October 21, 2014 •Anthony Curcio
Federal spending is big news lately. Due to the Budget Control Act and “sequestration” (the capping of certain Federal spending for a very long time), Federal budgets are tight. Many programs must be cut to make room for other priorities, but Federal lenders have more flexibility in modifying their loans to comply with these types of restrictions.
Typically, when a Federal agency has to limit or cut its budget, program sizes must be reduced. For example, if a $100 million grant must be reduced to $80 million, the program would have to cut $20 million of grants: pretty simple.
But in the world of Federal lending, loans are more nimble. To cut or limit costs, Federal lenders can change the terms and conditions of the loans in order to save money without actually reducing the volume of loans. For example, to cut spending on loans (otherwise known as credit subsidy), program managers have a number of options, including collecting more fees, raising borrowers' interest rates, reducing the maturity of the loan, or requiring higher underwriting standards. But none of these options require an actual reduction in the size of the loans.
These options give Federal lending programs a lot of “tools” in their toolbox to comply with sequestration-related spending limits (and other guidelines) without necessarily gutting loan volumes, making lending policy uniquely resilient to tough budget times.
However, to ensure that these changes to the loan terms and conditions will result in a lower cost as scored by the Federal budgeting offices, Federal lenders must employ advanced credit subsidy modeling that directly proves this cause and effect. Without this proof, validating the reduced cost to the taxpayer may be impossible. For this reason, Federal lending requires sophisticated cost estimation afforded by state-of-the-art Federal Credit modeling, now more than ever.
