Credit Reform:

HUD's Fiscal Year 2000 Credit Subsidy Budget Estimates Were Reasonable, But Could Have Been Improved

AIMD-00-60R: Published: Jan 14, 2000. Publicly Released: Jan 14, 2000.

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GAO provided information on the Federal Housing Administration's credit subsidy budget estimates used to formulate the President's fiscal year (FY) 2000 budget to determine whether: (1) these estimates were reasonable; and (2) any changes need to be made to the credit subsidy estimation process to ensure that future budget estimates are reasonable.

GAO noted that: (1) the estimates of loan program costs included in the FY 2000 President's budget for the Section 221(d)(4) of the National Housing Act and the Mutual Mortgage Insurance (MMI) Fund loan guarantee programs were reasonable, given the nature of the estimates; (2) however, the process used to calculate these estimates could be improved, which would also have improved the quality of the estimate; (3) for example, the financial statement audit work related to the Section 221(d)(4) program, which was available after the submission of the FY 2000 budget estimate to the Office of Management and Budget, identified better sources of data that would have reduced the estimated program cost by nearly $12 million or 9 percent of the original cost over the life of the loans made during FY 2000 and estimated to be outstanding for up to 40 years; (4) further, the MMI Fund budget estimate was prepared with a cash flow model containing several formula errors; (5) although some of these errors were identified and corrected during the 1998 audit prior to the budget submission, a lack of coordination between the budget and financial statement audit processes and the lack of a detailed supervisory review allowed these errors to remain in the budget model; and (6) if all the identified errors had been corrected in the budget model, the estimated net receipts of MMI Fund would have increased by $96 million, or 4 percent of the original net receipts amount over the life of the loans made during FY 2000 and estimated to be outstanding for up to 30 years.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to improve HUD's credit subsidy estimation process, the Secretary of Housing and Urban Development or his designee should minimize the differences between credit subsidy estimates for the budget and financial statements by implementing plans to adjust the timing of audit procedures related to credit subsidies so that these procedures are completed in time for any alternative sources of data and errors identified during the audit to be factored into the President's budget submission.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: FHA took steps to minimize differences between credit subsidy estimates for the budget and financial statements by using the same cash flow model for its budget and financial statements, and by working with its actuarial review contractors and auditors to establish time frames that would allow the cash flow models and assumption values to be audited prior to its budget submission. Furthermore, FHA's success in meeting the accelerated financial statement time frames ensures that audit procedures are completed prior to its budget submission.

    Recommendation: In order to improve HUD's credit subsidy estimation process, the Secretary of Housing and Urban Development or his designee should establish a process to incorporate all necessary revisions identified during the audit in time to meet the schedule for the President's budget submission.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: To establish a process to incorporate revisions identified during the audit, FHA worked with its actuarial review contractors and auditors to establish time frames that would allow the cash flow models and assumption values to be audited prior to its budget submission. As a result, revisions identified during the audit could be incorporated into credit subsidy estimates prior to the submission of the President's Budget. FHA has also implemented new policies and procedures that include a process for integrating new legislative changes in the budget models prior to the submission of the President's Budget. (The procedures are contained in the Office of Evaluation's Configuration Management Plan for Single- and Multifamily Cash Flow Models, first issued in 2003, and most recently revised as of May 2004.) Furthermore, because policy proposals affecting assumption values for the budget may be decided after the submission of cash flow models to the auditors, it should be recognized that assumption values might be different between the budget and financial statements. Furthermore, FHA views consistency to be dependent on acceptance by both its auditors and OMB.

    Recommendation: In order to improve HUD's credit subsidy estimation process, the Secretary of Housing and Urban Development or his designee should use the audited liability for loan guarantees model when preparing the President's budget submission for the MMI Fund. In the interim, complete the detailed cell-by-cell review of the budget model to identify and correct all formula errors.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: FHA implemented a process to use the audited MMI liability for loan guarantees (LLG) cash flow model as a baseline for credit subsidy estimates for the budget. The audited LLG model was first used for budget estimates for fiscal year 2003.

    Recommendation: In order to improve HUD's credit subsidy estimation process, the Secretary of Housing and Urban Development or his designee should establish a supervisory review process detailed enough to identify formula errors in budget models prior to submitting credit subsidy estimates to the Office of Management and Budget for inclusion in the President's budget.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: FHA has implemented policies and procedures that include formal supervisory review of corrections and modifications to cash flow models prior to the submission for the President's Budget. Under the new procedures, the Deputy Assistant Secretary for Finance and Budget reviews and approves all model changes, including incorporation of new programs or policies, prior to implementation. Furthermore, the use of the integrated cash flow models for the financial statement and the budget should reduce the risk of formula errors in budget estimates.

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