The process of preparing their annual budget  request requires that FHA and RHS prepare estimates of the dollar amount  of loans they anticipate guaranteeing nearly 2 years in advance. When an agency decides to guarantee a loan, it  uses this rate to determine the credit subsidy cost of doing so. Difficulties in Estimating Demand Underlie FHA and RHS’s 10 Suspensions of Loan Guarantee Programs Since 1994

On 10 occasions since 1994, FHA and RHS have suspended the issuance of  loan guarantees under certain programs because the programs effectively  exhausted their commitment authority or credit subsidy budget authority  before the end of a fiscal year. Specifically, FHA suspended programs six  times and RHS four times. Difficulties in Estimating Program Demand Contributed to the Exhaustion of Commitment and Budget Authority before the End of a Fiscal Year

Due partly to difficulties in estimating the demand for loan guarantee  programs, the resources budgeted for these programs have not always  reflected the amounts required to keep them operating for a full fiscal year. FHA and RHS Manage Their Programs in a Similar Manner but Estimate and Notify Congress of the Rate at Which They Will Exhaust Commitment and Budget Authority Differently

FHA and RHS basically manage their loan guarantee programs on a first- come, first-served basis, a factor limiting both agencies’ ability to control  the rate at which they use commitment authority and obligate credit  subsidy budget authority. Our analysis indicates that FHA’s basic approach for making estimates does  not always accurately forecast whether the agency will exhaust its  commitment authority; however, FHA officials and federal budget experts  said that more complex methods would not necessarily produce better  estimates. FHA Has Specific Estimation and Notification Requirements for Utilization of Commitment Authority and Relies Primarily on a Straightforward Estimation Process to Satisfy These Requirements

FHA is required by statute to estimate, on at least a monthly basis, the rate  at which it will use commitment authority for the remainder of the fiscal  year and to notify Congress (1) when 75 percent of the authority has been  used or (2) if estimates indicate that the authority will be exhausted before  the end of the year. For example, by requiring FHA to provide more frequent  notifications concerning its commitment authority balances and creating  notification requirements for FHA and RHS concerning their balances of  credit subsidy budget authority, Congress could gain additional and more  timely information to consider whether supplemental appropriations  would be needed to prevent program suspensions. Congress could also  provide FHA higher annual limits on commitment authority to minimize the  likelihood that the agency would exhaust this authority before the end of a  fiscal year. To help prevent program suspensions due to the exhaustion of  credit subsidy budget authority, Congress could (1) combine multifamily  programs with negative and positive subsidy costs under the GI/SRI  account to eliminate the need for credit subsidy appropriations, (2)  authorize FHA to use negative subsidies to cover any shortfalls in credit  subsidy budget authority, or (3) make budget authority from the  subsequent year’s appropriation available in the current year. Finally, the  agencies can continue to use or be given additional administrative tools to  help delay or prevent program suspensions due to exhaustion of credit  subsidy budget authority. Congress could require FHA and RHS to provide such notifications—for  example, when they have obligated specified percentages or at certain  points in the fiscal year. To identify options that Congress, FHA, and RHS could exercise to help  prevent the agencies from suspending their loan guarantee programs  before the end of a fiscal year and the likely implications of these options,  we interviewed budget, legal, and housing finance specialists from OMB  and CBO; housing industry officials from the National Association of Home  Builders, the Mortgage Bankers Association, and the National Association  of Realtors; and we conducted a literature review to identify relevant  studies and legislation.
Why GAO Did This Study

In fiscal year 2004, the Department of Housing and Urban Development's Federal Housing Administration (FHA) and the Department of Agriculture's Rural Housing Service (RHS) guaranteed approximately $136 billion in mortgages for single-family homes, multifamily rental housing, and healthcare facilities under a variety of programs. In past years, both agencies have occasionally had to suspend the issuance of guarantees under some programs when they exhausted the dollar amounts of their commitment authority (which serves as a limit on the volume of new loans that an agency can guarantee) or credit subsidy budget authority (the authority to cover the long-term costs--known as credit subsidy costs--of extending these guarantees) before the end of a fiscal year. These suspensions can be disruptive to homebuyers, developers, and lenders. GAO was asked to determine (1) how often and why FHA and RHS have suspended their loan guarantee programs over the last decade, (2) how these agencies manage and notify Congress of the rate at which the authorities for these programs will be exhausted, and (3) options Congress and the agencies could exercise to help prevent future suspensions and the potential implications of these options.

What GAO Found

On 10 occasions since 1994, FHA and RHS have suspended the issuance of loan guarantees after exhausting the commitment authority or credit subsidy budget authority for certain programs before the end of a fiscal year. Specifically, FHA suspended several programs six times and RHS suspended one program four times. The resources budgeted for these programs have not always been adequate to keep them operating for a full fiscal year due partly to difficulties in estimating demand for loan guarantees--a difficulty compounded by the process of preparing the budget request to Congress, which requires that the agencies forecast demand nearly 2 years in advance. FHA and RHS both manage their programs on a first-come, first-served basis, a factor limiting their ability to control the rate at which they use commitment authority and obligate budget authority. However, the agencies have different requirements and approaches for estimating the rate at which they will exhaust these authorities and notifying Congress. For example, unlike RHS, FHA is statutorily required to notify Congress when it has used 75 percent of its commitment authority and when it estimates that it will exhaust this authority before the end of a fiscal year. GAO's analysis indicates that FHA's basic approach for making estimates--applying utilization rates experienced up until the time of the analysis to the remainder of the fiscal year--does not always accurately forecast whether the agency will exhaust its commitment authority. However, FHA officials and federal budget experts said that more complex methods would not necessarily produce better estimates. Through discussions with federal agency and mortgage industry officials, GAO identified several options that Congress, FHA, and RHS could exercise to help prevent future suspensions; however, the options would also have budgetary impacts (such as increasing the budget deficit), make oversight of the programs more difficult, or impose additional administrative burdens on the agencies. For example, Congress could require FHA to provide more frequent notifications about the percentage of commitment authority the agency has used and expand this requirement to include obligations of credit subsidy budget authority. This option, which could also be applied to RHS, could give Congress additional and more timely information to consider whether to provide supplemental appropriations before the end of a fiscal year. Other options for Congress include (1) authorizing FHA to use revenues generated by some of its loan guarantee programs to cover any shortfalls in budget authority for others and (2) providing "advance funding"--budget authority made available in an appropriation act for the current fiscal year that comes from a subsequent year's appropriation--for FHA and RHS program credit subsidy costs. Further, FHA and RHS can continue to use or be given additional administrative tools--such as transferring budget authority--to help delay or prevent program suspensions.