RHS, a component of USDA’s RD mission area, is responsible for rural housing and community facilities programs. Under the single-family guarantee program, RHS provides lenders guarantees on residential mortgage loans to households with low to moderate incomes in areas statutorily designated as rural. The guarantees cover 30-year fixed-rate loans made to purchase a home or refinance an existing RHS direct or guaranteed loan. The guarantee program requires no down payment from borrowers and currently charges a 2.75 percent up-front guarantee fee (which borrowers may finance in the approved loan amount) and a 0.5 percent annual guarantee fee. The guarantee provides coverage for eligible losses of up to 90 percent of the original loan balance, including unpaid principal and interest, principal and interest on USDA-approved advances for protection and preservation of the property, and the costs associated with selling a foreclosed property. RHS-approved lenders and servicers originate, underwrite, and service the mortgage loans that RHS guarantees. According to RHS, in fiscal year 2014, about 1,700 lenders originated loans guaranteed by RHS. A borrower (home buyer) applies for a guaranteed loan through an RHS- approved lender. Since 2006, RHS has provided an automated underwriting system for lenders to submit loan information and determine borrower eligibility. RHS staff are to review the loan information and, if it meets RHS’s requirements, issue a conditional commitment to guarantee the loan. Upon receiving and satisfying the commitment conditions, the lender closes the loan and submits the closing package to RHS. After reviewing the closing package, RHS issues the loan guarantee. A lender may service its own loans—including collecting monthly mortgage payments, maintaining escrow accounts for property taxes and hazard insurance, and conducting loss mitigation activities—or pay a fee for another organization to service its loans. Servicers also are responsible for liquidating foreclosed properties. In December 2014, new program regulations went into effect that expanded the pool of lenders eligible to participate in the guarantee program. With the regulation change, any lender supervised and regulated by the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Federal Reserve System, or the Federal Housing Finance Board was eligible. According to RHS, the regulation enables many small community banks and credit unions that were ineligible prior to the change in regulations to participate in the guarantee program. RD offices at the national, state, and local levels play important roles in the guarantee program. The Single Family Housing Guaranteed Loan Division in Washington, D.C., is responsible for developing, implementing, and monitoring program policy and procedures. The division’s functions include legislative and budget planning; management reporting; issuance of regulatory and policy directives; portfolio monitoring; and approval, training, and review of nationwide lenders and servicers. RD state and local offices conduct program operations within their geographic jurisdictions. Their responsibilities include approving lenders that operate in a single state to participate in the program and monitoring the lenders’ underwriting and servicing of guaranteed loans. In addition, staff in state and local offices are responsible for reviewing loan applications and closing documentation and issuing conditional and final loan guarantee commitments. They also are to provide loan servicing guidance to lenders and servicers and train lenders on program requirements. Other offices play key roles in administering and overseeing the guarantee program including, but not limited to, the following: RHS’s Centralized Servicing Center (CSC) in St. Louis, Missouri, reviews and approves lender loss-mitigation efforts and lender claims, among other functions. RD’s Office of the Chief Financial Officer calculates credit subsidy estimates and reestimates; oversees periodic management control reviews and state internal reviews of RD programs, including the guarantee program; and reviews documentation related to implementation of USDA Office of the Inspector General audit recommendations and forwards it to USDA’s Office of the Chief Financial Officer, which determines whether the recommendation can be closed. Under FCRA, USDA and other federal agencies must estimate the credit subsidy costs of their direct loan and loan guarantee programs and include the costs to the government in their annual budgets. Agencies annually estimate credit subsidy costs for each program by cohort—the loans agencies commit to insure or guarantee in a given fiscal year. The credit subsidy cost is equal to the net present value of estimated lifetime cash flows to and from the government, excluding administrative costs. For a mortgage guarantee program, cash inflows consist primarily of premiums received from borrowers and cash outflows consist mostly of claim payments to lenders. Credit programs have a positive subsidy cost when the present value of estimated payments by the government exceeds the present value of estimated premiums and other funds received by the government (collections). When credit programs have a positive subsidy cost, they require appropriations. Conversely, negative subsidy programs are those in which the present value of estimated collections is expected to exceed the present value of estimated payments. FCRA requires that agencies have budget authority to cover credit subsidy costs before entering into credit transactions. To estimate their subsidy costs for annual appropriation requests, credit agencies estimate the future performance of direct loans and loan guarantees. Agencies are responsible for accumulating relevant, sufficient, and reliable data on which to base these estimates. To estimate future credit performance, agencies generally have models that include assumptions about defaults, prepayments, recoveries, and the timing of these events and are based on the nature of their credit programs. As needed, agencies also incorporate economic assumptions provided by the President into credit subsidy calculations. Further, OMB requires agencies to discount cash flows using projected Treasury interest rates that are consistent with the economic assumptions underlying the President’s budget. The discount rates are used to derive the present value of future cash flows that, in turn, indicate the credit subsidy costs. The costs can be expressed as a rate. For example, if an agency commits to guarantee loans totaling $1 million and has estimated that the present value of cash outflows will exceed the present value of cash inflows by $15,000, the estimated credit subsidy rate is 1.5 percent. Under FCRA, agencies generally must produce annual updates of their credit subsidy estimates—known as reestimates—of each cohort based on information about the actual performance and estimated changes in future credit performance. This requirement reflects the fact that estimates of credit subsidy costs can change over time. Beyond changes in estimation methodology, each additional year provides more historical data on credit performance that may influence estimates of the amount and timing of future cash flows. Economic assumptions also can change from one year to the next, including assumptions on interest rates. When reestimated credit subsidy costs exceed agencies’ original cost estimates—resulting in an upward reestimate—the additional subsidy costs are not covered by new discretionary appropriations but rather are funded from permanent, indefinite budget authority. In January 2013, OMB reissued its Circular A-129, which provides guidance to federal agencies on managing credit programs. The guidance addresses key aspects of managing a loan guarantee program, including assessing the eligibility and creditworthiness of borrowers, overseeing guaranteed loan lenders and servicers, developing performance indicators and risk thresholds, and analyzing and reporting on portfolio risks. The circular also provides guidance on management structures, including the need for risk-management functions that are independent from credit program administration. According to OMB staff, the 2013 update to the circular incorporated best practices for risk management. RD’s Office of the Chief Financial Officer has primary responsibility for ensuring the guarantee program’s compliance with the circular. In part due to the recent housing crisis, the estimated credit subsidy costs of RHS’s guarantee program rose in recent years. RD uses information on historical average performance to develop its cost estimates, although it adjusted its method in recent years to account for the effects of the housing crisis. Furthermore, RD has been developing econometric (statistical) models to estimate future credit subsidy costs that should help address the limitations of its current method, such as reduced reliability when economic conditions vary from those in the past. RHS estimated the initial subsidy rates of its most recent single-family mortgage guarantee cohorts to be around zero. As required by FCRA, RD annually estimates the credit subsidy cost of the loans it plans to guarantee in the upcoming fiscal year and reestimates credit subsidy costs for prior loan cohorts. According to RHS officials, since 2010 RHS has had the goal of making each new loan guarantee cohort “subsidy neutral”—that is, initially, the present value of lifetime estimated cash inflows equals the present value of lifetime estimated cash outflows. Accordingly, the initial credit subsidy rate estimates for the 2011 through 2014 cohorts were close to zero (ranging from -0.04 percent to -0.25 percent). However, the current reestimated rates for the 2011 and 2012 cohorts are slightly positive (1.39 percent and 0.86 percent, respectively). The current reestimated rates for the 2013 and 2014 cohorts—the most recent cohorts to be reestimated—are slightly negative, each at -0.31 percent. The reestimated costs of the RHS guarantee portfolio as a whole substantially increased in recent years. In part, the larger reestimates reflected growth in the size of RHS’s loan cohorts. RHS has submitted net upward credit subsidy reestimates—expectations that the guaranteed portfolio as a whole will cost more or produce less revenue than previously estimated—in 8 of the last 11 years (see fig. 1). 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.