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Rethinking Federal Credit: Managing Loan and Loan Guarantee
Programs in a Changing Environment Thursday, May 17, 2018
Changing Economic and Policy Environments for
the World’s Largest Financial Institution
2
Doug Criscitello, Executive Director, MIT Golub Center for Finance and Policy
Kyle Shohfi, Research Associate, MIT Golub Center for Finance and Policy
BY EXTENDING CREDIT & PROVIDING INSURANCE, THE U.S. GOVERNMENT FUNCTIONS AS THE WORLD’S
LARGEST FINANCIAL INSTITUTION
2.563 2.256 1.931 1.864 0.907
0
5
10
15
20
FEDERAL
GOVERNMENT
JPMORGAN
CHASE
BANK OF
AMERICA
WELLS FARGO CITIGROUP GOLDMAN
SACHS
Tri
llio
ns
of
$
ASSETS OR INSURED OBLIGATIONS
DIRECT LOANS & LOAN GUARANTIES INSURANCE & OTHER SUPPORT
REGULATION & OVERSIGHT
FSOC
World’s Largest Financial Institution
5
- Direct Loans & Loan Guaranties
• Federal credit origins: post-World War I – Farm loans refinanced
– Loans to railroads returned to private control after wartime nationalization
• Expansion during ‘30s to counter depression & moderate impact
– Loans to farmers, businesses & homeowners
• NBER (Saulnier, 1958), Federal Lending & Loan Insurance – Comprehensive look at fed credit during 1950s
– Purpose: counteract depression, fill gaps, respond to emergencies, give preferential treatment
– Key Qs:
• Do credit programs reallocate resources to promote the general welfare & achieve beneficial outcomes?
• What are the economic impacts?
• How best to organize agencies to deliver programs?
Historical perspective (thru 1950s)
Historical perspective (thru 1950s)
Historical perspective (1960s) • New programs created & others
expanded
• JFK Presidential Committee on Federal Credit Programs (1962-63)
– Reduce/remove credit gaps – gov’t support disappears over time
– Subsidize credit – if valid need remains, no reasonable expectation of gov’t withdrawing
• President’s Commission on Budgeting Concepts (1967)
– Basis for Congressional Budget Act (1974)
• Created CBO
• Later amended to include FCRA (1990)
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0
20
40
60
80
100
120
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160
180
1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
Face Value of Federal Credit Outstanding
Loan Guarantees
Direct Loans
Dollars in billions
Combined
Historical perspective (1960s)
Historical perspective (1970s-1980s) • OMB
– Reagan-era OMB questioned need for some credit programs
– Options for credit budgeting & reform
• CBO focus – Some of its earliest work focused on size & growth of credit programs across
government • Attempts to quantify performance of guaranteed loans
• Concerns about poor data & definitional differences regarding delinquency/default
– Testimony • Rivlin (1981): Guarantee programs shifting from actuarially sound insurance programs to
programs providing subsidy; need to assess costs
• Penner (1986): Budgetary treatment of federal credit assistance fails to depict costs accurately
• Reischauer (1990): Need to reform credit budgeting
• “Rationing in Markets with Imperfect Information,” (Stiglitz, Weiss 1981)
– No special role for gov’t credit in perfect market
– But credit markets are not perfect – asymmetric info between borrowers & lenders:
– Beneficial for gov’t to fill credit gap when it leads to socially desirable outcomes where value exceeds taxpayer costs
Economic rationale for government credit support
Perfect market for loans
Interest
rate
Quantity of loans
supply
demand
• Higher rates => lower borrower quality
Credit gap: no market-clearing interest rate
Interest
rate
Quantity of loans
supply (actual)
demand
credit gap
supply in
perfect market
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1970 1975 1980 1985
Face Value of Federal Credit Outstanding (2018 Dollars) Dollars in trillions
Loan Guarantees
Direct Loans
Combined
Historical perspective (1970s-1980s)
Historical perspective (1990s-2000s)
Improvements in gov’t
financial management
focused on or applied
to credit programs
FCRA enacted & effective for FY92
• Implementation focus during 1990s & into early 2000s
Chief Financial Officer Act (CFO
Act)
The Federal Credit
Reform Act of
1990 (FCRA)
1990
Accountability of Tax
Dollars Act of 2002 (ATD) 2000
Improper Payments
Elimination and Recovery
Act of 2010
2010
Federal Information
Security Management Act
of 2002
Debt Collection Improvement Act of
1996 (DCIA)
Federal Debt Collection and
Procedures Act of 1990
Cash Management and
Improvement Act Amendments of
1992
Federal Financial Management
Improvement Act of 1996 (FFMIA)
Information Technology
Management Reform Act of 1996 (Clinger-Cohen Act)
Government Management
Reform Act of 1994 (GMRA)
Government Performance and
Result Act of 1993
Act of 1982 (FMFIA)
16
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%1
99
0
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
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99
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00
20
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02
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08
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09
20
10
20
11
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20
13
20
14
20
15
20
16
20
17
Federal Participation Rate in Credit Market
*Outstanding federal direct loans & guarantees divided by total liabilities of domestic nonfinancial sector
Historical perspective (1990s-2000s)
0
500
1000
1500
2000
2500
2007 2010 2007 2010
Post-crisis Growth
Energy
SBA
USDA
VA
ED
HUD
Commitments Outstandings
Dollars in billions
Historical perspective (2007-2010)
• Today, it is clear that government loan programs to finance the acquisition of homes, businesses, farms, and college educations have become a well established part of U.S. credit marketplace
– Two departments with portfolios exceeding $1 trillion
– Others managing significantly larger portfolios than in past
• Questions – Have we receded from concerns about role of government in credit marketplace?
– Has the government’s role post-financial crisis, combined with FCRA budgetary treatment, created complacency in addressing appropriate role of government in credit markets?
– How will advances in data & technology be used to assess & revise programs?
20
Historical perspective (2010-present)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Face Value of Federal Credit Outstanding (2018 Dollars)
Combined
Dollars in trillions
Loan Guarantees
Direct Loans
Bringing it all together
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Federal Credit Obligations/Commitments (2018 Dollars)
Dollars Percent of Credit Market
Dollars in trillions
Bringing it all together
$4.34 Trillion
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
19
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19
95
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96
19
97
19
98
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99
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00
20
01
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19
2017
$ (
in m
illi
on
s)
Federal Loans Outstanding
(Direct & Guaranteed)
Other
Business
Education
Housing
Looking forward: President’s FY19 Budget
President’s FY19 Budget: Credit Programs
Direct lending of $163 billion in ‘19 drives
direct loan portfolio above $1 trillion for first time
BIG CHANGES PROPOSED FOR NEW LOAN REPAYMENT OPTIONS
• New, single Income Driven Repayment (IDR) plano Maximum payment of 12.5% of monthly income
o 15 years for undergrad & 30 years for grad borrowers (forgiveness follows)
o Severely delinquent borrowers auto-enrolled in IDR
o Income verification with IRS
• Eliminated subsidized loan program & public service loan forgiveness
• Risk share: raises notion of postsecondary institutions sharing portion of
financial risk associated with student loans
PRESIDENT’S 2019 BUDGET: STUDENT LOANS
BUDGET DATA POINTS
• Budget assumes student loans will generate budgetary savings in ’19,
but estimates have traditionally been overly optimistico Existing direct loans expected to cost $48B more than initial estimates
• Undergrad default rates forecast to drop from about 25% to 16%
• Loan servicing costs expected to exceed $1 billion in ‘19
PRESIDENT’S 2019 BUDGET: HOME MORTGAGES
• Up to additional $158 bill ion available if demand exceeds forecasts
• Ginnie Mae provided authority to guarantee $550 bill ion in new
mortgage-backed securities
PROGRAM REFORMS
• For HECM reverse mortgages, HUD has already raised premiums &
lowered share of equity homeowners can borrow against
o HUD plans to implement additional program changes for 2019 to keep
expected budgetary costs below zero
HUD/FHA forecasts $242 billion in single-family
mortgage guarantees, with portfolio >$1.3 trillion by close of ‘19
BUDGET DATA POINTS
• Budget assumes single family guaranties generate budgetary savings in ’19, but estimates have consistently been too optimistic
o Single-family loans originated over past 25 years now expected to cost
$97 billion more than initially estimated
VA to guarantee $43B in mortgages, with portfolio
approaching $200B by close of ‘19
• Federally backed mortgage lending to veterans expected to
remain near record levels
• Key program features proposed to be extended in Budget
• VA typically provides full guarantee on first 25% of default losses
BUDGET DATA POINTS
• Cost of loan guarantees forecast to drop significantly: from $891 million in
‘17 to $110 million in ‘19
• Over time & on average, VA estimates of loan costs have been accurate
PRESIDENT’S 2019 BUDGET: MORTGAGES (cont.)
PRESIDENT’S 2019 BUDGET: BUSINESS LOANS
Supports $43 billion in SBA business lending
as portfolio approaches $150 billion• Proposed counter-cyclical policies aimed at maintaining SBA operations
while ensuring private lending not displaced
o Fee adjustments across business loan guarantee programs to cover
anticipated lending & offset administrative costs
o Admin flexibility allows SBA to increase loan levels by 15%
o SBA Express loan limits increased from $350k to $1 million
o Annual fee assessed on secondary market guaranties to ensure viability
• Business & industry (B&I) loan guaranties at USDA eliminated
• ExIm Bank to focus efforts on market segments where U.S. support is
critical to compete (e.g., areas of national security importance, small &
medium-sized exporters)
BUDGET DATA POINTS
• SBA fees would be set to cover expected program & admin costs
• Lending has cost $6 billion more than initially estimated over past 25 years
PRESIDENT’S 2019 BUDGET: DEVELOPMENT FINANCE
NEW
DEVELOPMENT
FINANCE
INSTITUTION
(DFI)
• Aimed at encouraging participation of US
private sector capital & skills in economic &
social development of emerging markets
• Annual l imit of $8B on total commitments,
including insurance activities
• OPIC traditionally provides political risk
insurance against losses due to expropriation,
inconvertibility & damage from political
violence
• $94 mill ion in admin funding to cover DFI
operations & continued administration of
USAID and OPIC legacy credit portfolios
Merger of USAID’s Development Credit Authority &
Overseas Private Investment Corporation (OPIC) to support
$4.1 billion in lending & other support
PRESIDENT’S 2019 BUDGET: INFRASTRUCTURE PLAN
Aims to spend $200B across a range
of activities to stimulate
Administration-projected $1.5T in
investment through leveraging State, local & private funds & shorten
approval process to 2 years or less,
while empowering state & local
authorities, rural infrastructure &
workforce development
Credit assistance: Infrastructure Financing Programs—$20B to increase
capacity of existing Federal credit programs and use of private activity bonds
• $14B in 10-yr budget authority to expand & broaden TIFIA,1 RRIF2 & WIFIA3 eligibility & expand Rural Utilities Service lending programs ($28B
in ‘19 lending)
• $6B to create flexibility and broaden eligibility for PABs to provide tools and
mechanisms for market participants to invest in infrastructure1 Transportation Infrastructure Finance and Innovation Act2 Railroad Rehabilitation & Improvement Financing3 Water Infrastructure Finance and Innovation Act
World’s Largest Financial Institution
27
- Insurance & Other Support
1968 National Flood Insurance
Current coverage:$1.25 trillion
1916 Farm Credit System
Current coverage:$251 billion
1932 Federal Home Loan Banks
Current coverage:$1 trillion
1933 Federal Deposit Insurance
Current coverage:$7 trillion
1970 Freddie Mac
Current coverage:$2 trillion
1938 Fannie Mae
Current coverage:$3.3 trillion
1974 PBGC
Current coverage:$3.2 trillion
Federal Insurance Programs
INSURANCE & OTHER ACTIVITIES*
*Excludes the Federal Reserves emergency lending facilities *Excludes federal health/life/P&C/disaster insurance *No explicit guaranty for FHLBs
7.006
5.333
3.221
1.011
0.251
0 1 2 3 4 5 6 7 8
Deposit Insurance (FDIC)
Fannie and Freddie
Pension Guarantees (PBGC)
Home Loan Banks (FHLBs)
Farm Credit (FCS)
Trillions of $
Federally Backed Credit & Insurance Outstanding, June 2017
President’s FY19 Budget: Insurance & Other
World’s Largest Financial Institution
31
- Regulation & Oversight
President’s FY19 Budget: Financial Regulation
