FY 2014                           Balance       Received      Adjustments       Used       Transfers-Out Ending Balance
Positive Subsidy               $          464 $            - $            - $            - $           - $          464
Working Capital and Contract
Expenses                                298            127            (37)           (114)            -            274
Reestimates                               -            210              -            (210)            -              -
GI/SRI Liquidating                      107             30              -              (3)            -            134
Total                          $        869 $          367 $          (37) $        (327) $           - $          872



                                 Beginning    Appropriations     Other      Appropriations
FY 2013                           Balance       Received      Adjustments       Used       Transfers-Out Ending Balance
Positive Subsidy               $          464 $            - $            - $            - $           - $          464
Working Capital and Contract
Expenses                                309             207           (39)            (111)         (68)           298
Reestimates                               -           7,367             -           (7,367)           -              -
GI/SRI Liquidating                       89              30             -              (12)           -            107
Total                          $        862 $        7,604 $          (39) $       (7,490) $        (68) $         869




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; appropriations are rescinded; or other miscellaneous adjustments are required.




                                                         76
Note 17. Budgetary Resources

The SF-133 and the Statement of Budgetary Resources for fiscal year 2013 have been reconciled to the fiscal year
2013 actual amounts included in the Program and Financing Schedules presented in the fiscal year 2015 Budget
of the United States Government. There were no significant reconciling items. Information from the fiscal year
2014 Statement of Budgetary Resources will be presented in the fiscal year 2016 Budget of the U.S. Government.
The Budget will be transmitted to Congress on the first Monday in February 2015 and will be available from the
Government Printing Office and online at that time.

Obligated balances as of September 30, 2014 and 2013 are as follows:

       Unpaid Obligations


                            (Dollars in Millions)
                            Undelivered Orders                 FY 2014   FY 2013
                             MMI/CMHI                          $   1,570 $   1,870
                             GI/SRI                                  321       436
                             EI                                       26        36
                             TI                                        -         2
                            Undelivered Orders Subtotal        $ 1,917 $ 2,344

                            Accounts Payable
                             MMI/CMHI                          $       527 $    447
                             GI/SRI                                    372      382
                            Accounts Payable Subtotal          $       899 $    829

                            Total                              $   2,816   $   3,173




                                                          77
Note 18. Budgetary Resources - Collections

During fiscal year 2012 and 2014, FHA collected funds received from the National Servicing Settlement with the
Nation’s five largest loan servicers, as well as settlements from lenders as a result of increased monitoring and
enforcement actions.

The following table presents the composition of FHA’s collections for the period ended September 30, 2014 and
2013:

FY 2014                                         MMI/CMHI         GI/SRI        H4H         Total
Collections:
 Premiums                                       $     11,041 $        843 $          1 $      11,885
 Notes                                                 4,884          434            1         5,319
 Property                                              5,348          223            1         5,572
 Interest Earned from U.S. Treasury                    1,637          473            1         2,111
 Subsidy                                               9,850            -            -         9,850
 Reestimates                                           9,018          210            -         9,228
 Collections from settlements                            466            -            -           466
 Other                                                    47           15            -            62
Total                                           $    42,291 $       2,198 $          4 $     44,493



FY 2013                                         MMI/CMHI         GI/SRI        H4H         Total
Collections:
 Premiums                                       $     11,178 $         842 $         1 $      12,021
 Notes                                                 2,253           601           1         2,855
 Property                                              8,400           319           -         8,719
 Interest Earned from U.S. Treasury                    2,002           603           1         2,606
 Subsidy                                              17,444             -           -        17,444
 Reestimates                                          32,913         5,681           -        38,594
 Collections from settlements                              -             -           -             -
 Other                                                    43            13           1            57
Total                                           $    74,233 $       8,059 $          4 $     82,296




                                                       78
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, 2014 and 2013:

 (Dollars in Millions)
 FY 2014                                 MMI/CMHI         GI/SRI          H4H            EI          TI             Total
 Transfers:
 Working Capital and Contract Expenses   $          - $            - $             - $         - $           - $             -


 (Dollars in Millions)
 FY 2013                                 MMI/CMHI     GI/SRI     H4H                     EI                         Total
 Transfers
 Working Capital and Contract Expenses $       (68) $        - $     - $                       - $           - $        (68)




Note 20. Budgetary Resources – Obligations

The following table presents the composition of FHA’s obligations for the period ended September 30, 2014 and
2013:

(Dollars in Millions)


FY 2014                                                   MMI/CMHI        GI/SRI         H4H         EI/TI           Total
Obligations
 Claims                                                   $    25,392 $       2,706 $          5 $           - $       28,103
 Property Expenses                                                956            92             -            -          1,048
 Interest on Borrowings                                           726           237             -            -            963
 Subsidy                                                        9,849           526             -            -         10,375
 Downward Reestimates                                           3,250         2,060             -            -          5,310
 Upward Reestimates                                             5,769           210             -            -          5,979
 Admin, Contract and Working Capital                              122             -             -            -            122
 Other                                                             10            79             -            -             89
Total                                                     $   46,074 $       5,910 $           5 $           - $      51,989



FY 2013                                                   MMI/CMHI        GI/SRI         H4H         EI/TI           Total
Obligations
 Claims                                                   $    26,766 $       2,596 $          3 $            - $      29,365
 Property Expenses                                              1,982            78             -             -         2,060
 Interest on Borrowings                                           710           211             -             -           921
 Subsidy                                                       17,446         1,046             -             -        18,492
 Downward Reestimates                                           5,241           529             -             -         5,770
 Upward Reestimates                                            27,673         5,681             -             -        33,354
 Admin, Contract and Working Capital                              110             -             -            4            114
 Other                                                             12            87             -             -            99
Total                                                     $   79,940 $      10,228 $           3 $           4 $      90,175




                                                      79
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, 2014 and 2013:

(Dollars in Millions)                                                                            FY 2014        FY 2013
RESOURCES USED TO FINANCE ACTIVITIES
 Obligations Incurred - SBR                                                                  $      51,989 $       90,175
 Spending Authority from Offsetting Collections and Recoveries - SBR                         $     (44,499)       (82,297)
 Offsetting Receipts - SBR                                                                   $      (2,668)        (1,442)
 Transfers In / Out - NP                                                                     $      (2,230)             -
 Imputed Financing from Costs Absorbed by Others                                             $          15             18
TOTAL RESOURCES USED TO FINANCE ACTIVITIES                                                   $       2,607 $        6,454

RESOURCES THAT DO NOT FUND THE NET COST OF OPERATIONS
Undelivered Orders and Adjustments                                                           $         428 $         (266)
Revenue and Other Resources                                                                         45,001         81,088
Purchase of Assets                                                                                 (45,433)       (55,840)
Appropriation for prior year Re-estimate                                                            (5,979)       (33,354)
TOTAL RESOURCES NOT PART OF NET COST OF OPERATIONS                                           $      (5,983) $      (8,372)

TOTAL RESOURCES USED TO FINANCE THE NET COST (SURPLUS) OF OPERATIONS                         $      (3,376) $      (1,918)

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                                                 $      10,639 $       14,777
Downward Re-estimate of Credit Subsidy Expense                                                      (6,006)        (6,035)
Changes in Loan Loss Reserve Expense                                                                    27             (3)
Changes in Bad Debt Expenses Related to Uncollectible Pre-Credit Reform Receivables                    (97)          (440)
Reduction of Credit Subsidy Expense from Endorsements and Modifications of Loan Guarantees         (10,457)       (18,358)
Gains or Losses on Sales of Credit Program Assets                                                       29             19
Other                                                                                                3,952          2,560
TOTAL COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL
NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD                                      $      (1,913) $      (7,480)

NET COST (SURPLUS) OF OPERATIONS                                                             $      (5,289) $      (9,398)




                                                              80
Required Supplementary Information

Schedule A: Intragovernmental Assets

FHA's Intragovernmental assets, by federal entity, are as follows on September 30, 2014 and 2013:

           (Dollars in Millions)
                                            Fund Balance Investments in
                                              with U.S.   U.S. Treasury
           FY 2014                            Treasury      Securities   Other Assets                  Total
           U.S. Treasury                    $     50,232 $        6,379 $           -              $     56,611
           HUD                                          -              -            1                         1
                           Total            $     50,232 $        6,379 $           1              $     56,612

                                            Fund Balance Investments in
                                              with U.S.   U.S. Treasury
           FY 2013                            Treasury      Securities   Other Assets                  Total
           U.S. Treasury                    $     63,481 $             3 $          -              $     63,484
           HUD                                          -              -            1                         1
                           Total            $     63,481 $             3 $          1              $     63,485


Schedule B: Intragovernmental Liabilities

FHA's Intragovernmental liabilities, by federal entity, are as follows on September 30, 2014 and 2013:

           (Dollars in Millions)
                                                               Borrowings
                                                 Accounts       from U.S.      Other
           FY 2014                               Payable        Treasury     Liabilities               Total
           U.S. Treasury                     $              - $     27,528 $        1,689 $              29,217
           HUD                                              3             -              -                    3
                           Total            $               3 $     27,528 $        1,689 $              29,220

                                                                  Borrowings
                                                 Accounts          from U.S.         Other
           FY 2013                               Payable           Treasury        Liabilities         Total
           U.S. Treasury                     $              -    $     25,940    $        3,983    $     29,923
           HUD                                              8                -                 -              8
                           Total             $              8    $     25,940    $        3,983    $     29,931




                                                            81
Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program for Budgetary
September 30, 2014:
Dollars in Millions                                                               MMI/CMHI               MMI/CMHI           GI/SRI                              Budgetary
                                                                                 Capital Reserve          Program          Program           Other              Total

Budgetary Resources:
Unobligated balance brought forward, October 1                               $                   2       $       95    $          23     $        717       $         837
Unobligated balance brought forward, October 1, as adjusted                                      2               95               23              717                 837
Recoveries of prior year unpaid obligations                                                      -               23                3               45                  71
Other changes in unobligated balance (+ or -)                                                   (2)             (25)             (10)            (234)               (271)
Unobligated balance from prior year budget authority, net                                        -               93               16              528                 637
Appropriations (discretionary and mandatory)                                                     -              127              210               30                 367
Spending authority from offsetting collections (discretionary and mandatory)                 7,337            5,766                -              214              13,317
Total budgetary resources                                                    $               7,337       $    5,986    $         226     $        772       $      14,321

Status of Budgetary Resources:
Obligations incurred                                                                             -            5,892              210                  67            6,169
  Apportioned                                                                                    -               44               16                  25               85
  Exempt from apportionment                                                                      -                -                -                  85               85
  Unapportioned                                                                              7,337               50                -                 680            8,067
Total unobligated balance, end of year                                                       7,337               94               16                 705            8,152
Total budgetary resources                                                   $                7,337       $    5,986    $         226     $           772    $      14,321

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                              -          147                   4               483             634

Uncollected customer payments from Federal sources, brought forward,
October 1 (-)                                                                                      (2)            -                -                  (1)              (3)
Obligated balance, start of year (net), before adjustments (+ or -)                                (2)          147                4                 482              631
Adjustment to obligated balance, start of year (net) (+ or -)                                       -             -                -                   -                -
Obligated balance, start of year (net), as adjusted                                                (2)          147                4                 482              631
Obligations incurred                                                                                -         5,892              210                  67            6,169
Outlays (gross) (-)                                                                                 -        (5,870)            (210)                (65)          (6,145)
Change in uncollected customer payments from Federal sources (+ or -)                              (6)            -                -                   -               (6)
Recoveries of prior year unpaid obligations (-)                                                     -           (23)              (3)                (45)             (71)
Unpaid obligations, end of year (gross)                                                             -           146                1                 440              587
Uncollected customer payments from Federal sources, end of year                                    (8)            -                -                  (1)              (9)
Obligated balance, end of year (net)                                        $                      (8)   $      146    $           1     $           439    $         578

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                        7,337            5,893              210              244              13,684
Actual offsetting collections (discretionary and mandatory) (-)                            (13,098)               -                -             (213)            (13,311)
Change in uncollected customer payments from Federal sources
(discretionary and mandatory) (+ or -)                                                          (6)               -                -                 -                 (6)
Anticipated offsetting collections (discretionary and mandatory) (+ or -)                        -                -                -                 -                  -
Budget authority, net (discretionary and mandatory)                                         (5,766)           5,893              210                30                367
Outlays, gross (discretionary and mandatory)                                                     -            5,870              210                65              6,145
Actual offsetting collections (discretionary and mandatory) (-)                            (13,098)               -                -              (213)           (13,311)
Outlays, net (discretionary and mandatory)                                                 (13,098)           5,870              210              (148)            (7,166)
Distributed offsetting receipts (-)                                                              -                -                -            (2,668)            (2,668)
Agency outlays, net (discretionary and mandatory)                           $              (13,098)      $    5,870    $         210     $      (2,816)     $      (9,834)




                                                                                      82
Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program for Budgetary
September 30, 2013:
Dollars in Millions                                                               MMI/CMHI               MMI/CMHI            GI/SRI                         Budgetary Total
                                                                                 Capital Reserve          Program           Program           Other              Total

Budgetary Resources:
Unobligated balance brought forward, October 1                               $               3,309       $       72     $          41     $        652        $      4,074
 Adjustment to unobligated balance brought forward, October 1 (+ or -)                           -                1                 -                -                   1
Unobligated balance brought forward, October 1, as adjusted                                  3,309               74                41              651               4,075
Recoveries of prior year unpaid obligations                                                      -               11                 3               73                  87
Other changes in unobligated balance (+ or -)                                               (3,309)           3,285               (20)            (164)               (208)
Unobligated balance from prior year budget authority, net                                        -            3,370                23              561               3,954
Appropriations (discretionary and mandatory)                                                     -            1,814             5,681               30               7,525
Borrowing authority (discretionary and mandatory)                                                -                -                 -                1                   1
Spending authority from offsetting collections (discretionary and mandatory)                     2           22,694                 -              226              22,922
Total budgetary resources                                                    $                   2       $   27,878     $       5,704     $        818        $     34,402

Status of Budgetary Resources:
Obligations incurred                                                                                -        27,783             5,681                 100           33,564
Unobligated balance, end of year:
  Apportioned                                                                                      -             34                16                  27               77
  Unapportioned                                                                                    2             61                 7                 691              761
Total unobligated balance, end of year                                                             2             95                23                 718              838
Total budgetary resources                                                   $                      2     $   27,878     $       5,704     $           818     $     34,402

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                              -           157                   8               567              732

Uncollected customer payments from Federal sources, brought forward,
October 1 (-)                                                                                      (1)             -                 -               1                    -
Obligated balance, start of year (net), before adjustments (+ or -)                                (1)           157                 8             568                  732
Adjustment to obligated balance, start of year (net) (+ or -)                                       -             (1)                -               -                   (1)
Obligated balance, start of year (net), as adjusted                                                (1)           155                 8             569                  731
Obligations incurred                                                                                -         27,783             5,681             100               33,564
Outlays (gross) (-)                                                                                 -        (27,780)           (5,682)           (112)             (33,574)
Change in uncollected customer payments from Federal sources (+ or -)                              (1)             -                 -               -                   (1)
Recoveries of prior year unpaid obligations (-)                                                     -            (11)               (3)            (73)                 (87)
Unpaid obligations, end of year (gross)                                                             -            147                 4             483                  634
Uncollected customer payments from Federal sources, end of year                                    (2)             -                 -              (1)                  (3)
Obligated balance, end of year (net)                                        $                      (2)   $       147    $            4    $        482        $         631

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                            2           24,508             5,681              257               30,448
Actual offsetting collections (discretionary and mandatory) (-)                            (22,695)               -                 -             (226)             (22,921)
Change in uncollected customer payments from Federal sources
(discretionary and mandatory) (+ or -)                                                          (1)               -                 -                -                   (1)
Budget authority, net (discretionary and mandatory)                                        (22,694)          24,508             5,681               31                7,526
Outlays, gross (discretionary and mandatory)                                                     -           27,780             5,682              112               33,574
Actual offsetting collections (discretionary and mandatory) (-)                            (22,695)               -                 -             (226)             (22,921)
Outlays, net (discretionary and mandatory)                                                 (22,695)          27,780             5,682             (114)              10,653
Distributed offsetting receipts (-)                                                              -                -                 -            1,442               (1,442)
Agency outlays, net (discretionary and mandatory)                           $              (22,695)      $   27,780     $       5,682     $      1,328        $       9,211




                                                                                      83
Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by FHA Program for Non-Budgetary
September 30, 2014:
                                                                                        MMI/CMHI               GI/SRI                            Budgetary Total
                                                                                        Financing            Financing            Other              Total

Budgetary Resources:
Unobligated balance brought forward, October 1                                      $         46,334     $          11,495    $           26     $        57,855
Unobligated balance brought forward, October 1, as adjusted                                   46,334                11,495                26              57,855
Recoveries of prior year unpaid obligations                                                      714                    50                  1                765
Other changes in unobligated balance (+ or -)                                                      -                     -                 (1)                (1)
Unobligated balance from prior year budget authority, net                                     47,048                11,546                24              58,618
Borrowing authority (discretionary and mandatory)                                              7,000                 1,769                  -              8,769
Spending authority from offsetting collections (discretionary and mandatory)                  23,181                   817                  4             24,002
Total budgetary resources                                                           $        77,229      $         14,132     $           28     $       91,389

Status of Budgetary Resources:
Obligations incurred                                                                          40,158                 5,658                 4              45,820
Unobligated balance, end of year:                                                                  -                     -
  Apportioned                                                                                 12,076                 1,406                12              13,494
  Exempt from apportionment                                                                        -                     -            13,494              13,494
  Unapportioned                                                                               24,996                 7,068                11              32,075
Total unobligated balance, end of year                                                        37,072                 8,474                23              45,569
Total budgetary resources                                                           $        77,229      $         14,132     $           28     $       91,389

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                          2,019                  520                 -               2,539
Obligated balance, start of year (net), before adjustments (+ or -)                             2,019                  520                 -               2,539
Obligated balance, start of year (net), as adjusted                                             2,019                  520                 -               2,539
Obligations incurred                                                                           40,158                5,658                 4              45,820
Outlays (gross) (-)                                                                           (39,657)              (5,704)               (5)            (45,366)
Recoveries of prior year unpaid obligations (-)                                                  (714)                 (50)               (1)               (765)
Unpaid obligations, end of year (gross)                                                         1,806                  423                 -               2,229
Obligated balance, end of year (net)                                                $          1,806     $            423     $            -     $        2,229

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                         30,181                 2,586                 4              32,771
Actual offsetting collections (discretionary and mandatory) (-)                              (29,181)               (1,997)               (4)            (31,182)
Budget authority, net (discretionary and mandatory)                                            1,000                   589                 -               1,589
Outlays, gross (discretionary and mandatory)                                                  39,657                 5,704                 5              45,366
Actual offsetting collections (discretionary and mandatory) (-)                              (29,181)               (1,997)               (4)            (31,182)
Outlays, net (discretionary and mandatory)                                                    10,476                 3,707                 1              14,184
Agency outlays, net (discretionary and mandatory)                                   $        10,476      $          3,707     $            1     $       14,184




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Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by FHA Program for Non-Budgetary
September 30, 2013:

                                                                                                                                                     Non
                                                                                        MMI/CMHI               GI/SRI                           Budgetary Total
                                                                                        Financing            Financing            Other             Total

Budgetary Resources:
Unobligated balance brought forward, October 1                                      $         33,167     $           7,082    $           26    $        40,275
Unobligated balance brought forward, October 1, as adjusted                                   33,167                 7,082                26             40,275
Recoveries of prior year unpaid obligations                                                      381                    23                 -                404
Unobligated balance from prior year budget authority, net                                     33,548                 7,105                25             40,678
Borrowing authority (discretionary and mandatory)                                             17,603                 1,488                 1             19,092
Spending authority from offsetting collections (discretionary and mandatory)                  47,304                 7,389                 3             54,696
Total budgetary resources                                                           $        98,455      $         15,982     $           29    $      114,466

Status of Budgetary Resources:
Obligations incurred                                                                          52,121                 4,487                 3             56,611
Unobligated balance, end of year:
  Apportioned                                                                                 22,797                 2,187                15             24,999
  Unapportioned                                                                               23,537                 9,308                11             32,856
Total unobligated balance, end of year                                                        46,334                11,495                26             57,855
Total budgetary resources                                                           $        98,455      $         15,982     $           29    $      114,466

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                          1,931                  541                 -              2,472
Obligated balance, start of year (net), before adjustments (+ or -)                             1,931                  541                 -              2,472
Obligated balance, start of year (net), as adjusted                                             1,931                  541                 -              2,472
Obligations incurred                                                                           52,121                4,487                 3             56,611
Outlays (gross) (-)                                                                           (51,651)              (4,486)               (4)           (56,141)
Recoveries of prior year unpaid obligations (-)                                                  (381)                 (23)                -               (404)
Unpaid obligations, end of year (gross)                                                         2,019                  520                 -              2,539
Obligated balance, end of year (net)                                                $          2,019     $            520     $            -    $        2,539

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                          64,907                8,877                 4             73,788
Actual offsetting collections (discretionary and mandatory) (-)                               (51,514)              (7,859)               (2)           (59,375)
Budget authority, net (discretionary and mandatory)                                            13,393                1,019                 1             14,413
Outlays, gross (discretionary and mandatory)                                                   51,651                4,486                 4             56,141
Actual offsetting collections (discretionary and mandatory) (-)                               (51,514)              (7,859)               (2)           (59,375)
Outlays, net (discretionary and mandatory)                                                        138               (3,373)                1             (3,234)
Agency outlays, net (discretionary and mandatory)                                   $            138     $         (3,373)    $            1    $       (3,234)




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Other Information
The Office of Management and Budget (OMB) requires all CFO Act agencies’ to include the Schedule of Spending in the
Other Accompanying Information section of their Annual Financial Report. The Schedule of Spending presents an overview
of how and where agencies are spending money. The statement discloses FHA’s resources that were available to spend,
services or items that were purchased, with whom the agencies are spending money, and how obligations are issued.

                                                   SCHEDULE OF SPENDING
                                                    As of September 30 2014
                                                           in millions

                                                                              FY 2014                    FY 2013
What Money is Available to spend?
Total Resources                                                               $105,710                   $148,867
Less Amount Available but Not Agreed to be Spent                               $13,579                    $25,075
Less Amount Not Available to be Spent                                          $40,142                    $33,617
Total Amounts Agreed to be Spent                                               $51,989                    $90,175


How was the Money Spent?
Category*
     Claims                                                                    $27,991                    $29,656
     Property Expenses                                                           $596                      $1,414
     Interest on Borrowings                                                       $963                       $921
     Subsidy                                                                   $10,457                    $18,358
     Downward Reestimates                                                       $5,310                     $5,770
     Upward Reestimates                                                         $5,979                    $33,354
     Admin, Contract and Working Capital                                          $116                       $116
     Other                                                                         $99                       $126

Total Spending                                                                 $51,511                    $89,714
Amounts Remaining to be Spent                                                     $478                       $461
Total Amounts Agreed to be Spent                                               $51,989                    $90,175


Who did the Money go to?
For Profit                                                                     $29,280                    $31,772
Government                                                                     $22,709                    $58,403
Total Amounts Agreed to be Spent                                               $51,989                    $90,175


How Was the Money Issued?
     Claims                                                                    $28,103                    $29,365
     Property Expenses                                                          $1,048                     $2,060
     Interest on Borrowings                                                      $963                        $921
     Subsidy                                                                   $10,376                    $18,491
     Downward Reestimates                                                       $5,310                     $5,770
     Upward Reestimates                                                         $5,979                    $33,354
     Admin, Contract and Working Capital                                          $123                       $114
     Other                                                                         $87                       $100
Total on How Money Was Issued                                                  $51,989                    $90,175




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Summary of Financial Statement Audit and Management Assurances

For FY2014, one material internal control weakness was identified. The following tables provide a
summary of financial audit findings with regard to audit opinion and management assurances.

Summary of Financial Statement Audit 
 
Summary of Financial Statement Audit
Audit Opinion                                            Unmodified
Restatement                                              No

                                                          Beginning                                              Ending 
Material Weakness                                          Balance         New       Resolved     Consolidated   Balance
Failure to recognize accounts receivable appropriately                 0         1              0            0             1
Total Material Weaknesses                                              0         1              0            0             1 
 


Summary of Management Assurances 
 
Summary of Management Assurances
                       Effectiveness of Internal Control over Financial Reporting (FMFIA section 2)
Statement of Assurance                                Qualified

                                                          Beginning                                              Ending 
Material Weaknesses                                        Balance         New       Resolved     Consolidated   Balance
Failure to recognize accounts receivable appropriately                 0         1              0            0             1
Total Material Weaknesses                                              0         1              0            0             1 




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