oversight

Audit of FHA's Fiscal Years 2016 and 2015 (Restated) Financial Statements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-11-14.

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

        Federal Housing Administration,
                Washington, DC
       Fiscal Years 2016 and 2015 (Restated) Financial
                      Statements Audit




Office of Audit, Financial Audits Division   Audit Report Number: 2017-FO-0002
Washington, DC                                               November 14, 2016
To:            Edward Golding, Principal Deputy Assistant Secretary for Housing, H
                      //signed//
From:          Thomas R. McEnanly, Director, Financial Audits Division, GAF
Subject:       Audit of the Federal Housing Administration’s Financial Statements for Fiscal
               Years 2016 and 2015 (Restated)




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our audit of the Federal Housing Administration’s fiscal years
2016 and 2015 (restated) 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: 2017-FO-0002
                    Date: November 14, 2016

                    Audit of the Federal Housing Administration’s Financial Statements for
                    Fiscal Years 2016 and 2015 (Restated)



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) to audit the financial statements of the Federal Housing
Administration (FHA) annually. We audited the accompanying financial statements and notes of
FHA, as of and for the fiscal years ending September 30, 2016 and 2015 (restated), which are
composed 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 years then ended. Additionally, we
audited the restatement adjustments made by FHA in fiscal year 2016 to restate its fiscal year
2015 financial statements. We conducted these audits in accordance with U.S. generally
accepted government auditing standards.

What We Found
In our opinion, except for the effects of FHA’s general counsel refusal to sign off on certain
matters included in the management representation letter concerning all known actual or possible
FHA litigation, claims, and assessments, FHA’s fiscal years 2016 and 2015 financial statements
were presented fairly, in all material respects, in accordance with the U.S. generally accepted
accounting principles for the Federal Government. Our opinion is reported in FHA’s Fiscal Year
2016 Annual Management Report. The results of our audit of FHA’s principal financial
statements and notes for the fiscal years ending September 30, 2016 and 2015, including our
report on FHA’s internal control and test of compliance with selected provisions of laws and
regulations applicable to FHA are presented in this report. Our audit disclosed two material
weaknesses, three significant deficiencies in internal controls, and one instance of
noncompliance with applicable laws and regulations which are discussed further in the body of
this report.

What We Recommend
We recommended FHA develop, document, implement or strengthen existing system and
internal control processes, policies and procedures to support reliable financial reporting over its
receivable, liability for loan guarantee and budgetary balances. Additionally, we recommended
FHA deobligate $277 million for invalid obligations and bill the appropriate parties for the $55
million in loans receivable that were unsupported as of fiscal yearend.
Table of Contents
Independent Auditor’s Report................................................................................3

Material Weaknesses .............................................................................................10
         Finding 1: Cash Flow Modeling Errors Were Not Detected...................................... 10

         Finding 2: FHA’s Controls Over Financial Reporting Related to Budgetary
         Resources Had Weaknesses ........................................................................................... 13

Significant Deficiencies ..........................................................................................17
         Finding 3: FHA’s Controls Related to Claims Had Weaknesses .............................. 17

         Finding 4: Weaknesses in FHA’s Controls Over Model Governance....................... 22

         Finding 5: Weaknesses Were Identified in Selected FHA Information Technology
         Systems ............................................................................................................................. 24

Scope and Methodology .........................................................................................30

Followup on Prior Audits ......................................................................................32

Appendixes ..............................................................................................................33
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 33

         B. Auditee Comments and OIG’s Evaluation ............................................................. 34

         C. FHA’s Fiscal Years 2016 and 2015 Financial Statements and Notes ................... 41




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




                              Independent Auditor’s Report
Principal Deputy Assistant Secretary
Federal Housing Administration

In our audit of the fiscal years 2016 and 2015 (restated) financial statements of the Federal Housing
Administration (FHA), a component of the U.S. Department of Housing and Urban Development
(HUD), we found

      Except for the effects of the matter described in the Basis for Qualified opinion paragraph,
       the financial statements and notes were presented fairly, in all material respects, in
       accordance with U.S. generally accepted accounting principles;
      Two material weaknesses in internal control over financial reporting;
      Three significant deficiencies in internal control over financial reporting; and
      One instance of reportable noncompliance with certain provisions of laws and regulations
       that apply to FHA.
The following sections and appendixes discuss in more detail (1) our conclusions, including other
additional information; (2) management’s responsibilities; (3) our responsibilities; (4)
management’s response to findings; (5) the current status of prior-year findings; and (6) a schedule
of questioned costs.

Report on the Financial Statements
We have audited the accompanying financial statements of FHA, which are composed of the
balance sheets as of September 30, 2016 and 2015 (restated), 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.

Management’s Responsibilities
FHA management is responsible for preparing and fairly presenting these financial statements in
accordance with U.S. generally accepted accounting principles. These responsibilities include
designing, implementing, and maintaining internal control to ensure that FHA prepares and fairly
presents 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 on internal control
over financial reporting, including providing reasonable assurance that the broad control objectives
of the Federal Managers’ Financial Integrity Act (FMFIA) are met; and (3) ensuring compliance
with other applicable laws and regulations.



                                                   3
Auditor’s Responsibilities
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with U.S. generally accepted auditing standards and the
standards applicable to financial audits contained in the Government Auditing Standards, issued by
the Comptroller General of the United States. Those 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. 15-02, as amended, 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 to express 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 plan the audit, (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 15-02, as amended, requires testing, and (3) applying certain limited procedures with
respect to the required supplementary information (RSI) 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
FMFIA, 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, 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.

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 15-02, as amended, that we deemed to be
applicable to FHA’s financial statements for the fiscal years ending September 30, 2016 and 2015.
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 qualified audit opinion.



                                                   4
Basis for Qualified Opinion
During our fiscal year 2016 audit, FHA’s general counsel refused to sign off on certain matters
included in the management representation letter concerning all known actual or possible litigation,
claims, and assessments related to FHA. OIG believes that FHA’s legal counsel is responsible for
and knowledgeable about those matters which form part in FHA management’s preparation and fair
presentation of the financial statements. Due to legal counsel’s refusal to sign off on these matters,
which is a scope limitation, we lacked assurance that all known actual or possible litigation, claims
and assessments related to FHA had been properly accounted for or disclosed in the financial
statements in accordance with generally accepted accounting principles.

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified opinion
paragraph, the financial statements referred to above presented fairly, in all material respects, the
financial position of FHA as of September 30, 2016 and 2015 (restated), 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, net of 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, 2016, could
change depending on which economic outcome 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 may contain technical errors. The
loan guarantee liability is discussed further in note 6 to the financial statements. Our opinion was
not modified with respect to this matter.

As discussed in note 21 to the financial statements, the 2015 financial statements have been restated
to correct a misstatement due to improper utilization of the raw data that are being used to establish
its maintenance and operating expense rate management assumption. Our opinion is not modified
with respect to this matter.

Other Matters

Prior Period Financial Statements
In our reports dated November 16, 2015 and November 14, 2014, we expressed an opinion that
FHA’s financial statements for fiscal year 2015 and 2014 respectively fairly present the financial
position of FHA’s financial statements as of September 30, 2015 and 2014, and its net costs,
changes in net position, and budgetary resources for the years then ended in accordance with



                                                    5
generally accepted accounting principles. However, in fiscal year 2016, new information
concerning material errors affecting the 2015 and 2014 financial statements were identified. For
this reason, the opinion expressed in the 2015 and 2014 audited financial statements was no longer
appropriate because the financial statements as published at that time contained material
misstatements. Accordingly, our opinion on the audited financial statements for 2015 and 2014 is
withdrawn because they could no longer be relied upon and is replaced by the auditor’s report on
the restated financial statements.

Required Supplementary Information
U.S. generally accepted accounting principles require that FHA management’s discussion and
analysis and other RSI 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’s discussion and analysis and other RSI in accordance
with U.S. generally accepted government auditing standards, which consisted of inquiries of
management about the methods of preparing 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 assurance on this information because the limited procedures do not provide us with
sufficient evidence to express an opinion or provide assurance.

Other Information
The message from the Commissioner and the schedule of spending are presented for additional
analysis and are not a required part of the financial statements or RSI. 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 assurance on it.

Report on Internal Control Over Financial Reporting and 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 appropriate audit procedures for expressing our
opinion on the financial statements but not for 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
on 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.



                                                  6
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, other deficiencies in internal control that
might be material weaknesses or significant deficiencies may exist that were not identified. We
identified five deficiencies in internal control, described below. We consider two to be material
weaknesses and three to be significant deficiencies.

Cash Flow Modeling Errors Were Not Detected
In fiscal years 2014 and 2015, FHA’s home equity conversion mortgage (HECM) net loans
receivable and liability for loan guarantee were not reported in accordance with generally accepted
accounting principles (GAAP). Specifically, FHA did not estimate its property maintenance and
operating management assumption expense rate based on actual historical payments. This condition
occurred because FHA failed to isolate the accrued expenses in its input data in modeling its
maintenance and operating expense rate management assumption. Additionally, FHA failed to
adequately review significant changes observed in its maintenance and operating expense input data
until 2016. This failure caused an overstatement of FHA’s loan guaranty liability and an
understatement of net loans receivable and related foreclosed property line items in fiscal years
2014 and 2015. According to FHA, the overstatement of the liability account and understatement of
the asset account was $833 million and $540 million respectively in fiscal year 2015, and the
overstatement of the liability account and understatement of the asset account was $830 million and
$542 million respectively in fiscal year 2014.

FHA’s Controls Over Financial Reporting Related to Budgetary Resources Had Weaknesses
In fiscal year 2016, we identified financial reporting control deficiencies related to FHA’s
monitoring of its budgetary resources. Specifically, we found that errors were not prevented or
detected in a timely manner. These errors were related to the (1) discrepancies identified between
proprietary and budgetary accounts and (2) system-generated accounting report used for financial
reporting. Additionally, FHA’s monitoring of its unliquidated obligation balances was not effective.
We attributed these conditions to FHA’s ineffective monitoring and processing controls. As a
result, errors with an absolute amount totaling $680.2 million were not prevented or detected in a
timely manner. Finally, FHA missed the opportunity to recapture $276.5 million in invalid
obligations.

FHA’s Controls Related to Claims Had Weaknesses
In fiscal year 2016, we found that (1) the designation of two A43C (Claims) system edits, which are
used in processing claims, was inappropriate, and (2) FHA continued to have significant delays in
billing noncompliant mortgagees for partial claims for which the promissory note was not provided
within 60 days. The system edit issue occurred because FHA lacked periodic monitoring to ensure
that the designation of the error codes was appropriate. The lack of alignment between FHA’s
policy and the regulatory requirements and persistent delays in initiating the collection process for
noncompliant mortgagees was a contributing factor to FHA not claiming amounts due in a timely
manner. The system edit issue creates a significant vulnerability in FHA’s systems application
controls, and its risk of improper payments is increased because FHA relied heavily on system edits
to ensure that hundreds of thousands of single-family claim requests worth more than $15 billion in
fiscal year 2016 were processed correctly. Additionally, delays in implementing the collection



                                                   7
process for noncompliant mortgagees with unsupported partial claims caused unsupported partial
claims to remain in the loans receivable inventory longer, which is neither a good cash management
practice nor a good strategy to help improve the health of the Mutual Mortgage Insurance fund.

Weaknesses in FHA’s Controls Over Model Governance
FHA had not fully implemented an effective model risk management governance framework.
Specifically, it had not finalized or implemented policies and procedures relating to (1) model
documentation, (2) model assumption sensitivity analysis testing, and (3) data management and
validation. This condition occurred because FHA had not made establishing a model governance
framework a priority. FHA’s failure to fully implement a control mechanism, such as the model
risk management governance framework, increased the risk of inconsistencies and errors in
financial reporting occurring without being detected or prevented.

Weaknesses Were Identified in Selected FHA Information Technology Systems
Our review of the general and application controls over FHA’s Single Family Premium Collection
System – Periodic (SFPCS-P) and SAMS found (1) weaknesses in SFPCS-P, which included the
system being incorrectly classified as a low-impact system instead of a moderate-impact system; (2)
software products used by SFPCS-P were outdated; (3) the interface reconciliation from SFIS to
SFPCS-P was not sufficiently performed; (4) SFPCS-P had not participated in HUD’s disaster
recovery exercise for more than 4 years; (5) segregation of duties for SFPCS-P developers was not
effectively implemented; and (6) SFPCS-P security documents contained inaccurate information.
Additionally, we found (1) weaknesses in SAMS, which included the interface reconciliations from
SFIS to SAMS was not sufficiently performed and (2) least privilege and segregation of duties
requirements were not fully implemented for SAMS users. We completed an additional review of
the general and application controls over SFIS and the Claims system and determined the
information system control weaknesses previously identified in SFIS and Claims were being
addressed. However, we found (1) weaknesses in Claims, which included inconsistencies in error
code and (2) the configuration information and the history of system changes was not retained for
more than 5 years. Furthermore, we found (1) weaknesses in both the SFIS and Claims systems,
which included application and user access controls were not effectively implemented or adequately
managed and (2) management did not adequately implement effective application configuration
management. We also found HUD Application Release Tracking System (HARTS) documents for
FHA applications were not processed and maintained properly. These conditions occurred because
some application controls were not sufficient. As a result, the appropriate confidentiality, integrity,
and availability of critical information may have been negatively impacted. In addition, the
information used to provide input to the FHA financial statements could have been adversely
affected.

Report on Compliance
As part of obtaining reasonable assurance about whether FHA’s financial statements were 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 determining
financial statement amounts. However, providing an opinion on compliance with those provisions
was not an objective of our audit, and, accordingly, we do not express such an opinion. The results
of our tests disclosed one instance of noncompliance that would be reportable under U.S. generally
accepted government auditing standards or OMB audit guidance.



                                                   8
    of our tests disclosed one instance of noncompliance that would be reportable under U.S. generally
    accepted government auditing standards or 0MB audit guidance.

           The audit’ of HIJD’s fiscal year 2015 compliance with the Improper Payments Elimination
            and Recovery Act of 2010 (IPERA)
                                        2 found that FHA’s annual risk assessment process did
           not fully comply with 0MB guidance. Although FHA performed a risk assessment of its
           programs, it did not conduct its annual risk assessment activities in accordance with 0MB
           guidance. Specifically, it did not assess all low-risk programs on a 3-year cycle or consider
           all of the nine required risk factors as required by section 3(a)(3)(B) of IPERA. This
           occurred because Fl-IA (1) established a threshold, which excluded some programs to be
           subject to risk assessment process and (2) did not maintain evidence to support that they had
           considered all required nine required risk factors. In addition, the audit found that FHA
           improperly assessed the risk of the single family claims program as medium, based on
           qualitative instead of a quantitative assessment. FIIA’s non-compliance with requirements
           for risk assessments may result in programs that are susceptible to significant improper
           payments not being identified for further review and prevent FHA from identif’ing
           improper payments and taking the necessary steps to address and recover significant
           improper payments.



This report is intended for the information and use of the management of Fl-IA, 0MB, the U.S.
Government Accountability Office, and Congress and is not intended to he 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 is 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 Fl-IA’ 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 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 Fl-IA management in a separate management letter.



Randy W. McGinnis
Assistant Inspector General for Audit
November 14, 2016




     The IPERA audit conducted by OIG in fiscal year 2016 was for fiscal year 2015 IPERA compliance.
2
     Audit Report 2016-FO-0005, Compliance With the Improper Payments Elimination and Recovery Act, May 13,
     2016. As a component entity, FHA’s programs are rolled up in HUD’s agencywide JPERA compliance
     determination.



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Material Weaknesses

Finding 1: Cash Flow Modeling Errors Were Not Detected
In fiscal years 2014 and 2015, FHA’s home equity conversion mortgage (HECM) net loans
receivable and liability for loan guarantee were not reported in accordance with generally
accepted accounting principles (GAAP). Specifically, FHA did not estimate its property
maintenance and operating management assumption expense rate based on actual historical
payments. This condition occurred because FHA failed to isolate the accrued expenses in its
input data in modeling its maintenance and operating expense rate management assumption.
Additionally, it failed to adequately review significant changes observed in its maintenance and
operating expense input data until 2016. This failure caused an overstatement of FHA’s loan
guaranty liability and an understatement of net loans receivable and related foreclosed property
line items in fiscal years 2014 and 2015. According to FHA, the overstatement of the liability
account and understatement of the asset account was $833 million and $540 million respectively
in fiscal year 2015, and the overstatement of the liability account and understatement of the asset
account was $830 million and $542 million respectively in fiscal year 2014.
Accrued Maintenance and Operating Expenses Were Erroneously Included in Prior Years’
Cash Flow Models
Accrued costs from the period of note assignment to conveyance were erroneously included in
FHA’s default cost estimates for fiscal years 2014 and 2015. In accordance with Statement of
Federal Financial Accounting Standards No. 2, paragraph 36, the agency’s default cost estimates
must be based on “actual” historical loan performance experience. To document actual
experience, a database should be maintained to provide historical information on actual
payments, prepayments, late payments, defaults, recoveries, and amounts written off.
Based on our audit, FHA failed to comply with GAAP with regard to the property maintenance
and operating expense cash flows. The property maintenance and operating expense rate is one
of the assumptions used in the HECM cash flow model to determine the liability for loan
guarantee and recovery on assets. It accounts for maintenance expenses associated with HECM
conveyed properties. This rate is based on management assumptions that utilized FHA’s
historical data. The data used to calculate the expense rate are extracted from the Single Family
Asset Management System (SAMS), which is the management and accounting system for HUD-
owned single-family properties. The contractor that maintains SAMS provides the data to
FHA’s cash flow modeling team, which uses the data to calculate the maintenance and operating
expense rate. This expense rate is used as an input to the HECM cash flow model.
In fiscal years 2014 and 2015, FHA failed to realize that the data used to calculate the
maintenance and operating management assumption expense rate contained inappropriate data.
Specifically, the inappropriate data that became part of the expense rate included accrued
interest, accrued servicing fees, and accrued mortgage insurance premiums. While these accrued
costs are considered expenses, they should not be used to calculate the liability for loan
guarantee since they do not represent cash outflows. As noted earlier, adding accrued expenses




                                                 10
(that is, noncash outflows) to the maintenance and operating management assumption rate was
not consistent with GAAP.
FHA Overlooked the Increase in the Maintenance and Operating Expense Rate
FHA overlooked the significant changes in its maintenance and operating expense input data in
2014 and 2015. In fiscal year 2014, FHA noticed that the maintenance and operating expense
rate had significantly increased. FHA believed that the expense rate would return to a level more
aligned with what had been observed historically so no action was taken, and FHA used the
inflated rate in the 2014 cash flow model. In fiscal year 2015, FHA noticed that the expense rate
was still high, chose not to conduct an analysis to determine the reason behind the increase, and
used the inflated rate again. In fiscal year 2016, FHA, working with the SAMS contractor,
determined that increasing foreclosure costs were the driving force behind the increased
maintenance and operating expense rate. For this reason, in August 2016, FHA decided to
exclude the foreclosure costs in cash flow estimates. At that time, FHA did not know that the
foreclosure costs were all accrued expenses. When we questioned FHA’s decision to exclude
foreclosure costs from the maintenance and operating expense rate in October 2016, FHA was
unable to provide an immediate explanation. FHA did not conduct a thorough analysis of the
issue until we questioned the methodology change in October 2016. In its analysis, FHA
determined that the foreclosure costs were made up of accrued expenses. Additionally, FHA
found that the SAMS contractor combined the foreclosure costs with the other costs in the data
file that was provided to FHA’s cash flow modeling team, which inflated the maintenance and
operating expense rate management assumption in prior years.
FHA officials were not able to explain why the SAMS contractor started combining the costs in
fiscal year 2014 when it had not done so in prior years or why they had not performed an
analysis in 2014 and 2015 when they noted that the maintenance and operating expense rate had
begun to increase. Had FHA conducted an analysis before fiscal year 2016, it would have
realized that the rate increased due to the erroneous inclusion of accrued expenses.
Overall, there was a control deficiency in financial reporting. FHA correctly excluded the
accrued expenses from the maintenance and operating expense rate in fiscal year 2016.
However, due to the materiality of the misstatements affecting previously issued financial
statements, an accounting adjustment would be needed to correct them.
Conclusion
FHA needs to improve controls over its cash flow modeling processes. When unusual trends are
observed, FHA should conduct an analysis in a timely manner to determine whether the trends
are explainable or based on accurate data or whether errors have occurred. Enhancing modeling
controls will ensure compliance with GAAP and allow FHA to produce financial statements that
are free of material misstatements.
Recommendations
We recommend that the Acting Director of the Office of Evaluation
       1A.    Develop and implement a process to (1) research inconsistent data in a timely
              manner to prevent errors when calculating the loan guaranty liability and (2)
              ensure that only cash transactions are included and accrued expenses are not
              included as part of the maintenance and operating expense rate.



                                                11
We recommend that the Acting FHA Comptroller
      1B.    Restate the fiscal year 2015 financial statements to correct the impact of using the
             incorrect maintenance and operating expense rate in the HECM cash flow model.
      1C.    Determine the impact of using the incorrect maintenance and operating expense
             rate on the fiscal year 2014 financial statements and if material, restate the fiscal
             year 2014 financial statements to correct the impact of the error.




                                                12
Finding 2: FHA’s Controls Over Financial Reporting Related to
Budgetary Resources Had Weaknesses
In fiscal year 2016, we identified financial reporting control deficiencies related to FHA’s
monitoring of its budgetary resources. Specifically, we found that errors were not prevented or
detected in a timely manner. These errors were related to the (1) discrepancies identified
between proprietary and budgetary accounts and (2) system-generated accounting report used for
financial reporting. Additionally, FHA’s monitoring of its unliquidated obligation balances was
not effective. We attributed these conditions to FHA’s ineffective monitoring and processing
controls. As a result, errors with an absolute3 amount totaling $680.2 million were not prevented
or detected in a timely manner. Finally, FHA missed the opportunity to recapture $276.5 million
in invalid obligations.
Proprietary and Budgetary Tie-Point Variances Were Not Detected
In fiscal year 2016, we identified accounting errors in FHA’s March 30, 2016, unpaid expended
authority account balance. The total absolute value and net value of these accounting errors were
$245.3 million and $166.2 million, respectively. These errors were the result of FHA’s failure to
detect significant variances between proprietary accounts payable and the associated budgetary
accounts at the fund level. During our audit of unpaid obligations, we found discrepancies
between the accounts payable and unpaid expended authority for three of FHA’s fund accounts.
Variances in tie-points can be an indicator that accounting transactions were not properly posted.
After we brought this issue to FHA’s attention, FHA conducted research and concluded that the
variances were the result of reporting errors in the budgetary accounts. According to FHA, most
of these errors occurred when FHA transitioned to its new accounting system.
FHA is responsible for establishing and maintaining internal control to ensure the reliability of
financial reporting. While FHA has controls to identify financial reporting errors, these controls
were not effectively designed to detect variances between proprietary and budgetary accounts at
the fund level across all its accounting areas. These financial reporting errors caused the ending
unpaid obligations balance on the statement of budgetary resources to be overstated by $166.2
million. Additionally, as some errors were carried forward from prior years, the prior years’
beginning and ending unpaid obligation balances were also overstated. According to FHA
officials, the agency planned to adjust the statement of budgetary resources for fiscal year 2016
to correct the errors.
Individual Undelivered Order Balances for Management and Marketing Contracts Were
Inaccurate
In addition to the tie-point errors noted above, FHA’s individual contract undelivered order4
balances5 for single-family management and marketing6 contracts were also not accurate. As of
August 2016, the total absolute amount of all undelivered order errors for the 131 contracts in

3
    The absolute amount is the total of the understatements and overstatements without netting the two.
4
    The undelivered order balance is the difference between the obligated amount and the expenditure amount.
5
    Undelivered orders and accounts payable are the components of unpaid obligations listed on the Statement of
    Budgetary Resources.
6
    Our review focused on the management and marketing contracts. However, FHA determined that the
    undelivered order balances for its closing agent contracts were also inaccurate.




                                                         13
question, out of 174, was $434.9 million and the net amount was $687,716. Additionally, the
ending undelivered order account balance for the 174 management and marketing contracts for
the same period was $1.6 billion.7 Our analysis is provided below.

         For 131 of 174 contracts, the undelivered order balances on the ACOBHD01 report,8
          which is used for financial reporting purposes, did not agree with the T330 contract
          period report.9 We found discrepancies in the expenditure amounts for all 131 contacts
          and discrepancies in the obligation amounts for 41 of the 131 contracts. Some obligation
          and expenditure amounts on the ACOBHD01 report were overstated compared to the
          T330 contract period report, while others were understated. While the dollar impact of
          the errors on a net basis may not be significant due to offsetting effects of the
          overstatements and understatements, we found that the errors were pervasive, affecting
          75.3 percent of the contracts.

         According to FHA, the ACOBHD01 report contained errors because the report was not
          programmed to pull the correct information from the appropriate tables in the Single
          Family Asset Management System (SAMS), which is the management and accounting
          system for HUD-owned single-family property.

         For years, FHA used the ACOBHD01 report primarily for financial reporting. However,
          as noted earlier, this report was unreliable. To address this issue, in August 2016, FHA
          informed us that it had found another table in SAMS (that is, T330 contract period
          report), which contained the accurate undelivered order balances for management and
          marketing contracts.
Weaknesses in Unliquidated Balance Review Process Were Identified
FHA’s unliquidated balance review process had weaknesses.10 Specifically, funds were not
always deobligated on time for some completed contracts, and program offices were not
responsive to the Deputy Assistant Secretary of Finance and Budget’s request to identify
contracts and projects with invalid obligations.11 HUD Handbook 1830.2, Administrative
Control of Funds: Policies and Procedures, requires FHA to perform an annual review of




7
     As of August 2016, the ending undelivered order account balance for the closing agent contracts was $94.4
     million.
8
     The ACOBHD01 report refers to the M&M Disbursements with Obligation – Cumulative Summary Report.
     This report is used to support the balances in the general ledger.
9
     The T330 contract period report refers to the procurement report that is extracted from the T330 table in the
     Single family Property Management and Accounting System. FHA asserted that the T330 report contract period
     report was accurate. Both the ACOBHD01 and T330 reports come from SAMS, but come from different tables
     within SAMS.
10
     The unliquidated balance is the difference between the obligated amount and the expenditure amount. This term
     is synonymous with the term undelivered order. HUD’s guidance refers to the process of identifying invalid
     obligations as the unliquidated balances review process and not the undelivered order review process. Therefore,
     in this subsection, we used the term unliquidated balances as opposed to undelivered orders.
11
     Invalid obligations are remaining obligating balances that are available for recapture because the contracts are
     complete.




                                                          14
unliquidated obligations to accurately determine the status of its budgetary resources, which is an
important element of funds control.

         Funds not deobligated for completed contracts. FHA failed to deobligate $276.5 million
          in invalid obligations for 193 contracts. In fiscal year 2015, although FHA had already
          identified 134 completed single-family property management and asset sales contracts,
          these funds remained obligated in fiscal year 2016. The unliquidated balance for these
          contracts totaled $234.5 million as of May 2016.12 Further, FHA identified 59 additional
          single-family property management contracts with invalid obligations in fiscal year 2016.
          As of September 30, 2016, the remaining amount to be deobligated for these additional
          contracts was $42 million. The Financial Analysis and Controls Division, which is
          responsible for recording deobligations for the single-family property management
          contracts, stated that deobligations were not recorded for the single-family property
          management contracts because it did not receive documentation showing that the
          contracts had been closed out.

         Contracts with invalid obligations not identified clearly and in a timely manner.
          Although program offices were required to respond to the annual review memorandums
          by a specified date, some program offices did not respond in a timely manner. For
          example, the program offices had to respond to the 2016 annual review memorandums by
          June 15, 2016, but the multifamily program office did not respond to the multifamily
          property management contracts annual review memorandum until August 2016. The
          Financial Analysis and Controls Division also informed us that the multifamily program
          office had not responded to prior years’ annual review memorandum for multifamily
          property contracts. Further, the program offices’ responses did not always clearly
          identify which contracts or projects had invalid obligations.
Conclusion
FHA needs to improve its controls over financial reporting to ensure that it produces financial
statements that are free of material misstatements. FHA has developed and implemented
procedures to identify financial reporting errors, but these procedures need to be strengthen to
detect variances between its proprietary and budgetary accounts at the fund level for all
accounting areas. Additionally, FHA needs to take measures to ensure that it relies on accurate
data to report the undelivered order balances for management and marketing contracts. Further,
more robust procedures are needed to ensure that invalid obligations are identified and
deobligated in a timely manner so that funds can be put to better use.
Recommendations
We recommend that the Acting FHA Comptroller
          2A.     Establish and implement effective controls to detect variances between
                  proprietary and budgetary accounts at the fund level across all accounting areas.




12
     As of September 30, 2016, FHA reported that $195.4 million of the $234.5 million had been deobligated.



                                                         15
          2B.      Determine the adjustments needed to correct the variances between accounts
                   payable and unpaid expended authority for fiscal years 2015 and 2016 and post
                   the adjusting entries accordingly.
          2C.      Establish and implement policies and procedures to ensure that accurate data are
                   used to report the undelivered order balances for management and marketing
                   contracts.
          2D.      Ensure that the $276.5 million identified as invalid obligations in fiscal years
                   2015 and 2016 are deobligated as appropriate.13
          2E.      Request that the Principal Deputy Assistant Secretary for Housing establish and
                   implement more robust internal control policies and procedures for the annual
                   review process to include (1) a complete narrative of the deobligation process for
                   all obligation types, which specifies the offices responsible for deobligating funds,
                   the required documentation, and the timeframes for providing this documentation,
                   and (b) a process for addressing untimely or unclear responses and presenting the
                   issues to management for resolution.




13
     The final deobligation amount may be less than $276.5 million if final invoices need to be paid for the contracts.



                                                            16
Significant Deficiencies

Finding 3: FHA’s Controls Related to Claims Had Weaknesses
In fiscal year 2016, we found that (1) the designation of two A43C (Claims) system edits,14
which are used in processing claims, was inappropriate, and (2) FHA continued to have
significant delays in billing noncompliant mortgagees for partial claims for which the promissory
note was not provided within 60 days. The system edit issue occurred because FHA lacked
periodic monitoring to ensure that the designation of the error codes was appropriate. The lack
of alignment between FHA’s policy and the regulatory requirements and persistent delays in
initiating the collection process for noncompliant mortgagees was a contributing factor to FHA’s
not claiming amounts due in a timely manner.15 The system edit issue creates a significant
vulnerability in FHA’s systems application controls, and its risk of improper payments is
increased because FHA relied heavily on system edits to ensure that hundreds of thousands of
single-family claim requests worth more than $15 billion in fiscal year 2016 were processed
correctly. Additionally, delays in implementing the collection process for noncompliant
mortgagees with unsupported partial claims caused unsupported partial claims to remain in the
loans receivable inventory longer, which is neither a good cash management practice nor a good
strategy to help improve the health of the Mutual Mortgage Insurance fund.16
Systems Edits for Two Error Codes Were Not Appropriately Changed
Our audit of FHA’s list of soft error codes as of September 29, 2016, found two soft error codes
that should have been designated as hard or fatal error codes. We questioned the designation of
the error codes as soft based on our knowledge of the program. Claim requests with hard or fatal
errors are placed into suspense, while claim requests with only soft errors are processed and paid
without suspension or additional review. If these two error codes had been classified as hard or
fatal error codes, claim requests with the two error codes would have been placed into suspense.
FHA staff acknowledged that the two error codes identified should have been hard errors given
their importance in detecting potential improper claims.17 According to FHA staff, the two error
codes were established as soft error codes in 1999. We attributed this condition to a lack of
periodic monitoring to assess the appropriateness of system edit code designations by the
appropriate level of management. FHA management’s failure to change soft edits to hard edits
when appropriate increases FHA’s risk of improper payments since claim requests with soft error
codes are processed and approved for payment without suspension or additional review.



14
     System edits are key controls in processing claims in the Claims system.
15
     As of September 30, 2016, there were 2,798 partial claims with a total claim amount of $76 million unsupported
     by promissory notes more than 60 days after the date of execution. The issue continued because of changes
     made to the billing process during fiscal year 2016 and the decision to continue to delay the billing until 6
     months after the date of execution instead of 60 days.
16
     Collecting the amounts for unsupported partial claims in a timely manner improves the status of the Mutual
     Mortgage Insurance fund by restoring funds paid out as loss mitigation claims.
17
     FHA staff stated in October 2016 that they would change the status of the two error codes in the A43C system
     from soft to hard.



                                                          17
The Prior Year’s Audit Finding Was Not Resolved
We reported in the fiscal year 2014 audit report that 57,164 partial claims, representing $1.5
billion of the gross loans receivable balance reported on FHA’s balance sheet as of September
30, 2014, were not supported with second mortgage notes more than 60 days after the date of
execution. By the end of fiscal year 2015, the number of partial claims had decreased to 12,057
partial claims, representing $376 million of the gross loans receivable balance. As of September
30, 2016, there were 2,798 partial claims unsupported by second mortgage notes more than 60
days after the date of execution with a total claim amount of $76 million. In our review for fiscal
year 2016, we determined that none of the four causes for the finding reported in the fiscal year
2015 audit report under “Finding 1: Controls To Prevent Misclassification of the Receivables
Had Not Been Fully Implemented” had been fully addressed. One cause related to the untimely
document processing by FHA’s loan servicing contractor continued to be a problem in fiscal year
2016, but FHA planned to resolve the issue by procuring three new contracts in place of a single
contract in fiscal year 2017. The other three causes, which were related to the timely billing of
and collection from noncompliant mortgagees, also continued to be problems in fiscal year 2016.
The two factors that prevented further reductions in the number of unsupported partial claims
were as follows.

        Alignment of FHA’s policy and regulatory requirements with FHA’s billing and
         collection process. In response to our audit recommendations in fiscal year 2014, FHA
         developed a number of policies and procedures with the goal of identifying partial claims
         with promissory notes missing beyond their prescribed submission period and
         appropriately billing noncompliant mortgagees for the amount of claims paid plus the
         incentive fee for their failure to submit the required documentation to FHA. According
         to the description of the process provided by FHA in fiscal year 2016, the first
         reimbursement letter is not sent until 6 months after execution of the partial claim. Based
         on FHA’s policy under Mortgagee Letter 2015-1818 and the regulatory requirements, the
         first reimbursement letter should be sent after 60 days if the promissory note is not
         provided within 60 days of execution. The table below illustrates the lack of alignment
         between FHA’s policy and the regulatory requirements and FHA’s billing and collection
         process as implemented. Starting the billing and collection process earlier may increase
         mortgagee compliance with the 60-day deadline to submit the promissory note.

         Lack of controls to ensure timely referral of loans receivable with missing notes for
         collection. As of September 30, 2016, FHA had identified 12 separate rounds of partial
         claims with claim dates through March 31, 2016, and had initiated the notification letter
         process for 10 rounds with claim dates through January 31, 2016. However, FHA had
         referred only round 1 and round 2 partial claims, partial claims with claim dates before
         November 30, 2014, for debt collection. The debt collection process was initiated only
         for round 1, partial claims with claim dates on or before February 28, 2014. We
         identified two factors that led to delays in implementing the collection process for partial
         claims with missing documents in fiscal year 2016. One factor was that based on its


18
     Mortgagee Letter 2015-18 has been superseded by Housing Handbook 4000.1 FHA Single Family Housing
     Policy Handbook, which was effective September 30, 2016.




                                                      18
          experience with the round 1 partial claims, FHA made changes to its billing and
          collection process in fiscal year 2016. The new process, which had not been fully
          implemented as of the end of fiscal year 2016, would be applied to round 2 partial claims
          and later rounds. We noted that under the new process, debts would be referred to the
          Mortgagee Review Board;19 however, the new process did not establish a timeframe for
          collection of debt from noncompliant mortgagees. See the table below for the
          comparison of the old and new procedures. The other factor was that an extension letter
          was sent at the request of the HUD Office of General Counsel and the FHA
          Commissioner following the issuance of the two reimbursement letters. The extension
          letter delayed the referral of rounds 2 through 8 noncompliant mortgagees under the new
          process. According to FHA staff, the extension letter was issued to provide notification
          to the holding mortgagees that the loans would be referred to the Mortgagee Review
          Board instead of the Financial Operations Center in Albany. Because of the delays
          embedded in the process, we determined that there was a lack of controls to ensure timely
          referral of loans receivable with missing notes for collection.
                   Differences between regulations and procedures implemented
                                            Procedures implemented                 New procedures
                  Regulations and
     Months                                 (effective before October            implemented (effective
                  mortgagee letter
                                                       2016)                        October 2016)
     Months
     1 and 2
                  No action required            No action performed                No action performed
     Months
       3-6
                                                No action performed                No action performed
     Month 7                                    No action performed                No action performed
                                                                                 Reimbursement request
                                          Reimbursement request letter 1        letter 1 sent to mortgagee
     Month 8
                                          sent to mortgagee by contractor         by National Servicing
                                                                                           Center
                                                                                 Reimbursement request
                                          Reimbursement request letter 2        letter 2 sent to mortgagee
     Month 9
                 Mortgagee required       sent to mortgagee by contractor         by National Servicing
                 to reimburse FHA                                                          Center
                                                                                     Debts referred to
                                              Request for administrative        Mortgagee Review Board
                                           offset letter and package issued
     Month                                                                        by National Servicing
                                          to Financial Operations Center -
      10                                                                       Center - Notice of violation
                                             Financial Operations Center
                                           initiates debt collection process   sent by Mortgagee Review
                                                                                   Board to mortgagee
                                            Financial Operations Center
     Month                                                                      Mortgagee Review Board
                                             continues debt collection
      11                                                                            process begins20
                                                      process

19
     FHA staff made the first referral to the Mortgagee Review Board on October 18, 2016.
20
     Under the Mortgagee Review Board process, mortgagees may request a hearing before an administrative law
     judge if they disagree with the notice of violation.




                                                        19
We determined that of the 2,798 partial claims unsupported by second mortgage notes more than
60 days after the date of execution, 2,167, with a total claim amount of $66 million on the
September 2016 missing documents report, were collectible.21 Of the 2,167 collectible partial
claims, we identified 1,760 partial claims with a total claim amount of $55.3 million not included
in our previous estimate of unsupported partial claims at the end of fiscal year 2015 that should
be billed. FHA had initiated the billing process for only 620 of the partial claims, with a total
claim amount of $17 million, as of September 30, 2016. The remaining 1,547 partial claims,
with a total claim amount of $49 million, were awaiting action by FHA because FHA staff waits
30 days following the six-month period before they send the first reimbursement letter. Of the
1,547 partial claims, 1,233 partial claims, with a total claim amount of $40 million, were
between 60 days and 6 months old.
Conclusion
Weaknesses in FHA’s controls related to claims were identified in fiscal year 2016. Two soft
error codes in the Claims system were identified that should have been hard or fatal error codes
due to a lack of monitoring controls to ensure that the designation of these two system edits as
soft error codes was appropriate. Since claim requests with soft error codes are processed and
approved for payment without suspension or additional review, FHA was vulnerable to errors
and its risk of making improper payments was increased. Our review of the September 2016
missing documents report found that 2,167 collectible partial claims, with a total claim amount
of $66 million, were missing notes after 60 days. Most of these partial claims were between 60
days and 6 months old. Contrary to its policy under Mortgagee Letter 2015-18 and its
regulations, which require that the promissory note be provided within 60 days of execution,
FHA did not send the first reimbursement letter until 6 months after execution of the partial
claim. FHA’s billing and collection process reduced the incentive for mortgagees to submit the
promissory note within 60 days as required. The lack of alignment between FHA’s stated policy,
which reflects the regulatory requirements, and FHA’s billing process and delays in initiating the
collection process for noncompliant mortgagees resulted in FHA’s not claiming amounts due in a
timely manner. Collecting the amounts for unsupported partial claims in a timely manner
improves the status of the Mutual Mortgage Insurance fund by restoring funds paid out as loss
mitigation claims. Additionally, delays in implementing the collection process caused
unsupported partial claims to remain in the loans receivable inventory longer.
Recommendations
We recommend that the Acting FHA Comptroller
          3A.     Strengthen the process for making system edit changes in the Claims system by
                  ensuring that appropriate steps are taken to evaluate the appropriateness of the
                  status of error codes when they are established or changed.




21
     Some partial claims were uncollectible because they were subject to settlement agreements between FHA and
     various mortgagees.



                                                         20
We recommend that the Office of Single Family Housing
      3B.    Revise FHA’s internal control procedures to realign with its regulatory
             requirements so that the first reimbursement letter is sent immediately after 60
             days instead of after 6 months and establish a timeframe for collection once
             partial claims are referred to the Mortgagee Review Board.
      3C.    Request payment in the amount of the claims paid, plus incentive, from
             mortgagees that have not provided the original note within the prescribed deadline
             for the $55.3 million.




                                               21
Finding 4: Weaknesses in FHA’s Controls Over Model Governance
FHA had not fully implemented an effective model risk management governance framework.
Specifically, it had not finalized or implemented policies and procedures relating to (1) model
documentation, (2) model assumption sensitivity analysis testing, and (3) data management and
validation. This condition occurred because FHA had not made establishing a model governance
framework a priority. FHA’s failure to fully implement a control mechanism, such as the model
risk management governance framework, increased the risk of inconsistencies and errors in
financial reporting occurring without being detected or prevented.
Policies and Procedures for Model Documentation Were Not Finalized
FHA policies and procedures for its entitywide governance of its cash flow model documentation
were not finalized. For example, assumption documentation for the single-family and HECM
programs were not consolidated into a single document. Instead, the assumption documents
were included in several documents and were in various formats, including PowerPoint
presentations, Excel spreadsheets, and Word documents. All of the assumption documentation,
including the sign-off documents, should be consolidated into a single document, which includes
the values of the assumptions calculated for fiscal year 2016. Not maintaining documentation in
a single document increased the risk that documentation would be misplaced. The assumption
documentation for the multifamily program was maintained in a single document. In accordance
with the U.S. Government Accountability Office’s Standards for Internal Control in the Federal
Government, section 12.03, FHA is responsible for creating policy documentation in the
appropriate level of detail to allow management to effectively monitor the control activity.
Additionally, FHA did not have a finalized model risk rating policy that included a model
scoring or prioritization process. Implementing a model risk policy will enable FHA to quantify
the relative riskiness of each of its cash flow models.
Polices and Policies for Performing Sensitivity Analyses Did Not Exist
FHA had not defined the requirements for performing a sensitivity analysis on its model
assumptions. Federal Accounting Standards Advisory Board Technical Release 6 suggests that
all assumptions should be tested at least once to identify which assumptions have the greatest
impact on the liability for loan guarantee estimate. In fiscal year 2016, FHA performed a
sensitivity analysis for only some assumptions. Specifically, it did not perform a sensitivity
analysis on the (1) timing and holding period assumptions for the multifamily program; (2) real
estate-owned loss assumption, conditional claim rate, and conditional prepayment rate in the
mutual mortgage insurance cash flow model for the single-family program; and (3) the
acquisition cost assumption and property maintenance expense for the HECM program. Our
review found that FHA also did not perform a sensitivity analysis on these assumptions in fiscal
year 2015. FHA did not perform a sensitivity analysis on all of the programs’ model
assumptions in fiscal year 2015 because it was not made a priority. In FY 2016, we determined
that the multifamily cash flow modeling team misinterpreted Technical Release 6 and did not
believe a sensitivity analysis needed to be performed on all assumptions. Without performing a
sensitivity analysis on all model assumptions, FHA cannot know which assumptions have the
greatest impact on the liability for loan guarantee estimates.




                                                22
Policies and Procedures Were Not Established for Data Management and Validation
FHA had not established policies and procedures for data management and validation. For
example, there were no policies and procedures to address the steps to be taken when
inconsistent data are noted. In fiscal years 2014 and 2015, accrued expenses were erroneously
included as part of the HECM maintenance and operating expense rate, and FHA failed to detect
this error in a timely manner, although it noted that the expense rate had significantly increased.
(Finding 1 discusses the details of this error.) Had policies and procedures been in place, FHA
may have been able to detect the error earlier.
FHA also did not have documented policies and procedures for verifying the accuracy of data
inputs. Data inputs can contain errors, while model components are error free, resulting in
erroneous model output. Therefore, it is important that FHA has documented data validation
procedures that are designed to minimize the likelihood of data errors.
Conclusion
FHA needs to improve its governance over its cash flow models. Finalizing and implementing
policies and procedures are necessary to ensure that errors do not occur in the agency’s subsidy
estimation and reestimation process.
Recommendations
We recommend that the Acting Director of the Office of Evaluation
       4A.     Make it a priority to fully implement a model risk governance structure, which
               includes finalizing and implementing policies and procedures.




                                                 23
Finding 5: Weaknesses Were Identified in Selected FHA
Information Technology Systems
We reviewed the general and application controls over FHA’s Single Family Premium
Collection System – Periodic (SFPCS-P)22 and SAMS.23 We found weaknesses in the SFPCS-P
information system relating to system classification, outdated software products, interface
reconciliations, segregation of duties, configuration management, and inaccurate documents. We
also found weaknesses in the SAMS information system related to interface reconciliations and
segregation of duties. These conditions occurred because some application controls were not
sufficient. As a result, the appropriate confidentiality, integrity, and availability of critical
information may have been negatively impacted. In addition, the information used to provide
input to the FHA financial statements could have been adversely affected.
Based on our review of general and application controls over SFPCS-P and SAMS, the following
deficiencies were identified in 2016.
The Billing and Collection System for FHA Monthly Mortgage Insurance Payments Was
Classified Incorrectly
The billing and collection system for FHA monthly mortgage insurance payments was classified
incorrectly. Specifically, SFPCS-P was classified as a low-impact system instead of a moderate-
impact system. In addition, according to SFPCS-P system documentation, the system was not
classified as a mission-critical system since insurance premium collection was not considered a
medium-impact program. This condition occurred because SFPCS-P did not adequately consider
the impact on organizational assets. In addition, SFPCS-P did not sufficiently consider
interconnected systems when determining mission-critical system status. Federal agencies
should classify their non-national security systems according to impact levels for confidentiality,
integrity, and availability. When a system is not properly classified, appropriate security controls
are not implemented, which could result in disruption of access to our use of information that
could have a serious adverse effect on organizational operations, organizational assets, or
individuals. SFPCS-P collected and processed approximately $8 billion in monthly mortgage
insurance premiums between October 1, 2015, and August 31, 2016.
Some Software Products Used By SFPCS-P Were Outdated
Some software products used by SFPCS-P were outdated. Specifically, (1) 9 software products
were at least 2 generations behind the latest version; (2) 5 software products had reached “end of
service,” and 1 software product had reached “end of life”; (3) 1 software product’s
vulnerabilities with Common Vulnerabilities and Exposures scores of 7.5 and 9.7 had been
known since November 24, 2015, but a plan of action and milestones was not created until April
16, 2016; and (4) 38 software products used by SFPCS-P were not approved by the HUD
Configuration Change Management Board (CCMB) to be considered as a departmental standard

22
     SFPCS-P is an ongoing, fully operational financial system that supports HUD’s Single Family Insurance
     Operations Division. SFPCS-P provides an automated system for the billing and collection of monthly premium
     payments (and any assessed late or interest charges) at the case level and an accounting of all transactions related
     to the billing, collection, and application of monthly premiums.
23
     SAMS records all data associated with the daily maintenance of case records. SAMS tracks and reports on HUD
     homes for sale and processes all financial transactions related to the repair, lease, listing, and sale, including
     payments for contractor services, taxes, and homeowner association and condominium fees



                                                             24
and implemented for use by SFPCS-P. As a result, the installed software products that were at
least two generations behind could leave HUD vulnerable in ways that are publically known and
posted on the Internet. In addition, by not consistently following its CCMB approval process
and ensuring that all software products are approved for testing and use, HUD increased its risk
that products would not meet the needs of its users or the intended purpose of the software and
that resources would be unnecessarily expended.
Some Interface Reconciliations Were Not Sufficient
Some interface reconciliations of the data between the source system and some of the destination
systems were not sufficiently performed; specifically, the interface from SFIS to SFPCS-P and
the interface from SFIS to SAMS. This condition occurred because SFIS did not include control
totals in the interface file transmitted to SFPCS-P and SAMS. When the system interface was
designed in 1999, control totals were not included among the requirements. Without sufficient
monitoring and reconciliation, there was no reasonable assurance that transactions would be
accurately processed through the interface and that no transactions would be added, lost, or
altered during processing.
HUD Application Release Tracking System Documents for FHA Applications Had Not
Been Processed and Maintained Properly
HUD Application Release Tracking System (HARTS) documents for FHA applications were not
processed and maintained properly. Specifically, (1) the contents of completed FHA
applications release documents within HARTS were overwritten by newer release documents;
(2) a HARTS release document creator was unable to continue editing a document he created
after the document was viewed by another person but before the document was submitted to
begin the concurrence process; (3) HARTS was not capable of capturing the correct release date,
and users had been using a manual workaround to ensure that the correct release date was
recorded; and (4) when HARTS was recently converted to a different platform, the retention
period for release documents was reduced, and the SFPCS-P staff was not informed of the
change. This condition occurred because (1) the conversion of HARTS was poorly
implemented, (2) the Office of the Chief Information Officer (OCIO) considered HARTS to be
an internal OCIO tool used to track the progress of release testing through the test center, and (3)
HARTS was considered to be under general infrastructure development and maintenance, which
does not apply to system data or content. FHA management would be severely hampered when
conducting research into the purpose of recent or long-term changes and updates to the system if
FHA were to lose the history of releases for its various applications. Because HARTS contains
all data concerning the release history of applications, it would be redundant and an inefficient
use of resources for program offices to manage and maintain their own applications’ release
history in a separate repository. Funding would also be unnecessarily diverted to create
redundancy when it could be put to better use to support the more than 44 million mortgages that
FHA has insured since 1934.
SFPCS-P Had Not Participated in HUD’s Disaster Recovery Exercise for More Than 4
Years
SFPCS-P, which is classified as a non-mission-critical application, had not participated in
HUD’s disaster recovery exercises for fiscal years 2013 through 2016. This condition occurred
because disaster recovery testing is no longer completed by the program area and is an inherited
control from OCIO. In addition, OCIO stated that non-mission-critical applications participated



                                                  25
in a disaster recovery exercise only under specific circumstances. Ten non-mission-critical
applications were randomly selected to be included in the disaster recovery test and system
owners must agree to participate but were not required. OCIO customer relationship
coordinators and project leads could request any noncritical applications to be added to the 10
randomly selected applications for nonfunctional testing during the disaster recovery exercise.
Because SFPCS-P was not properly classified as moderate and therefore was not included in the
exercise, SFPCS-P management could not ensure that the steps established to maintain or restore
business operations, including computer operations, in the event of emergencies, system failures,
or disaster would be effective. Further, without proper testing of the contingency plan based on
the appropriate classification, weaknesses in the plan and related supporting activities might not
be identified until an event occurred. As a result, OCIO and SFPCS-P management could not
proactively address these weaknesses, and the benefits of testing would be lost.
Segregation of Duties for SFPCS-P Developers Was Not Effectively Implemented
Segregation of duties for SFPCS-P developers was not effectively implemented. Specifically,
(1) 6 developers were granted above-read access to some mainframe production datasets via
improper UserID setup, (2) 15 developers had unnecessary access to some applications via
excessive profile linkages, (3) 4 developers were granted above-read access to 5 mainframe
datasets by linking to 2 profiles, and (4) 1 user retained read access to the SFPCS-P mainframe
production and 1 configuration management tool after the user was reassigned to another
application. This condition occurred because (1) the additional profile linkages were from the
applications that the developers used to support and were not removed when the developers were
transferred to work on other applications, (2) some profile linkages were derived from modeling
certain UserIDs when requesting access to the applications, (3) the user access removal process
did not include the removal of profile linkage, and (4) the “top secret” administrator did not
clean up all of the user’s dataset and profile linkages when an application retired. Without
proper control of information system processes and services, FHA management could not ensure
the confidentiality, integrity, and availability of user data and, ultimately, the accomplishment of
FHA’s mission.
Least Privilege and Segregation of Duties Requirements Were Not Fully Implemented for
SAMS Users
SAMS users were granted above-read access to some SAMS screens used for entering,
modifying, and authorizing disbursement data, vendor data, and contract data. In addition, some
SAMS users were granted access rights to perform incompatible business functions, such as data
entry and supervisor authorization, update or approval access to both vendor and disbursement
screens, and data entry and verification and reconciliation. These conditions occurred because
(1) user access to vendor screens was not reviewed after case management responsibilities were
transferred to the Asset Disposition and Management System; (2) SAMS officials had also not
performed annual review of the access modes granted to each user profile; and (3) the SAMS
user guide had not been updated to reflect the current operations for all sections, including the
sections defining disbursement responsibilities for various groups and approval procedures for
transmittals created in SAMS. Without adequate access controls and segregation of duty
controls for the disbursement, vendor, and contract screens, FHA transmittal or disbursement
data could be maliciously or accidentally modified by unauthorized users, and the integrity of
FHA financial statements would be at risk. By not properly documenting the high-risk
segregation of duty cases for SAMS business processes and limiting access to screens used by



                                                  26
SAMS users to perform these processes, FHA officials could not ensure that users would not be
granted complete controls over incompatible functions. Also, FHA officials could not ensure
that access to these screens would be properly reviewed during the user profile reviews.
SFPCS-P Security Documents Contained Inaccurate Information
SFPCS-P management had not maintained accurate documents for its security management
program. Specifically, the system security plan, configuration management plan, contingency
plan, and standard operating procedures contained outdated or conflicting information. These
conditions occurred because of an overall lack of oversight by FHA SFPCS-P management to
ensure that the documents were adequately updated, contained information consistent with other
published documents, and complied with established HUD procedures. Without a well-designed
program, security controls may be inadequate; responsibilities may be unclear, misunderstood, or
improperly implemented; and controls may be inconsistently applied. Such conditions may lead
to insufficient protection of sensitive or critical resources and disproportionately high
expenditures for controls over low-risk resources.
We completed an additional review of the general and application controls over SFIS and the
Claims system. Based on that review, we identified the following deficiencies.
Inconsistencies in Error Codes Caused Uncertainties in Claims Payments
Inconsistencies in error codes caused uncertainties in claims payments. Specifically, there were
inconsistencies between soft error codes identified for claims submitted in May 2015 and the soft
error code list maintained by FHA. In addition, supporting documents were not always
maintained when error codes were changed from hard error codes to soft error codes to ensure
that the changes were programmed correctly in the system. Further, for claims reported in the
June 2015 suspense report, there were inconsistencies in 341 claims with errors in part A24 and
2,018 claims with errors in part B25 of form HUD-27011.26 These conditions occurred because of
deficiencies in internal controls, including a lack of oversight and monitoring of documents to
ensure consistency and accuracy. Without updated documentation and active oversight, FHA
management could not be assured that operations and guidance to staff were consistent and
accurately complied with policy. As a result of the inconsistencies in the soft, hard, and fatal
error codes and the lack of supporting documentation for the changes made to the error codes
before 2010, FHA could not ensure, without additional review, that the claims paid in May and
June 2015 were paid correctly.
Retention of Software Modifications Was Not Sufficient for the FHA Claims System
OCIO did not retain configuration information and the history of system changes, including the
related approvals, made throughout the development and life of the Claims system for more than
5 years. This condition occurred because the OCIO had no agreement with the FHA Office of
Finance and Budget to retain the change and configuration history for the Claims system longer


24
     Part A on form HUD-27011 provides the initial case data. Part A is the first part of the claim prepared and
     contains information relating to the mortgage, property, property condition, lender, payment history, and
     foreclosure or assignment process.
25
     Part B on form HUD-27011 contains fiscal data consisting of allowable expenses and accrued interest. It
     provides summary information relating to receipts and disbursements by the lender, which affects the amount of
     the insurance claim.
26
     Application for Single Family Insurance Benefits



                                                          27
than the established general retention period. Without access to the nature of the software
modifications and the history of related approvals of the software and configuration changes
made, FHA Claims management and technical staff would not be able to review or reverse those
changes if necessary.
Access Controls for SFIS and Claims Were Not Effectively Implemented
Application and user access controls for SFIS and Claims were not effectively implemented or
adequately managed. Some contractors were granted excessive file privileges to SFIS
production datasets. In addition, SFIS’ and Claims’ practices for separation of duties and least
privilege were not effective. This condition occurred because overall review and maintenance of
the user access and privileges granted on the mainframe were inadequate or nonexistent. As a
result, unauthorized individuals, including outside intruders and former employees, could read
and copy SFIS and Claims sensitive data and make undetected changes or deletions for malicious
purposes or personal gain. Therefore, the confidentiality, integrity, and availability of user data
and, ultimately, the accomplishment of SFIS’ and Claims’ mission could not be assured.
Effective Application Configuration Management Was Not Adequately Implemented for
SFIS and Claims
SFIS and Claims management did not adequately implement effective application configuration
management for the SFIS and Claims systems. Specifically, (1) personal programs were used for
release upgrades to the system, and (2) the SFIS configuration management plan was not
prepared in accordance with HUD’s software configuration management plan template and
outline. These conditions occurred because SFIS management did not comply with established
National Institute of Standard and Technology27 guidance and received conflicting configuration
management guidance from OCIO. Without an adequate SFIS configuration management
practice, SFIS management could not ensure that only authorized systems and related program
modifications were implemented. As a result, SFIS might not be configured and operating
securely as intended.
In fiscal year 2015, we reported on various weaknesses with general system controls and controls
over certain applications as well as weak security management.
Information System Control Weaknesses Previously Identified in FHA’s SFIS and Claims
Systems Were Being Addressed
In an audit conducted in fiscal year 2015,28 we found that improvements were needed to ensure
that information security controls over SFIS and Claims fully complied with Federal
requirements and HUD’s own security policies. Some of the personally identifiable information
that was retained in Claims’ postmaintenance database files was not encrypted. In addition, five
of nine vulnerabilities identified during the fiscal year 2015 vulnerability scan were identified
during the fiscal year 2014 scan but had not been corrected. The remaining four vulnerabilities
identified had remained uncorrected for longer than 90 days. In addition, SFIS staff had not
implemented an effective application contingency planning practice. Further, the risk

27
     NIST Special Publication (SP) 800-53, Rev 4, Security and Privacy Controls for Federal Information Systems
     and Organizations
28
     2016-DP-0002, Review of Information Systems Controls over SFIS and Claims, issued December 21, 2015.
     This was a limited distribution report because of the sensitive nature of the information reported and was not
     made available to the public.



                                                           28
assessment prepared for SFIS did not accurately document whether SFIS was operating with an
acceptable level of risk to information technology resources; information processed, stored, and
transmitted in the application; and SFIS’ connections to other systems.
We followed up on the status of these weaknesses during fiscal year 2016. HUD had addressed
the weaknesses identified during the audit and was implementing appropriate corrective actions.
These actions are scheduled to be completed by the end of fiscal year 2017.
Conclusion
As a result of the weaknesses identified in FHA’s systems, the appropriate confidentiality,
integrity, security, and availability of critical information could have been negatively impacted.
An improper system classification could result in the use of inadequate security controls, and the
use of outdated software could have left HUD susceptible to security breaches. In addition, the
information used to provide input to the FHA financial statements could have been adversely
affected. FHA must improve its information security controls over its SFIS, Claims, SFPCS-P,
and SAMS systems to comply with Federal requirements and its own security policies to prevent
an increased risk of unauthorized disclosure or modification of FHA system data.
Recommendations
Recommendations were included in separate OIG audit reports.29 Therefore, no
recommendations are reported here.




29
     Audit report 2016-DP-0003, Additional Review of Information System Controls Over FHA Information
     Systems, issued August 31, 2016, and we expect to issue our final audit report regarding SFPCS-P and Claims
     systems in fiscal year 2017.



                                                         29
Scope and Methodology
In accordance with the Chief Financial Officers Act of 1990, as amended, OIG is responsible for
conducting the annual financial statement audit of FHA. The scope of this work includes the
audit of FHA’s balance sheets as of September 30, 2016 and 2015, 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
accordance with U.S. generally accepted government auditing standards and OMB Bulletin 15-
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;
       governmentwide 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 15-02, as amended, 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 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.
With respect to internal controls related to performance measures to be reported in FHA’s Fiscal
Year 2016 Annual Management Report, we obtained an understanding of the design of



                                                 30
significant internal controls as described in OMB Bulletin 15-02, as amended. We performed
limited testing procedures as required by American Institute of Certified Public Accountants’
auditing standards at AU-C, section 730, Required Supplementary Information, and OMB
Bulletin 15-02, as amended. 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 in relation 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 significant deficiencies.
We noted certain matters in the internal control structure and its operation that we consider
significant deficiencies under OMB Bulletin 15-02, as amended.




                                                  31
Followup on Prior Audits
The current fiscal yearend status of open recommendations from prior-year reports on FHA’s
financial statements are provided below. Specifically, we identified five unimplemented
recommendations from prior-year reports. One of the five recommendations was implemented
after fiscal yearend but before the date of this report. FHA should continue to track these
recommendations under the prior-year report numbers in accordance with departmental
procedures. Each of these open recommendations and its status is shown below.
Federal Housing Administration Fiscal Years 2015 and 2014 Financial Statements Audit,
2016-FO-0002
With respect to FHA not fully implementing controls to prevent misclassification of the
receivables, we recommend that the Office of Single Family Housing
1.a.   Document FHA’s end-to-end business processes and controls associated with the
       processing, reclassifying, billing and collection, and reporting of activities and
       transactions related to partial claims. (Final action target date was July 31, 2016;
       reported in ARCATS as 2016-FO-0002-001-A, closed October 3, 2016.)
1.b.   Fully implement the policies and procedures created to send demand letters and refer
       delinquent lenders to FOC within the timeframes prescribed in the policy and in
       accordance with Mortgagee Letter 2015-18. (Final action target date was November 1,
       2016; reported in ARCATS as 2016-FO-0002-001-B.)
1.c.   Start the billing process for the claims paid, plus incentive, in which the lender has not
       provided the original note and security instrument within the prescribed deadlines for the
       $291 million. (Final action target date is November 30, 2016; reported in ARCATS as
       2016-FO-0002-001-C.)
Federal Housing Administration Fiscal Years 2014 and 2013 Financial Statements Audit,
2015-FO-0001
With respect to FHA’s not establishing appropriate receivables for legal settlements and partial
claims notes, we recommended that the Director of Single Family Asset Management
2.a.   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. (Final action target date was October 31, 2015; reported in ARCATS
       as 2015-FO-0001-001-F.)
Federal Housing Administration Fiscal Years 2013 and 2012 Financial Statements Audit,
2014-FO-0002
With respect to undelivered orders for property-related contracts being reviewed annually and
deobligated promptly, we recommended that the FHA Comptroller
3.a.   Review and deobligate, 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 October 15, 2015; reported in ARCATS as 2014-FO-0002-001-C.)




                                                 32
Appendixes

Appendix A
           Schedule of Questioned Costs and Funds To Be Put to Better Use
      Recommendation                                           Funds to be put to better
                                      Unsupported 1/
          number                                                         use
              2.D.                                                  $276,567,940
              3.B.                    $ 55,350,830
            Totals                    $ 55,350,830                 $ 276,567,940


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.




                                              33
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               34
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               35
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 3




                               36
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 4




                               37
Ref to OIG
Evaluation


Comment 5




             38
                         OIG Evaluation of Auditee Comments


Comment 1   OIG believes that FHA’s legal counsel is responsible for and knowledgeable
            about all known actual or possible litigation, claims, and assessments related to
            FHA. Therefore, without FHA’s legal counsel acknowledgement on the
            correctness of the matters included in the legal representations provided to OIG in
            the management representation letter raises significant concerns and constitutes
            scope limitation in our audit work. Accordingly, we qualified our opinion on this
            respect.
            OIG accepts the response of concurrence with the recommendations. FHA argued
            that it is using the best available data at the time the estimates were made. OIG is
            taking exception to this statement because, based on our audit evidence, we
            determined that the best and accurate data were available to FHA at that time but
            FHA failed to properly use it. Additionally, we have sufficient appropriate
            evidence to support that errors in the utilization of home equity conversion
            mortgage operations and maintenance cost data occurred because of a weak
            entitywide model governance structure and internal controls. FHA’s continued
            efforts in improving its controls over the cash flow modeling process will improve
            the reliability of the estimation process and reliability of financial information
            related to the loan guarantee liability and loans receivable.
Comment 2   OIG accepts the response of concurrence with the recommendations. OIG
            recognized the net immaterial differences between the T330 and the ACOBHD01
            reports. However, OIG calculated and reported the absolute amounts because (1)
            the differences between the reports significantly varied by both positive and
            negative amounts on individual contracts for a number of contracts in the
            population, and (2) for purposes of our audit, we need to consider both the
            absolute and net differences in assessing the significance of the issue in
            accordance with the audit standards. FHA’s efforts to improve the monthly
            reconciliation, obligation reporting, and deobligation review processes will
            improve the reliability of the financial statements.
Comment 3   We do not agree that the four underlying causes of prior year audit findings
            mentioned in FHA’s response were fully resolved.
            OIG notes that during the course of the audit, evidence was not provided to
            support the implementation of the Scorecard Performance Metric, the process
            implemented in FY15 related to the Mortgagee Review Board, or the
            comprehensive process implemented by Financial Operations Center. We also
            note that no mortgagees were referred to the Mortgagee Review Board until
            October 18, 2016, which was outside the scope of our audit, according to the
            documentation provided by FHA. Additionally, OIG attests that while the
            Mortgagee Letter intended to align with the regulations, the implementation of the
            process provides additional time well in excess of the 60 day provision within the
            regulations.



                                              39
            OIG disagrees that the billing/collection process for non-compliant mortgagees
            has been in effect for well over a year, as described in the A-123 process
            narrative. The process included in the fiscal year 2016 A-123 narrative was not
            fully implemented for all non-compliant lenders identified during fiscal year
            2016, because the process was changed from what was included in the narrative.
            OIG is aware that the regulations do not prescribe a specific timeframe in which
            the Secretary must initiate the collection process; however, OIG believes
            requesting payment immediately after the 60-day deadline for submitting the note,
            would facilitate more immediate recovery of funds owed to FHA, which is both
            good business and effective cash management practices. Based upon our review,
            the majority of the unsupported partial claim notes were between 60 days and six
            months old. The number of unsupported partial claim notes would be reduced
            further if FHA sent the first reimbursement letter much earlier than its current
            process. At present, FHA’s process can take about 11 months after partial claims
            are paid to be referred to the Mortgagee Review Board and is silent on a
            timeframe for collection after referral. OIG believes that FHA can do better than
            11 months and that it needs to protect the interest of the government. We look
            forward to working with FHA in reaching a mutually acceptable corrective action
            plan in fiscal year 2017.
Comment 4   OIG accepts the response of concurrence with the finding and recommendation
            and agrees that they are the underlying condition that caused Finding 1.
            However, OIG believes that it would be appropriate to separate the finding
            because there were other governance related issues in this finding that were not
            related to Finding 1. Our recommendation was adjusted to remove any
            duplicative language.
Comment 5   Although FHA states that it considered the items noted by the OIG, we found
            when reviewing HUD documentation for the FIPS 199 category that only one
            item was considered in the analysis. Other items such as Public Information
            Integrity, Catastrophic Loss of System Availability, Large and Interconnecting
            Systems, Critical Infrastructures and Key Resources of the worksheet were not
            listed as considered during the analysis. The documentation also lists numerous
            interfaces and states "The systems listed above are important for the successful
            operation of the system." We continue to believe that minimal analysis was
            considered and incorporated related to interconnected systems and the low-impact
            classification. OIG looks forward to working with FHA’s Office of Finance and
            Budget to reach a mutually acceptable management decision to close out the
            recommendations during the audit resolution process.




                                             40
Appendix C
       FHA’s Fiscal Years 2016 and 2015 Financial Statements and Notes




                                      41
                                      FEDERAL HOUSING ADMINISTRATION
                      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                        CONSOLIDATED BALANCE SHEETS
                                          As of September 30, 2016 and 2015
                                                 (Dollars in Millions)


                                                                                                         Restated
                                                                                            FY 2016      FY 2015
           ASSETS
             Intragovernmental
               Fund Balance with U.S. Treasury (Note 3)                                 $      20,820    $   39,057
               Investments (Note 4)                                                            36,397        14,754
               Other Assets (Note 7)                                                                -             1
             Total Intragovernmental                                                    $      57,217    $   53,812

             Investments (Note 4)                                                       $          31    $        31
             Accounts Receivable, Net (Note 5)                                                    242            407
             Loans Receivable and Related Foreclosed Property, Net (Note 6)                    17,742         12,924
             Other Assets (Note 7)                                                                 53             45
           TOTAL ASSETS                                                                  $    75,285     $   67,219

           LIABILITIES
              Intragovernmental
               Accounts Payable (Note 8)                                                $           7    $        1
               Borrowings (Note 9)                                                             30,873        27,023
               Other Liabilities (Note 10)                                                      2,765         2,889
              Total Intragovernmental                                                   $      33,645    $   29,913

             Accounts Payable (Note 8)                                                   $        495    $       545
             Loan Guarantee Liability (Note 6)                                                   (806)        15,283
             Other Liabilities (Note 10)                                                          854            726
           TOTAL LIABILITIES                                                             $    34,188     $   46,467

           NET POSITION
             Unexpended Appropriations (Note 16)                                         $        415    $       871
             Cumulative Results of Operations                                                  40,682         19,881
           TOTAL NET POSITION                                                            $    41,097     $   20,752

           TOTAL LIABILITIES AND NET POSITION                                            $    75,285     $   67,219



                                    The accompanying notes are an integral part of these statements.


                                 
                                                                  42
                                       FEDERAL HOUSING ADMINISTRATION
                      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                    CONSOLIDATED STATEMENTS OF NET COST
                                    For the Periods Ended September 30, 2016 and 2015
                                                    (Dollars in Millions)


                                                                                                                                                  Re s tate d
                                                                                                                                     FY 2016      FY 2015
                   Single Family Forward
                     Intragovernmental Gross Costs                                                                               $        791     $       955
                     Less: Intragovernmental Earned Revenue                                                                               662           1,133
                     Intragovernmental Net Costs                                                                                 $        129     $      (178)

                     Gross Costs With the Public                                                                                 $     (18,764)   $   (13,283)
                     Less: Earned Revenues                                                                                                  14             11
                     Net Costs With the Public                                                                                   $     (18,778)   $   (13,294)
                   Single Family Forward Ne t Cos t (Surplus )                                                                   $     (18,649)   $   (13,472)

                   HECM
                    Intragovernmental Gross Costs                                                                                $        234     $       59
                    Less: Intragovernmental Earned Revenue                                                                                403            584
                    Intragovernmental Net Costs                                                                                  $       (169)    $     (525)

                    Gross Costs With the Public                                                                                  $       (305)    $    (3,993)
                    Less: Earned Revenues                                                                                                   1               1
                    Net Costs With the Public                                                                                    $       (306)    $    (3,994)
                   HECM Ne t Cos t (Surplus )                                                                                    $       (475)    $    (4,519)

                   Multifamily
                    Intragovernmental Gross Costs                                                                                $        111     $      104
                    Less: Intragovernmental Earned Revenue                                                                                 32             58
                    Intragovernmental Net Costs                                                                                  $         79     $       46

                    Gross Costs With the Public                                                                                  $       (389)    $     (559)
                    Less: Earned Revenues                                                                                                  52             45
                    Net Costs With the Public                                                                                    $       (441)    $     (604)
                   Multifamily Ne t Cos t (Surplus )                                                                             $       (362)    $     (558)

                   He althcare
                    Intragovernmental Gross Costs                                                                                $         85     $       73
                    Less: Intragovernmental Earned Revenue                                                                                 53             16
                    Intragovernmental Net Costs                                                                                  $         32     $       57

                    Gross Costs With the Public                                                                                  $       (129)    $     (140)
                    Less: Earned Revenues                                                                                        $          1              1
                    Net Costs With the Public                                                                                    $       (130)    $     (141)
                   He althcare Ne t Cos t (Surplus )                                                                             $        (98)    $      (84)

                   Salarie s and Adminis trative Expe ns e s
                     Intragovernmental Gross Costs                                                                               $         17     $       15
                     Less: Intragovernmental Earned Revenue                                                                                 -              -
                     Intragovernmental Net Costs                                                                                 $         17     $       15

                    Gross Costs With the Public                                                                                  $        591     $      567
                    Less: Earned Revenues                                                                                                   -              -
                    Net Costs With the Public                                                                                    $        591     $      567
                   Admins trative and Contracts Ne t Cos t (Surplus )                                                            $        608     $      582

                   Ne t Cos t of Ope rations                                                                                     $    (18,976)    $ (18,051)



                                             The accompanying notes are an integral part of these statements.


                                                                                                                              
                                                                                                  43
                                       FEDERAL HOUSING ADMINISTRATION
                      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                  CONSOLIDATED STATEMENTS OF NET POSITION
                                    For the Periods Ended September 30, 2016 and 2015
                                                    (Dollars in Millions)



                                                                                                           Restated
                 CUMULATIVE RESULTS OF OPERATIONS (Note 16)                                  2016             2015
                 Beginning Balance                                                       $ 19,046 $          2,013
                 Adjustments
                  Changes in Accounting Principles
                  Corrections of Errors                                                       835             1,371
                 Beginning Balance, As Adjusted                                          $ 19,881      $     3,384

                 Budgetary Financing Sources:
                  Appropriations Used                                                         3,393          2,206

                 Other Financing Sources (Nonexchange)
                  Donations and Forfeitures of Property
                  Transfers In/Out Without Reimbursement                                      480               442
                  Imputed Financing From Costs                                                 15                15
                  Other                                                                    (2,063)           (4,217)
                 Total Financing Sources                                                 $ 1,825 $          (1,554)
                 Net Cost of Operations                                                      18,976         18,051
                 Net Change                                                                  20,801         16,497
                 Cummulative Results of Operation                                        $ 40,682      $   19,881

                 Unexpended Appropriations (Note 16)
                 Beginning Balance                                                       $     871     $       872
                 Budgetary Financing Sources
                   Appropriations Received                                                 3,437              2,235
                  Other Adjustments (Recissions, etc)                                       (500)               (30)
                  Appropriations Used                                                     (3,393)            (2,206)
                 Total Budgetary Financing Sources                                      $ (456) $                (1)

                 Unexpended Appropriation                                                $     415     $       871

                 Net Position                                                            $ 41,097      $   20,752


                                    The accompanying notes are an integral part of these statements.




                                 
                                                                  44
                                     FEDERAL HOUSING ADMINISTRATION
                      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                COMBINED STATEMENT OF BUDGETARY RESOURCES
                                        For the Period Ended September 30, 2016
                                                  (Dollars in Millions)


                                                                                                                                       FY 2016       FY 2016        FY 2016
                                                                                                                                     Budgetary Non-Budgetary          Total
Budgetary Resources:
Unobligated balance brought forward, October 1                                                                                   $     16,733 $       33,986    $    50,719
Adjustment to unobligated balance brought forward, October 1 (+ or -)                                                                       -             (3)            (3)
Unobligated balance brought forward, October 1, as adjusted                                                                            16,733         33,983         50,716
Recoveries of prior year unpaid obligations                                                                                               241            463            704
Other changes in unobligated balance (+ or -)                                                                                            (681)             -           (681)
Unobligated balance from prior year budget authority, net                                                                              16,293         34,446         50,739
Appropriations (discretionary and mandatory)                                                                                            3,431              -          3,431
Borrowing authority (discretionary and mandatory)                                                                                           -         13,077         13,077
Spending authority from offsetting collections (discretionary and mandatory)                                                           25,010         19,800         44,810
Total budgetary resources                                                                                                        $     44,734 $       67,323    $   112,057

Status of Budgetary Resources:
Obligations incurred                                                                                                             $      6,976   $     50,911    $    57,887
Unobligated balance, end of year:
   Apportioned                                                                                                                             70          5,574          5,644
  Unapportioned                                                                                                                        37,648         10,838         48,486
Unexpired unobligated balance, end of year                                                                                             37,718         16,412         54,130
Expired unobligated balance, end of year                                                                                                   40              -             40
Total unobligated balance, end of year                                                                                                 37,758         16,412         54,170
Total budgetary resources                                                                                                              44,734         67,323        112,057

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                                                           $         564 $       2,485    $     3,049
Uncollected customer payments from Federal sources, brought forward, October 1 (-)                                                         (15)            -            (15)
Obligated balance, start of year (net), before adjustments (+ or -)                                                                        549         2,485          3,034
Adjustment to obligated balance, start of year (net) (+ or -)                                                                                -             3              3
Obligated balance, start of year (net), as adjusted                                                                                        549         2,488          3,037
Obligations incurred                                                                                                                     6,976        50,911         57,887
Outlays (gross) (-)                                                                                                                     (6,953)      (50,286)       (57,239)
Change in uncollected customer payments from Federal sources (+ or -)                                                                      (20)            -            (20)
Recoveries of prior year unpaid obligations (-)                                                                                           (241)         (463)          (704)
Unpaid obligations, end of year (gross)                                                                                                    346         2,650          2,996
Uncollected customer payments from Federal sources, end of year                                                                            (35)            -            (35)
Obligated balance, end of year (net)                                                                                             $         311 $       2,650    $     2,961

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                                                            $      28,441 $      32,876    $    61,317
Actual offsetting collections (discretionary and mandatory) (-)                                                                        (24,991)      (29,027)       (54,018)
Change in uncollected customer payments from Federal sources (discretionary and mandatory) (+ or -)                                        (20)            -            (20)
Recoveries of prior year paid obligations (discretionary and mandatory)                                                                      1             -              1
Budget authority, net (discretionary and mandatory)                                                                                      3,431         3,849          7,280
Outlays, gross (discretionary and mandatory)                                                                                             6,953        50,286         57,239
Actual offsetting collections (discretionary and mandatory) (-)                                                                        (24,991)      (29,027)       (54,018)
Outlays, net (discretionary and mandatory)                                                                                             (18,038)       21,259          3,221
Less Distributed offsetting receipts (-)                                                                                                (2,000)            -         (2,000)
Agency outlays, net (discretionary and mandatory)                                                                                $     (20,038) $     21,259    $     1,221




                                              The accompanying notes are an integral part of these statements



                                                                                                                              
                                                                                                  45
                                      FEDERAL HOUSING ADMINISTRATION
                      (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                COMBINED STATEMENT OF BUDGETARY RESOURCES
                                        For the Period Ended September 30, 2015
                                                  (Dollars in Millions)

                                                                                                            FY 2015       FY 2015        FY 2015
                                                                                                          Budgetary Non-Budgetary          Total
Budgetary Resources:
Unobligated balance brought forward, October 1                                                        $      8,152 $       45,569    $    53,721
Unobligated balance brought forward, October 1, as adjusted                                                  8,152         45,569         53,721
Recoveries of prior year unpaid obligations                                                                     50            382            432
Other changes in unobligated balance (+ or -)                                                                 (241)             -           (241)
Unobligated balance from prior year budget authority, net                                                    7,961         45,951         53,912
Appropriations (discretionary and mandatory)                                                                 2,225              -          2,225
Borrowing authority (discretionary and mandatory)                                                                -         12,146         12,146
Spending authority from offsetting collections (discretionary and mandatory)                                21,716         25,563         47,279
Total budgetary resources                                                                             $     31,902 $       83,660    $   115,562

Status of Budgetary Resources:
Obligations incurred                                                                                  $     15,170   $     49,673    $    64,843
Unobligated balance, end of year:
  Apportioned                                                                                                   56          3,509          3,565
  Unapportioned                                                                                             16,676         30,478         47,154
Total unobligated balance, end of year                                                                      16,732         33,987         50,719
Total budgetary resources                                                                             $     31,902   $     83,660    $   115,562

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                                          587         2,229          2,816
Uncollected customer payments from Federal sources, brought forward, October 1 (-)                               (9)            -             (9)
Obligated balance, start of year (net), before adjustments (+ or -)                                             578         2,229          2,807
Obligated balance, start of year (net), as adjusted                                                             578         2,229          2,807
Obligations incurred                                                                                         15,170        49,673         64,843
Outlays (gross) (-)                                                                                         (15,142)      (49,035)       (64,177)
Change in uncollected customer payments from Federal sources (+ or -)                                            (6)            -             (6)
Actual transfers, unpaid obligations (net) (+ or -)                                                             (50)         (382)          (432)
Actual transfers, uncollected customer payments from Federal sources (net) (+ or -)                             565         2,485          3,050
Recoveries of prior year unpaid obligations (-)                                                                 (50)         (382)          (432)
Unpaid obligations, end of year (gross)                                                                         565         2,485          3,050
Uncollected customer payments from Federal sources, end of year                                                 (15)            -            (15)
Obligated balance, end of year (net)                                                                  $         550 $       2,485    $     3,035

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                                        23,941        37,708         61,649
Actual offsetting collections (discretionary and mandatory) (-)                                             (21,710)      (38,213)       (59,923)
Change in uncollected customer payments from Federal sources (discretionary and mandatory) (+ or -)              (6)            -             (6)
Budget authority, net (discretionary and mandatory)                                                           2,225          (505)         1,720
Outlays, gross (discretionary and mandatory)                                                                 15,142        49,035         64,177
Actual offsetting collections (discretionary and mandatory) (-)                                             (21,710)      (38,213)       (59,923)
Outlays, net (discretionary and mandatory)                                                                   (6,568)       10,822          4,254
Less Distributed offsetting receipts (-)                                                                     (2,797)            -         (2,797)
Agency outlays, net (discretionary and mandatory)                                                     $      (9,365) $     10,822    $     1,457




                                    The accompanying notes are an integral part of these statements.




                                 
                                                                               46
                                   NOTES TO THE FINANCIAL STATEMENTS
                                                                              September 30, 2016

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 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, healthcare facilities, property improvements, manufactured homes, and reverse mortgages,
also referred to as Home Equity Conversion Mortgages (HECM). The objectives of activities carried out by FHA
relate directly to the development of affordable housing.

FHA categorizes its insurance programs as Single Family (including Title 1), Multifamily, Healthcare, and HECM.
Single Family activities support initial or continued home ownership; Title I activities support manufactured
housing and property improvement. Multifamily and Healthcare 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.



                                                                                                                              
                                                                                                  47
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/SRI                           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 (GAAP) applicable to federal agencies, as promulgated by the Federal Accounting
Standards Advisory Board (FASAB). The recognition and measurement of budgetary resources and their status for
purposes of preparing the Combined Statement of Budgetary Resources (SBR), is based on concepts and guidance
provided by the 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 sheet, statement 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.

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.


                                 
                                                                     48
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 Statement 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 these
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 this 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.
Capital Reserve balances are accumulated for unanticipated losses.

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

Loans Receivable and Related Foreclosed Property, Net

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



                                                                                                                              
                                                                                                  49
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 from 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 sheet. As required by SFFAS No. 2, the Loan Guarantee
Liability includes the Credit Reform-related Liabilities for Loan Guarantees (LLG) and the pre-Credit Reform Loan
Loss Reserve (LLR) (see Note 6).

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

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

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

Use of Estimates

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

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

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

                                 
                                                         50
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 has several procurement actions in place and incurred expenses for software development
are transferred 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 2016 and $15
million for fiscal year 2015, and it was included in FHA’s financial statements as an imputed cost in the
Consolidated Statement of Net Cost, and as imputed financing in the Consolidated Statement 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 loan guarantees)
to satisfy the liabilities. Thus, all of FHA’s liabilities are considered covered by budgetary resources.




                                                                                                                              
                                                                                                  51
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. These borrowings are authorized through a
permanent indefinite authority at interest rates set each year by the U.S. Treasury.




                                 
                                                         52
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, 2016 and 2015 are as follows:

                            (Dollars in millions)                                                                                                 Restated
                                                                                                                                 FY 2016          FY 2015
                            Intragovernmental:
                                        Fund Balance with Treasury                                                         $               35 $              26
                            Total Intragovernmental                                                                                        35                26

                            Other Assets                                                                                                 29               37
                            Total Non-Entity Assets                                                                                      64               63
                            Total Entity Assets                                                                                      75,221           67,156
                            Total Assets                                                                                   $        75,285 $         67,219

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

According to the FCRA, FHA transfers 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. At the end of each year, fund balances in the GI/SRI general fund receipt accounts
are transferred into the U.S. Treasury’s general fund.

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




                                                                                                                              
                                                                                                  53
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, 2016 and 2015:

                                    (Dollars in millions)                            FY 2016         FY 2015
                                    Fund Balances:
                                      Revolving Funds                            $      19,699   $      37,081
                                      Appropriated Funds                                   245             724
                                      Other Funds                                          876           1,252
                                           Total                                 $     20,820    $     39,057

                                    Status of Fund Balance with U.S. Treasury:
                                      Unobligated Balance --
                                           Available                             $       5,643   $       3,565
                                           Unavailable                                  12,180          32,442
                                      Obligated Balance Not Yet Disbursed                2,997           3,050
                                           Total                                 $     20,820    $     39,057



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


                                 
                                                                       54
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, 2016 were as follows:

(Dollars in millions)

                                                                                           Amortized (Premium)
FY 2016                                                            Cost                      / Discount, Net                       Investments, Net       Market Value
MMI/CMHI Investments                                  $                      36,311        $                 54                  $             36,365   $           36,389
MMI/CMHI Accrued Interest                                                                                                                          32                   32
Total                                                 $                    36,311           $                           54       $            36,397    $          36,421

The cost, net amortized premium/discount, net investment, and market values as of September30, 2015 were as
follows:

                                                                                           Amortized (Premium)
FY 2015                                                            Cost                      / Discount, Net                       Investments, Net       Market Value
MMI/CMHI Investments                                  $                      14,731        $                 10                  $             14,741   $           14,750
MMI/CMHI Accrued Interest                                                                                                                          13                   13
Total                                                 $                    14,731           $                           10       $            14,754    $          14,763


Investments in Private-Sector Entities

Investments Risk Sharing Debentures as of September 30, 2016 and 2015 were as follows:


                                                           Beginning                New                                              Ending
(Dollars in millions)                                       Balance              Acquisitions               Redeemed                 Balance
FY 2016
 Risk Sharing Debentures                                  $              31 $                        - $                     -             31
Total                                                     $              31 $                        - $                     - $           31




                                                           Beginning                New                                              Ending
(Dollars in millions)                                       Balance              Acquisitions               Redeemed                 Balance
FY 2015
  601 Program and Note Sales                              $                 -     $                  -    $                  -   $              -
  Risk Sharing Debentures                                 $               41      $               19      $               (29) $               31
Total                                                     $              41       $               19      $              (29) $            31




                                                                                                                              
                                                                                                  55
Note 5. Accounts Receivable, Net

Accounts receivable, net, as of September 30, 2016 and 2015 are as follows:

                                                   Gross                 Allowance                    Net
  (Dollars in millions)                       FY 2016    FY 2015      FY 2016    FY 2015        FY 2016   FY 2015
  With the Public:

  Receivables Related to                  $        9 $         9 $         (1) $        -   $        8   $      9
    Credit Program Assets
  Premiums Receivables                             1            -           -           -            1          -
  Partial Claims Receivables                      77          376         (23)       (124)          54        252
  Generic Debt Receivables                       264          117        (264)       (117)           -          -
  Settlements Receivables                        141          114           -           -          141        114
  Miscellaneous Receivables                       38           32           -           -           38         32
  Total                                   $      530 $        648 $      (288) $     (241) $       242 $      407



Receivables Related to Credit Program Assets

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

Premium Receivables

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 Claim Receivables

Partial Claim receivables 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 Receivables

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

Settlement Receivables

FHA receives signed consent judgments that are approved by the courts but which funds have not been received.

Miscellaneous Receivables

Miscellaneous receivables include late charges and penalties receivables on delinquent premium receivables, refund
receivables from overpayments of claims, 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.

                                 
                                                         56
Note 6. Direct Loans and Loan Guarantees, Non-Federal Borrowers

    Direct Loan and Loan Guarantee Programs Administered by FHA include:
      
    Single Family Forward Mortgages
    Multifamily Mortgages
    Healthcare Mortgages
    Home Equity Conversion Mortgages (HECM)

FHA reports its insurance operations in four overall program areas: Single Family Forward mortgages, Multifamily
mortgages, 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 healthcare facility
projects and improve access to quality healthcare 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.

FHA Direct Loan and Loan Guarantee Programs and the related loans receivable, foreclosed property, and Loan
Guarantee Liability as of September 30, 2016 and 2015 are as follows:

Direct Loan Programs:

Starting in FY 2015, FHA began a Federal Financing Bank (FFB) Risk Share program, an inter-agency partnership
between HUD, FFB and the Housing Finance Authorities (HFAs). The FFB Risk Share program provides funding
for multifamily mortgage loans insured by FHA. Under this program, FHA records a direct loan from the public
and borrowing from FFB. The program does not change the basic structure of Risk Sharing; it only substitutes FFB
as the funding source. The HFAs would originate and service the loans, and share in any losses.

Prior to fiscal year 2015, 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.




                                                                                                                              
                                                                                                  57
Direct Loans Obligated (Pre-1992):
(Dollars in Millions)

                                                        GI/SRI - Multifamily                     Total
September 30, 2016
     Loan Receivables                               $                               8 $                      8
     Interest Receivables                                                          12                       12
     Allowance                                                                     (4)                      (4)
     Total Value of Assets                          $                              16 $                     16

September 30, 2015                                      GI/SRI - Multifamily                     Total
     Loan Receivables                               $                              14 $                     14
     Interest Receivables                                                          12                       12
     Allowance                                                                     (6)                      (6)
     Total Value of Assets                          $                              20 $                     20




Direct Loans Obligated (Post-1991):
(Dollars in Millions)

                                      MMI/CMHI - Single Family        GI/SRI - Multifamily          Total
September 30, 2016
  Loan Receivables                    $                        - $                       554 $              554
  Interest Receivables                                         -                           1                  1
  Foreclosed Property                                          -                            -                 -
  Allowance                                                   (3)                         27                 24
  Total Value of Assets               $                       (3) $                      582 $              579

September 30, 2015                     MMI/CMHI - Single Family    GI/SRI - Multifamily             Total
  Loan Receivables                     $                       - $                      102 $               102
  Interest Receivables                                         -                           -                  -
  Foreclosed Property                                          -                           -                  -
  Allowance                                                  (3)                         33                  30
  Total Value of Assets               $                      (3) $                      135 $               132




                                 
                                                 58
Total Amount of Direct Loans Disbursed (Post- 1991):
(Dollars in Millions)

                    Direct Loan Programs                                                    FY 2016                                          FY 2015
                    MMI/CHMI
                        Single Family Forward                              $                                         -           $                            1
                    MMI/CHMI Subtotal                                      $                                         -           $                            1

                    GI/SRI
                        Multifamily/Healthcare                             $                                        451                                  103
                    GI/SRI Subtotal                                        $                                        451 $                                103




Subsidy Expense for Direct Loans:


                     September 30, 2016
                                                                                                 GI/SRI                                        Total
           Multifamily/Healthcare
              FFB
                 Financing                  $                                                                                    (68) $                (68)
                 Defaults                                                                                                          4                     4
                 Fees and Other Collections                                                                                       (9)                   (9)
                 Other                                                                                                            21                    21
           Subtotal                         $                                                                                    (52) $                (52)



                    September 30, 2015
                                                                                                 GI/SRI                                        Total
           Multifamily/Healthcare
              FFB
                 Financing                  $                                                                                        (5) $              (5)
                 Fees and Other Collections                                                                                          (3)                (3)
                 Other                                                                                                               (1)                (1)
           Subtotal                                                                                                                  (9)                (9)




                                                                                                                              
                                                                                                  59
Total Direct Loan Subsidy Expense:



                    Direct Loan Programs                       FY 2016                          FY 2015
               GI/SRI                              $                              (52) $                           (9)
               Total                               $                              (52) $                           (9)


Schedule for Reconciling Subsidy Cost Allowance Balances:


                     Beginning Balance, Changes, and Ending Balance                            FY 2016               FY 2015
Beginning balance of the subsidy cost allowance                                            $              (30) $                   5

Add: subsidy expense for direct loans disbursed during the reporting years by component
      -Financing                                                                                          (68)                     (5)
    - Default costs (net recoveries)                                                                        4                  -
    - Fees and other collections                                                                           (9)                     (3)
    - Other subsidy costs                                                                                  21                      (1)
Total of the above subsidy expense components                                              $              (52) $                   (9)

Adjustments:
   - Fees received                                                                                         1                         0
   - Subsidy allowance amortization                                                                       28                         1
   - Other                                                                                                -                        (4)
          Ending balance of the subsidy cost allowance before reestimates                  $              (53) $                   (6)
Add or subtract subsidy reestimates by component:
   - Technical/default reestimate
   -Subsidy Expense Component                                                                              46                  (24)
   -Interest Expense Component                                                                              2
   -Total of the above reetimate components                                                $               48                  (24)
   Adjustment of prior years' credit subsidy reestimates                                   $              (19)
   Total Technical/Default Reestimate                                                      $               29 $                (24)

Ending balance of the subsidy cost allowance                                               $              (24) $               (30)




                                 
                                                                        60
Loan Guarantee Programs:
Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):

         (Dollars in Millions)
         FY 2016                                                                     MMI/CMHI                         GI/SRI                   Total
         Guarante e d Loans
           Single Family Forward
                 Loan Receivables                                                     $                 21 $                       -       $           21
                 Foreclosed Property                                                                     7                              9              16
                 Allowance for Loan Losses                                                              (5)                            (3)             (8)
           Subtotal                                                                   $                 23 $                            6 $            29

              Multifamily/He althcare
                  Loan Receivables                                                    $               -          $                1,780 $          1,780
                  Interest Receivables                                                                -                             230              230
                  Foreclosed Property                                                                 -                               1                1
                  Allowance for Loan Losses                                                           -                            (818)            (818)
              Subtotal                                                                $               -          $               1,193 $          1,193

              HECM
                  Loan Receivables                                                    $               -          $                      4 $              4
                  Interest Receivables                                                                -                                 2                2
                  Foreclosed Property                                                                 -                                (2)              (2)
                  Allowance for Loan Losses                                                           -                                (5)              (5)
              Subtotal                                                                $               -          $                     (1) $            (1)

         Total Guarante e d Loans                                                     $                 23       $               1,198     $      1,221

         (Dollars in Millions)
         FY 2015                                                                     MMI/CMHI                         GI/SRI                   Total
         Guarante e d Loans
           Single Family Forward
                 Loan Receivables                                                     $                22 $                        -       $            22
                 Foreclosed Property                                                                     7                              9               16
                 Allowance for Loan Losses                                                              (7)                            (4)             (11)
           Subtotal                                                                   $                22 $                             5 $             27

             Multifamily/He althcare
                 Loan Receivables                                                     $               -          $            1,947 $              1,947
                 Interest Receivables                                                                 -                         233                  233
                 Foreclosed Property                                                                  -                           1                    1
                 Allowance for Loan Losses                                                            -                        (808)                (808)
             Subtotal                                                                 $               -          $           1,373 $              1,373

             HECM
                 Loan Receivables                                                     $               -          $                      4 $              4
                 Interest Receivables                                                                 -                                 2                2
                 Foreclosed Property                                                                  -                                (2)              (2)
                 Allowance for Loan Losses                                                            -                                (5)              (5)
             Subtotal                                                                 $               -          $                     (1) $            (1)

         Total Guarante e d Loans                                                     $                22        $           1,377        $       1,399

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

                                                                                                                              
                                                                                                  61
Defaulted Guaranteed Loans from Post-1991 Guarantees:


     (Dollars in Millions)
     FY 2016                                      MMI/CMHI         GI/SRI          H4H                Total
     Guaranteed Loans
       Single Family Forward
             Loan Receivables                 $       10,320 $           350 $                 5 $        10,675
             Interest Receivables                          5               -                   -               5
             Foreclosed Property                       2,817              74                   1           2,892
             Allowance                                (7,326)           (241)                 (5)         (7,572)
       Subtotal                               $       5,816 $           183 $                  1 $        6,000

         Multifamily/Healthcare
             Loan Receivables                 $          -     $         735 $            -       $            735
             Foreclosed Property                         -                 1              -                      1
             Allowance                                   -              (365)             -                   (365)
         Subtotal                             $          -     $        371 $             -       $           371

         HECM
             Loan Receivables                 $         4,472 $         3,593 $           -       $        8,065
             Interest Receivables                       2,351           1,830             -                4,181
             Foreclosed Property                           36             132             -                  168
             Allowance                                 (1,580)         (1,279)            -               (2,859)
         Subtotal                             $        5,279 $         4,276 $            -       $       9,555

     Total Guaranteed Loans                   $       11,095   $       4,830   $              1   $      15,926

    (Dollars in Millions)                      Restated             Restated                           Restated
    FY 2015                                   MMI/CMHI               GI/SRI              H4H              Total
    Guaranteed Loans
      Single Family Forward
            Loan Receivables                  $        8,802 $           292 $                4   $       9,098
            Interest Receivables                           -               1                  -               1
            Foreclosed Property                        3,130              94                  1           3,225
            Allowance                                 (7,053)           (233)                 2          (7,284)
      Subtotal                                $       4,879 $           154 $                 7   $      5,040

        Multifamily/Healthcare
            Loan Receivables                  $         -      $         656 $            -       $            656
            Foreclosed Property                         -                  1              -                      1
            Allowance                                   -               (272)             -                   (272)
        Subtotal                              $         -      $        385 $             -       $           385

        HECM
            Loan Receivables                  $        2,182 $         3,107 $            -       $       5,289
            Interest Receivables                         992           1,517              -               2,509
            Foreclosed Property                           11             101              -                 112
            Allowance                                   (790)         (1,172)             -              (1,962)
        Subtotal                              $       2,395 $         3,553 $             -       $      5,948

    Total Guaranteed Loans                    $       7,274    $      4,092    $              7   $     11,373

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

                                 
                                                        62
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 2016):
          MMI/CMHI
           Single Family Forward                                                                            $             1,207,216    $       1,097,384
           Multifamily/Healthcare                                                                                               617                  590
          MMI/CMHI Subtotal                                                                                 $            1,207,833     $      1,097,974

            GI/SRI
             Single Family Forward                                                                          $                  9,418   $           6,575
             Multifamily/Healthcare                                                                                          118,319             108,744
            GI/SRI Subtotal                                                                                $                127,737    $        115,319

            H4H
             Single Family - 257                                                                           $                     90    $             83
            H4H Subtotal                                                                                   $                     90    $             83

        Total                                                                                               $            1,335,660     $      1,213,376

        Guaranteed Loans Outstanding (FY 2015):
          MMI/CMHI
           Single Family Forward                                                                           $              1,168,002    $       1,065,360
           Multifamily/Healthcare                                                                                               558                  537
          MMI/CMHI Subtotal                                                                                 $            1,168,560     $      1,065,897

            GI/SRI
             Single Family Forward                                                                         $                  10,716   $           7,774
             Multifamily/Healthcare                                                                                          112,682             104,289
            GI/SRI Subtotal                                                                                $                123,398    $        112,063

            H4H
             Single Family - 257                                                                           $                     98    $             92
            H4H Subtotal                                                                                   $                     98    $             92

        Total                                                                                               $            1,292,056     $      1,178,052




                                                                                                                              
                                                                                                  63
New Guaranteed Loans Disbursed (FY 2016):

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


            MMI/CMHI
             Single Family Forward                       $         221,756   $         219,781
             Multifamily/Healthcare                                     85                  85
            MMI/CMHI Subtotal                            $        221,841    $        219,866

            GI/SRI
             Single Family Forward                       $             107   $             106
             Multifamily/Healthcare                                 12,117              12,062
            GI/SRI Subtotal                              $         12,224    $         12,168

        Total                                            $        234,065    $        232,034

        New Guaranteed Loans Disbursed (FY 2015):
          MMI/CMHI
           Single Family Forward                         $         213,056   $         211,253
           Multifamily/Healthcare                                       69                  69
          MMI/CMHI Subtotal                              $        213,125    $        211,322

            GI/SRI
             Single Family Forward                       $             116   $             115
             Multifamily/Healthcare                                 11,249              11,196
            GI/SRI Subtotal                              $         11,365    $         11,311

        Total                                            $        224,490    $        222,633




                                 
                                                    64
Home Equity Conversion Mortgage (HECM)

HECM (reverse mortgages) are not included in the previous tables due to the unique nature of the program. Since
the inception of the program, FHA has insured 997,031 HECM loans with a maximum claim amount of $235 billion.
Of these 997,031 HECM loans insured by FHA, 600,526 loans with a maximum claim amount of $148 billion are
still active. As of September 30, 2016 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 2016            MMI/CMHI                                      $               14,612                               $            70,354                $        105,149
                   GI/SRI                                                             -                                            34,294                          42,948
                                                Total            $              14,612                                $          104,648                 $       148,097

FY 2015            MMI/CMHI                                      $               15,890                               $            67,739                $        101,062
                   GI/SRI                                                             -                                            37,732                          48,583
                                                Total            $              15,890                                $          105,471                 $       149,645




                                                                                                                              
                                                                                                  65
Loan Guarantee Liability, Net:



(Dollars in Millions)
FY 2016                                 MMI/CMHI           GI/SRI           H4H           Total
  LLR
   Single Family Forward            $              1 $               - $           - $                 1
   Multifamily/Healthcare                          -                (1)            -                  (1)
  Subtotal                          $              1 $              (1) $          - $                 -

     LLG
     Single Family Forward          $          (7,683) $             79 $         16 $            (7,588)
     Multifamily/Healthcare                       (24)           (3,141)           -              (3,165)
      HECM                                      3,460             6,487            -               9,947
     Subtotal                       $         (4,247) $          3,425 $          16 $             (806)

Loan Guarantee Liability Total      $          (4,246) $       3,424 $            16 $          (806)
                                         Restated        Restated                        Restated
FY 2015                                 MMI/CMHI         GI/SRI             H4H           Total
  LLR
  Single Family Forward             $              7 $               - $           - $                7
  Subtotal                          $              7 $               - $           - $                7

     LLG
     Single Family Forward          $          5,937 $              610 $         23 $         6,570
     Multifamily/Healthcare                      (21)            (3,100)           -          (3,121)
      HECM                                     4,205              7,622            -          11,827
     Subtotal                       $        10,121 $            5,132 $          23 $       15,276

Loan Guarantee Liability Total      $        10,128 $            5,132 $          23 $       15,283




                                 
                                                            66
Subsidy Expense for Loan Guarantees by Program and Component:


                         (Dollars in millions)

                         FY 2016                                                           MMI/CMHI                    GI/SRI                 Total
                            Single Family Forward
                               Defaults                                                  $            5,585 $                          5 $        5,590
                               Fees and Other Collections                                           (16,457)                          (8)      (16,465)
                               Other                                                                  1,791                            -          1,791
                            Subtotal                                                     $          (9,081) $                         (3) $     (9,084)

                                Multifamily/Healthcare
                                  Defaults                                               $                   2 $                   176 $           178
                                  Fees and Other Collections                                                (5)                   (653)           (658)
                                Subtotal                                                 $                  (3) $                (477) $         (480)

                                HECM
                                  Defaults                                               $                844 $                   -       $        844
                                  Fees and Other Collections                                             (945)                    -               (945)
                                Subtotal                                                 $              (101) $                   -       $      (101)

                         Total                                                                       (9,185)                     (480)         (9,665)

                         FY 2015                                                           MMI/CMHI                    GI/SRI                 Total
                            Single Family Forward
                               Defaults                                                  $           5,684 $                           5 $     5,689
                               Fees and Other Collections                                          (18,700)                           (7)    (18,707)
                            Subtotal                                                     $        (13,016) $                          (2) $ (13,018)

                                Multifamily/Healthcare
                                  Defaults                                               $                   2 $                   185 $           187
                                  Fees and Other Collections                                                (6)                   (696)           (702)
                                Subtotal                                                 $                  (4) $                (511) $         (515)

                                HECM
                                  Defaults                                               $               991 $                    -       $        991
                                  Fees and Other Collections                                          (1,056)                     -             (1,056)
                                Subtotal                                                 $               (65) $                   -       $        (65)

                         Total                                                           $        (13,085) $                     (513) $ (13,598)




                                                                                                                              
                                                                                                  67
Subsidy Expense for Modification and Reestimates:

                                    (Dollars in millions)
                                                                           Technical
                                    FY 2016                               Reestimate
                                        MMI/CMHI                          $    (7,897)
                                        GI/SRI                                   (225)
                                    Total                                 $    (8,122)

                                    FY 2015                                 Restated
                                        MMI/CMHI                          $    (2,248)
                                        GI/SRI                                 (1,618)
                                    Total                                 $    (3,866)



Total Loan Guarantee Subsidy Expense:


                                    (Dollars in millions)                   Restated
                                                              FY 2016       FY 2015
                                        MMI/CMHI            $     (17,082) $ (15,333)
                                        GI/SRI                       (704)      (2,131)
                                    Total                   $     (17,786) $ (17,464)




                                 
                                                            68
Subsidy Rates for Loan Guarantee Endorsements by Program and Component:


                                                                                                                                         Fees and Other
(Percentage)                                                                                                              Defaults          Collections    Total

Budget Subsidy Rates for FY 2016 Loan Guarantees:

           MMI/CMHI
           Single Family
           SF (Forward)                                                                                                           2.27            (6.07)   (3.80)
           SF - HECM                                                                                                              5.76            (6.45)   (0.69)
           SF - Neg Equity Refi/ Short Refinance                                                                                 10.02           (10.02)     -
           GI/SRI
           Multifamily
             Apartments - NC/SC                                                                                                   2.42            (5.15)   (2.73)
             Apartments - NC/SC 04/01/2016                                                                                        1.91            (4.29)   (2.38)
             Apartments- Refinance                                                                                                0.29            (4.96)   (4.67)
             Apartments Refinance - 04/01/16                                                                                      0.31            (3.92)   (3.61)
           Healthcare
             MF - FHA Full Insurance - Health Care                                                                                4.00            (7.43)   (3.43)
             MF- Hospitals                                                                                                        3.23            (6.45)   (3.22)

                                                                                                                                         Fees and Other
(Percentage)                                                                                                              Defaults          Collections    Total

Budget Subsidy Rates for FY 2015 Loan Guarantees:

           MMI/CMHI
           Single Family
            SF (Forward) -01/27/2015 - present                                                                                    2.66            (8.01)   (5.35)
            SF (Forward) -10/01/2014 - 01/26/2015                                                                                 2.66           (11.69)   (9.03)
            SF- HECM                                                                                                              6.20            (6.60)   (0.40)
            SF- Short Refinance                                                                                                  10.06           (10.06)     -
           GI/SRI
           Multifamily
             Apartments                                                                                                           2.52            (6.17)   (3.65)
             Apartments Refinance                                                                                                 0.30            (4.99)   (4.69)
           Healthcare
             MF- Residential Care                                                                                                 3.79            (8.02)   (4.23)
             MF- Hospitals                                                                                                        2.61            (7.06)   (4.45)




                                                                                                                              
                                                                                                  69
Schedule for Reconciling Loan Guarantee Liability Balances:

                                                                                                               Restated
                                                                              FY 2016                           FY 2015
 (Dollars in Millions)                                                     LLR       LLG                     LLR       LLG
 Beginning Balance of the Loan Guarantee Liability                       $     7 $ 15,276                  $     9 $ 32,634
 Add:        Subsidy Expense for guaranteed loans disbursed during
             the reporting fiscal years by component:
                          Default Costs (Net of Recoveries)                       -                6,612       -              6,867
                          Fees and Other Collections                              -             (18,068)       -            (20,465)
                          Other Subsidy Costs                                     -                1,791       -                  -
             Total of the above subsidy expense components                        -              (9,665)       -           (13,598)
 Adjustments:
             Fees Received                                              $         -         $  14,018      $   -       $  13,274
             Foreclosed Property and Loans Acquired                               -            11,148          -          13,538
             Claim Payments to Lenders                                            -           (22,423)         -         (26,614)
             Interest Accumulation on the Liability Balance                       -              (189)         -             564
             Other                                                                -               814          -             372
 Ending Balance before Reestimates                                      $              7    $ 8,979        $       9   $ 20,170
 Add or Subtract Subsidy Reestimates by Component:
             Technical/Default Reestimate
                          Subsidy Expense Component                     $             (7) $      (4,951)   $       (2) $     (4,644)
                          Interest Expense Component                                              1,438                         782
             Adjustment of prior years' credit subsidy reestimates                     -         (6,272)           -         (1,032)
 Total Technical/Default Reestimate                                                   (7)       (9,785)         (2)        (4,894)
 Ending Balance of the Loan Guarantee Liability                         $         -         $     (806)    $       7   $ 15,276

Administrative Expense:

                                    (Dollars in Millions)   FY 2016    FY 2015
                                       MMI/CMHI                  586        556
                                       GI/SRI                      -          1
                                       H4H                         -          -
                                    Total                        586        557




                                 
                                                             70
Other Information on Foreclosed Property:

Additional information on FHA foreclosed property as of September 30, 2016 and 2015 is as follows:


                                                                                                                             FY 2016      FY 2015
                              Average number of days in inventory for Sold Cases                                                    134       122
                              End of Fiscal Year active inventory                                                                23,176    25,109


The above chart references the average holding period for FHA foreclosed property, and the total number of foreclosed
properties on-hand as September 30, 2016. Foreclosed properties are primarily Single Family properties.

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, 2016 is comprised of only Single Family properties. There
are no Multifamily 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)).




                                                                                                                              
                                                                                                  71
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
Healthcare 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 funds. 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 three healthcare 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 Healthcare 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
                                 
                                                                     72
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 2016.

Mutual Mortgage Insurance (MMI) – On net, the MMI Fund LLG decreased from $10,434 million at the end of
fiscal year 2015 to $4,226 million at the end of fiscal year 2016. The decrease in liability can be attributed to
HECM and Forward loans. 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 2016 book-of-business which is forecasted to add approximately $8.3 billion in negative liability
to the MMI fund, in addition to a decrease in forecasted claim costs. Aside from economic forecasts, the major
factor affecting the HECM LLG calculation is the change to how the model projects maintenance and operations
costs for future years.

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 decreased from $ 7,622 million at the end of FY 2015 to $ 6,487
million at the end of FY 2016. This liability is driven more by long term house price appreciation forecasts than
short term forecasts. The HECM loans remaining in the GI/SRI fund benefit from slower UPB (Unpaid Principal
Balance) growth. The majority 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 $31.4 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 increased this year by $129 million, from ($1,203) million
to ($1,074) million, due to decreased insurance-in-force.


                                                                                                                              
                                                                                                  73
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 $20.4 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 increased this year by $2.5 million, from ($607) million to ($604) million.

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 third largest multifamily program in
the GI/SRI fund with an insurance-in-force of $14.5 billion. The Section 221(d)(4) liability increased by $1.5
million this year, from ($112) million to ($110.5) million.

GI/SRI Section 232 Healthcare New Construction (NC) - 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 billion. The Section 232 NC liability decreased by $12.4
million this year, from ($70.6) million to ($83) million due to lower claim and prepayment expectations.

GI/SRI Section 232 Healthcare 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 $22.9 billion. The Section
232 Refinance liability decreased by $56.5 million this year from ($686.6) million to 743.1) million due to an
increase in insurance-in-force.

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 $7.2 billion. The Section 242 liability increased by $45 million from ($224) million to ($179)
million due to lower premium revenue caused by increased prepayment expectations.

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 value, 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 that future revisions will be in the downward direction.

                                 
                                                          74
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. 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.

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 FHA’s 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. This second opinion directly
addresses potential model risk by evaluating whether 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 at 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 ability 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 is also 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 based on the quality of business management at each facility, and from the supply of
medical care in each community relative to demand and the ability of facility management to adapt to changing
technologies and the competitive landscape. These are factors for which it is difficult to predict future trends.

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 properties.

MMI Single Family LLR - For the single family portfolio, the remaining insurance-in-force for Pre-Credit Reform
loans is $717 million. The aggregate liability for the remaining pre-credit reform loans in FY 2016 is $1.1 million,
which is a $5.4 million decrease.


                                                                                                                              
                                                                                                  75
GI/SRI Multifamily & Healthcare LLR - For the multifamily and healthcare portfolio, the remaining insurance-in-
force for pre-credit reform loans is $356 million. The aggregate liability for the remaining pre-credit reform loans
in FY 2016 is ($1) million, which is a $500 thousand increase from the ($1.5) million estimate in FY 2015. The
year-over-year increase in aggregate liability is due to a $129 million decline in insurance-in-force as both measures
move closer to zero.




                                 
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Note 7. Other Assets

The following table presents the composition of Other Assets held by FHA as of September 30, 2016 and 2015:

                           (Dollars in millions)
                                                                                                                                     FY 2016         FY 2015
                           Intragovernmental:
                            Advances to HUD for Working Capital Fund Expenses                                                    $             - $             1
                           Total                                                                                                 $             - $             1

                           With the Public:
                            Escrow Monies Deposited at Minority-Owned Banks                                                      $         29 $            37
                            Deposits in Transit                                                                                            24               8
                           Total                                                                                                 $         53 $            45



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 renovation expenses. These escrow monies are deposited at the U.S. Treasury (see Note 2), invested in
U.S. Treasury securities (see Note 4 - GI/SRI Investments) or deposited at minority-owned banks.

Deposits in Transit

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




.




                                                                                                                              
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Note 8. Accounts Payable

Accounts Payable as of September 30, 2016 and 2015 are as follows:

                               (Dollars in millions)

                                                                                  FY 2016           FY 2015
                               Intragovernmental:
                               Claims Payable to Ginnie Mae                       $        7 $          -
                               Payables to U.S. Treasury                                   -                -
                               Miscellaneous Payables to Other Federal Agencies            -                1
                               Total                                              $        7    $           1



                                                                                      FY 2016       FY 2015
                               With the Public:
                                Claims Payable                                    $      311 $         357
                                Premium Refunds Payable                                  141           142
                                Single Family Property Disposition Payable                21            25
                                Miscellaneous Payables                                    22            21
                               Total                                              $      495    $      545

Claims Payables

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

Premium Refunds Payables

Premium refund payables 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 Payables

Single family property disposition payables 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.




                                 
                                                                    78
Note 9. Debt

The following tables describe the composition of Debt held by FHA as of September 30, 2016 and 2015:


(Dollars in millions)


                                                                             FY 2016                                                                    FY 2015

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



Other Debt:
    Borrowings from FFB                                         102                      452                     554                              -                 122              122
    Borrowings from U.S. Treasury                             26,921                   3,398                  30,319                         27,528                (627)          26,901
Total                                         $              27,023 $                  3,850 $                30,873        $                27,528 $              (505) $        27,023

                                                                                                      FY 2016                                                                FY 2015
Classification of Debt:
    Intragovernmental Debt                                                                      $             30,873                                                     $        27,023
    Debt Held by the Public                                                                                        -                                                                   -
Total                                                                                           $             30,873                                                     $        27,023




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 2016, FHA’s U.S. Treasury borrowings carried interest rates ranging from 1.02 percent to 7.59
percent. In fiscal year 2015, they carried interest rates ranged from 1.02 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.

Borrowings from Federal Financing Bank:

Starting in FY 2015, FHA began a Federal Financing Bank (FFB) Risk Share program, an inter-agency partnership
between HUD, FFB and the Housing Finance Authorities (HFAs). The FFB Risk Share program provides funding
for multifamily mortgage loans insured by FHA. Under this program, FHA records a direct loan from the public
and borrowing from FFB. The program does not change the basic structure of Risk Sharing; it only substitutes FFB
as the funding source. The HFAs would originate and service the loans, and share in any losses.




                                                                                                                              
                                                                                                    79
Note 10. Other Liabilities

The following table describes the composition of Other Liabilities as of September 30, 2016 and 2015:

                                    (Dollars in millions)

                                    FY 2016                                       Current
                                    Intragovernmental:
                                     Receipt Account Liability                $        2,765
                                    Total                                     $       2,765

                                    With the Public:
                                    Trust and Deposit Liabilities             $           64
                                    Multifamily Notes Unearned Revenue                   247
                                    Premiums collected on unendorsed cases               345
                                     Miscellaneous Liabilities                          198
                                    Total                                     $         854

                                                                                  Restated
                                    FY 2015                                       Current
                                    Intragovernmental:
                                     Receipt Account Liability                $        2,889
                                    Total                                     $       2,889

                                    With the Public:
                                     Trust and Deposit Liabilities            $          63
                                     Multifamily Notes Unearned Revenue                 251
                                     Premiums collected on unendorsed cases             326
                                     Miscellaneous Liabilities                           86
                                    Total                                     $         726




                                 
                                                                 80
Receipt Account Payable Liability

The receipt account payable liability is created from downward credit subsidy reestimates in the GI/SRI receipt
account.

Trust and Deposit Liabilities

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

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.

Miscellaneous Liabilities

Miscellaneous liabilities mainly include disbursements in transit (cash disbursements pending Treasury
confirmation), unearned premium revenue, and any loss contingencies that are recognized by FHA for past events
that warrant a probable, or likely, future outflow of measurable economic resources.




                                                                                                                              
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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, 2016.


Activity with Ginnie Mae

As of September 30, 2016, 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 2016       FY 2015
                                                                                (in Millions) (in Millions)
 Mortgages Held for Investment & Foreclosed Property (Pre-claim)                        3,950         5,000
 Short Sale Claims Receivable                                                              94            48

“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.




                                 
                                                        82
Note 12. Gross Costs

Gross costs incurred by FHA for the period ended September 30, 2016 and 2015 are as follows:


(Dollars in millions)


                                                          Single Family                                                                                    Administrative
FY 2016                                                      Forward                   HECM                Multifamily                 Healthcare            Expenses            Total
Intragovernmental:
  Interest Expense                                    $                    791 $                 234 $                    115 $                  81 $                    - $              1,221
  Imputed Cost                                                               -                     -                         -                    -                     15                   15
  Other Expenses                                                             -                     -                        (4)                   4                      2                    2
Total                                                 $                    791 $                 234 $                    111 $                  85 $                   17 $             1,238

With the Public:
 Salary and Administrative Expense                    $                       - $                    - $                         - $                 - $               584 $               584
  Subsidy Expense                                                       (9,083)                  (102)                    (400)                (131)                        -            (9,716)
   Re-estimate Expense                                                  (7,859)                  (300)                      49                  (10)                        -            (8,120)
  Interest Expense                                                      (1,585)                   (60)                       7                      41                      -            (1,597)
  Interest Accumulation Expense                                           (254)                   157                      (74)                 (28)                        -              (199)
  Bad Debt Expense                                                           (3)                     -                       8                       -                      -                 5
  Loan Loss Reserve                                                          (6)                     -                           -                  (1)                     -                (7)
  Other Expenses                                                             26                      -                      21                       -                      7               54
Total                                                 $               (18,764) $                (305) $                  (389) $               (129) $                 591 $         (18,996)


Total Gross Costs                                     $               (17,973) $                  (71) $                 (278) $                (44) $                 608 $         (17,758)



                                                                                     Restated                                                                                   Restated
                                                          Single Family                                                                                    Administrative
FY 2015                                                      Forward                   HECM                Multifamily                 Healthcare            Expenses            Total
Intragovernmental:
  Interest Expense                                    $                    955 $                  59 $                    104 $                  73 $                    - $              1,191
  Imputed Cost                                                               -                     -                        -                     -                     15                   15
Total                                                 $                    955 $                  59 $                    104 $                  73 $                   15 $             1,206

With the Public:
 Salary and Administrative Expense                    $                      - $                    - $                    -     $               -     $               557 $              557
 Subsidy Expense                                                       (13,018)                   (65)                    (399)                 (125)                    -            (13,607)
  Re-estimate Expense                                                      185                 (3,430)                     (70)                    (6)                   -             (3,321)
 Interest Expense                                                         (604)                (1,028)                     (17)                    51                    -             (1,598)
 Interest Accumulation Expense                                             140                    526                      (39)                  (61)                    -                566
 Bad Debt Expense                                                           (2)                     3                      (44)                     -                    -                (43)
 Loan Loss Reserve                                                          (1)                     -                        (2)                    1                    -                 (2)
 Other Expenses                                                             17                      1                        12                     -                   10                 40
Total                                                 $               (13,283) $              (3,993) $                  (559) $               (140) $                 567 $         (17,408)

Total Gross Costs                                     $               (12,328) $              (3,934) $                  (455) $                (67) $                 582 $         (16,202)




                                                                                                                              
                                                                                                  83
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.

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.




                                 
                                                         84
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.




                                                                                                                              
                                                                                                  85
Note 13. Earned Revenue

Earned revenues generated by FHA for the period ended September 30, 2016 and 2015 are as follows:


(Dollars in millions)

                                                       Single Family
FY 2016                                                   Forward           HECM       Multifamily   Healthcare         Total
Intragovernmental:
 Interest Revenue from Deposits at U.S. Treasury   $              537 $        391 $            32 $         53 $            1,013
 Interest Revenue from MMI/CMHI Investments                       125           12               -            -                137
 Gain on Sale of MMI/CMHI Investments                               -            -               -            -                  -
Total Intragovernmental                            $              662 $        403 $            32 $         53 $           1,150

With the Public:
 Insurance Premium Revenue                         $                1   $          -   $         1 $              - $            2
 Income from Notes and Properties                  $               11   $          -   $        42                1             54
 Other Revenue                                     $                2   $          1   $         9                -             12
Total With the Public                              $               14   $          1   $        52 $              1 $           68

Total Earned Revenue                               $             676 $         404 $            84 $         54 $           1,218

                                                       Single Family
FY 2015                                                   Forward           HECM       Multifamily   Healthcare         Total
Intragovernmental:
 Interest Revenue from Deposits at U.S. Treasury   $             1,095 $       584 $            58 $         16 $            1,753
 Interest Revenue from MMI/CMHI Investments                         38           -               -            -                 38
 Gain on Sale of MMI/CMHI Investments                                -           -               -            -                  -
Total Intragovernmental                            $            1,133 $        584 $            58 $         16 $           1,791

With the Public:
 Insurance Premium Revenue                         $                (1) $          1 $           2 $              - $            2
 Income from Notes and Properties                                  11              -            38                1             50
 Other Revenue                                                       1             -             5                -              6
Total With the Public                              $               11 $            1 $          45 $              1 $           58

Total Earned Revenue                               $            1,144 $        585 $           103 $         17 $           1,849



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.

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.



                                 
                                                                 86
Gain on Sale of MMI/CMHI Investments

Gains occur as a result of a 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 2016 were:

                                                              Upfront Premium Rates
  10/01/2015 - 9/30/2016
  Single Family                                                         1.75%
  Multifamily                                                           0.25%, 0.50%, 0.65%, 0.80% or 1.00%
  HECM Standard                                                         2.50% (Based on Maximum Claim Amount)
  HECM Saver                                                            0.50% (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 2016 were:

                                                     Annual Periodic Premium Rates
Singel Family
10/01/2015 - 1/25/2016                                                  0.80%, 0.85%, 1.00% or 1.05%
01/27/16 to present                                                     1.30%, 1.35%, 1.50% or 1.55%
Multifamily                                                             0.45%, 0.57%, 0.65% or 0.70%
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.



                                                                                                                              
                                                                                                  87
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.




                                 
                                                     88
Note 15. Transfers Out and Other Financing Sources

Transfers in/out incurred by FHA for the period ended September 30, 2016 and 2015 are as follows:

                          (Dollars in millions)

                                                                                           Cumulative
                                                                                                                       Unexpended
                          FY 2016                                                          Results of                                     Total
                                                                                                                      Appropriations
                                                                                           Operations
                          Transfers Out:
                          HUD                                                          $                    480 $                  - $              480
                          Other Financing Sources:
                          Treasury                                                     $                (2,063) $                  - $        (2,063)

                                                                                            Restated                                     Restated
                                                                                           Cumulative
                                                                                                                       Unexpended
                          FY 2015                                                          Results of                                     Total
                                                                                                                      Appropriations
                                                                                           Operations
                          Transfers Out:
                          HUD                                                          $                    442 $                  - $              442
                          Other Financing Sources:
                          Treasury                                                     $                (4,217) $                  - $        (4,217)




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.




                                                                                                                              
                                                                                                  89
Note 16. Unexpended Appropriations


Unexpended appropriation balances at September 30, 2016 and 2015 are as follows:

  (Dollars in millions)
                                      Beginning    Appropriations     Other       Appropriations
  FY 2016                              Balance       Received      Adjustments        Used       Ending Balance
  Positive Subsidy                  $          454 $            - $         (452) $            - $           2
  Working Capital and Contract
  Expenses                          $        260   $           130   $        (48)   $       (109)          233
  Reestimates                       $          -   $         3,282   $          -    $     (3,282)            -
  GI/SRI Liquidating                $        157   $            25   $          -    $         (2)          180
  Total                             $        871   $        3,437    $      (500)    $    (3,393) $         415



                                      Beginning    Appropriations     Other      Appropriations
  FY 2015                              Balance       Received      Adjustments       Used       Ending Balance
  Positive Subsidy                  $          464 $            - $         (10) $            - $          454
  Working Capital and Contract
  Expenses                                   274               130           (20)            (124)          260
  Reestimates                                  -             2,080             -           (2,080)            -
  GI/SRI Liquidating                         134                25             -               (2)          157
  Total                             $        872 $          2,235 $          (30) $       (2,206) $         871




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.




                                 
                                                       90
Note 17. Budgetary Resources

The SF-133 and the Statement of Budgetary Resources for fiscal year 2015 have been reconciled to the fiscal year
2015 actual amounts included in the Program and Financing Schedules presented in the fiscal year 2017 Budget of
the United States Government. There were no significant reconciling items. Information from the fiscal year 2016
Statement of Budgetary Resources will be presented in the fiscal year 2018 Budget of the U.S. Government. The
Budget will be transmitted to Congress on the first Monday in February 2017 and will be available from the
Government Printing Office and online at that time.

Obligated balances as of September 30, 2016 and 2015 are as follows:

              Unpaid Obligations


                                                   (Dollars in Millions)
                                                   Undelivered Orders                                           FY 2016 FY 2015
                                                    MMI/CMHI                                                     $ 1,598 $ 1,658
                                                    GI/SRI                                                           597     368
                                                    H4H                                                                1       1
                                                    EI                                                                 -      17
                                                   Undelivered Orders Subtotal                                   $ 2,196 $ 2,044


                                                   Accounts Payable
                                                    MMI/CMHI                                                     $         670 $   663
                                                    GI/SRI                                                                 130     343
                                                   Accounts Payable Subtotal                                     $         800 $ 1,006

                                                   Total                                                         $ 2,996 $ 3,050




                                                                                                                              
                                                                                                  91
Note 18. Budgetary Resources - Collections

The following table presents the composition of FHA’s collections for the period ended September 30, 2016 and
2015:

             (Dollars in Millions)


                                                     MMI/CM        GI/SRI         H4H         Total
             FY 2016                                   HI
             Collections:
              Premiums                                $  13,201 $         853 $          1 $ 14,055
              Notes                                       1,584           574            1     2,159
              Property                                    4,134           232            1     4,367
              Interest Earned from U.S. Treasury            730           390            -     1,120
              Subsidy                                     9,185             -            -     9,185
              Reestimates                                18,969         3,282            -    22,251
             Collections from settlements                   679             -            -       679
              Other                                         185            16            1       202
             Total                                    $ 48,667 $       5,347 $           4 $ 54,018



                                                     MMI/CM        GI/SRI         H4H         Total
             FY 2015                                   HI
             Collections:
              Premiums                                $  12,593 $         859 $          1 $ 13,453
              Notes                                       2,194           507            -     2,701
              Property                                    4,319           193            1     4,513
              Interest Earned from U.S. Treasury          1,362           379            -     1,741
              Subsidy                                    13,086             -            -    13,086
              Reestimates                                21,327         2,080            -    23,407
              Collections from settlements                  961             -            -       961
              Other                                          52             9            -        61
             Total                                    $ 55,894 $       4,027 $           2 $ 59,923




                                 
                                                      92
Note 19. Budgetary Resources – Obligations

The following table presents the composition of FHA’s obligations for the period ended September 30, 2016 and
2015:


(Dollars in Millions)


                                                                                                       MMI/CM                GI/SRI        H4H             EI/TI          Total
September 30, 2016                                                                                       HI
Obligations
 Claims                                                                                               $ 18,567 $                 2,981 $             2 $            - $  21,550
 Property Expenses                                                                                          605                      44          -                 -        649
 Interest on Borrowings                                                                                     931                    278           -                 -      1,209
 Subsidy                                                                                                  9,184                    569           -                 -      9,753
 Downward Reestimates                                                                                    15,461                   1,463          -                 -     16,924
 Upward Reestimates                                                                                       3,508                   3,282          -                 -      6,790
 Admin, Contract and Working Capital                                                                        121                      -           -                 -        121
 FFB Direct Loans                                                                                            -                     688           -                 -        688
 Other                                                                                                       98                    105           -                 -        203
Total                                                                                                 $ 48,475 $                 9,410 $             2 $             - $ 57,887



                                                                                                       MMI/CM                GI/SRI        H4H             EI/TI          Total
September 30, 2015                                                                                       HI
Obligations
 Claims                                                                                               $ 19,412 $                 3,680 $             4 $            - $ 23,096
 Property Expenses                                                                                          794                      86              1             -       881
 Interest on Borrowings                                                                                     937                    251               -             -     1,188
 Subsidy                                                                                                 13,085                    561               -             -    13,646
 Downward Reestimates                                                                                     8,436                   2,276              -             -    10,712
 Upward Reestimates                                                                                      12,891                   2,080              -             -    14,971
 Admin, Contract and Working Capital                                                                        130                       -              -             -       130
 Other                                                                                                       26                    193               -             -       219
Total                                                                                                 $ 55,711 $                 9,127 $             5 $           - $ 64,843




                                                                                                                              
                                                                                                  93
Note 20. 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, 2016 and 2015:


                                                                                                                           Restated
(Dollars in Millions)                                                                                        FY 2016        FY2015
RESOURCES USED TO FINANCE ACTIVITIES:
Obligations Incurred - SBR                                                                               $     57,890 $      64,843
 Spending Authority from Offsetting Collections and Recoveries - SBR                                          (54,742)       (60,362)
Offsetting Receipts - SBR                                                                                      (2,000)        (2,797)
Other Finaincing Sources - NP                                                                                  (2,063)        (4,217)
Transfers In/Out Without Reimbursement                                                                           481            442
Imputed Financing Sources                                                                                         15             15
TOTAL RESOURCES USED TO FINANCE ACTIVITIES                                                               $      (419) $      (2,076)


RESOURCES THAT DO NOT FUND THE NET COST OF OPERATIONS:
Undelivered Orders and Adjustments                                                                       $       (150) $        (127)
Revenue and Other Resources                                                                                    56,036        62,726
Purchase of Assets                                                                                            (50,134)       (49,188)
Appropriations for prior Year Re-estimate                                                                      (6,829)       (14,972)
Other Resources or Adjustments to Net Obligated Resources that do not Affect Net Cost of Operations             1,567         3,761
TOTAL RESOURCES NOT PART OF NET COST OF OPERATIONS                                                       $       490 $        2,200


Total Resources Used to Finance the Net Cost of Operations                                               $        71 $          124



COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL NOT REQUIRE OR GENERATE RESOURCES IN THE 
CURRENT PERIOD
Upward Reestimate of Credit Subsidy Expense                                                              $      5,561 $      12,881
Downward Reestimate of Credit Subsidy Expense                                                                 (15,297)       (17,776)
Changes in Loan Loss Reserve Expense                                                                               (7)            (1)
Changes in Bad Debt Expenses Related to Uncollectible Pre-Credit Reform Receivables                                 5            (42)
Reduction of Credit Subsidy Expense from Endorsements and Modifications of Loan Guarantees                     (9,716)       (13,607)
Gains or Losses on Sales of Credit Program Assets                                                                 25             15
Other                                                                                                            382            355
COMPONENTS OF THE NET COST (SURPLUS) OF OPERATIONS THAT WILL NOT REQUIRE OR GENERATE RESOURCES IN THE 
CURRENT PERIOD                                                                                         $     (19,047) $     (18,175)


Net Cost of Operations                                                                                   $   (18,976) $     (18,051)




                                 
                                                                                      94
Note 21. Restatement of FHA’s Fiscal Year 2015 Financial Statements


In FY 2016, FHA corrected material misstatements in the Consolidated Balance Sheet (BS), the
Statement of Net Cost (SNC) and the Statement of Changes in Net Position (SCNP) to recognize the
reduction of erroneous accrued expenses in the Home Equity Conversion Mortgage (HECM) cash flow
model assumptions used to calculate the agency’s Liability for Loan Guarantees (LLG). Historically
reported property Maintenance and Operating (M&O) management expenses erroneously included
accrued costs that resulted in FHA’s LLG to be overstated by $830 million in FY14 and $833 million in
FY 2015. As a result, the overstated total gross cost of HECM expenses reported on the SNC for FY
2014 caused the cumulative results of operations reported on the SCNP to be understated by $1.4 billion.
The same error occurred in the calculation of the FY 2015 model expense rate assumptions however,
there was less of a net impact on FY 2015 reporting. The net effect of the error for both years, offset by
the adjustment for the annual reestimates, resulted in the overall HECM gross cost reported on the SNC
in FY 2015 to be overstated by $1.4 million and the cumulative result of operations on the SCNP to be
understated by $835 million.

Maintenance and Operating (M&O) expenses represent primarily Management and Marketing contract
expenses maintained in the SAMS property management system. FHA uses M&O expenses in the cash
flow model assumptions to calculate the LLG. In FY14 and FY15, the M&O expense reports FHA
received for HECM showed significant increases in M&O expenses over previous years. FHA initially
attributed the increases to an increase in expenses related to HECM property sales and projected the
increase to level off and return to previous levels. In FY16, further research of the M&O data found that
accrued costs (interest, service fees from assignment to conveyance, and mortgage insurance premiums)
were being incorrectly included in the M&O expenses. These activities were inappropriate to include
since they do not represent cash flows.

FHA has restated its FY15 financial statements to correct the reported balance of the LLG in the current
period. Due to the imminent publishing of the FY16 audited financial statements, the FY15 restatement
will be presented comparatively. Recalculation of the FY14 corrected LLG and net costs of operations
are reflected in the restated FY15 beginning balance of the Statement of Changes in Net Position. The
restatement will affect the line balances of the Loan Receivables and Related Foreclosed Property, Other
Liabilities, LLG and Current Year Results of Operations on the Balance Sheet; the HECM Gross Cost
with the Public on the Statement of Net Cost; the Changes in Net Position beginning balance, Other
Financing Sources and Net Costs of Operations on the Statement of Changes in Net Position; and related
footnotes.




                                                                                                                              
                                                                                                  95
                                 
                                    96
                                                                                                                              
                                                                                                  97
                                 
                                    98
Required Supplementary Information

Schedule A: Intragovernmental Assets

FHA's Intra-governmental assets, by Federal entity, are as follows on September 30, 2016 and 2015:

           (Dollars in Millions)

                                                                  Fund Balance             Investments in
                                                                     with U.S.              U.S. Treasury    Accounts
           FY 2016                                                   Treasury                Securities     Receivable Other Assets                     Total
           U.S. Treasury                                           $      20,820           $        36,397 $          - $         - $                      57,217
                                  Total                            $     20,820            $       36,397 $           - $         - $                     57,217



                                                                  Fund Balance Investments in
                                                                    with U.S.   U.S. Treasury                           Accounts
           FY 2015                                                  Treasury     Securities                             Receivable    Other Assets      Total

           U.S. Treasury                                           $         39,057 $                    14,754 $                    - $        - $         53,811
           HUD                                                                    -                           -                      -          1                1
                                  Total                            $        39,057 $                    14,754 $                     - $        1 $        53,812

Schedule B: Intragovernmental Liabilities

FHA's Intra-governmental liabilities, by Federal entity, are as follows on September 30, 2016 and 2015:


                         (Dollars in Millions)


                                                                                     Accounts                           Other
                         FY 2016                                                      Payable            Borrowings   Liabilities               Total
                         Federal Financing Bank                                  $                  -    $       555 $            - $                555
                         U.S. Treasury                                                              -         30,318         2,765                33,083
                         HUD                                                                        7              -              -                    7
                                       Total                                    $                   7    $   30,873 $       2,765 $              33,645




                                                                                                                   Restated       Restated
                                                                                     Accounts                       Other
                         FY 2015                                                      Payable        Borrowings   Liabilities      Total
                         Federal Financing Bank                                  $                 - $       122 $            - $        122
                         U.S. Treasury                                                             -      26,901         2,889        29,790
                         HUD                                                                       1           -              -            1
                         Total                                                   $                 1 $   27,023 $       2,889 $      29,913



                                                                                                                              
                                                                                                  99
Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program for Budgetary
September 30, 2016:



Dollars in Millions                                                              MMI/CMHI                MMI/CMHI           GI/SRI                             Budgetary
                                                                               Capital Reserve            Program          Program           Other              Total

Budgetary Resources:
Unobligated balance brought forward, October 1                             $             15,963      $           98    $            6    $        666      $      16,733
Unobligated balance brought forward, October 1, as adjusted                              15,963                  98                 6             666             16,733
Recoveries of prior year unpaid obligations                                                   -                  11                 -             230                241
Other changes in unobligated balance (+ or -)                                            (3,514)              3,468                 -            (635)              (681)
Unobligated balance from prior year budget authority, net                                12,449               3,577                 6             261             16,293
Appropriations (discretionary and mandatory)                                                  -                 130             3,276              25              3,431
Spending authority from offsetting collections (discretionary & mandatory)               24,771                   1                 -             238             25,010
Total budgetary resources                                                  $            37,220       $       3,708     $       3,282     $       524       $     44,734

Status of Budgetary Resources:
Obligations incurred                                                                          -               3,629             3,282             65               6,976
  Apportioned                                                                                 -                  58                 -             12                  70
  Unapportioned                                                                          37,220                   -                 -            428              37,648
Unexpired unobligated balance, end of year                                               37,220                  58                 -            440              37,718
Expired unobligated balance, end of year                                                      -                  21                 -             19                  40
Total unobligated balance, end of year                                                   37,220                  79                 -            459              37,758
Total budgetary resources                                                 $             37,220       $       3,708     $       3,282     $       524       $     44,734

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                           -             133                   1               430             564
Uncollected customer payments from Federal sources, brought forward,
October 1 (-)                                                                                (14)                 -                 -              (1)                (15)
Obligated balance, start of year (net), before adjustments (+ or -)                          (14)               133                 1             429                 549
Obligated balance, start of year (net), as adjusted                                          (14)               133                 1             429                 549
Obligations incurred                                                                           -              3,629             3,282              65               6,976
Outlays (gross) (-)                                                                            -             (3,613)           (3,282)            (58)             (6,953)
Change in uncollected customer payments from Federal sources (+ or -)                        (20)                 -                 -               -                 (20)
Recoveries of prior year unpaid obligations (-)                                                -                (11)                -            (230)               (241)
Unpaid obligations, end of year (gross)                                                        -                138                 1             207                 346
Uncollected customer payments from Federal sources, end of year                              (34)                 -                 -              (1)                (35)
Obligated balance, end of year (net)                                      $                 (34)     $         138     $            1    $       206       $         311

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                     24,771               131             3,276              263              28,441
Actual offsetting collections (discretionary and mandatory) (-)                          (24,751)                -                 -             (240)            (24,991)
Change in uncollected customer payments from Federal sources
(discretionary and mandatory) (+ or -)                                                       (20)                 -                 -                -                (20)
Recoveries of prior year unpaid obligations (-)                                                -                  -                 -                1                  1
Budget authority, net (discretionary and mandatory)                                            -                131             3,276               24              3,431
Outlays, gross (discretionary and mandatory)                                                   -              3,613             3,282               58              6,953
Actual offsetting collections (discretionary and mandatory) (-)                          (24,751)                 -                 -             (240)           (24,991)
Outlays, net (discretionary and mandatory)                                               (24,751)             3,613             3,282             (182)           (18,038)
Distributed offsetting receipts (-)                                                            -                  -                 -           (2,000)            (2,000)
Agency outlays, net (discretionary and mandatory)                         $             (24,751)     $       3,613     $       3,282     $     (2,182)     $     (20,038)




                                 
                                                                                 100
Required Supplementary Information

Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program for Budgetary
September 30, 2015:


Dollars in Millions                                                                              MMI/CMHI                  MMI/CMHI             GI/SRI                             Budgetary
                                                                                               Capital Reserve              Program            Program           Other              Total

Budgetary Resources:
Unobligated balance brought forward, October 1                             $                                7,337 $                   94   $           16    $        705 $             8,152
Unobligated balance brought forward, October 1, as adjusted                                                 7,337                     94               16             705               8,152
Recoveries of prior year unpaid obligations                                                                     -                     24                -              26                  50
Other changes in unobligated balance (+ or -)                                                              (7,337)                 7,317                -            (221)               (241)
Unobligated balance from prior year budget authority, net                                                       -                  7,435               16             510               7,961
Appropriations (discretionary and mandatory)                                                                    -                    130            2,070              25               2,225
Spending authority from offsetting collections (discretionary & mandatory)                                 15,963                  5,554                -             199              21,716
Total budgetary resources                                                  $                              15,963 $               13,119    $       2,086     $       734 $            31,902

Status of Budgetary Resources:
Obligations incurred                                                                                            -                 13,021            2,080                 69           15,170
  Apportioned                                                                                                   -                     47                6                  3               56
  Unapportioned                                                                                            15,963                     52                -                661           16,676
Total unobligated balance, end of year                                                                     15,963                     98                6                665           16,732
Total budgetary resources                                                                  $              15,963       $         13,119    $       2,086     $           734   $      31,902

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                                            -                 146                  1               440              587
Uncollected customer payments from Federal sources, brought forward,
October 1 (-)                                                                                                    (8)                   -                -                  (1)             (9)
Obligated balance, start of year (net), before adjustments (+ or -)                                              (8)                 146                1                439              578
Obligated balance, start of year (net), as adjusted                                                              (8)                 146                1                439              578
Obligations incurred                                                                                              -               13,021            2,080                  69          15,170
Outlays (gross) (-)                                                                                               -              (13,010)          (2,080)                (52)        (15,142)
Change in uncollected customer payments from Federal sources (+ or -)                                            (6)                   -                -                   -              (6)
Recoveries of prior year unpaid obligations (-)                                                                   -                  (24)               -                 (26)            (50)
Unpaid obligations, end of year (gross)                                                                           -                  133                1                431              565
Uncollected customer payments from Federal sources, end of year                                                (14)                    -                -                  (1)            (15)
Obligated balance, end of year (net)                                                       $                   (14) $               133 $               1 $              430 $           550

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                                      15,963                  5,684           2,070              224              23,941
Actual offsetting collections (discretionary and mandatory) (-)                                           (21,512)                     -               -             (198)            (21,710)
Change in uncollected customer payments from Federal sources
(discretionary and mandatory) (+ or -)                                                                         (5)                     -                -               (1)                 (6)
Budget authority, net (discretionary and mandatory)                                                        (5,554)                 5,684            2,070               25               2,225
Outlays, gross (discretionary and mandatory)                                                                    -                 13,010            2,080               52             15,142
Actual offsetting collections (discretionary and mandatory) (-)                                           (21,512)                     -                -             (198)           (21,710)
Outlays, net (discretionary and mandatory)                                                                (21,512)                13,010            2,080             (146)             (6,568)
Distributed offsetting receipts (-)                                                                             -                      -                -           (2,797)             (2,797)
Agency outlays, net (discretionary and mandatory)                                          $             (21,512) $              13,010    $       2,080     $     (2,943) $           (9,365)




                                                                                                                              
                                                                                                 101
Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by FHA Program for Non-Budgetary September
30, 2016:

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

Budgetary Resources:
Unobligated balance brought forward, October 1                                       $         27,597   $           6,360   $            29 $         33,986
 Adjustment to unobligated balance brought forward, October 1 (+ or -)                              -                   -                 (3)             (3)
Unobligated balance brought forward, October 1, as adjusted                                    27,597               6,360                26           33,983
Recoveries of prior year unpaid obligations                                                       409                  54                  -             463
Unobligated balance from prior year budget authority, net                                      28,006               6,414                26           34,446
Borrowing authority (discretionary and mandatory)                                              11,021               1,536               520           13,077
Spending authority from offsetting collections (discretionary and mandatory)                   16,405               3,381                14           19,800
Total budgetary resources                                                            $        55,432    $         11,331    $           560 $        67,323

Status of Budgetary Resources:
Obligations incurred                                                                           44,823               5,319                769          50,911
  Apportioned                                                                                   2,784               2,783                  7           5,574
  Unapportioned                                                                                 7,825               3,229               (216)         10,838
Unexpired unobligated balance, end of year                                                     10,609               6,012               (209)         16,412
Total unobligated balance, end of year                                                         10,609               6,012               (209)         16,412
Total budgetary resources                                                            $        55,432    $         11,331    $           560 $        67,323

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                           2,042                440                  3           2,485
Obligated balance, start of year (net), before adjustments (+ or -)                              2,042                440                  3           2,485
Adjustment to obligated balance, start of year (net) (+ or -)                                        -                  -                  3               3
Obligated balance, start of year (net), as adjusted                                              2,042                440                  6           2,488
Obligations incurred                                                                            44,823              5,319                769          50,911
Outlays (gross) (-)                                                                            (44,471)            (5,283)              (532)        (50,286)
Recoveries of prior year unpaid obligations (-)                                                   (409)               (54)                 -            (463)
Unpaid obligations, end of year (gross)                                                          1,985                422                243           2,650
Obligated balance, end of year (net)                                                 $          1,985 $              422 $              243 $         2,650

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                          27,426               4,917               533           32,876
Actual offsetting collections (discretionary and mandatory) (-)                               (23,905)             (5,106)               (16)        (29,027)
Budget authority, net (discretionary and mandatory)                                             3,521                (189)              517            3,849
Outlays, gross (discretionary and mandatory)                                                   44,471               5,283               532           50,286
Actual offsetting collections (discretionary and mandatory) (-)                               (23,905)             (5,106)               (16)        (29,027)
Outlays, net (discretionary and mandatory)                                                     20,566                 177               516           21,259
Distributed offsetting receipts (-)                                                                 -                   -                  -               -
Agency outlays, net (discretionary and mandatory)                                    $        20,566 $               177 $              516 $        21,259




                                 
                                                                               102
Required Supplementary Information

Schedule D: Comparative Combining Budgetary Resources by FHA Program for Non-Budgetary September
30, 2015:

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

Budgetary Resources:
Unobligated balance brought forward, October 1                                                                    $               37,072   $           8,474   $            23   $         45,569
Unobligated balance brought forward, October 1, as adjusted                                                                       37,072               8,474                23             45,569
Recoveries of prior year unpaid obligations                                                                                          333                  49                 -                382
Unobligated balance from prior year budget authority, net                                                                         37,405               8,523                23             45,951
Borrowing authority (discretionary and mandatory)                                                                                 10,003               2,020               123             12,146
Spending authority from offsetting collections (discretionary and mandatory)                                                      22,856               2,702                 5             25,563
Total budgetary resources                                                                                         $              70,264    $         13,245    $           151   $        83,660

Status of Budgetary Resources:
Obligations incurred                                                                                              $              42,667    $           6,884   $           122   $        49,673
Unobligated balance, end of year:
  Apportioned                                                                                                                      2,158               1,333                18              3,509
  Unapportioned                                                                                                                   25,439               5,028                11             30,478
Total unobligated balance, end of year                                                                                            27,597               6,361                29             33,987
Total budgetary resources                                                                                         $              70,264    $         13,245    $           151   $        83,660

Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross)                                                            $                1,806 $               423                  - $           2,229
Obligated balance, start of year (net), before adjustments (+ or -)                                                                1,806                 423                  -             2,229
Obligated balance, start of year (net), as adjusted                                                                                1,806                 423                  -             2,229
Obligations incurred                                                                                                              42,666               6,884                123            49,673
Outlays (gross) (-)                                                                                                              (42,097)             (6,819)              (119)          (49,035)
Recoveries of prior year unpaid obligations (-)                                                                                     (333)                (49)                 -              (382)
Unpaid obligations, end of year (gross)                                                                                            2,042                 439                  4             2,485
Obligated balance, end of year (net)                                                                              $               2,042 $               439 $                 4 $          2,485

Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory)                                                             $               32,859 $             4,721 $             128 $           37,708
Actual offsetting collections (discretionary and mandatory) (-)                                                                  (34,374)             (3,833)                (6)          (38,213)
Budget authority, net (discretionary and mandatory)                                                                               (1,515)                888               122               (505)
Outlays, gross (discretionary and mandatory)                                                                                      42,097               6,819               119             49,035
Actual offsetting collections (discretionary and mandatory) (-)                                                                  (34,374)             (3,833)                (6)          (38,213)
Outlays, net (discretionary and mandatory)                                                                                         7,723               2,986               113             10,822
Agency outlays, net (discretionary and mandatory)                                                                 $               7,723 $             2,986 $              113 $          10,822




                                                                                                                              
                                                                                                 103
Other Accompanying 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.




                                 
                                                         104
                                                FEDERAL HOUSING ADMINISTRATION
                                (AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
                                                      SCHEDULE OF SPENDING
                                                       As of September 30 2016
                                                              in millions

                                                                                                                                 FY 2016      2015
What Money is Available to Spend?
Total Resources                                                                                                                  $112,060   $115,562
Less Amount Available but Not Agreed to be Spent                                                                                   $5,638     $3,565
Less Amount Not Available to be Spent                                                                                             $48,533    $47,154
Total Amounts Agreed to be Spent                                                                                                 $57,889    $64,843


How Was the Money Spent?
Category*
    Claims                                                                                                                        $21,578    $22,996
    Property Expenses                                                                                                                $329       $385
    Interest on Borrowings                                                                                                         $1,209     $1,187
    Subsidy                                                                                                                        $9,716    $13,607
    Downward Reestimates                                                                                                          $16,924    $10,712
    Upward Reestimates                                                                                                             $6,790    $14,972
        Admin, Contract and Working Capital                                                                                         $111       $128
        FFB Direct Loans                                                                                                            $470         $0
        Other                                                                                                                       $111       $190


Total Spending                                                                                                                    $57,238    $64,177
Amounts Remaining to be Spent                                                                                                       $651       $666
Total Amounts Agreed to be Spent                                                                                                 $57,889    $64,843


Who Did the Money go to?
For Profit                                                                                                                        $22,780    $24,366
Government                                                                                                                        $35,109    $40,477
Total Amounts Agreed to be Spent                                                                                                 $57,889    $64,843


How Was the Money Issued?
        Claims                                                                                                                    $21,550    $23,096
        Property Expenses                                                                                                           $649       $880
        Interest on Borrowings                                                                                                     $1,209     $1,187
        Subsidy                                                                                                                    $9,754    $13,646
        Downward Reestimates                                                                                                      $16,924    $10,712
        Upward Reestimates                                                                                                         $6,790    $14,972
        Admin, Contract and Working Capital                                                                                         $121       $130
        FFB Direct Loans                                                                                                            $687         $0
        Other                                                                                                                       $205       $220
Total on how Money Was Issued                                                                                                    $57,889    $64,843

                                                                                                                              
                                                                                                 105