Estimated Costs of Guarantee Program Have Risen, and Rural Development Has Enhanced Its Cost Estimation Process

In part due to the recent housing crisis, the estimated credit subsidy costs  of RHS’s guarantee program rose in recent years. The reestimated costs of the RHS guarantee portfolio as a whole  substantially increased in recent years. The upward  reestimates for fiscal years 2012 through 2014 were significantly larger  than those of prior years. For example, the reestimates for 2012, 2013,  and 2014 were $364 million, $804 million, and $615 million, respectively,  compared with $42 million for 2010. Furthermore, the  auditor said that using an econometric modeling methodology would allow  RD to improve the quality of its estimates. RHS Has Not Fully Aligned Its Policies and Procedures with OMB Guidance

RHS’s policies and procedures for the guarantee program were  consistent with 19 of 26 OMB A-129 standards for managing federal  credit programs, but were not fully consistent with the other 7. RHS’s compliance review  guide contains risk factors for prioritizing the reviews. RHS Has Not Established Risk-Related Metrics and Responsibilities Fully Consistent with All OMB Standards for Credit Program Management

As shown in table 4, RHS’s policies and procedures were consistent with  two of the six standards in Circular A-129 concerning credit program  management and partially consistent with the remaining four. While RD has position descriptions for individuals  involved in risk-management functions that specify duties and  responsibilities, RHS does not have written procedures for a key part  of its risk-management structure and documented lines of  communication, as required by OMB’s Circular A-129. RHS’s risk-management structure is  decentralized and complex. For  example, RHS has not developed thresholds for the magnitude of  expected losses that are acceptable at the portfolio or loan level. However, these reports do not include a qualitative  discussion of areas meriting increased management focus, as  specified in Circular A-129. However, RHS could further strengthen its policies and procedures for  managing the guarantee program by addressing inconsistencies with  Circular A-129 standards related to applicant screening, lender oversight,  management frameworks, and risk assessment and reporting. To strengthen oversight of lenders and servicers, develop and publish in the Federal Register qualification  requirements for the principal officers of lenders and servicers  seeking initial or continued approval to participate in the guarantee  program, develop and publish in the Federal Register capital and financial  requirements for guarantee program lenders that are not regulated  by a federal financial institution regulatory agency, and establish standing policies and procedures to help ensure that the  agency reviews the eligibility of lenders and servicers participating  in the guarantee program at least every 2 years. To strengthen risk assessment and reporting,  improve performance measures comparing RHS and FHA loan performance, potentially by making comparisons on a cohort basis and limiting comparisons to loans made in similar geographic areas, develop risk thresholds for the guarantee program, potentially in the form of maximum portfolio- or loan-level loss tolerances, and identify issues for increased management focus in high-level dashboard reports. For four of the six recommendations with which RD neither agreed nor  disagreed, RD said it recognized the underlying risk implications and was  continuing to consider the recommendations. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine: (1) recent trends in the credit subsidy  costs of the Rural Housing Service’s (RHS) single-family guarantee  program (guarantee program) and the process for estimating those costs  and (2) the extent to which RHS’s policies and procedures for the  guarantee program are consistent with Office of Management and Budget  (OMB) standards for managing credit programs. We did not verify RHS’s compliance with its own policies  and procedures or assess their effectiveness.
Why GAO Did This Study

In recent years, RHS's single-family mortgage guarantee program has grown significantly, and RHS currently manages a guaranteed portfolio of more than $100 billion. RHS helps low- and moderate-income rural residents purchase homes by guaranteeing mortgages made by private lenders.
GAO was asked to examine the program's cost estimation methodology and risk-management structure. This report discusses (1) recent trends in the credit subsidy costs of RHS's guarantee program and the process for estimating those costs and (2) the extent to which RHS's policies and procedures for the program are consistent with federal standards for managing credit programs. GAO analyzed RHS budget data for fiscal years 2004 through 2014, examined RHS policies and procedures, reviewed OMB standards, and interviewed RHS officials.

What GAO Found

The estimated credit subsidy costs (expected net lifetime costs) of single-family mortgages guaranteed by the Department of Agriculture's (USDA) Rural Housing Service (RHS) substantially increased in recent years, partly due to high losses from the 2007 through 2011 housing crisis. For example, the fiscal year 2013 and 2014 reestimates (which federal agencies must do annually) indicated higher expected costs of $804 million and $615 million, respectively, compared with the prior reestimates (see fig.). To improve the current estimation method (which relies on average historical losses), RHS hired a contractor to develop statistical models that will predict losses based on loan, borrower, and economic variables.
RHS's policies and procedures are not fully consistent with all Office of Management and Budget (OMB) standards for managing credit programs (OMB Circular A-129). RHS's policies and procedures are consistent with the OMB standards in most areas, including loan documentation, collateral requirements, and aspects of applicant screening and lender oversight. However, RHS
has not established and published all required lender eligibility standards such as principal officer qualifications (e.g., experience level) and financial standards (e.g., minimum net worth);
lacks written policies and procedures for a committee responsible for analyzing and addressing the credit quality (default risk) of guaranteed loans;
has not established a position independent of program management to help manage the risks of its guaranteed portfolio;
has not established risk thresholds (for example, maximum portfolio- or loan-level loss tolerances) and uses certain loan performance benchmarks that have limited value for risk management; and
has not incorporated a discussion of areas needing increased management focus into its “dashboard” reports.
These and other inconsistencies occurred in part because RHS has not completed an ongoing assessment of its policies and procedures against Circular A-129. Furthermore, the Office of Rural Development (which oversees RHS) has not established procedures for prioritizing Circular A-129 reviews of its credit programs based on risk. More fully adhering to Circular A-129 standards would enhance RHS's effectiveness in managing the risks of its guarantee program.

What GAO Recommends

GAO is making 11 recommendations to USDA to help ensure that RHS's policies and procedures are consistent with OMB standards and to strengthen management of the guarantee program and other credit programs. Areas on which the recommendations focus include overseeing lenders, formalizing or establishing key risk management functions, and assessing and reporting on portfolio risk and performance. RHS agreed with or said it was acting on five of the recommendations. RHS neither agreed nor disagreed with the rest but said it generally recognized the underlying risk implications. GAO maintains that the recommendations are valid, as discussed in the report.