Federal Housing Administration,
Washington, DC
Fiscal Years 2017 and 2016 (Restated) Financial
Statements Audit
This audit report was reissued on February 13, 2018 to correct the Combined Statement of Budgetary
Resources for the period ended September 30, 2017 on page 44. The audit report was previously
reissued on November 27, 2017 to correct a number reported for deobligations on page 16 from $206.9
million to $71.9 million.
Office of Audit, Financial Audits Division Audit Report Number: 2018-FO-0003
Washington, DC November 15, 2017
To: Dana Wade, General 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 2017 and 2016 (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
2017 and 2016 (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 website. 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: 2018-FO-0003
Date: November 15, 2017
Audit of the Federal Housing Administration’s Financial Statements for
Fiscal Years 2017 and 2016 (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 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, 2017 and 2016 (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 2017 to restate its fiscal year 2016
financial statement notes. We conducted these audits in accordance with U.S. generally accepted
government auditing standards.
What We Found
In our opinion, FHA’s fiscal years 2017 and 2016 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 2017 Annual Management
Report. The results of our audit of FHA’s principal financial statements and notes for the fiscal
years ending September 30, 2017 and 2016, 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, two significant
deficiencies in internal controls, and no instances of noncompliance with applicable laws and
regulations, which are discussed further in the body of this report.
What We Recommend
To support reliable financial reporting, we recommend that FHA strengthen its existing system
of internal control processes, and policies, and procedures to (1) ensure effective model
governance implementation and (2) prevent or detect material misstatements occurring in the
financial statements and notes in a timely manner. Additionally, we recommend that FHA
deobligate $270.7 million to recapture funds with invalid obligations.
Table of Contents
Independent Auditor’s Report................................................................................3
Material Weaknesses ...............................................................................................9
Finding 1: Weaknesses Were Identified in FHA’s Modeling Processes ..................... 9
Finding 2: FHA’s Controls Over Financial Reporting Had Weaknesses ................. 16
Significant Deficiencies ..........................................................................................25
Finding 3: FHA’s Controls Related to Partial Claims Had Improved, but
Weaknesses Remained .................................................................................................... 25
Finding 4: Weaknesses Were Identified in Selected FHA Information Technology
Systems ............................................................................................................................. 28
Scope and Methodology .........................................................................................32
Followup on Prior Audits ......................................................................................34
Appendixes ..............................................................................................................36
A. Schedule of Funds To Be Put to Better Use ............................................................ 36
B. Auditee Comments and OIG’s Evaluation ............................................................. 37
C. FHA’s Fiscal Years 2017 and 2016 Financial Statements and Notes ................... 40
2
U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
OFFICE OF INSPECTOR GENERAL
Independent Auditor’s Report
General Deputy Assistant Secretary
Federal Housing Administration
In our audit of the fiscal years 2017 and 2016 (restated) financial statements of the Federal Housing
Administration (FHA), a component of the U.S. Department of Housing and Urban Development
(HUD), we found
• The financial statements and notes were presented fairly, in all material respects, in
accordance with U.S. generally accepted accounting principles.
• There were two material weaknesses in internal control over financial reporting.
• There were two significant deficiencies in internal control over financial reporting.
• There were no instances 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
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 funds to be put to better use.
Report on the Financial Statements
We audited the accompanying financial statements of FHA, which are composed of the balance
sheets as of September 30, 2017 and 2016 (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 of 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. 17-03, 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 17-03 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 17-03 that we deemed to be applicable to
FHA’s financial statements for the fiscal years ending September 30, 2017 and 2016. 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 was sufficient and appropriate to provide a
basis for our audit opinion.
4
Opinion on Financial Statements
In our opinion, the financial statements referred to above presented fairly, in all material respects,
the financial position of FHA as of September 30, 2017 and 2016 (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 7 to the financial statements, the loan guarantee liability (LGL) is an
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. In 2017, FHA
made a few model methodology changes. These changes included changing the methodology for
(1) calculating for the net present value of the future cash flows using a single path (President’s
Economic Assumption released in March 2017) instead of using an average of 100 paths for claim
and prepayments, which was the methodology used in 2016, and (2) discounting the timing of the
cash flows from the end of the year to the middle of the year for certain programs. We caution our
readers to be cognizant of the fact that the comparability of the LGL numbers in 2017, when
compared to those in 2016, could be impacted because of the changes. Our opinion was not
modified with respect to this matter.
Other Matters
Fiscal Year 2016 Financial Statements and Notes
In our report, dated November 14, 2016, we expressed an opinion that FHA’s financial statements
for fiscal year 2016 fairly presented the financial position of FHA’s financial statements as of
September 30, 2016, and its net costs, changes in net position, and budgetary resources for the years
then ended in accordance with generally accepted accounting principles. However, in fiscal year
2017, as discussed in note 21 to the financial statements, a material error was identified in the 2016
Note 7 - Direct Loans and Loan Guarantees and Note 12 - Gross Costs, which required correction of
the balances in fiscal year 2017. With the exception of the differences that FHA attributed to the
timing of information being transferred between systems as discussed in finding 2, note 7 was
restated to correct balances reported for the home equity conversion program (HECM) current-year
endorsements, the cumulative current outstanding balance, and maximum potential liability, and the
single family forward guaranteed loans outstanding and new guaranteed loans disbursed. Note 7
was also restated to correct the allocation of the technical/default reestimates between the subsidy
expense and interest expense components. Additionally, note 12 was restated to correct gross cost
with the public to adjust the allocation of reestimate and interest expenses. For these reasons, the
opinion expressed in the 2016 audited financial statements was no longer appropriate because the
accompanying notes to the financial statements as published at that time contained material
misstatements. Accordingly, our opinion on the audited financial statements for 2016 is withdrawn
because it can 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 analysis
and other required supplementary information be presented to supplement the financial statements.
Such information, although not a part of the financial statements, is required by the Federal
5
Accounting Standards Advisory Board, which considers it to be an essential part of financial
reporting for placing the financial statements into an appropriate operational, economic, or historical
context. We have applied certain limited procedures to the management discussion and analysis
and other required supplementary information in accordance with U.S. generally accepted
government auditing standards, 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 FHA Commissioner is presented for additional analysis is are not a required
part of the financial statements or required supplementary information. This information has not
been subjected to the auditing procedures applied in the audit of the financial statements, and,
accordingly, we do not express an opinion or provide 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.
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 four deficiencies in internal control, described below. We consider two to be material
weaknesses and two to be significant deficiencies.
Weaknesses Were Identified in FHA’s Modeling Processes
In 2017, we identified a number of weaknesses in FHA’s modeling processes. Specifically, these
weaknesses were related to FHA’s ineffective model documentation, model governance, and
modeling practices. All of these weaknesses were a direct result of FHA’s failure to ensure that
well-controlled modeling processes were implemented. As a result, FHA failed to prevent or detect
6
$631.8 million in total errors to its model output results, which support FHA’s LGL line item in its
financial statements. Further, given unresolved concerns regarding the predictive capability of the
single-family model, along with not following established policies and procedures and best practices
for model coding, all of these concerns could impact the reliability of FHA’s liabilities for loan
guarantees (LLG) estimates.
FHA’s Controls Over Financial Reporting Had Weaknesses
In fiscal year 2017, some of the control deficiencies in financial reporting identified in 2016
continued, and new control deficiencies were identified. Specifically, these new control
deficiencies included issues related to the timing of the recognition of the credit subsidy expense
and unrecorded accruals. In addition, FHA had material note disclosure errors in note 7 of the
financial statements. These note errors included (1) inaccurate disclosure of the loan endorsement
amounts for the 2017 and 2016 single-family and HECM programs and (2) incorrect allocation of
LGL reestimates between the subsidy expense and interest expense components in fiscal year 2016.
These conditions occurred because FHA did not have effective monitoring and processes in place to
ensure (1) that accounting events were recorded in a timely manner, (2) that accrual methodologies
were reviewed on a regular basis for completion and accuracy, and (3) the accuracy of data reported
in the financial statements. As a result, $382 million in accounting adjustments had to be made to
correct the errors in FHA’s accounting records, and $23.7 billion in restatements were made to
fiscal year 2016 endorsement amounts in note 7. Additionally, FHA may have missed an
opportunity to put $270.7 million of its unobligated funds to better use because invalid obligations
were not always deobligated on time.
FHA’s Controls Related to Partial Claims Had Improved, but Weaknesses Remained
In fiscal year 2017, FHA began billing noncompliant lenders for partial claims when the lenders had
not provided FHA with the related promissory note (second mortgage note) when the note was not
provided within 60 days of executing the partial claim. FHA began billing lenders between 2 and
59 days after the 60-day expiration period. While this was a marked improvement from waiting
until 6 months after the expiration period, it was not always immediately after as we had previously
recommended. A delay in FHA management’s reaching agreement to change the billing policy and
procedures was a contributing factor in FHA’s delay in fully implementing the controls in a timely
manner. Unnecessary delays in implementing the collection process from noncompliant lenders
with unsupported partial claims is not a good cash management practice and does not help improve
the health of the Mutual Mortgage Insurance fund. FHA should continue to implement its policy
and ensure that the implementation is fully carried out.
Weaknesses Were Identified in Select FHA Information Technology Systems
The Asset Disposition and Management System (ADAMS) application and the source applications
used in the credit reform estimation and reestimation process contained security vulnerabilities.
These conditions occurred because of a lack of contract oversight and insufficient coordination
between the Office of the Chief Information Officer (OCIO) and FHA. As a result, the
confidentiality, integrity, and availability of critical information may be negatively impacted. In
addition, the information used to provide input to the FHA financial statements could be adversely
affected. We also determined that remediation of weaknesses previously reported with the Single
Family Premium Collection Subsystem – Periodic (SFPCS-P), Single Family Acquired Asset
Management System (SAMS), Single Family Insurance System (SFIS), and Single Family
7
Insurance System Claims Subsystem (Claims) are in progress and expected to be fully remediated
—
within the agreed-upon timeframes.
Report on Compliance
As part of obtaining reasonable assurance about whether FHA’s financial statements were free from
material misstatement, we performed tests of their 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 ai opinion. The results
of our tests disclosed no instances of noncompliance that would be reportable under U.S. generally
accepted government auditing standards or 0MB audit guidance.
This report is intended for the information and use of the management of FHA, 0MB, the U.S.
Government Accountability Office, and Congress and is not intended to be and should not be used
by anyone other than these specified parties. However, this report is a matter of public record,
and
its distribution is not limited. The purpose of the Report on Internal Control Over Financial
Reporting and the Report on Compliance sections of this report 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 FHA’s internal control or compliance. These reports are an integral part
of
an audit performed in accordance with Government Auditing Standards in considering FHA’s
internal control and compliance. Accordingly, these reports are not suitable for any other purpose.
In addition to this report and providing specific recommendations to FHA management, we noted
other matters involving internal control over financial reporting and FHA’s operation that we
are
reporting to FHA management in a separate management letter.
Kim ny R. Ranhl
Acting Assistant Inspector General for Audit
Washington, DC
November 14, 2017
8
Material Weaknesses
Finding 1: Weaknesses Were Identified in FHA’s Modeling
Processes
In 2017, we identified a number of weaknesses in FHA’s modeling processes. Specifically,
these weaknesses were related to FHA’s ineffective model documentation, model governance,
and modeling practices. All of these weaknesses were a direct result of FHA’s failure to ensure
that well-controlled modeling processes were implemented. As a result, FHA failed to prevent
or detect $631.8 million in total errors to its model output results, which support FHA’s LGL line
item in its financial statements. Further, given unresolved concerns regarding the predictive
capability of the single-family model, along with not following established policies and
procedures and best practices for model coding, all of these concerns could impact the reliability
of FHA’s LGL estimates.
Current-Year Status of Prior-Year Audit Matters
In fiscal year 2016, we reported that FHA had not fully implemented an effective model risk
management governance framework. Specifically, FHA had not established or finalized policies
and procedures related to its modeling processes. In our fiscal year 2017 audit follow-up, we
noted that in response to our finding, FHA finalized its Credit Reform Board Charter and Model
Risk Management Guidelines in August 2017, 1 and addressed some of the model governance
deficiencies noted last year. However, due to late completion, we have not validated FHA’s full
implementation of the model governance framework. Additionally, none of the prior-year issues
had been fully remediated. The current-year status of each of the prior year findings are noted
below:
• In fiscal year 2016, FHA’s model assumption documentation for the single-family and
HECM programs was not consolidated into a single document, and FHA did not have a
model risk rating policy that included a model scoring or prioritization process. In fiscal
year 2017, FHA consolidated the assumption documentation for the single-family and
HECM programs into one document. FHA also established a model risk rating policy in
fiscal year 2017, but FHA did not implement the policy by scoring and prioritizing its
models according to their relative level of risk.
• During our fiscal year 2016 audit, we also cited FHA for not having defined requirements
for performing sensitivity analyses. In addition, FHA did not perform sensitivity
analyses on all of the assumptions made for the single-family, HECM, and multifamily
programs, contrary to Federal Accounting Standards Advisory Board, Technical Release
6, requirements. In 2017, while FHA had established policies and procedures for
performing sensitivity analyses, FHA was not following them. 2 Additionally, as in 2016,
1
The charter and guidelines, which were dated June 28, 2017, were signed by the General Deputy Assistant
Secretary for Housing on August 1, 2017.
2
FHA’s Model Risk Management Guidelines states that “The sensitivity of model results to each assumption must
be tested to determine materiality and reasonableness.”
9
FHA did not perform a sensitivity analysis on the assumptions used in the single-family,
HECM, and multifamily recovery on assets models and on all assumptions in the HECM
LLG model.
• Finally, in fiscal year 2016, FHA had not established policies and procedures for data
management and validation. For example, FHA did not have policies and procedures to
address the steps to be taken when inconsistent data are noted, or policies and procedures
for verifying the accuracy of data inputs. In fiscal year 2017, FHA developed policies
and procedures for data management and validation, which require statistics and trend
analysis to be performed to ensure the accuracy of data. However, for the single-family
and HECM programs, FHA had performed only a very small number of statistics on a
small subset of data and had not performed any trend analyses until we brought this issue
to its attention. For the multifamily program, FHA had not performed data validation on
all data that were used in the multifamily models.
Modeling Errors Not Detected or Prevented
In fiscal year 2017, we identified a number of errors in the modeling processes for the single-
family, HECM, and multifamily programs. FHA was unaware of these errors until we brought
them to its attention or the errors were identified as a result of our inquiry. Examples of errors
identified included using (1) an incorrect input dataset for the single-family model, (2) an
incorrect methodology for discounting the net present value of future cash flows for the HECM
program, (3) an incorrect housing price index-variable in the single-family and HECM models,
and (4) incorrect single effective rates for healthcare programs.
Incorrect Fair Isaac Corporation dataset used in the single-family LLG model. FHA
inadvertently loaded the incorrect Fair Isaac Corporation (FICO) dataset into the single-family
LLG model when it initially ran its final single-family LLG estimates. This data error came to
light in October 2017 when we could not replicate FHA’s model output results. After research,
FHA confirmed that the OIG’s model output results could not match up with FHA because FHA
had (1) provided OIG with an incorrect dataset, and (2) imported an incomplete loan FICO
dataset into its own estimates, which it attributed to an oversight. When FHA realized its loan
FICO import error in late October 2017, it reran its model to rectify the situation. This model
processing error, if not corrected, would have caused the single-family LLG amount to be
understated by $323.4 million, according to FHA.
Incorrect discounting methodology used in the HECM LLG model. When FHA initially
ran the final HECM LLG model in fiscal year 2017, FHA used the end-of-year period for
discounting the cash flows despite the fact that methodology used for all other programs
in 2017 was based on the middle of the year. 3 FHA acknowledged to us that an error had
been made and it reran the HECM models using the middle-of-year period. FHA
attributed the use of the incorrect discounting period to miscommunication. Had we not
identified this error, the HECM LLG would have been overstated by $280 million.
3
FHA used the end-of-year convention for both the HECM and single-family programs in fiscal year 2016.
10
Incorrect housing price index values used in the single-family and HECM LLG models.
FHA entered incorrect housing price index values into some of the single-family and
HECM LLG models. Had we not identified the error, the liability for loan guarantee for
the single-family program would have been understated by $7.8 million, based on FHA’s
calculation. 4 FHA did not measure the impact of the error for the HECM program, but
based on our analysis, the LLG for the HECM program would have been understated by
approximately $13.7 million.
Incorrect single effective rates were used for the healthcare programs. FHA used the
incorrect single effective rates (SER) 5 for the healthcare programs when it initially ran the
LLG and recovery on assets models. According to FHA, its policy is to use a different
single effective rate for the healthcare programs than the rate for the multifamily
programs. However, instead of using the single effective rate designated for the
healthcare programs, FHA inadvertently used the rate designated for the multifamily
programs. This occurred because FHA inadvertently copied the single effective rate for
multifamily to healthcare programs. After we brought this error to FHA’s attention, FHA
corrected the rates for the healthcare programs. Had we not identified this error, the LLG
for the healthcare programs would have been overstated by $6.9 million.
Relationships of Certain Variables Used in the Single-family Model Not Consistent With
Our Expectations
FHA may not have fully evaluated the reasonableness of certain relationships in the single-
family model, causing us concern. This concern was based on our observation that the
relationships of certain variables used in the model were not consistent with our
expectations. These inconsistencies, if not fully addressed, could significantly impact FHA’s
ability for its model to reliably predict future performance of the single-family portfolio. When
developing a model, random samples of loans are used to develop a model’s specifications.
There is typically a trade-off between how precisely the model is fit, or trained, using historical
loan experience and the ability of the model to reliably predict future outcomes for the loan
portfolio. A significant amount of professional judgement is needed to refine the model and
establish an appropriate balance between model complexity and model predictability. While
FHA generally appeared to exercise professional judgement in developing certain assumptions,
there were some instances in which it appeared that FHA did not fully evaluate the
reasonableness of certain relationships in the single-family model. Two examples are cited
below. 6
• One of the key future cash flows taken into account is the likelihood that a borrower will
prepay the loan. Generally, there is a positive relationship between a borrower’s FICO
score and the likelihood of prepayment. Borrowers with higher FICO scores are more
likely to prepay when compared to borrowers with lower FICO scores. However, FHA
used the opposite relationship in the model for borrowers with a FICO score in the
4
Based on our independent assessment, this amount appears to be reasonable.
5
The single effective interest rate is the disbursement-weighted average discount rate for substantially disbursed
cohorts.
6
We also identified other unreasonable relationships, which we have provided to FHA.
11
ranges of 550 to 650 and 725 to 750 and did not provide a reasonable explanation of why
the identified relationships were logical and to be expected.
• The loan-to-value ratio captures the original equity position of each borrower and is a key
factor in determining the likelihood of prepayment. The single-family model had
unintuitive relationships for certain loan-to-value ratio ranges. In the model, the direction
of the likelihood of prepayment changed back and forth for adjacent loan-to-value ratio
ranges in an unintuitive manner that was not in line with what would reasonably be
expected. In addition, FHA did not incorporate the 97.5 cut-off for the maximum loan-
to-value ratio, which is a key design feature of the single-family program.
Due to these unreasonable relationships, we have concerns regarding the reliability of the single-
family model in predicting the future performance of the single-family portfolio. Our concerns
are supported by the analysis that we performed. We tested FHA’s single-family model using
different randomly selected groups of loans used to develop relationships, while keeping
everything else the same. Simply changing the “training” data over six different model runs
produced LLG estimates that changed by $638 million. Although we did not have sufficient
time to perform a full statistical analysis on a much larger number of model runs, this variation in
the LLG estimates was larger than we would normally expect for randomly generated samples of
loans.
FHA’s Increased Susceptibility to Modeling Errors Due to Ineffective Modeling Practices
In addition to the modeling errors and the use of unreasonable assumptions in the single-family
model, we identified a number of modeling practices, which could significantly increase FHA’s
risk of continued modeling errors if they are not appropriately addressed. Specifically, we found
that (1) modeling documentation did not include necessary information and contained errors, (2)
correct datasets were not readily provided upon request so we could replicate the single-family
model results, and (3) some of FHA’s coding practices were contrary to best practices.
Ineffective model documentation. FHA’s model documentation did not contain necessary
information and contained errors. Our efforts to replicate model results were hindered because
FHA’s modeling documentation was incomplete and contained errors and not all required
datasets were provided. Federal Accounting Standards Advisory Board, Technical Release 6,
requires model documentation to be complete and stand on its own so that an independent person
could perform the same steps and replicate the same results with little or no outside explanation
or assistance. However, we spent a considerable amount of time attempting to replicate FHA’s
modeling results because we encountered the following problems: 7
• Information that should have been included in the model documentation was not
included. For example, documentation for the single-family and HECM models did not
include (1) the timing of developing certain assumptions and the time when data were
extracted to develop assumptions, (2) the values for the macro variables needed to
execute the main cash flow programs, (3) all input files and datasets required to run the
models, (4) an outline of which programs should be executed during each phase of model
7
We provided a detailed list of the problems that we encountered to FHA management during our audit.
12
execution, and (5) descriptions of all of the variables used in the single-family logistic
regression models.
• Inconsistent information was also included in model documentation for the single-family
and HECM programs. For example, the naming convention for variables listed in the
HECM model documentation did not agree with the naming convention used in the
model. For the single-family program, variables were incorrectly referenced on certain
pages of the model documentation.
• Model documentation for the single-family program contained errors. Specifically, we
found that (1) model documentation did not specify the correct computer specifications
for running the model, (2) the variable names in the model documentation did not always
agree with the variable names in the model code, and (3) model documentation
incorrectly stated that variables were used in a specific model when they were not.
Correct datasets for the single-family model were not initially provided. Our efforts to replicate
the single-family model results were hindered because required datasets were not provided upon
our initial request. For the single-family program, FHA did not initially provide us multiple
datasets needed to run the model, and in other cases, we were provided incorrect datasets. In
addition, the format of a file was changed within the model code between the interim and final
model versions, but the updated file was not provided to us when we were attempting to replicate
the results. We believe some of these conditions occurred because FHA did not have adequate
controls in place for ensuring that updated or correct files were maintained in a centralized
location.
Industry best model coding practices were not adopted. Adopting leading industry best coding
practices could minimize user error, and increase reliability, and reduce maintenance of FHA’s
programming code. For the single-family and HECM programs, we identified a number of
model coding practices and techniques which significantly increased FHA’s risk of modeling
errors. Specifically, we found that
• The single-family model had large sections of duplicated code. This coding practice
could lead to errors if the programmer or developer makes a change to the code in one
section of the model but not the other sections. Best coding practices suggest that
duplicate code be consolidated into one routine that can be called multiple times.
• The single-family program code referenced a specific file location in a risky manner.
This coding practice introduces increased risk of broken file references when file
locations are changed or code is moved to another system. This increases the difficulty
of maintaining the code since any update would require that the user identify and change
each reference to that specific file location throughout the code. In instances in which the
references point to data that are updated regularly, there is a risk that stale data will be
used and errors will go undetected since the model would not produce processing errors
or warnings. Best coding practices suggest using non-specific (“relative”) file path
structures that are independent of a particular file directory structure and can be updated
easily by changing as few lines of code as possible.
13
• For the HECM program area, the model’s output filenames changed depending on the
date of execution, and the model could not be executed without making manual
adjustments to the code that referenced those files. This practice requires significant user
intervention. The user has to verify the filenames before running each stage of the model
and then update the code to match the filenames. If the filename changes at a later point,
an error could be introduced without warning or detection. In addition to increasing the
risk of error, this practice lengthens the time that it takes to run the model. Best coding
practices suggest that programs be seamlessly executed from start to finish (“end to
end”) without significant user intervention along the way.
• When values and references were updated in the single-family and HECM programs,
FHA had to search throughout the entire program and make conforming changes. This
increases the risk of error if the user does not update every value or reference in the
programs. Best coding practice is to assign these types of “global” values or references
one time and group them together at the beginning of the code to enhance code usability
and minimize the risk of user error.
Conclusion
FHA should continue striving to improve its model governance to ensure the reliability of the
LLG estimates. In 2017, FHA developed a model governance framework. While this is a step in
the right direction, FHA needs to continue to monitor its activities to ensure full implementation
of the model governance framework. With regard to FHA’s controls over its models, we noted
that although FHA had some policies and procedures in place to ensure that modeling errors are
minimized, it needs to ensure that established policies and procedures are followed. In addition,
FHA can benefit from (1) performing additional analysis to identify assumptions that may skew
the LLG estimates, (2) improving its modeling documentation, and (3) following best coding
practices.
Recommendations
We recommend that the Director of the Office of Evaluation
1A. Establish and implement an effective quality control process to prevent or detect
model processing errors cited in our report and prevent other similar model
processing errors in the future.
1B. Reevaluate FHA’s existing model documentation for single-family, HECM, and
multifamily models to determine whether their current state is acceptable, so that
it provides the intended users a thorough understanding of how the model works
and also allows new users to assume responsibility for the model’s use
(operational procedures). Based on this review, FHA should make adjustments as
needed to the model documentation. At a minimum, these adjustments should
include appropriate actions taken to address model documentation deficiencies
cited in our report.
1C. Review FHA’s existing model coding for single-family, HECM, and multifamily
models and make necessary changes to make them consistent with industry’s best
practices in model coding. At a minimum, FHA should implement actions to
address model coding deficiencies cited in our report.
14
1D. Establish and implement policies and procedures for assessing and monitoring the
reliability of the work performed by FHA’s modeling contractors.
1E. Revisit the model’s ability to predict future performance of the single-family
portfolio, based on our concerns expressed in this report regarding relationships of
certain variables (such as loan-to-value ratio and FICO scores to prepayment) that
are not consistent with our expectations. FHA should provide us an analysis to
support its position if it believes that a model design change is not warranted.
1F. Correct the impact of all the modeling errors that we identified in this report.
15
Finding 2: FHA’s Controls Over Financial Reporting Had
Weaknesses
In fiscal year 2017, some of the control deficiencies in financial reporting identified in 2016
continued, and new control deficiencies were identified. Specifically, these new control
deficiencies included issues related to the timing in the recognition of the credit subsidy expense
and unrecorded accruals. In addition, FHA had material note disclosure errors in note 7 of the
financial statements. 8 These note errors included (1) inaccurate disclosure of the loan
endorsement amounts for the 2016 and 2017 single-family and HECM programs and (2)
incorrect allocation of LGL reestimates between the subsidy expense and interest expense
components in fiscal year 2016. These conditions occurred because FHA did not have effective
monitoring and processes in place to ensure (1) that accounting events were recorded in a timely
manner, (2) that accrual methodologies were reviewed on a regular basis for completion and
accuracy, and (3) the accuracy of data reported in the financial statements. As a result, $382
million9 in accounting adjustments had to be made to correct the errors in FHA’s accounting
records, and $23.7 billion 10 in restatements were made to fiscal year 2016 endorsement amounts
in note 7. Additionally, FHA may have missed an opportunity to put $270.7 million of its
unobligated funds to better use because invalid obligations were not always deobligated on time.
Current-Year Status of Prior-Year Audit Matters
Weaknesses in Deobligation of Unliquidated Balances Continued
In fiscal year 2016, we reported that FHA’s unliquidated balance review process had
weaknesses. Specifically, contracts with invalid obligations were not identified clearly and in a
timely manner, and excess funds were not deobligated for completed contracts. In connection
with our fiscal year 2017 audit follow-up, we noted that although there is now an effective
process to identify invalid contract obligations, challenges continued in deobligating these funds.
Of the $276.5 million identified as invalid deobligations during the fiscal year 2016 audit, $71.9
million had not been deobligated at the end of fiscal year 2017. In addition, during FHA’s fiscal
year 2017 unliquidated balance review, the program offices identified 158 contracts and projects
with invalid obligations totaling $299.2 million, but only $28.5 million had been deobligated at
the end of fiscal year 2017. The remaining $270.7 million was awaiting action from FHA or the
Office of Contracting and Procurement for deobligation.
Challenges in Clearing Discrepancies in the Undelivered Order Balances for Management and
Marketing Contracts Continued
In fiscal year 2016, we reported that FHA’s individual contract undelivered order balances for
single-family management and marketing contracts were not accurate on the report used for
financial reporting. 11 We found discrepancies in the expenditure amounts for 131 contracts and
discrepancies in the obligation amounts for 41 contracts. Before the end of our fiscal year 2016
8
Note 7 was formerly note 6 in the fiscal year 2016 financial statements.
9
The adjustments included $138,000 for management and marketing contracts, $71.7 million for multifamily
credit subsidy expense, $14.4 million for property contracts, $75.2 million for supplemental claims and $220.6
million (absolute value of $110.3 million) for reestimates.
10
FHA made restatements in the amount of $47 million for discrepancies for the HECM program and $23.7 billion
for discrepancies for single-family program endorsements.
11
The undelivered order balance is the difference between the obligated amount and the expenditure amount.
16
audit, FHA informed us that it had identified another report that contained the accurate
undelivered order balances. There was a $2.3 million difference between the total undelivered
order balance on the report used for financial reporting and the report that FHA identified as
containing the correct balances. During our fiscal year 2017 audit, FHA reported that it had
made significant progress in correcting the discrepancies on the report used for financial
reporting. According to FHA, as of September 30, 2017, there was only a $138,000 difference
between the report used for financial reporting and the report that FHA identified as containing
the correct balances.
Timing Differences in the Obligation and Disbursement Processing of Multifamily
Guaranteed and Direct Loans
FHA did not record the subsidy costs associated with the multifamily loan guarantees and direct
loans in a timely manner in accordance with generally accepted accounting principles. 12
Specifically, FHA failed to recognize the multifamily loan guarantee and direct loan subsidy
costs in the proper period. Additionally, due to manual recording of transactions in several
systems by various groups, the risk of inconsistent recording of accounting events among the
systems increased.
We audited 15 loan guarantee loans with an unpaid principal balance and calculated subsidy
costs of $194.5 million and $7.8 million, respectively, and 11 Federal Financing Bank (FFB)
direct loans with an unpaid principal balance and calculated subsidy costs of $63.8 million and
$7.0 million, respectively, all endorsed between October 1, 2016, and June 30, 2017.
Multifamily loan guarantee. The credit subsidy expense for 12 of 15 (85 percent) loan
guarantees was not recorded in the period when these loans were endorsed. The subsidy
costs of the 12 loans with exception totaled $6.7 million. The delay in recognizing the
credit subsidy expense averaged 72 days, including one delay of 269 days. Additionally,
the credit subsidy obligation for 4 of the 15 loans (27 percent) was not in the appropriate
period. We noted that the delay in recording the obligation for the subsidy cost averaged
approximately 49 days, including one delay of 104 days.
Multifamily direct loans. The credit subsidy expense for all of the direct loans was not
recorded in the period when the loan was disbursed by FFB. We noted that the delay in
recognizing the credit subsidy expense for the subsidy cost averaged 71 days, including
one delay of 208 days. Additionally, the credit subsidy obligation for 3 of 11 loans (27
percent) was not in the appropriate period, which was when the firm approval was signed.
The delay in recording the obligation for the subsidy cost averaged approximately 20
days, including two delays of 29 days.
Other issues. FHA did not have an effective process to ensure consistent tracking and
recording of loan information between the Development Application Processing System
(DAP) and the FHA Subsidiary Ledger (FHASL) Revenue Management (Revenue
12
When FHA issues a firm commitment, the commitment authority is reduced by the loan amount and a subsidy
obligation is created against the annual allotment of credit subsidy. When the loan is endorsed, a subsidy cost is
recognized. For direct loans, when FHA issues a firm commitment, both the direct loan and subsidy obligations
are created against the annual allotment of direct loans and credit subsidy. When the loan is disbursed, a subsidy
cost is recognized.
17
Management) system. Nine of the 15 loan guarantees and 9 of the 11 direct loans
showed as being endorsed in various periods. DAP is used by the multifamily production
field offices and is a comprehensive, automated underwriting system that supports
processing and tracking of FHA multifamily housing applications from pre-application
through final closing, and it is where all loan characteristics are recorded. Revenue
Management is used by the headquarters Office of Multifamily Housing Programs,
Financial Operations Division, to track and record the loan history, including financial
transactions, such as payments, interest, etc, which are not recorded in DAP.
A combination of things contributed to these conditions. Although information was
available to FHA, the timing of completion to process the loan package 13 prevented FHA
from recording the accounting events at the point of recognition. Obtaining the
information from several systems and keying the obligation and expense information, a
labor-intensive process, was another contributing factor. FHA did not have controls in
place to ensure that proper cut-offs and accruals were established to record accounting
events in the proper periods. In addition, as the multifamily production field offices
entered loan information into DAP and the Financial Operations Division also entered
loan information into Revenue Management, both of which are used to recognize
accounting events in the general ledger, there was no process in place to ensure that loan
information was consistent among DAP, Revenue Management, and the general ledger.
As of September 30, 2017, $71.7 million in credit subsidy expense was accrued on 126
loans that were endorsed and disbursed as of the end of the fiscal year but had not had the
expense recognized in the general ledger. As part of the process to identify the loans to
include in the accrual, FHA had identified inconsistencies between DAP and Revenue
Management and was following up on the differences.
Omission of Accrued Liabilities on Property Contracts
FHA, as a practice, did not estimate accrued liabilities for expenses incurred but not yet
billed by its contractors on its single-family and multifamily property contracts. This was
not in accordance with generally accepted accounting principles. 14
We attributed FHA’s omission of the accruals to an oversight. When we brought the
issue to FHA’s attention, FHA developed a methodology for estimating an accrual for
single-family property expenses, and it was implemented in July 2017. In response to our
finding, FHA reported that it booked $14.4 million in accruals for single-family contract
expenses in July 2017. FHA currently does not have a plan to estimate an accrual for the
multifamily contracts because it believes this amount is immaterial. We will be
13
The Financial Operations Division reviews the loan package and manually enters more than 30 data points from
the package into the Revenue Management module of FHASL for loan guarantees and more than 125 data points
for direct loans.
14
Paragraph 19 of Statement of Federal Financial Accounting Standards 5, Accounting for Liabilities of The
Federal Government, states that a liability is a probable future outflow or other sacrifice of resources as a result
of past transactions or events and general purpose federal financial reports should recognize probable and
measurable future outflows or other sacrifices of resources arising from transactions and events that are unpaid
amounts due as of the reporting date.
18
monitoring the activities of the multifamily property contracts in fiscal year 2018 to
determine whether FHA’s assessment on multifamily contracts needs to be revisited.
Supplemental Claims Not Accurately Accrued
Besides the accrual on property contracts, we also found issues on the accrual of
supplemental claims. FHA failed to (1) account for the backlog of unopened, paper-
based supplemental claims and (2) properly estimate the average paid supplemental claim
amount to use in its quarterly accrual methodology. FHA failed to properly account for
the backlog of unopened paper-based supplemental claims in its supplemental claims
accrual estimation process. Before March 2016, paper-based supplemental claims
received by FHA were opened regularly and imaged into the A43C system by a
contractor for review, processing, and payment. However, when FHA’s contract expired
in March 2016, boxes of supplemental paper claims remained unopened because FHA
was not properly staffed to handle the volume of supplemental claims in-house at the
same rate as the previous contractor, thus creating a backlog. These backlogged claims
were excluded from the quarterly accrual because the accrual includes the count of the
paper-based supplemental claims that have been opened. Based on FHA’s estimate,
approximately 4,000 paper-based supplemental claims were being filed with FHA each
month, and there was a backlog of approximately 6 months at the end of the first quarter,
4 months at the end of second quarter, and 5 months at the end of third quarter. As a
result, FHA’s supplemental claims count used in the accrual estimation process was off
by the amount of the backlog at the end of each of the first three quarters of fiscal year
2017.
In addition to using the incorrect supplemental claims count, the average quarterly
supplemental claims amount used in FHA’s calculation was also incorrect. Although the
Single Family Post Insurance Division had taken over the work previously performed by
its contractor, FHA was unable to catch up to pay the number of supplemental claims at
the pre-March 2016 level. In an effort to catch up on paying claims, FHA was able to
process and pay claims for only those under $2,000. Claims of $2,000 and over were not
processed or paid and were only opened and imaged. As a result of paying only claims
under $2,000 at a pace slower than the pre-March 2016 level, the average claim amount
used in the calculation by the Single Family Claims Servicing Branch no longer
accurately reflected the true average claim amount during the post-March 2016 period.
In August 2017, in response to our inquiry, FHA developed a methodology to account for
unopened supplemental claims resulting from the backlog and calculated the average
claim amount as $1,421. This average amount is based on the claims paid for the first 6
months of fiscal year 2016, which would also include claim payments of $2,000 and
above.
The understatement of the quarterly accruals, as a result of FHA’s failure to update the
calculation for the unopened claims and the correct average claim, is calculated in the
following table.
19
Table 1: Variances noted in quarterly supplemental claims accrual
Per books 15 Per audit
Fiscal Unpaid Variance
year 2017 claims Average Unpaid Average OIG
reporting count claim Accrual claims claim accrual (understatement)
period amount per FHA count amount calculation
(A) (C =A*B) (G = C-F)
(B) (D) (E) (F=D*E)
Q1 13,090 $622.25 $8,145,253 37,090 16 $1,421.81 $52,734,933 $(44,589,680)
Q2 12,025 621.70 7,475,943 28,025 17 1,421.81 39,846,225 (32,370,283)
Q3 16,423 584.62 9,601,214 36,423 18 1,421.81 51,786,586 (42,185,371)
As of the fourth quarter of 2017, FHA reported that it had almost cleared the backlog of
the unopened claims and processed most of the claims under $2,000 for payment. Claims
$2,000 and over, which made up the majority of the unpaid claims, were expected to be
processed once a new contract is awarded and is in place. Since the majority of the
unprocessed claims were over $2,000, the average claim amount used by FHA in the
fourth quarter was $2,600. Therefore, FHA’s estimated accrual for the fourth quarter
based on 37,386 unprocessed claims was $97.2 million. FHA also accrued $813,000 for
572 unopened supplemental claims, using the $1,421 average claim amount, for a total
accrual of $98.0 million as of September 30, 2017.
Discrepancies Identified in FHA Systems Loan Endorsement Amounts
There were errors in FHA’s reporting of the required financial note disclosures related to
its loan guarantees. For the HECM and single-family programs, we found discrepancies
in the current-year loan endorsement amounts between the systems that FHA used for
financial reporting and the Computerized Home Underwriting Mortgage System
(CHUMS), which is the system of record for current-year endorsements for these two
loan programs. 19
• Discrepancies for HECM program. For notes reporting, FHA relied on the HECM current
year endorsement amount recorded in the Home Equity Reverse Mortgage Information
Technology (HERMIT) system, but this number did not agree with the current year
15
Obtained from the general ledger division’s quarterly accrual calculation.
16
Calculated by multiplying the 4,000 claims received per month by the 6 months of the backlog of unopened
claims (24,000) and adding the known unpaid claims of $13,090 as of the first quarter.
17
Calculated by multiplying the 4,000 claims received per month by the 4 months of the backlog of unopened
claims (16,000) and adding the known unpaid claims of $12,025 as of the second quarter.
18
Calculated by multiplying the 4,000 claims received per month by the 5 months of the backlog of unopened
claims (20,000) and adding the known unpaid claims of $16,423 as of third quarter.
19
The endorsement amount for HECM loans is the maximum claim amount and the endorsement amount for
single-family loans is the outstanding principal.
20
endorsement amount recorded in the CHUMS. We noted the following differences for
fiscal years 2016 and 2017.
Table 2. Current year endorsement amounts in CHUMS and HERMIT
Current year
Current year Current year
endorsement amount
System endorsement amount endorsement amount
as of second quarter
fiscal year 2016 fiscal year 2017
fiscal year 2017
CHUMS $14,668,583,075 $8,448,068,569 $17,700,507,981
HERMIT 14,611,593,307 8,440,449,189 17,690,646,482
Difference 56,989,768 7,619,380 9,861,499
After our inquiry, FHA conducted research and determined the 2016 endorsement
amount was underreported by $47.7 million because the HERMIT Cohort Summary
Report did not include 153 mortgages in the 2016 cohort year. 20 FHA stated that the
remaining $9.2 million difference for fiscal year 2016 and the differences for fiscal year
2017 can be attributed to the timing of information being transferred between the two
systems. FHA did not provide supporting documentation for us to validate its
explanation regarding timing differences as the cause of the variance.
• Discrepancies for single-family program. For notes reporting, FHA relied on a Single
Family Housing Enterprise Data Warehouse (SFHEDW) query to report the single-family
current-year endorsement amount, but this number did not agree with the current-year
endorsement amount recorded in CHUMS. We noted the following differences for fiscal
years 2016 and 2017.
Table 3. Current year endorsement amounts in CHUMS and on SFHEDW query
Current year
Current year Current year
endorsement amount
endorsement Amount endorsement amount
as of second quarter
fiscal year 2016 fiscal year 2017
fiscal year 2017
CHUMS $245,466,130,380 $128,073,490,984 $251,010,304,706
SFHEDW Query 221,755,681,201 245,403,356,141 250,903,805,698
Difference 23,710,449,179 117,329,865,157 106,499,008
FHA attributed discrepancies between CHUMS and SFHEDW to timing differences.
According to FHA, CHUMS does not transmit new endorsement amounts to the data
warehouse until the second weekend of the following month. Therefore, endorsements
that occur in September would not be transmitted to the data warehouse until October.
After we identified the fiscal year 2016 and second quarter fiscal year 2017
20
We did not perform any test work to verify that these loans belonged in the 2016 cohort year.
21
discrepancies, FHA decided to run the fiscal year 2017 year-end query later than it had
done in the past. However, there was still a difference between CHUMS and SFHEDW,
although it was much smaller than the $23.7 billion difference for fiscal year 2016.
Additionally, FHA did not provide supporting documentation for us to validate FHA’s
explanation regarding timing differences as the cause of the variance.
With respect to the $117.3 billion difference for the second quarter of fiscal year 2017,
FHA acknowledged that it ran an incorrect database access query for 2017, which
contributed to the larger difference. FHA had controls in place to ensure that the loan
endorsement amounts on the queries agreed with the reported amounts. However, FHA
management failed to detect that the query done in fiscal year 2017 was for the incorrect
period. 21
OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management
and Internal Control, requires agencies to establish and maintain internal control to
ensure the reliability of financial reporting. The Government Accountability Office’s
Standards for Internal Control in the Federal Government states that management should
design control activities to ensure that transactions are accurately recorded to maintain
their relevance and value to management in controlling operations and making decisions.
FHA’s failure to reconcile discrepancies in the loan endorsement amount among various
FHA systems resulted in the agency’s reporting inaccurate information.
Inconsistent Methodology Used To Allocate Reestimates in Fiscal Year 2016
In fiscal year 2016, FHA used an inconsistent methodology to allocate the loan guarantee
liability reestimates amount between the subsidy expense and interest expense
components. FHA used the end-of-year convention to allocate the reestimates for the
single-family 2010-2016 cohorts, while it used the middle-of-year convention for the
HECM and multifamily programs and for the single-family 1992-2009 cohorts.
OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management
and Internal Control, requires agencies to establish and maintain internal control to
ensure the reliability of financial reporting. FHA used an inconsistent methodology to
allocate the reestimates because it did not have an effective process to ensure that
management reviewed and approved formula changes in its reestimates workbook before
they were implemented. There was no audit trail to support the formula changes, and
FHA could not provide a definitive explanation for the changes.
Because FHA used the end-of-year convention instead of the middle-of-year convention
for the single-family 2010-2016 cohorts, the subsidy expense component was understated
by $110 million, and the interest expense component was overstated by the same amount
on the fiscal year 2016 financial statements.
21
The incorrect queries were run for the first three quarters of fiscal year 2017. Had we not identified the error, the
same error would have likely occurred in at year-end.
22
Conclusion
While considerable progress was made to address the control deficiencies identified last
year, FHA should continue striving to improve its controls over financial reporting to
minimize the risk of material misstatements in its financial reporting. 22 Additionally,
although FHA had developed and implemented procedures to record accounting events
via various accrual entries, these procedures and methodologies need to be reviewed on a
regular basis to confirm that their uses are still appropriate and reasonable.
Recommendations
We recommend that the Deputy Assistant Secretary for Finance and Budget
2A. Ensure that the $270.7 million identified as invalid obligations in fiscal year 2017
is deobligated as appropriate. 23
2B. Develop and implement policies, procedures, and controls to ensure that he
obligation is recognized when the loan guarantee commitment or the direct loan
obligation is made and the subsidy cost expense is recognized when the loan is
endorsed for loan guarantees and when the loan is disbursed for direct loans.
2C. Develop and implement a reconciliation process to ensure that the information in
various systems is consistent for all accounting events.
2D. Develop and implement (1) a methodology to estimate accrued liabilities for
property contracts to account for expenses that had been incurred by contractors
but not billed and (2) a process to ensure that an audit trail exists for identifying
accruals in the general ledger.
2E. Develop and implement policies and procedures to ensure that the reasonableness
and appropriateness of the quarterly supplemental claims accrual estimation
methodology is periodically reviewed.
2F. Develop and implement policies, procedures, and controls to ensure that the
reported current-year endorsements in HERMIT and SFHEDW agree with the
current-year endorsements in CHUMS.
2G. Strengthen existing internal control to ensure that amounts reported on the
financial statements agree with the appropriate supporting documentation.
2H. Restate the fiscal year 2016 financial statement notes to correct the inaccurate
loan guarantee amounts reported by FHA.
2I. Develop and implement procedures and controls to ensure that management
reviews and approves changes in the reestimate workbook before they are
22
Before issuance of this report, in mid-November 2017, OIG identified another financial reporting error related to
Note 7. FHA inadvertently posted $187 million of the LGL estimate amount in the multifamily General
Insurance/Special Risk Insurance Fund (GI/SRI) instead of single-family GI/SRI. FHA attributed the error to an
oversight and properly adjusted the note disclosure error after the issue was brought to FHA’s attention.
23
The final deobligation amount may be less than $270.7 million if final invoices need to be paid for the contracts.
23
implemented and maintains documentation to support the rationale for making
changes in the reestimate workbook.
2J. Correct the presentation error related to the allocation of reestimates in FHA’s
fiscal year 2017 financial statements.
2K. Assess whether prior-year financial statements need to be restated to correct the
impact of the presentation error in the allocation of reestimates identified in fiscal
year 2017.
24
Significant Deficiencies
Finding 3: FHA’s Controls Related to Partial Claims Had
Improved, but Weaknesses Remained
In fiscal year 2017, FHA began billing noncompliant lenders for partial claims when the lenders
had not provided FHA with the related promissory note (second mortgage note) when the note
was not provided within 60 days of executing the partial claim. 24 FHA began billing lenders
between 2 and 59 days after the 60-day expiration period. While this was a marked
improvement from waiting until 6 months after the expiration period, it was not always
immediately after as we had previously recommended. A delay in FHA management’s reaching
agreement to change the billing policy and procedures was a contributing factor in FHA’s delay
in fully implementing the controls in a timely manner. Unnecessary delays in implementing the
collection process from noncompliant lenders with unsupported partial claims is not a good cash
management practice and does not help improve the health of the Mutual Mortgage Insurance
fund. 25 FHA should continue to implement its policy and ensure that the implementation is fully
carried out.
FHA Had Made Considerable Improvement in Pursuing Partial Claim Promissory Notes,
but Challenges Remained
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 within 60 days after the date of
execution of the partial claim. By the end of fiscal year 2015, the number of unsupported partial
claims had decreased to 12,057, representing $376 million of the gross loans receivable balance.
As of fiscal year-end 2016, there were 2,798 partial claims unsupported by second mortgage
notes, representing $76 million, and as of fiscal year-end 2017, the number had been reduced to
695 partial claims unsupported by second mortgage notes within 60 days after the date of
execution, with a total claim amount of $18 million.
In response to our fiscal year 2014 audit recommendations, FHA developed a number of policies
and procedures and updated Mortgagee Letter 2015-18 26 with the goal of identifying partial
claims with promissory notes missing beyond the prescribed submission period and
appropriately billing noncompliant lenders for the amount of partial claims paid plus the
incentive fee for failure to submit the required documentation to FHA. Based on FHA’s policy
under the Mortgagee Letter and the regulatory requirements, FHA is to send the first
reimbursement letter to a noncompliant lender if the promissory note has not been provided
24
The lender must deliver to HUD’s loan servicing contractor, no later than 60 days from the execution date of the
partial claim, the original partial claim promissory note and, no later than 6 months from the execution date, the
recorded subordinate mortgage.
25
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.
26
Mortgagee Letter 2015-18 has been superseded by Housing Handbook 4000.1, FHA Single Family Housing
Policy Handbook, which was effective September 30, 2016.
25
within 60 days of partial claim execution. However, the process designed as a result did not
ensure that FHA sent a reimbursement letter until 6 months after execution of the partial claim.
As the issue continued to exist in fiscal year 2015, four causes were reported in our finding in the
fiscal year 2015 audit report under Finding 1: Controls To Prevent Misclassification of the
Receivables Had Not Been Fully Implemented. One cause related to the untimely document
processing by FHA’s loan servicing contractor. The other three causes were related to the timely
billing of and collection from noncompliant lenders.
In our review for fiscal year 2016, we determined that none of the four causes reported in the
fiscal year 2015 audit report had been fully addressed. The cause that related to FHA’s
contractor’s not processing documents in a timely manner continued to be a problem. FHA
planned to resolve the issue in fiscal year 2017 by procuring three new contracts in place of a
single contract. The other three causes related to billing and collection efforts toward
noncompliant lenders also continued in fiscal year 2016. When testing the designed process in
fiscal year 2016, we noted additional delays in the implementation. We identified two factors
that led to delays in collecting partial claims with missing documents. One factor was that FHA
made changes to its billing and collection process during fiscal year 2016, and therefore, the new
process had not been fully implemented as of the end of fiscal year 2016. The other factor was
that FHA sent an extension letter to lenders at the request of the HUD Office of General Counsel
and the FHA Commissioner following the issuance of the two reimbursement letters, which
further delayed the process. Because of the delays embedded in the process, there was a need to
strengthen controls to ensure timely referral for collection of loans receivable with missing
promissory notes.
Policies and Procedures Had Been Updated To More Closely Align With Regulatory
Requirements
FHA had improved its policies and procedures for the partial claim promissory note process.
FHA is to send letters to lenders requesting reimbursement in the amount of the partial claim
plus the incentive fee if they have not provided FHA with partial claim promissory notes within
60 days of executing the partial claim or the recorded secondary mortgage within 6 months of
executing the partial claim. FHA is to send these letters to noncompliant lenders at 61-, 91-,
181-, and 211-day intervals.
We reviewed five of the 61-day letters, noting that FHA no longer waited 6 months to send the
letters. The letters requested payment in the amount of the claim plus the incentive fee.
However, the letters were not always sent within a reasonable period after the 60 days expired, as
letters were sent between 2 and 59 days after the 60-day expiration period. We also reviewed
three of the 91-day letters for lenders that did not send the note or payment after they were billed
in the 61-day letter. Although FHA sent the letters relatively close to 30 days after the 61-day
letters, they were sent between 24 and 71 days after the 90 days expired. Lastly, we reviewed
five of the 181-day letters sent to lenders that did not send to FHA the promissory note, payment,
or recorded mortgage within 6 months. These letters were sent between 29 and 45 days after the
26
expiration dates noted in the letter. 27 Although requested, FHA did not provide evidence to show
that it sent the 211-day letters or referred noncompliant lenders to the Office of Program
Enforcement (OPE) under the new policy.
In 2017, during the audit resolution process for fiscal year 2016 and as mentioned above, FHA
management agreed to send notices 61 and 91 days after the partial claim paid date for missing
promissory notes, and reimbursement letters after 181 and 211 days after the claim paid date for
missing notes or mortgages to request payment in the amount of the claim plus the incentive fee.
FHA also changed from referring noncompliant lenders to the Mortgagee Review Board after
exhausting the use of the letters to referring them to OPE. FHA began implementing this new
process in May 2017, sending the first 61-day letters requesting payment. Even though FHA had
not yet procured three new contracts or fully implemented the new policies and was still
experiencing delays in sending the letters, it has experienced a significant decrease in
noncompliant lenders. Since the initial finding was reported in fiscal year 2014, which included
57,164 partial claims representing $1.5 billion, FHA’s number of partial claims unsupported by
second mortgage notes within 60 days after execution has decreased to 695 partial claims with a
total claim amount of $18 million, of which 498 with a total claim amount of $15 million are
considered collectible as of fiscal yearend 2017.
Conclusion
FHA is no longer waiting until 6 months after execution of partial claims to begin requesting
payment from lenders that do not provide the supporting promissory note; however, FHA is not
always requesting payment immediately following the expiration periods. Internal controls to
rectify the weaknesses in FHA’s controls related to claims that were originally identified in fiscal
year 2014 were partially implemented in fiscal year 2017. As of yearend 2017, 498 collectible
partial claims with a total claim amount of $15 million were missing promissory notes at least 60
days after the partial claim was executed. 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. As the recommendations from the prior-year audits
remain open, we will review the results of the implementation when FHA has fully implemented
the management decision.
Recommendations
No recommendations are made as the prior-year recommendations have not been closed.
27
The 181-day letters noted that FHA was requesting reimbursement for the list, when (1) the 6 months from the
date of execution expired during a certain period (expiration dates) and (2) HUD had not previously billed the
lender.
27
Finding 4: Weaknesses Were Identified in Selected FHA
Information Technology Systems
The ADAMS 28 application and the source applications used in the credit reform estimation and
reestimation process 29 contained security vulnerabilities. These conditions occurred because of a
lack of contract oversight and insufficient coordination between OCIO and FHA. As a result, the
confidentiality, integrity, and availability of critical information may be negatively impacted. In
addition, the information used to provide input to the FHA financial statements could be
adversely affected. We also determined that remediation of weaknesses previously reported with
the SFPCS-P, SAMS, SFIS, and Claims are in progress and expected to be fully remediated
within the agreed-upon timeframes.
ADAMS Software Maintenance Was Not Adequate
FHA did not properly oversee its contractor to ensure that it provided proper software
maintenance support for its ADAMS application system. Specifically, the contractor (1) used
one software product that was no longer supported, (2) used different versions of another
software product on the production and disaster recovery servers, and (3) did not properly
maintain system security documentation. The deficiencies occurred because FHA did not
adequately review the contractor-submitted monthly reports and security documents detailing the
software in use and, therefore, was unable to identify, address, and resolve the noted issues. In
addition, the contract for ADAMS support did not specify a requirement for the service provider
to monitor, manage, maintain, and refresh the ADAMS software environment at an industry-
established best practice of the software vendor’s current level of general availability 30 minus one
generation or better. The ADAMS contractor also indicated that the servers hosting the
production website using the unsupported software product were not upgraded sooner because
the relevant website framework was not compatible with the new operating system. The
contractor completed the upgrade to the servers on August 18, 2017. Also, the contractor stated
that the reason for the different software product versions was an oversight on its part and agreed
that the software versions should be in sync between the production and the disaster recovery
environments. Lastly, the contractor did not maintain accurate system documentation because it
did not meet the contract obligation to comply with National Institute of Standards and
Technology, Special Publication 800-53, and HUD Information Technology Security Policy 31
28
ADAMS is a comprehensive data application that receives, stores, and displays case-level information about
properties acquired by HUD or already managed by HUD. It allows users to track events and information
describing the status of real property from the date of conveyance to HUD through several stages of
management, marketing, and disposition to final reconciliation of sale proceeds.
29
Beginning in fiscal year 1992, the Federal Credit Reform Act (FCRA) required that the ultimate cost of credit
programs be calculated and the budgetary resources be obtained before new direct loan obligations are incurred
or new loan guarantee commitments are made. In meeting the FCRA requirement, FHA estimates the LGL and
recovery on assets. FHA’s Office of Evaluation (OE) is responsible for the development, maintenance, and
improvement of all program area cash flow models (CFM) used for credit subsidy estimation and reestimation.
Annually, OE collects and consolidates data from FHA’s program and accounting systems for use in the CFMs.
Data are mainly sourced from Housing Multifamily On-Line Property Integrated Information Suite Data Mart
and the Single Family Housing Enterprise Data Warehouse.
30
In the software release life cycle, general availability refers to the marketing phase when all commercialization
activities pertaining to the software product have been completed and it is available for purchase.
31
HUD Handbook 2400.25, REV-4.1
28
requirements to accurately document an inventory of information system components. As a
result, computer systems running unsupported software are exposed to an elevated risk of
cybersecurity dangers, such as malicious attacks or electronic data loss.
Servers Used in FHA Credit Subsidy Reform Estimation and Reestimation Process
Vulnerable
The multifamily and single-family data sources for the credit reform estimation and reestimation
process had not been properly protected. Vulnerability scans performed on both applications’
servers identified vulnerabilities requiring remediation. Specifically, five vulnerabilities were
identified in the June 2017 scan of the Housing Multifamily On-Line Property Integrated
Information Suite Data Mart 32 (HM-OPIIS) servers, and three vulnerabilities were identified in
the February 2017 and July 2017 scans of the SFHEDW 33 servers. While OCIO had addressed
and remediated two of the five vulnerabilities identified within HM-OPIIS, three remained
outstanding. These vulnerabilities have not been addressed because the OCIO and FHA do not
agree on who is responsible for addressing and remediating the vulnerabilities. OCIO stated that
the remediation for the remaining vulnerabilities falls at the application level. However, HM-
OPIIS management believes that the remaining three vulnerabilities fall under the purview of
OCIO. Although FHA attempted to remediate the three SFHEDW vulnerabilities identified in
the February 2017 scan, the same vulnerabilities were identified in the July 2017 scan. The
vulnerabilities identified in July have not been fixed because the SFHEDW information
technology support contractor has not been able to determine the cause of the problems. As a
result, the confidentiality, integrity, and availability of the data required for the credit
reestimation process could be at serious risk if the vulnerabilities identified with HM-OPIIS and
SFHEDW are not remediated in a timely manner.
Followup on Information System Control Weaknesses Previously Identified in FHA’s
SFPCS-P and SAMS
In an audit we conducted in fiscal year 2016, 34 we found that the general and application controls
over SFPCS-P and SAMS did not fully comply with Federal requirements and HUD’s own
security policies. FHA classified SFPCS-P as a low-impact instead of a moderate-impact
system, and some software used by SFPCS-P was outdated. In addition, some interface
reconciliations of the data between the source system and SFPCS-P and SAMS were insufficient,
and SFPCS-P application release documents were not processed and maintained properly by the
32
HM-OPIIS is a data repository, which consolidates and standardizes data from multiple internal and external
sources. It is used by field office asset managers, appraisers, and underwriters to more accurately focus default
prevention, loss mitigation, and other risk management activities and to prioritize workloads so as to address the
highest risk properties first.
33
SFHEDW is an integrated data warehouse that contains critical data from 21 originating source systems, which
are mostly owned by the offices within the Office of Single Family Housing. SFHEDW is a key source for HUD
employees and contractors who require access to single-family mortgage and insuring data. The system allows
queries for reporting to support oversight activities, market and economic assessment, public and stakeholder
communication, planning and performance evaluation, policy and guideline promulgation, monitoring, and
enforcement.
34
Audit report 2017-DP-0002, Review of Information Systems Controls Over FHA’s Single Family Premiums
Collection Subsystem – Periodic and the Single Family Acquired Asset Management System, issued February 9,
2017. This was a limited distribution report because of the sensitive nature of the information reported and was
not made available to the public.
29
HUD Application Release Tracking System. Further, HUD had not included SFPCS-P in its
disaster recovery exercise for more than 4 years. Also, segregation of duties for SFPCS-P
developers and least privilege 35 and segregation of duties requirements for SAMS users were not
fully implemented, and SFPCS-P security documents were inaccurate.
We followed up on the status of these weaknesses during fiscal year 2017. HUD was addressing
the weaknesses identified and implementing appropriate corrective actions. These actions are
scheduled to be completed by the end of the first quarter of fiscal year 2019.
Followup on Information System Control Weaknesses Previously Identified in FHA’s SFIS
and Claims Systems
In an audit we conducted in fiscal year 2016, 36 we found that the general and application controls
over SFIS and Claims did not fully comply with Federal requirements and HUD’s own security
policies. 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, for claims reported in the
June 2015 suspense report, there were inconsistencies in 341 claims with errors in the initial case
data and 2,018 claims with errors in the fiscal data of the application for single-family insurance
benefits. OCIO also did not retain the history of software modifications, including the related
approvals made throughout the development and life of the Claims system, for more than 5
years. 37 Further, user access controls for SFIS and Claims were not adequately managed. SFIS
and Claims management did not adequately implement effective application configuration
management for the SFIS and Claims systems.
We followed up on the status of these weaknesses during fiscal year 2017. HUD was addressing
the weaknesses and implementing appropriate corrective actions. These actions are scheduled to
be completed by the end of the first quarter of fiscal year 2018.
Conclusion
FHA must improve its contract oversight of its application service provider and information
security controls over the data sources used in its credit reform estimation and reestimation
process to comply with Federal requirements and its own security policies to prevent an
increased risk of unauthorized disclosure or modification of FHA system data.
35
HUD’s Information Technology Security Policy requires that program offices and system owners employ the
concept of least privilege, allowing only authorized accesses for users (and processes acting on behalf of users),
which are necessary to accomplish assigned tasks in accordance with organizational missions and business
functions.
36
Audit report 2016-DP-0003, Additional Review of Information System Controls Over FHA Information
Systems, issued August 31, 2016. This was a limited distribution report because of the sensitive nature of the
information reported and was not made available to the public.
37
OCIO used the National Archives and Records Administration General Records Schedule 3.1 for General
Technology Management Records as a guide to limit the retention of operational history of system changes to 5
years. However, the schedule also states that when the business need requires longer retention of the
information, it should be saved and protected. The FHA Office of Finance and Budget requires operational
change and configuration history for all system configuration and changes during the life cycle of the Claims
system.
30
Recommendations
Recommendations are included in a separate Office of Inspector General (OIG) audit report.
Therefore, no recommendations are reported here.
31
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, 2017 and 2016, and the related statements of
net costs and changes in net position, the combined statements of budgetary resources for the
years then ended, and the related notes to the financial statements. We conducted this audit in
accordance with U.S. generally accepted government auditing standards and OMB Bulletin 17-
03, 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 17-03, 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.
• 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 2017 Annual Management Report, we obtained an understanding of the design of
32
significant internal controls as described in OMB Bulletin 17-03. We performed limited testing
procedures as required by the American Institute of Certified Public Accountants’ auditing
standards at AU-C, section 730, Required Supplementary Information, and OMB Bulletin 17-03.
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 17-03.
33
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 seven unimplemented
recommendations from prior-year reports. 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 2016 and 2015 Financial Statements Audit,
2017-FO-0002
With respect to FHA not having effective monitoring and processing controls over its
unliquidated obligation balances and using inaccurate data to report on its undelivered orders, we
recommend that the Acting FHA Comptroller
1.a. Establish and implement policies and procedures to ensure that accurate data are used to
report the undelivered order balances for management and marketing contracts. (Final
action target date is November 30, 2017; reported in the Audit Resolution and Corrective
Actions Tracking System (ARCATS) as 2017-FO-0002-002-C.)
1.b. Ensure that the $276.5 million identified as invalid obligations in fiscal years 2015 and
2016 are deobligated as appropriate. (Final action target date is November 30, 2017;
reported in ARCATS as 2017-FO-0002-002-D.)
With respect to FHA not fully implementing controls to collect the amounts for unsupported
partial claims, we recommend that the Office of Single Family Housing
1.c. 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. (Final action target date is December 28, 2017; reported in
ARCATS as 2017-FO-0002-003-B.)
1.d. 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.
(Final action target date is December 28, 2017; reported in ARCATS as 2017-FO-0002-
003-C.)
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
2.a. 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.)
34
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
3.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
4.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.)
35
Appendixes
Appendix A
Schedule of Funds To Be Put to Better Use
Recommendation Funds to be put to better
number use 1/
2.A. $270,747,281
Totals 270,747,281
1/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an 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.
36
Appendix B
Auditee Comments and OIG’s Evaluation
Ref to OIG Auditee Comments
Evaluation
Comment 1
Comment 2
37
Auditee Comments and OIG’s Evaluation
Ref to OIG Auditee Comments
Evaluation
Comment 3
Comment 4
38
OIG Evaluation of Auditee Comments
Comment 1 OIG accepts the response of concurrence with the recommendations. FHA’s
continued efforts in improving its controls over the modeling process will
improve the reliability of the estimation process and reliability of financial
information related to the loan guarantee liability.
Comment 2 OIG accepts the response of concurrence with the recommendations. FHA should
continue their efforts to improve their internal controls over financial reporting in
order to improve the reliability of the financial statements.
Comment 3 OIG accepts the response of concurrence with the finding and previous year’s
recommendations. FHA’s continued efforts to bill noncompliant lenders will
continue to improve the status of the MMI fund.
Comment 4 OIG accepts the response of concurrence with the finding and recommendation
and looks forward to working with FHA to reach a mutually acceptable
management decision to close out the recommendations during the audit
resolution process.
39
Appendix C
FHA’s Fiscal Years 2017 and 2016 Financial Statements and Notes
40
catastrophic
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED BALANCE SHEETS
As of September 30, 2017, and 2016
(Dollars in Millions)
FY 2017 FY 2016
ASSETS
Intragovernmental
Fund Balance with U.S. Treasury (Note 3) $ 29,112 $ 20,820
Investments (Note 5) 30,841 36,397
Total Intragovernmental $ 59,953 $ 57,217
Cash and Other Monetary Assets (Note 4) $ 40 53
Investments (Note 5) $ 44 31
Accounts Receivable, Net (Note 6) 220 242
Loans Receivable and Related Foreclosed Property, Net (Note 7) 18,819 17,742
TOTAL ASSETS $ 79,076 $ 75,285
LIABILITIES
Intragovernmental
Accounts Payable (Note 8) $ 2 $ 7
Borrowings (Note 9) 29,141 30,873
Other Liabilities (Note 10) 1,673 2,765
Total Intragovernmental $ 30,816 $ 33,645
Accounts Payable (Note 8) $ 514 $ 495
Loan Guarantee Liability (Note 7) 20,616 (806)
Other Liabilities (Note 10) 636 854
TOTAL LIABILITIES $ 52,582 $ 34,188
NET POSITION
Unexpended Appropriations (Note 16) $ 459 $ 415
Cumulative Results of Operations 26,035 40,682
TOTAL NET POSITION $ 26,494 $ 41,097
TOTAL LIABILITIES AND NET POSITION $ 79,076 $ 75,285
The accompanying notes are an integral part of these statements.
41
catastrophic
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED STATEMENTS OF NET COST
For the Periods Ended September 30, 2017 and 2016
(Dollars in Millions)
FY 2017 FY 2016
Single Family Forward
Intragovernmental Gross Costs $ 765 $ 791
Less: Intragovernmental Earned Revenue 805 662
Intragovernmental Net Costs $ (40) $ 129
Gross Costs With the Public $ (919) $ (18,764)
Less: Earned Revenues 10 14
Net Costs With the Public $ (929) $ (18,778)
Single Family Forward Net Cost (Surplus) $ (969) $ (18,649)
HECM
Intragovernmental Gross Costs $ 235 $ 234
Less: Intragovernmental Earned Revenue 830 403
Intragovernmental Net Costs $ (595) $ (169)
Gross Costs With the Public $ 21,908 $ (305)
Less: Earned Revenues - 1
Net Costs With the Public $ 21,908 $ (306)
HECM Net Cost (Surplus) $ 21,313 $ (475)
Multifamily
Intragovernmental Gross Costs $ 114 $ 111
Less: Intragovernmental Earned Revenue 23 32
Intragovernmental Net Costs $ 91 $ 79
Gross Costs With the Public $ (1,512) $ (389)
Less: Earned Revenues 67 52
Net Costs With the Public $ (1,579) $ (441)
Multifamily Net Cost (Surplus) $ (1,488) $ (362)
Healthcare
Intragovernmental Gross Costs $ 40 $ 85
Less: Intragovernmental Earned Revenue 16 53
Intragovernmental Net Costs $ 24 $ 32
Gross Costs With the Public $ (322) $ (129)
Less: Earned Revenues $ 1 $ 1
Net Costs With the Public $ (323) $ (130)
Healthcare Net Cost (Surplus) $ (299) $ (98)
Salaries and Administrative Expenses
Intragovernmental Gross Costs $ 27 $ 17
Less: Intragovernmental Earned Revenue - -
Intragovernmental Net Costs $ 27 $ 17
Gross Costs With the Public $ 523 $ 591
Less: Earned Revenues - -
Net Costs With the Public $ 523 $ 591
Adminstrative and Contracts Net Cost (Surplus) $ 550 $ 608
Net Cost of Operations $ 19,107 $ (18,976)
The accompanying notes are an integral part of these statements.
42
catastrophic
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
CONSOLIDATED STATEMENTS OF NET POSITION
For the Periods Ended September 30, 2017 and 2016
(Dollars in Millions)
CUMULATIVE RESULTS OF OPERATIONS (Note 16) FY 2017 FY 2016
Beginning Balance $ 40,682 $ 19,046
Adjustments
Corrections of Errors - 835
Beginning Balance, As Adjusted $ 40,682 $ 19,881
Budgetary Financing Sources:
Appropriations Used 4,429 3,393
Non-Exchange Revenue 2 -
Other Financing Sources (Nonexchange)
Transfers In/Out Without Reimbursement 426 480
Imputed Financing From Costs 13 15
Other (412) (2,063)
Total Financing Sources $ 4,458 $ 1,825
Net Cost of Operations (19,107) 18,976
Net Change (14,647) 20,801
Cummulative Results of Operation $ 26,035 $ 40,682
Unexpended Appropriations (Note 16)
Beginning Balance 415 $ 871
Budgetary Financing Sources
Appropriations Received 4,473 3,437
Other Adjustments (Recissions, etc) - (500)
Appropriations Used (4,429) (3,393)
Total Budgetary Financing Sources $ 44 $ (456)
Unexpended Appropriation $ 459 $ 415
Net Position $ 26,494 $ 41,097
The accompanying notes are an integral part of these statements.
43
catastrophic
FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
COMBINED STATEMENT OF BUDGETARY RESOURCES
For the Period Ended September 30, 2017
(Dollars in Millions)
FY 2017 FY 2017 FY 2017
Budgetary Non-Budgetary Total
Budgetary Resources:
Unobligated balance brought forward, October 1 $ 37,758 $ 16,411 $ 54,169
Adjustment to unobligated balance brought forward, October 1 (+ or -) - 234 234
Unobligated balance brought forward, October 1, as adjusted 37,758 16,645 54,403
Recoveries of prior year unpaid obligations 11 82 93
Other changes in unobligated balance (+ or -) (425) - (425)
Unobligated balance from prior year budget authority, net 37,343 16,727 54,070
Appropriations (discretionary and mandatory) 4,473 - 4,473
Borrowing authority (discretionary and mandatory) - 8,376 8,376
Spending authority from offsetting collections (discretionary and
13,289 34,665 47,954
mandatory)
Total budgetary resources $ 55,105 $ 59,768 $ 114,873
Status of Budgetary Resources:
Obligations incurred $ 23,217 $ 34,975 $ 58,192
Unobligated balance, end of year:
Apportioned 69 6,272 6,341
Unapportioned 31,761 18,521 50,282
Unexpired unobligated balance, end of year 31,830 24,793 56,623
Expired unobligated balance, end of year 58 - 58
Total unobligated balance, end of year 31,888 24,793 56,681
Total budgetary resources 55,105 59,768 114,873
Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross) $ 346 $ 2,650 $ 2,996
Uncollected customer payments from Federal sources, brought forward,
(35) - (35)
October 1 (-)
Obligated balance, start of year (net), before adjustments (+ or -) 311 2,650 2,961
Obligated balance, start of year (net), as adjusted 311 2,650 2,961
Obligations incurred 23,217 34,975 58,192
Outlays (gross) (-) (23,160) (34,181) (57,341)
Change in uncollected customer payments from Federal sources (+ or -) (13) - (13)
Recoveries of prior year unpaid obligations (-) (11) (82) (93)
Unpaid obligations, end of year (gross) 393 3,362 3,755
Uncollected customer payments from Federal sources, end of year (48) - (48)
Obligated balance, end of year (net) $ 345 $ 3,362 $ 3,707
Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory) $ 17,762 $ 43,040 $ 60,802
Actual offsetting collections (discretionary and mandatory) (-) (13,275) (44,469) (57,744)
Change in uncollected customer payments from Federal sources (13) - (13)
Budget authority, net (discretionary and mandatory) 4,473 (1,429) 3,044
Outlays, gross (discretionary and mandatory) 23,160 34,181 57,341
Actual offsetting collections (discretionary and mandatory) (-) (13,275) (44,469) (57,744)
Outlays, net (discretionary and mandatory) 9,885 (10,288) (403)
Less Distributed offsetting receipts (-) (1,078) - (1,078)
Agency outlays, net (discretionary and mandatory) $ 8,807 $ (10,288) $ (1,481)
The accompanying notes are an integral part of these statements
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FEDERAL HOUSING ADMINISTRATION
(AN AGENCY OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT)
COMBINED STATEMENT OF BUDGETARY RESOURCES
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
25,010 19,800 44,810
mandatory)
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,
(15) - (15)
October 1 (-)
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 (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.
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NOTES TO THE FINANCIAL STATEMENTS
September 30, 2017
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, which guaranteed loans for three years. No new H4H loans have been guaranteed since
FY 2011.
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For the Loan Guarantee Program at FHA, there are Single Family and Multifamily activities in both the MMI/CMHI
and GI/SRI funds. The H4H fund only contains Single Family activity.
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 was 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, Multifamily Risk Sharing debentures, and
Securities Held Outside of Treasury. 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.
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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. Securities
Held Outside of Treasury represent marketable stock received as part of a settlement and held outside of the U.S.
Treasury through a Treasury authorized broker.
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.
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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), notes related to partial claims, and direct loans relating to the Federal Financing Bank
Risk Share program. Under the requirements of the FCRA, PMM notes are considered to be direct loans while
MNA notes are considered to be defaulted guaranteed loans. The PMM loans are generated from the sales on credit
of FHA’s foreclosed properties to qualified non-profit organizations. The MNA notes are created when FHA pays
the lenders for claims on defaulted guaranteed loans and takes assignment of the defaulted loans for direct
collections. The majority of MNAs are HECM notes. HECM loans, while not in default, are assigned to HUD when
they reach 98% of their maximum claim amount. 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 7).
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 7).
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
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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 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 7, 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 7, based on historical data, current and forecasted program and
economic assumptions.
Certain programs have higher risks due to increased chances of fraudulent activities perpetrated against FHA. FHA
accounts for these risks through the assumptions used in the liabilities for loan guarantee estimates. FHA develops
the assumptions based on historical performance and management's judgments about future loan performance.
General Property, Plant and Equipment
FHA does not maintain separate facilities. HUD purchases and maintains all property, plant and equipment used
by FHA, along with other Office of Housing activities.
Current HUD policy concerning SFFAS No. 10, Accounting for Internal Use Software, indicates that HUD will
either own the software or the functionality provided by the software in the case of licensed or leased software.
This includes “commercial off-the-shelf” (COTS) software, contractor-developed software, and internally
developed software. FHA 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. Additionally, FHA receives
appropriations for GI/SRI positive subsidy, upward re-estimates, 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 $13 million for fiscal year 2017 and $15
million for fiscal year 2016, 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
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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.
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.
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Note 2. Non-Entity Assets
Non-entity assets consist of assets that belong to other entities but are included in FHA’s consolidated balance
sheets. To reflect FHA’s net position accurately, these non-entity assets are offset by various liabilities. FHA’s
non-entity assets as of September 30, 2017 and 2016 are as follows:
(Dollars in millions)
FY 2017 FY 2016
Intragovernmental:
Fund Balance with Treasury $ 19 $ 35
Total Intragovernmental 19 35
Cash and Other Monetary Assets 26 29
Total Non-Entity Assets 45 64
Total Entity Assets 79,030 75,221
Total Assets $ 79,075 $ 75,285
FHA’s non-entity assets consist of escrow monies collected by FHA from the borrowers of its loans.
Cash and other monetary assets that are collected from FHA borrowers consist of escrow monies that 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.
In FY 2016, escrow monies deposited at minority-owned banks were reported as other assets in Note 2 – Non-Entity
Assets and in Note 7 – Other Assets.
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Note 3. Fund Balance with U.S. Treasury
FHA’s fund balance with U.S. Treasury was comprised of the following as of September 30, 2017 and 2016:
(Dollars in millions) FY 2017 FY 2016
Fund Balances:
Revolving Funds $ 28,000 $ 19,699
Appropriated Funds 269 245
Other Funds 843 876
Total $ 29,112 $ 20,820
Status of Fund Balance with U.S. Treasury:
Unobligated Balance
Available $ 6,044 $ 5,643
Unavailable 19,314 12,180
Obligated Balance Not Yet Disbursed 3,754 2,997
Total $ 29,112 $ 20,820
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 re-estimates transferred from the
financing account. If subsequent upward credit subsidy re-estimates are calculated in the financing account or there
is shortage of budgetary resources in the liquidating account, the capital reserve account will return the retained
negative subsidy to the financing account or transfer the needed funds to the liquidating account, respectively.
Status of Fund Balance with U.S. Treasury
Unobligated Fund Balance with U.S. Treasury represents Fund Balance with U.S. Treasury that has not been
obligated to purchase goods or services either because FHA has not received apportionment authority from OMB
to use the resources (unavailable unobligated balance) or because FHA has not obligated the apportioned resources
(available unobligated balance). Fund Balance with U.S. Treasury that is obligated, but not yet disbursed, consists
of resources that have been obligated for goods or services but not yet disbursed either because the ordered goods
or services have not been delivered or because FHA has not yet paid for goods or services received by the end of
the fiscal year.
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Note 4. Cash and Other Monetary Assets
(Dollars in millions)
FY 2017 FY 2016
With the Public:
Escrow Monies Deposited at Minority-Owned Banks $ 26 $ 29
Deposits in Transit 14 24
Total $ 40 $ 53
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 5 - 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.
In FY 2016, Escrow Monies Deposited at Minority-Owned Banks were reported as Other Assets in Note 2 – Non-
Entity Assets and with Deposits in Transit in Note 7 – Other Assets.
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Note 5. 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, 2017 were as follows:
(Dollars in millions)
Amortized (Premium)
FY 2017 Cost / Discount, Net Investments, Net Market Value
MMI/CMHI Investments $ 30,744 $ 51 $ 30,795 $ 30,747
MMI/CMHI Accrued Interest 46 46
Total $ 30,744 $ 51 $ 30,841 $ 30,793
The cost, net amortized premium/discount, net investment, and market values as of September 30, 2016 were as
follows:
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
Investments in Private-Sector Entities
Investments in Private Sector Entities as of September 30, 2017 and 2016 were as follows:
Beginning New Ending
(Dollars in millions) Balance Acquisitions Redeemed Balance
FY 2017
Securities Held Outside of Treasury $ - $ 13 $ - $ 13
Risk Sharing Debentures $ 31 $ - $ - $ 31
Total $ 31 $ 13 $ - $ 44
FY 2016
Risk Sharing Debentures $ 31 $ - $ - $ 31
Total $ 31 $ - $ - $ 31
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Note 6. Accounts Receivable, Net
Accounts receivable, net, as of September 30, 2017 and 2016 are as follows:
Gross Allowance Net
(Dollars in millions) FY 2017 FY 2016 FY 2017 FY 2016 FY 2017 FY 2016
With the Public:
Receivables Related to $ 12 $ 9 $ (1) $ (1) $ 11 $ 8
Credit Program Assets
Premiums Receivables - 1 - - - 1
Partial Claims Receivables 18 77 (8) (23) 10 54
Generic Debt Receivables 301 264 (300) (264) 1 -
Settlements Receivables 109 141 - - 109 141
Miscellaneous Receivables 89 38 - - 89 38
Total $ 529 $ 530 $ (309) $ (288) $ 220 $ 242
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 comprised 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.
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Note 7. 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) 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, 2017 and 2016 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 various 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 with the
public as an asset on its balance sheet, and conversely, borrowing from FFB as a liability. The program does not
change the basic structure of Risk Sharing; it only substitutes FFB as the funding source. The HFAs originate and
service the loans, and share in any losses.
In FY 2017, FHA changed the way it estimates its direct loan allowance for subsidy and credit subsidy re-estimates
for these risk share loans. The cash flow model for FFB direct loan program is developed by collecting and
consolidating data from FHA’s program and accounting systems. The model is based upon trends and assumptions
of historical data and analysis but, where necessary, management’s judgment. The model uses actual data through
August of the current fiscal year and projections are used to estimate the direct loan cash flows for the following
month of September. The model estimates total loan commitments and the percentage of commitments that will be
disbursed prior to the end of the fiscal year.
Previously, FHA used the estimated direct loan values from its models to calculate the allowance for subsidy and
credit subsidy re-estimates. In FY 2017, FHA analyzed the estimated direct loans disbursed compared to actual
loans disbursed at September 30th. Based on this information, management determined that an adjustment was
necessary to better estimate the Direct Loan value. FHA calculated the ratio of the allowance for subsidy to the
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direct loan unpaid principal balance per the cash flow models and applied that ratio to the actual direct loans
disbursed to estimate the allowance for subsidy and credit subsidy re-estimate.
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Direct Loans Obligated (Pre-1992):
(Dollars in Millions)
GI/SRI - Multifamily Total
September 30, 2017
Loan Receivables $ 8 $ 8
Interest Receivables 13 13
Allowance (4) (4)
Total Value of Assets $ 17 $ 17
September 30, 2016 GI/SRI - Multifamily Total
Loan Receivables $ 8 $ 8
Interest Receivables 12 12
Allowance (4) (4)
Total Value of Assets $ 16 $ 16
Direct Loans Obligated (Post-1991):
(Dollars in Millions)
MMI/CMHI - Single Family GI/SRI - Multifamily Total
September 30, 2017
Loan Receivables $ - $ 1,193 $ 1,193
Interest Receivables - 4 4
Allowance - 37 37
Total Value of Assets $ - $ 1,234 $ 1,234
September 30, 2016 MMI/CMHI - Single Family GI/SRI - Multifamily Total
Loan Receivables $ - $ 554 $ 554
Interest Receivables - 1 1
Allowance (3) 27 24
Total Value of Assets $ (3) $ 582 $ 579
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Total Amount of Direct Loans Disbursed (Post- 1991):
(Dollars in Millions)
FY 2017 FY 2016
Direct Loan Programs
GI/SRI
Multifamily/Healthcare $ 639 $ 451
GI/SRI Subtotal $ 639 $ 451
Subsidy Expense for Direct Loans:
September 30, 2017
GI/SRI Total
Multifamily/Healthcare
FFB
Financing $ (76) $ (76)
Defaults 1 1
Fees and Other Collections (18) (18)
Other 21 21
Subtotal $ (72) $ (72)
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)
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Subsidy Expense for Re-estimates:
(Dollars in millions)
FY 2017 Technical Reestimate
MMI/CMHI $ (6)
GI/SRI 67
Total $ 61
FY 2016
GI/SRI 64
Total $ 64
Total Direct Loan Subsidy Expense:
FY 2017 FY 2016
Direct Loan Programs
MMI/CMHI $ (6) $ -
GI/SRI $ (5) $ 13
Total $ (11) $ 13
Subsidy Rates for Direct Loans by Program and Component
September 30, 2017
Fees and Other
Finance Default Other Total
Collections
GI/SRI
Multifamily
FFB -13.92% 0.01% -0.97% 3.69% -11.19%
September 30, 2016
Fees and Other
Finance Default Other Total
Collections
GI/SRI
Multifamily
FFB 0.00% 2.61% -7.06% 0.00% -4.45%
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Schedule for Reconciling Subsidy Cost Allowance Balances:
Beginning Balance, Changes, and Ending Balance FY 2017 FY 2016
Beginning balance of the subsidy cost allowance $ (24) $ (30)
Add: subsidy expense for direct loans disbursed
during the reporting years by component
-Financing (76) (68)
- Default costs (net recoveries) 1 4
- Fees and other collections (18) (9)
- Other subsidy costs 21 21
Total of the above subsidy expense components $ (72) $ (52)
Adjustments:
- Fees received 3 1
- Subsidy allowance amortization (4) 28
- Other (4) -
nding balance of the subsidy cost allowance before reestimat $ (101) $ (53)
Add or subtract subsidy reestimates by component:
- Technical/default reestimate
-Subsidy Expense Component 110 46
-Interest Expense Component 3 2
-Total of the above reetimate components 113 $ 48
Adjustment of prior years' credit subsidy reestimates (49) (19)
Total Technical/Default Reestimate $ 64 $ 29
Ending balance of the subsidy cost allowance $ (37) $ (24)
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Loan Guarantee Programs:
Defaulted Guaranteed Loans from Pre-1992 Guarantees (Allowance for Loss Method):
(Dollars in Millions)
FY 2017 MMI/CMHI GI/SRI Total
Guaranteed Loans
Single Family Forward
Loan Receivables $ 19 $ - $ 19
Foreclosed Property 5 9 14
Allowance for Loan Losses (4) (4) (8)
Subtotal $ 20 $ 5 $ 25
Multifamily/Healthcare
Loan Receivables $ - $ 1,614 $ 1,614
Interest Receivables - 231 231
Allowance for Loan Losses - (682) (682)
Subtotal $ - $ 1,163 $ 1,163
HECM
Loan Receivables $ - $ 3 $ 3
Interest Receivables - 1 1
Foreclosed Property - (2) (2)
Allowance for Loan Losses - (1) (1)
Subtotal $ - $ 1 $ 1
Total Guaranteed Loans $ 20 $ 1,169 $ 1,189
(Dollars in Millions)
FY 2016 MMI/CMHI GI/SRI Total
Guaranteed 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/Healthcare
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 Guaranteed Loans $ 23 $ 1,198 $ 1,221
*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to FHA.
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Defaulted Guaranteed Loans from Post-1991 Guarantees:
(Dollars in Millions)
FY 2017 MMI/CMHI GI/SRI H4H Total
Guaranteed Loans
Single Family Forward
Loan Receivables $ 11,160 $ 416 $ 5 $ 11,581
Interest Receivables - - - -
Foreclosed Property 1,437 35 - 1,472
Allowance (6,133) (225) (5) (6,363)
Subtotal $ 6,464 $ 226 $ - $ 6,690
Multifamily/Healthcare
Loan Receivables $ - $ 645 $ - $ 645
Interest Receivables - (1) - (1)
Foreclosed Property - 1 - 1
Allowance - (272) - (272)
Subtotal $ - $ 373 $ - $ 373
HECM
Loan Receivables $ 6,992 $ 3,701 $ - $ 10,693
Interest Receivables 4,176 1,981 - 6,157
Foreclosed Property 36 79 - 115
Allowance (5,052) (2,597) - (7,649)
Subtotal $ 6,152 $ 3,164 $ - $ 9,316
Total Guaranteed Loans $ 12,616 $ 3,763 $ - $ 16,379
(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
*HECM loans, while not defaulted, have reached 98% of the maximum claim amount and have been assigned to FHA.
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Guaranteed Loans Outstanding:
(Dollars in Millions)
Outstanding Amount of
Principal of Outstanding
Guaranteed Loans, Principal
Loan Guarantee Programs Face Value Guaranteed
Guaranteed Loans Outstanding (FY 2017):
MMI/CMHI
Single Family Forward $ 1,272,515 $ 1,153,875
Multifamily/Healthcare 640 605
MMI/CMHI Subtotal $ 1,273,155 $ 1,154,480
GI/SRI
Single Family Forward $ 8,120 $ 5,414
Multifamily/Healthcare 128,163 117,604
GI/SRI Subtotal $ 136,283 $ 123,018
H4H
Single Family - 257 $ 81 $ 74
H4H Subtotal $ 81 $ 74
Total $ 1,409,519 $ 1,277,572
Guaranteed Loans Outstanding (FY 2016): RESTATED
MMI/CMHI
Single Family Forward $ 1,210,295 $ 1,100,046 Restated
Multifamily/Healthcare 617 590 Restated
MMI/CMHI Subtotal $ 1,210,912 $ 1,100,636 Restated
GI/SRI
Single Family Forward $ 9,310 $ 6,482 Restated
Multifamily/Healthcare 118,319 108,744
GI/SRI Subtotal $ 127,629 $ 115,226 Restated
H4H
Single Family - 257 $ 90 $ 83
H4H Subtotal $ 90 $ 83
Total $ 1,338,631 $ 1,215,945 Restated
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New Guaranteed Loans Disbursed (FY 2017):
(Dollars in Millions)
Outstanding Amount of
Principal of Outstanding
Guaranteed Loans, Principal
Face Value Guaranteed
MMI/CMHI
Single Family Forward $ 250,904 $ 248,286
Multifamily/Healthcare 22 22
MMI/CMHI Subtotal $ 250,926 $ 248,308
GI/SRI
Single Family Forward $ 98 $ 97
Multifamily/Healthcare 16,786 16,710
GI/SRI Subtotal $ 16,884 $ 16,807
Total $ 267,810 $ 265,115
New Guaranteed Loans Disbursed (FY 2016): RESTATED
MMI/CMHI
Single Family Forward $ 245,466 $ 242,905 Restated
Multifamily/Healthcare 85 85
MMI/CMHI Subtotal $ 245,551 $ 242,990
GI/SRI
Single Family Forward $ 107 $ 106
Multifamily/Healthcare 12,117 12,062
GI/SRI Subtotal $ 12,224 $ 12,168
Total $ 257,775 $ 255,158 Restated
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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 1,052,332 HECM loans with a maximum claim amount of $252
billion. Of these 1,052,332 HECM loans insured by FHA, 580,093 loans with a maximum claim amount of $148
billion are still active. As of September 30, 2017, 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 2017 MMI/CMHI $ 17,691 $ 72,968 $ 110,252
GI/SRI - $ 30,629 $ 37,330
Total $ 17,691 $ 103,597 $ 147,582
RESTATED
FY 2016 MMI/CMHI $ 14,659 $ 70,375 $ 105,196 Restated
GI/SRI - 34,294 42,948
Total $ 14,659 $ 104,669 $ 148,144 Restated
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Loan Guarantee Liability, Net:
(Dollars in Millions)
FY 2017 MMI/CMHI GI/SRI H4H Total
LLR
Single Family Forward $ 9 $ - $ - $ 9
Multifamily/Healthcare - (1) - (1)
Subtotal $ 9 $ (1) $ - $ 8
LLG
Single Family Forward $ (2,143) $ 339 $ 18 $ (1,786)
Multifamily/Healthcare (17) (4,108) - (4,125)
HECM 15,187 11,332 - 26,519
Subtotal $ 13,027 $ 7,563 $ 18 $ 20,608
Loan Guarantee Liability Total $ 13,036 $ 7,562 $ 18 $ 20,616
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)
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Subsidy Expense for Loan Guarantees by Program and Component:
(Dollars in millions)
FY 2017 MMI/CMHI GI/SRI Total
Single Family Forward
Defaults $ 6,073 $ 5 $ 6,078
Fees and Other Collections (19,523) (8) (19,531)
Other 2,359 - 2,359
Subtotal $ (11,091) $ (3) $ (11,094)
Multifamily/Healthcare
Defaults $ 1 $ 208 $ 209
Fees and Other Collections (2) (882) (884)
Subtotal $ (1) $ (674) $ (675)
HECM
Defaults $ 1,250 $ - $ 1,250
Fees and Other Collections (1,308) - (1,308)
Subtotal $ (58) $ - $ (58)
Total (11,150) (677) (11,827)
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)
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Subsidy Expense for Modification and Re-estimates:
(Dollars in millions)
Total Technical
FY 2017 Modifications Reestimate
MMI/CMHI $ - $ 21,112
GI/SRI - 3,693
Total $ - $ 24,805
FY 2016
MMI/CMHI $ - $ (7,897)
GI/SRI - (289)
Total $ - $ (8,186)
Total Loan Guarantee Subsidy Expense:
Total Loan Guarantee Subsidy Expense:
(Dollars in millions)
FY 2017 FY 2016
MMI/CMHI $ 9,962 $ (17,082)
GI/SRI 3,017 (769)
Total $ 12,979 $ (17,851)
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Subsidy Rates for Loan Guarantee Endorsements by Program and Component:
Fees and Other
(Percentage) Defaults Collections Total
Budget Subsidy Rates for FY 2017 Loans Guarantees:
MMI/CMHI
Single Family
SF - Forward 2.42 (7.78) (5.36)
SF - HECM 7.06 (7.39) (0.33)
SF - Neg Equity Refi/ Short Refinance 8.27 (8.27) -
GI/SRI
Multifamily
Apartments - NC/SC 1.49 (4.25) (2.76)
Apartments- Refinance 0.52 (4.31) (3.79)
Healthcare
FHA Full Insurance - Health Care 2.52 (8.37) (5.85)
Hospitals 1.14 (6.66) (5.52)
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
FHA Full Insurance - Health Care 4.00 (7.43) (3.43)
Hospitals 3.23 (6.45) (3.22)
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Schedule for Reconciling Loan Guarantee Liability Balances:
RESTATED
FY 2017 FY 2016
(Dollars in Millions) LLR LLG LLR LLG
Beginning Balance of the Loan Guarantee Liability $ - $ (806) $ 7 $ 15,276
Add: Subsidy Expense for guaranteed loans disbursed during
the reporting fiscal years by component:
Default Costs (Net of Recoveries) - 7,537 - 6,612
Fees and Other Collections - (21,723) - (18,068)
Other Subsidy Costs - 2,359 - 1,791
Total of the above subsidy expense components - (11,827) - (9,665)
Adjustments:
Fees Received $ - $ 14,567 $ - $ 14,018
Foreclosed Property and Loans Acquired - 8,743 - 11,148
Claim Payments to Lenders - (21,185) - (22,423)
Interest Accumulation on the Liability Balance - 274 - (189)
Other - 47 - 814
Ending Balance before Reestimates $ - $ (10,187) $ 7 $ 8,979
Add or Subtract Subsidy Reestimates by Component:
Technical/Default Reestimate
Subsidy Expense Component $ 7 $ 3,400 $ (7) $ (5,062) Restated
Interest Expense Component 1,579 1,549 Restated
Adjustment of prior years' credit subsidy reestimates - 25,817 - (6,272)
Total Technical/Default Reestimate 7 30,796 (7) (9,785)
Ending Balance of the Loan Guarantee Liability $ 7 $ 20,609 $ - $ (806)
Administrative Expense:
(Dollars in Millions) FY 2017 FY 2016
MMI/CMHI 534 586
GI/SRI - -
H4H -
Total 534 586
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Other Information on Foreclosed Property:
Additional information on FHA foreclosed property as of September 30, 2017 and 2016 is as follows:
The above chart references the average holding period for FHA foreclosed property, and the total number of foreclosed
properties on-hand as September 30, 2017. 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, 2017 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)).
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Credit Reform Valuation Methodology
FHA values its Credit Reform LLG and related receivables from notes and property inventories at the net present
value of their estimated future cash flows.
To apply the present value computations, FHA divides loans into cohorts and “risk” categories. Multifamily and
Health Care cohorts are defined based on the year in which loan guarantee commitments are made. Single Family
mortgages are grouped into cohorts based on loan endorsement dates for the GI/SRI and MMI fund. Within each
cohort year, loans are subdivided into product groupings, which are referred to as risk categories in federal budget
accounting. Each risk category has characteristics that distinguish it from others, including loan performance
patterns, premium structure, and the type and quality of collateral underlying the loan. For activity related to fiscal
years 1992-2008, the MMI Fund has one risk category and, for activity related to fiscal years 2009 and onward, the
MMI Fund has two risk categories. That second category is for HECM loans, which joined the MMI Fund group of
programs in 2009. The single family GI/SRI loans are grouped into four risk categories. There are 15 different
multifamily risk categories and three health care categories.
The cash flow estimates that underlie present value calculations are determined using the significant assumptions
detailed below.
Significant Assumptions – FHA developed economic and financial models in order to estimate the present value
of future program cash flows. The models incorporate information on the expected magnitude and timing of each
cash flow. The models rely heavily on the following loan performance assumptions:
• Conditional Termination Rates: The estimated probability of an insurance policy claim or non-
claim termination in each year of the loan guarantee’s term, given that a loan survives until the start
of that year.
• Claim Amount: The estimated amount of the claim payment relative to the unpaid principal balance
at the time the claim occurs.
• Recovery Rates: The estimated percentage of a claim payment or defaulted loan balance that is
recovered through disposition of a mortgage note or underlying property.
In FY 2017, FHA implemented a change in its discounting methodology used to estimate the net present value of
the Single Family and HECM cash flows. This change in estimate was due to FHA’s analysis of the timing of cash
flows that supported using the Middle of the Year (MOY) discount factor with the single effective rate. Previously,
FHA used End of Year (EOY) discounting to estimate the net present value of Single Family and HECM cash
flows.
Additional information about loan performance assumptions is provided below:
Sources of data: FHA developed assumptions for claim rates, prepayment rates, claim amounts, and recoveries
based on historical data obtained from its internal business systems.
Economic assumptions: Independent forecasts of economic conditions are used in conjunction with loan-level data
to generate Single Family, Multifamily, and Health Care claim and prepayment rates. OMB provides the central
economic assumptions used, such as interest rates, house price appreciation and the discount rates used against the
cash flows. Other sources are used to distribute the central assumptions geographically.
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
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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 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 2017. Overall, FHA’s liability
increased from the fiscal year 2016 estimates.
Mutual Mortgage Insurance (MMI) – On net, the MMI Fund LLG increased to $13,053 million at the end of fiscal
year 2017. The increase in liability can be attributed to HECM loans. The major factor affecting the HECM LLG
estimate is house price appreciation through its impacts on claim and recovery rates.
MMI Single Family Forward (SFF): In FY2016, the SFF LLG was modeled first by using actuarial models to
estimate the conditional claim and prepayment rates for each loan. The models use a spread of historical data to
generate claim and prepayment probabilities based on various borrower and loan-specific factors. A Monte Carlo
simulation framework was used to generate the stochastic loan performance output; 100 equally likely paths were
constructed, each resulting in a single estimate of the expected claim and prepayment likelihood. The average of
these 100 paths for claim and prepayment were used when calculating LLG in the Cash Flow Model (CFM). The
CFM discounts all cohort years using the latest Single Effective Rate (SER) specific to each cohort; in accordance
with Federal Credit Reform Modeling guidelines. Compared with the FY16 LLG, the FY17 LLG estimate uses a
single path (President’s Economic Assumption released in March 2017) to compute the expected net present value
of the future cash flows. In addition, the FY17 LLG includes Single Family Loan Sale (SFLS) as one of the exit
options when claims occur, while in the FY16, SFLS was not considered in the LLG calculations.
MMI Home Equity Conversion Mortgage (HECM): Like the SFF program, in FY2016, the HECM LLG was
modeled first by using actuarial models to estimate the "termination" probability for each loan. A HECM
termination event was grouped into three (3) categories; borrower death, borrower move out of subject property or
borrower refinance of subject property. A Monte Carlo simulation framework was used to generate the stochastic
loan performance output; 100 equally likely paths were constructed, each resulting in a single estimate of the
expected termination rate for each HECM loan. The average of these 100 paths for termination rates was used when
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calculating LLG in the Cash Flow Model (CFM). The CFM discounts all cohort years using the latest Single
Effective Rate (SER) specific to each cohort; in accordance with Federal Credit Reform Modeling guidelines.
Compared with the FY16 LLG, the FY17 LLG estimate uses a single path (President’s Economic Assumption
released in March 2017) to compute the expected net present value of the future cash flows.
GI/SRI (HECM) - HECM endorsements from fiscal years 1990-2008 remain in the GI/SRI Fund. Estimation of the
GI/SRI HECM LLG is consistent with that of the MMI HECM LLG estimation. The liability for these loans
increased to $11,671 million at the end of FY 2017. This liability is driven more by long term house price
appreciation forecasts than short term forecasts. The majority of the remaining GI/SRI HECM loans have adjustable
interest rates which impacts the LLG through its influence on unpaid balances, claim and recovery 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 $35.1 billion. The Section 223(f) liability is
negative, meaning that the present value of expected future premium revenues is greater than the present value of
expected future (net) claim expenses. The 223(f) liability decreased this year by $489 million, from ($1,075) million
to ($1,563) million, due to lower claim expectations as well as increased insurance-in-force.
GI/SRI Section 223(a)(7) - Section 223(a)(7) gives FHA authority to refinance FHA-insured loans. Under this
program, the refinanced principal amount of the mortgage may be the lesser of the original amount of the existing
mortgage or the remaining unpaid principal balance of the loan. Loans insured under any sections of the National
Housing Act may be refinanced under 223(a)(7), including those already under 223(a)(7). The Section 223(a)(7)
program has an insurance-in-force of $19.9 billion. The Section 223(a)(7) liability is negative, meaning that the
present value of expected future premium revenues is greater than the present value of expected future (net) claim
expenses. The 223(a)(7) liability decreased this year by $26.2 million, from ($604) million to ($630) 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 $16.9 billion. The Section 221(d)(4) liability decreased by $222.5
million this year, from ($110.5) million to ($333) million.
GI/SRI Section 232 Health Care New Construction - The Section 232 NC program provides mortgage insurance
for construction or substantial rehabilitation of nursing homes and assisted-living facilities. FHA insures a
maximum of 90 percent of the estimated value of the physical improvements and major movable equipment. The
Section 232 NC program has an insurance-in-force of $3.1 billion. The Section 232 NC liability decreased by $14.8
million this year, from ($83) million to ($98) million due to lowered claim expectations.
GI/SRI Section 232 Health Care Purchasing or Refinancing - The Section 232 Refinance program provides
mortgage insurance for two purposes: purchasing or refinancing of projects that do not need substantial
rehabilitation, and installation of fire safety equipment for either private, for-profit businesses or non-profit
associations. For existing projects, FHA insures a maximum of 85 percent of the estimated value of the physical
improvements and major movable equipment. The Section 232 Refinance program has an insurance-in-force of $25
billion. The Section 232 Refinance liability decreased by $64.6 million this year, from ($743.1) million to ($807.7)
million due to an increase in insurance-in-force and a decrease in claim expectations.
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
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estimated replacement cost of the hospital, including the installed equipment. The Section 242 program has an
insurance-in-force of $7.3 billion. The Section 242 liability decreased by $27 million this year from ($179) million
to ($206) million due to higher premium revenue caused by decreased prepayment expectations as well as lower
claims expected.
Risks to LLG Calculations
LLG calculations for most major programs now use Monte Carlo simulations and stochastic economic forecasts.
What is booked as an LLG value is the average or arithmetic “mean” value from a series of projections that view
loan portfolio performance under a large variety of possible economic circumstances. The individual economic
scenario forecasts are designed to mimic the types of movements in factors such as home prices, interest rates, and
apartment vacancy rates that have actually occurred in the historical record. By creating a large number of these
scenarios, each independent of the others, one creates a universe of potential outcomes that define the possible set
of LLG values in an uncertain world. Using the mean value across all forecast scenarios is valuable for providing
some consideration for “tail risk.” Tail risk occurs in most loan guarantee portfolios because potential losses under
the worst scenarios are multiples of potential gains under the best scenarios. The inclusion of tail events in the mean-
value calculation creates an addition to LLG, which is the difference between the mean value from the simulations
and the median value. The median is the point at which half of the outcomes are worse and half are better. By
booking a mean value rather than a median, FHA is essentially providing some additional protection in its loss
reserves against adverse outcomes. At the same time, booking an LLG based on a mean value results in a better
than even chance future revisions will be in the downward direction.
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.
For Multifamily programs, LLG risk comes from claims, recoveries and premiums. Claims and recoveries are
dependent on continued rental-income trends and rental-price growth. Premiums are driven by FHA policy and
industry demand for FHA products. Generally, risk comes from market, economic, and demographic influences
such as changes in local employment conditions, the supply of rental housing in each market where FHA has a
presence, population growth, and household formation. FHA’s policy of insuring loans pre-construction in its
221(d)(4) program subject LLG calculations to risk from their capability to operate post-construction.
For Healthcare programs (Sections 232 and 242), LLG risk comes principally from health-care reimbursement rates
from Medicare and Medicaid. In addition, the financial health of State and Municipal government entities also is a
source of LLG risk, as many of the FHA-insured projects benefit, in part, from periodic cash infusions from those
entities. Risk also varies as does the quality of business management at each facility, and from the supply of medical
care in each community relative to demand and the abilities of facility management to adapt to changing
technologies and the competitive landscape. These are factors for which it is difficult to predict future trends.
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For the SFF mortgage programs, LLG risk comes from claims, recoveries and premiums. Claims and recoveries
are largely dependent on house price appreciation and local market conditions such as demand to supply ratio, the
proportion of foreclosure properties. Premiums are driven by FHA policy, industry demand for FHA products and
interest rate outlook which determines the incentive of refinances. Generally, risk comes from portfolio
characteristics, market and prevailing economic conditions.
For both HECM programs (GI/SRI and MMI cohorts), LLG risk comes from claims, recoveries and premiums.
Claims and recoveries are largely dependent on house price appreciation and borrower behavior such as home
maintenance and ability to meet property tax and insurance obligations. Premiums are driven by FHA policy and
interest rates which determine the growth of HECM unpaid principal balances (UPB). Generally, risk comes from
portfolio characteristics, market and prevailing economic conditions.
Pre-Credit Reform Valuation Methodology
FHA values its Pre-Credit Reform related notes and properties in inventory at net realizable value, determined on
the basis of net cash flows. To value these items, FHA uses historical claim data, revenues from premiums and
recoveries, and expenses of selling and maintaining property.
MMI Single Family LLR - For the single-family portfolio, the aggregate liability for the remaining pre-credit reform
loans in FY 2017 is $9.0 million.
GI/SRI Multifamily & Healthcare LLR - For the multifamily and healthcare portfolio, the remaining insurance-in-
force for pre-credit reform loans is $197.6 million. The aggregate liability for the remaining pre-credit reform loans
in FY 2017 is ($847) thousand, which is a $153 thousand increase from the ($1) million estimate in FY 2016. The
year-over-year increase in aggregate liability is due to a $55 million decline in insurance-in-force as both measures
move closer to zero.
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Note 8. Accounts Payable
Accounts Payable as of September 30, 2017 and 2016 are as follows:
(Dollars in millions)
FY 2017 FY 2016
Intragovernmental:
Claims Payable to Ginnie Mae $ 1 $ 7
Miscellaneous Payables to HUD 1 -
Total $ 2 $ 7
FY 2017 FY 2016
With the Public:
Claims Payable $ 284 $ 311
Premium Refunds Payable 124 141
Single Family Property Disposition Payable 28 21
Miscellaneous Payables 78 22
Total $ 514 $ 495
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.
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Note 9. Debt
The following tables describe the composition of Debt held by FHA as of September 30, 2016 and 2017:
(Dollars in millions)
FY 2016 FY 2017
Beginning Balance Net Borrowings Ending Balance Beginning Balance Net Borrowings Ending Balance
Other Debt:
Borrowings from FFB 102 452 554 554 633 1,187
Borrowings from U.S. Treasury 26,921 3,398 30,319 30,319 (2,364) 27,954
Total $ 27,023 $ 3,850 $ 30,873 $ 30,873 $ (1,731) $ 29,141
FY 2016 FY 2017
Classification of Debt:
Intragovernmental Debt $ 30,873 $ 29,141
Debt Held by the Public - $ -
Total $ 30,873 $ 29,141
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 re-estimates 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 2017, FHA’s U.S. Treasury borrowings carried interest rates ranging from 1.67 percent to 7.36
percent. The maturity dates for these borrowings occur from September 2018 – 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 borrows from the FFB to disburse direct
loans.
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Note 10. Other Liabilities
The following table describes the composition of Other Liabilities as of September 30, 2017 and 2016:
(Dollars in millions)
FY 2017 Current
Intragovernmental:
Receipt Account Liability $ 1,673
Total $ 1,673
With the Public:
Trust and Deposit Liabilities $ 46
Multifamily Notes Unearned Revenue 250
Premiums collected on unendorsed cases 243
Miscellaneous Liabilities 97
Total $ 636
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
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Receipt Account Payable Liability
The receipt account payable liability is created from downward credit subsidy re-estimates 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.
Premiums Collected on Unendorsed Cases
Premiums collected on unendorsed cases are mortgage insurance premium amounts collected by FHA for cases that
have yet to be endorsed.
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, 2017.
Activity with Ginnie Mae
As of September 30, 2017, 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 2017 FY 2016
(in Millions) (in Millions)
Mortgages Held for Investment & Foreclosed Property (Pre-claim) 3,137 3,950
Short Sale Claims Receivable 47 94
“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.
Impact of Hurricanes Harvey, Irma and Maria
As the result of damages incurred by hurricanes Harvey, Irma and Maria, FHA expects claims and losses in those
areas. While immediate department efforts have been focused on providing relief to displaced residents, HUD is
continuing to assess what impact the storms will have on FHA’s financial position.
The President declared major disaster declarations in the areas that were directly affected by the hurricanes. In
response, the Federal Emergency Management Agency (FEMA) is operating an Individual Assistance Program to
assist residents with accessing available housing and addressing other immediate needs while recovering from the
devastation.
HUD has implemented several policies and programs to assist lenders, property owners and residents. Homeowners
in FHA-insured loans are eligible for a variety of relief measures including FHA Section 203(h) loans for disaster
victims. For the Single Family portfolio, HUD Handbook 4000.1, Section III.A.3.c.ii authorizes an initial
moratorium on foreclosures of properties within a Presidentially-Declared Major Disaster Area (PDMDA) for a
ninety (90) day period from the date of each PDMDA declaration. The initial moratorium applies to the initiation
of foreclosures and foreclosures already in process. HUD Mortgagee Letter 2017-15 extends the initial 90-day
foreclosure moratorium for FHA-insured homeowners for an additional 90 days due to the extensive damage and
continuing needs in hard-hit areas. In addition, HUD recently announced an additional 19 regulatory and
administrative waivers to further assist communities accelerate recovery efforts.
At this time, the expected loss from the damage caused by hurricanes Harvey, Irma and Maria cannot be reasonably
estimated. FHA has identified approximately 923,982, Single Family Forward and Home Equity Conversion
Mortgage (HECM) properties within the affected areas that account for 10.7 percent of FHA’s total active Single
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Family insured portfolios. The largest concentration of potentially affected properties is 551,283 in Florida, with
the remaining 257,952 and 124,747 in Texas and Puerto Rico, respectively.
As HUD assesses the status of each project and case with lenders, additional guidance may be issued and legislative
relief may be sought, if necessary, to mitigate the claims and losses against the insurance funds.
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Note 12. Gross Costs
Gross costs incurred by FHA for the period ended September 30, 2017 and 2016 are as follows:
(Dollars in millions)
Single Family Administrative
FY 2017 Forward HECM Multifamily Healthcare Expenses Total
Intragovernmental:
Interest Expense $ 765 $ 235 $ 114 $ 40 $ - $ 1,154
Imputed Cost - - - - 13 13
Other Expenses - - - - 15 15
Total $ 765 $ 235 $ 114 $ 40 $ 28 $ 1,182
With the Public:
Salary and Administrative Expense $ - $ - $ - $ - $ 520 $ 520
Subsidy Expense (11,093) (58) (547) (201) - (11,899)
Re-estimate Expense 9,358 16,286 (686) (91) - 24,867
Interest Expense 997 5,112 (117) (7) - 5,985
Interest Accumulation Expense (213) 569 (62) (23) - 271
Bad Debt Expense 5 (2) (136) - - (133)
Loan Loss Reserve 8 - - - - 8
Other Expenses 19 1 36 - 3 59
Total $ (919) $ 21,908 $ (1,512) $ (322) $ 523 $ 19,678
Total Gross Costs $ (154) $ 22,143 $ (1,398) $ (282) $ 551 $ 20,860
Administrative
FY 2016 RESTATED Single Family 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 (7,970) (300) 49 (10) - (8,231) Restated
Interest Expense (1,474) (60) 7 41 - (1,486) Restated
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)
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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 re-estimates.
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 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.
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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 expenses
from intra-agency agreements.
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Note 13. Earned Revenue
Earned revenues generated by FHA for the period ended September 30, 2017 and 2016 are as follows:
(Dollars in millions)
Single Family
FY 2017 Forward HECM Multifamily Healthcare Total
Intragovernmental:
Interest Revenue from Deposits at U.S. Treasury $ 552 $ 804 $ 23 $ 16 $ 1,395
Interest Revenue from MMI/CMHI Investments 253 26 - - 279
Total Intragovernmental $ 805 $ 830 $ 23 $ 16 $ 1,674
With the Public:
Insurance Premium Revenue $ - $ - $ 1 $ - $ 1
Income from Notes and Properties 9 - 43 1 53
Other Revenue 1 - 23 - 24
Total With the Public $ 10 $ - $ 67 $ 1 $ 78
Total Earned Revenue $ 815 $ 830 $ 90 $ 17 $ 1,752
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
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
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.
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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 2017 were:
Upfront Premium Rates
10/01/2016 - 9/30/2017
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 2017 were:
Annual Periodic Premium Rates
Single Family
10/01/2016 -1/25/2017 0.80%, 0.85%, 1.00% or 1.05%
01/26/17 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.
Income from Notes and Property
Income from Notes and Property includes revenue associated with FHA pre-1992 loan guarantees. This income
includes revenue from Notes and Properties held, sold, and gains associated with the sale.
Other Revenue
Other revenue includes revenue associated with FHA pre-1992 loan guarantees. FHA’s other revenue consists of
late charges and penalty revenue, fee income, and miscellaneous income generated from FHA operations.
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Note 14. Gross Cost and Earned Revenue by Budget Functional Classification
FHA cost and earned revenue reported on the Statements of Net Cost is categorized under the budget functional
classification (BFC) for Mortgage Credit (371). All FHA U.S. Treasury account symbols found under the
department code “86” for Department of Housing and Urban Development appear with the Mortgage Credit BFC.
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Note 15. Transfers In and Other Financing Sources
Transfers In and Other Financing Sources incurred by FHA for the periods ended September 30, 2017 and 2016 are
as follows:
(Dollars in millions)
Cumulative
Unexpended
FY 2017 Results of Total
Appropriations
Operations
Transfers In:
HUD $ 426 $ - $ 426
Non Exchange Revenue
HUD $ 2 $ - $ 2
Other Financing Sources:
Treasury $ (412) $ - $ (412)
Cumulative
Unexpended
FY 2016 Results of Total
Appropriations
Operations
Transfers In:
HUD $ 480 $ - $ 480
Non Exchange Revenue
HUD $ - $ - $ -
Other Financing Sources:
Treasury $ (2,063) $ - $ (2,063)
Transfers In from HUD
FHA does not receive an appropriation for salaries and expense; instead the FHA amounts are appropriated directly
to HUD. To recognize these costs in FHA’s Statement of Net Cost, a Transfer In from HUD is recorded based on
amounts computed by HUD.
Non Exchange Revenue
Non Exchange revenue consist of late fees incurred on Multifamily and Single Family premiums. Non-Exchange
Revenue was not reported in FY 2016.
Other Financing Sources
Transfers out to U.S. Treasury consist of negative subsidy from new endorsements, modifications and downward
credit subsidy re-estimates in the GI/SRI general fund receipt account.
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Note 16. Unexpended Appropriations
Unexpended appropriation balances at September 30, 2017 and 2016 are as follows:
(Dollars in millions)
Beginning Appropriations Other Appropriations
FY 2017 Balance Received Adjustments Used Transfers-Out Ending Balance
Positive Subsidy $ 2 $ - $ - $ - $ - $ 2
Contract Expenses $ 233 $ 130 $ - $ (108) $ - 255
Reestimates $ - $ 4,318 $ - $ (4,318) $ - -
GI/SRI Liquidating $ 180 $ 25 $ - $ (3) $ - 202
Total $ 415 $ 4,473 $ - $ (4,429) $ - $ 459
Beginning Appropriations Other Appropriations
FY 2016 Balance Received Adjustments Used Transfers-Out Ending Balance
Positive Subsidy $ 454 $ - $ (452) $ - $ - $ 2
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
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 MMI program account for administrative and contract expenses. The GI/SRI
no-year program account also receives appropriations for positive credit subsidy and upward re-estimates.
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.
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Note 17. Budgetary Resources
The SF-133 and the Statement of Budgetary Resources for fiscal year 2016 have been reconciled to the fiscal year
2016 actual amounts included in the Program and Financing Schedules presented in the fiscal year 2018 Budget of
the United States Government. In FY 2016, FHA recorded $234 million in borrowing authority in the President’s
Budget that was not included in the Statement of Budgetary Resources. The resources were recorded as an
adjustment to the beginning balance in FY 2017 SBR. Information from the fiscal year 2017 Statement of
Budgetary Resources will be presented in the fiscal year 2019 Budget of the U.S. Government. The Budget will be
transmitted to Congress on the first Monday in February 2018 and will be available from the Government Printing
Office and online at that time.
Obligated balances as of September 30, 2017 and 2016 are as follows:
Unpaid Obligations
(Dollars in Millions)
Undelivered Orders FY 2017 FY 2016
MMI/CMHI $ 1,895 $ 1,598
GI/SRI 912 597
H4H 1 1
Undelivered Orders Subtotal $ 2,808 $ 2,196
Accounts Payable
MMI/CMHI $ 752 $ 670
GI/SRI 195 130
Accounts Payable Subtotal $ 947 $ 800
Total $ 3,755 $ 2,996
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Note 18. Budgetary Resources - Collections
The following table presents the composition of FHA’s collections for the period ended September 30, 2017 and
2016:
(Dollars in Millions)
FY 2017 MMI/CMHI GI/SRI H4H Total
Collections:
Premiums $ 13,431 $ 866 $ 1 $ 14,298
Notes 1,269 806 - 2,075
Property 3,385 196 - 3,581
Interest Earned from U.S. Treasury 1,193 471 - 1,664
Subsidy 11,151 - - 11,151
Reestimates 20,369 4,720 - 25,089
Collections from settlements 150 - - 150
Other 104 (368) - (264)
Total $ 51,052 $ 6,691 $ 1 $ 57,744
FY 2016 MMI/CMHI GI/SRI H4H Total
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
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Note 19. Budgetary Resources – Obligations
The following table presents the composition of FHA’s obligations for the period ended September 30, 2017 and
2016:
(Dollars in Millions)
September 30, 2017 MMI/CMHI GI/SRI H4H Total
Obligations
Claims $ 15,694 $ 2,676 $ 1 $ 18,371
Property Expenses 613 49 - 662
Interest on Borrowings 904 230 - 1,134
Subsidy 11,152 800 - 11,952
Downward Reestimates 1,672 402 - 2,074
Upward Reestimates 18,691 4,318 - 23,009
Administrative Contracts 133 - - 133
FFB Direct Loans - 951 - 951
Other 9 (103) - (94)
Total $ 48,868 $ 9,323 $ 1 $ 58,192
September 30, 2016 MMI/CMHI GI/SRI H4H Total
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
Administrative Contracts 121 - - 121
FFB Direct Loans - 688 - 688
Other 98 105 - 203
Total $ 48,475 $ 9,410 $ 2 $ 57,887
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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, 2017 and 2016:
(Dollars in Millions) FY 2017 FY 2016
Resources Used to Finance Activities:
Obligations Incurred 58,192 57,890
Less: Spending Authority from Offsetting Collections (57,850) (54,742)
Obligations Net of Offsetting Collections and Recoveries 342 3,148
Less: Distributed Offsetting Receipts (1,078) (2,000)
Net Obligations (736) 1,148
Other Resources:
Transfers In/Out Without Reimbursement 426 481
Imputed Financing Sources 13 15
Other (412) (2,063)
Net Other Resources Used to Finance Activities 26 (1,567)
Total Resources Used to Finance Activities (710) (419)
Resources Used to Finance Items not Part of the Net Cost of Operations:
Change in Budgetary Resources Obligated for Goods, Services, and Benefits Ordered but not yet Provided (611) (150)
Budgetary Offsetting Collections and Receipts that do not Affect Net Cost of Operations 58,835 56,036
Resources that Finance the Acquisition of Assets or Liquidation of Liabilities (53,062) (50,134)
Appropriations for prior Year Re-estimate (4,318) (6,829)
Other Resources or Adjustments to Net Obligated Resources that do not Affect Net Cost of Operations 413 1,567
Total Resources Used to Finance Items Not Part of the Net Cost of Operations 1,256 490
Total Resources Used to Finance the Net Cost of Operations 546 71
-
Components of the Net Cost of Operations that will Not Require or Generate Resources in the Current Period: -
Upward Reestimate of Credit Subsidy Expense 23,214 5,561
Downward Reestimate of Credit Subsidy Expense 7,662 (15,297)
Reduction of Credit Subsidy Expense (11,857) (9,716)
Changes in Loan Loss Reserve Expense 9 (7)
Changes in Bad Debt Expenses (133) 5
Gains or Losses on Sales of Credit Program Assets 40 25
Other (375) 382
Total Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period 18,561 (19,047)
Net Cost of Operations 19,107 (18,976)
Net Cost of Operations from SNC 19,107 (18,976)
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Note 21. Restatement of FHA’s Fiscal Year 2016 Financial Statement Notes
In FY 2017, discrepancies were noted in the presentation of FHA’s FY 2016 Note 7 Direct Loans and Loan
Guarantees and Note 12 Gross Costs that required correction of balances reported in the FY 2017 comparative
financial statements. Corrections were made in Note 7 to HECM current year endorsements, cumulative Current
Outstanding Balance and Maximum Potential Liability and the Single Family Forward Guaranteed Loans
Outstanding and New Guaranteed Loans Disbursed. For Note 12, updates were made to Gross Cost with the Public
to adjust the allocation of Re-estimate and Interest expenses.
The HECM Current Year Endorsements amount of $14,612 million reported in FY 2016 did not include 153 active
cases due to the 2016 cohort year field not being populated on the HECM Cohort Summary Report that caused the
reported endorsement amount to be understated by $48 million. The associated HECM cumulative Current
Outstanding Balance and Maximum Potential Liability, were also understated by $20 million and $47 million,
respectively. The cases associated with the missing cohorts have been corrected to include the proper cohort for
future reporting.
The source report for the cumulative Single Family Forward Guaranteed Loans Outstanding and New Guaranteed
Loans Disbursed is run monthly from the Single Family Housing Enterprise Data Warehouse (SFHEDW) to obtain
the cumulative and year-to-date balances of Outstanding Principal of Guaranteed Loans (face value) and the
Amount of Outstanding Principal Guaranteed as of the end of the period. The report for FY 2016 as of September
30th was inadvertently run prior to the SFHEDW being updated with the activity for the month of September so the
amounts reported for FY 2016 only captured the cumulative and fiscal year to date balances through August. This
caused the cumulative amounts reported for both Single Family Forward Outstanding Principal of Guaranteed
Loans and the Amount of Outstanding Principal Guaranteed for the Mutual Mortgage Insurance (MMI) Fund to
each be understated by $3 billion and for the General Insurance/Special Risk Insurance to be overstated by $108
million and $93 million, respectively. The Outstanding Principal of Guaranteed Loans and the Amount of
Outstanding Principal for FY 2016 New Guaranteed Loans Disbursed were also understated by $24 billion and
$23 billion, respectively. The $23 billion understatement for the Amount of Outstanding Principal is based on the
ratio of FY 2017 Amount of Outstanding Principal to Outstanding Principal of Guaranteed Loans to provide a
reasonable estimate in the absence of report actual. An alternate report from the SF insurance system will be used
to report these balances going forward.
The discount factor used to calculate the FY 2016 financial statement re-estimate for Single Family Forward loans
was inconsistent with the discount factor used for other programs. The discount factor for SF Forward loans used
an end of year (EOY) vice middle of year (MOY) discount factor causing the subsidy expense component to be
understated by $110 million and the interest expense component to be overstated by the same amount in the
Schedule for Reconciling Loan Guarantee Liability Balances. Since both the subsidy and interest expenses are
reported as gross costs, these amounts were also understated and overstated respectively, in Note 12 costs reporting.
The discount factor for SF Forward loans was updated to MOY which will be used for future re-estimate calculations
to be consistent with all other programs.
Due to the imminent publishing of the FY 2017 audited financial statements, the FY 2016 notes restatements will
be presented comparatively.
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Required Supplementary Information
Schedule A: Intragovernmental Assets
FHA's Intra-governmental assets, by Federal entity, are as follows on September 30, 2017 and 2016:
(Dollars in Millions)
Fund Balance Investments in
with U.S. U.S. Treasury Accounts
FY 2017 Treasury Securities Receivable Other Assets Total
U.S. Treasury $ 29,112 $ 30,841 $ - $ - $ 59,953
Total $ 29,112 $ 30,841 $ - $ - $ 59,953
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
Schedule B: Intragovernmental Liabilities
FHA's Intra-governmental liabilities, by Federal entity, are as follows on September 30, 2017 and 2016:
(Dollars in Millions)
Accounts Other
FY 2017 Payable Borrowings Liabilities Total
Federal Financing Bank $ - $ 1,187 $ - $ 1,187
U.S. Treasury - 27,954 1,673 29,627
HUD 2 - - 2
Total $ 2 $ 29,141 $ 1,673 $ 30,816
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
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Required Supplementary Information
Schedule C: Comparative Combining Statement of Budgetary Resources by FHA Program for Budgetary
September 30, 2017:
Dollars in Millions MMI/CMHI MMI/CMHI GI/SRI Budgetary
Capital Reserve Program Program Other Total
Budgetary Resources:
Unobligated balance brought forward, October 1 $ 37,220 $ 80 $ - $ 458 $ 37,758
Unobligated balance brought forward, October 1, as adjusted 37,220 80 - 458 37,758
Recoveries of prior year unpaid obligations - 8 - 3 11
Other changes in unobligated balance (+ or -) (18,698) 18,691 - (418) (425)
Unobligated balance from prior year budget authority, net 18,522 18,779 1 41 37,343
Appropriations (discretionary and mandatory) - 130 4,318 25 4,473
Spending authority from offsetting collections (discretionary & mandatory) 13,112 - - 177 13,289
Total budgetary resources $ 31,635 $ 18,909 $ 4,319 $ 242 $ 55,105
Status of Budgetary Resources:
Obligations incurred - 18,824 4,318 75 23,217
Apportioned - 46 1 22 69
Unapportioned 31,635 1 - 125 31,761
Unexpired unobligated balance, end of year 31,635 47 1 147 31,830
Expired unobligated balance, end of year - 39 - 19 58
Total unobligated balance, end of year 31,635 47 1 205 31,888
Total budgetary resources $ 31,635 $ 18,909 $ 4,319 $ 242 $ 55,105
Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross) - 138 1 207 346
Uncollected customer payments from Federal sources, brought forward, October 1 (-) (34) - - (1) (35)
Obligated balance, start of year (net), before adjustments (+ or -) (34) 137 1 207 311
Adjustment to obligated balance, start of year (net) (+ or -) - - - - -
Obligated balance, start of year (net), as adjusted (34) 137 1 207 311
Obligations incurred - 18,824 4,318 75 23,217
Outlays (gross) (-) - (18,797) (4,318) (45) (23,160)
Change in uncollected customer payments from Federal sources (+ or -) (14) - - 1 (13)
Recoveries of prior year unpaid obligations (-) - (8) - (3) (11)
Unpaid obligations, end of year (gross) - 156 1 236 393
Uncollected customer payments from Federal sources, end of year (48) - - - (48)
Obligated balance, end of year (net) $ (48) $ 156 $ 1 $ 236 $ 345
Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory) 13,112 130 4,318 202 17,762
Actual offsetting collections (discretionary and mandatory) (-) (13,099) - - (176) (13,275)
Change in uncollected customer payments from Federal sources (discretionary and
mandatory) (+ or -) (14) - - 1 (13)
Budget authority, net (discretionary and mandatory) - 130 4,318 25 4,473
Outlays, gross (discretionary and mandatory) - 18,797 4,318 45 23,160
Actual offsetting collections (discretionary and mandatory) (-) (13,099) - - (176) (13,275)
Outlays, net (discretionary and mandatory) (13,099) 18,797 4,318 (131) 9,885
Distributed offsetting receipts (-) - - - (1,070) (1,070)
Agency outlays, net (discretionary and mandatory) $ (13,099) $ 18,797 $ 4,318 $ (1,201) $ 8,815
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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 and 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)
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Required Supplementary Information
Schedule D: Comparative Combining Budgetary Resources by FHA Program for Non-Budgetary
September30, 2017:
Non
MMI/CMHI GI/SRI Budgetary
Financing Financing Other Total
Budgetary Resources:
Unobligated balance brought forward, October 1 $ 10,609 $ 6,012 $ (210) $ 16,411
Adjustment to unobligated balance brought forward, October 1 (+ or -) - - 234 234
Unobligated balance brought forward, October 1, as adjusted 10,609 6,012 24 16,645
Recoveries of prior year unpaid obligations 65 15 2 82
Unobligated balance from prior year budget authority, net 10,674 6,027 26 16,727
Borrowing authority (discretionary and mandatory) 6,500 812 1,064 8,376
Spending authority from offsetting collections (discretionary and mandatory) 28,972 5,661 32 34,665
Total budgetary resources $ 46,146 $ 12,499 $ 1,123 $ 59,768
Status of Budgetary Resources:
Obligations incurred 30,019 3,887 1,069 34,975
Apportioned 3,568 2,664 40 6,272
Unapportioned 12,559 5,949 13 18,521
Unexpired unobligated balance, end of year 16,127 8,612 54 24,793
Total unobligated balance, end of year 16,127 8,612 54 24,793
Total budgetary resources $ 46,146 $ 12,499 $ 1,123 $ 59,768
Change in Obligated Balance:
Unpaid obligations, brought forward, October 1 (gross) 1,985 422 243 2,650
Obligated balance, start of year (net), before adjustments (+ or -) 1,985 422 243 2,650
Obligated balance, start of year (net), as adjusted 1,985 422 243 2,650
Obligations incurred 30,019 3,887 1,069 34,975
Outlays (gross) (-) (29,597) (3,829) (755) (34,181)
Recoveries of prior year unpaid obligations (-) (65) (15) (2) (82)
Unpaid obligations, end of year (gross) 2,342 466 554 3,362
Obligated balance, end of year (net) $ 2,342 $ 466 $ 554 $ 3,362
Budget Authority and Outlays, Net:
Budget authority, gross (discretionary and mandatory) 35,472 6,473 1,095 43,040
Actual offsetting collections (discretionary and mandatory) (-) (37,943) (6,485) (41) (44,469)
Budget authority, net (discretionary and mandatory) (2,472) (12) 1,055 (1,429)
Outlays, gross (discretionary and mandatory) 29,597 3,829 755 34,181
Actual offsetting collections (discretionary and mandatory) (-) (37,943) (6,485) (41) (44,469)
Outlays, net (discretionary and mandatory) (8,346) (2,656) 714 (10,288)
Agency outlays, net (discretionary and mandatory) $ (8,346) $ (2,656) $ 714 $ (10,288)
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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
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Other Accompanying Information
Summary of Financial Statement Audit and Management Assurances
For FY 2017, two material weaknesses were identified by the Office of Inspector General in its audit of
FHA’s Principal Financial Statements and accompanying Notes. Table 1 provides a summary of financial
audit findings with regard to the audit opinion. Table 2 is a summary of FHA’s FMFIA management
assurances.
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Audit of the Federal Housing Administration's Financial Statements for Fiscal Years 2017 and 2016 (Restated)
Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-02-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)