[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Proposed Rules]
[Pages 9154-9247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3474]
[[Page 9153]]
_______________________________________________________________________
Part III
Department of Housing and Development
_______________________________________________________________________
Office of the Secretary
_______________________________________________________________________
24 CFR Part 81
The Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac) Regulations; Proposed Rule
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 /
Proposed Rules
[[Page 9154]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Secretary
24 CFR Part 81
[Docket No. R-95-1754; FR-3481-P-01]
RIN 2501-AB56
The Secretary of HUD's Regulation of the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac)
AGENCY: Office of the Secretary, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would establish new regulations
implementing the Secretary of Housing and Urban Development's
regulatory authorities respecting the Federal National Mortgage
Association (``Fannie Mae'') and the Federal Home Loan Mortgage
Corporation (``Freddie Mac''). Under the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (``the Act''), the Secretary
has general regulatory authority over Fannie Mae and Freddie Mac
(``GSEs'').
Status as a GSE provides substantial advantages to Fannie Mae,
Freddie Mac, and their shareholders. With such public benefits flow
public responsibilities. In the Act, Congress set forth a framework to
ensure that the GSEs fulfill the public purposes set forth in their
Charter Acts and serve the housing needs of the country, without
threatening the GSEs' safety and soundness. Under the Act, the
Secretary is responsible for establishing housing goals to require the
GSEs to extend access to mortgage credit to very low-, low-, and
moderate-income families and families in central cities, rural areas,
and other underserved areas. The Secretary is also responsible for
advancing fair lending by requiring that the GSEs not discriminate in
their mortgage purchases because of race, color, religion, sex,
handicap, familial status, age, or national origin. This regulation
requires that the GSEs facilitate enforcement of the Fair Housing Act
and the Equal Credit Opportunity Act (ECOA) by submitting data on
mortgage lenders to assist investigations of possible Fair Housing Act
and ECOA violations. The proposed regulation also directs the GSEs to
undertake remedial action against sellers found to violate the Fair
Housing Act and ECOA and provides for the Secretary periodically to
review and comment on each GSE's underwriting and appraisal guidelines.
In addition, the regulation sets forth the scope of other Secretarial
responsibilities, including the statutory authority to review and
approve new programs of the GSEs, obtain data and reports from the GSEs
on their housing activities, and disseminate publicly information
related to the GSEs' housing activities while protecting proprietary
information.
DATES: Comment due date: May 2, 1995.
ADDRESSES: Comments should be sent to Rules Docket Clerk, Office of
General Counsel, room 10276, Department of Housing and Urban
Development (HUD), 451 Seventh Street, SW, Washington DC 20410-0500.
Communications should refer to the docket number and title. Facsimile
(FAX) comments are not acceptable. A copy of each communication
submitted will be available for public inspection and copying between
the hours of 7:30 a.m. and 5:30 p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Harold Bunce, Acting Director,
Financial Institutions Regulation, Office of Policy Development and
Research, telephone (202) 708-2770; or, for legal questions, Kenneth A.
Markison, Assistant General Counsel for Government Sponsored
Enterprises/RESPA, Office of the General Counsel, telephone (202) 708-
3137; Department of Housing and Urban Development, 451 Seventh Street,
SW, Washington, D.C. 20410. A telecommunications device for deaf
persons (TDD) is available at (202) 708-9300. (These are not toll-free
telephone numbers.)
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Statement
The information collection requirements contained in this rule have
been submitted to the Office of Management and Budget (OMB) for review
under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). No
person may be subjected to a penalty for failure to comply with these
information collection requirements until they have been approved and
assigned an OMB control number. The OMB control number, when assigned,
will be announced by separate notice in the Federal Register.
Public reporting burden for the collection of information
requirements contained in this rule is estimated to include the time
for reviewing the instructions, searching existing data sources,
gathering and maintaining the data needed, and completing and reviewing
the collection of information. Information on the estimated public
reporting burden is provided under the Preamble heading, Other Matters.
Send comments regarding this burden estimate or any other aspect of
this collection of information, including suggestions for reducing this
burden, to the Department of Housing and Urban Development, Rules
Docket Clerk, 451 Seventh Street, SW, Room 10276, Washington, DC 20410-
0500; and to the Office of Information and Regulatory Affairs, Office
of Management and Budget, Attention: Desk Officer for HUD, Washington,
DC 20503.
I. General
A. Purpose
This proposed rule would establish new regulations implementing the
authorities of the Secretary of Housing and Urban Development (``the
Secretary'') to regulate the GSEs under the GSEs' respective Charter
Acts (the Federal National Mortgage Association Charter Act (Fannie Mae
Charter Act), Title III of the National Housing Act, section 301 et
seq. (12 U.S.C. 1716 et seq.); and the Federal Home Loan Mortgage
Corporation Act (Freddie Mac Act), Title III of the Emergency Home
Finance Act of 1970, section 301 et seq. (12 U.S.C. 1451 et seq.) and
the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (``FHEFSSA'' or ``the Act''), enacted as Title XIII of the Housing
and Community Development Act of 1992 (Pub. L. 102-550, approved
October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641).
FHEFSSA substantially changed the Secretary's authorities to regulate
the GSEs, requiring the Secretary to promulgate new regulations. The
Secretary proposes these regulations to implement these new
authorities, to replace the Secretary's current regulations governing
Fannie Mae and, for the first time, to establish regulations governing
Freddie Mac.
B. Background
In 1968, Congress chartered Fannie Mae as a stockholder-owned,
privately managed corporation to fulfill various public purposes by
providing a secondary market for home mortgages. In 1970, Congress
chartered Freddie Mac within the Federal Home Loan Bank System.
The GSEs' Charter Acts set forth identical purposes for Fannie Mae
and Freddie Mac1 to: (1) Provide stability in the secondary market
for residential mortgages; (2) respond appropriately to the private
capital market; (3) provide ongoing assistance to the secondary
[[Page 9155]] market for residential mortgages (including activities
relating to mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than the return
earned on other activities) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital
available for residential mortgage financing; and (4) promote access to
mortgage credit throughout the Nation (including central cities, rural
areas, and other underserved areas) by increasing the liquidity of
mortgage investments and improving the distribution of investment
capital available for residential mortgage financing.2
\1\Cf. Fannie Mae Charter Act, section 301, to Freddie Mac Act,
section 301.
\2\Fannie Mae Charter Act, section 301, and Freddie Mac Act,
section 301(b).
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1. The Current Fannie Mae Regulations
In 1978, the Secretary promulgated regulations governing Fannie
Mae.3 These regulations were issued under the authority of the
Fannie Mae Charter Act and, among other things, implemented the
Secretary's ``general regulatory power'' over Fannie Mae and
established other specific regulatory powers of the Secretary,
including procedures under which the Secretary must approve stock and
debt issuances, changes to a statutory debt-to-capital ratio, and new
conventional mortgage programs.4 The regulations also require
Secretarial approval of Fannie Mae's underwriting guidelines to
implement fair housing requirements and regulate equal opportunity in
employment.5 To ensure that Fannie Mae fulfilled its Charter Act
purpose of providing a secondary market for home mortgages for low- and
moderate-income families, the regulations required that 30 percent of
Fannie Mae's aggregate mortgage purchases be mortgage purchases
financing housing secured by mortgages located in central cities and
that 30 percent of its aggregate mortgage purchases be mortgages
financing housing for low- and moderate-income families.6 Housing
for low- and moderate-income families under the Fannie Mae regulations
included multifamily housing insured under Federal Housing
Administration (FHA) programs, housing receiving housing assistance
payments (HAP), and, for single-family housing, housing purchased at a
price not in excess of 2.5 times the area median family income.7
\3\24 CFR part 81.
\4\24 CFR 81.12, 81.14, 81.15, and 81.16(c).
\5\24 CFR 81.18 and 81.19.
\6\24 CFR 81.16(d) and 81.17.
\7\24 CFR 81.2(l).
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2. FIRREA and the Secretary's Assumption of Regulatory Responsibility
Over Freddie Mac
Section 731 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (``FIRREA'') (Pub. L. 101-73, approved August
9, 1989) amended the Freddie Mac Act. The Secretary of HUD was granted
general regulatory power and essentially the same specific regulatory
powers with respect to Freddie Mac as the Secretary had respecting
Fannie Mae, so that the Secretary's regulatory authority was
``identical, on all relevant matters, to (the Secretary's) regulatory
power over (Fannie Mae).''8
\8\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
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3. The Federal Housing Enterprises Financial Safety and Soundness Act
Congress was concerned about the potential for loss to the
taxpayers if the GSEs suffered serious losses.9 In FIRREA,
Congress required the Treasury Department, the Congressional Budget
Office (CBO), and the General Accounting Office to study the regulation
of the GSEs and present recommendations to the Congress.10 These
studies concluded that the current regulatory authorities over the GSEs
were inadequate to protect the taxpayer and ensure that the GSEs served
the public purposes for which they were chartered. All three agencies
recommended that the Government be granted additional authority to
regulate the GSEs. The Treasury study formed the basis for a 1991
Administration proposal to create an independent office within HUD to
regulate the safety and soundness of the GSEs.
\9\See, e.g., H.R. Rep. 101-54, Part 1, 101st Cong., 1st Sess.
389 (1989).
\10\FIRREA, sections 1004 (Comptroller General study) and 1404
(Treasury study), and 2 U.S.C. 621 note (Treasury study and CBO
study).
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In 1991, the House of Representatives passed H.R. 2900 (102d Cong.,
1st Sess. (1991)), establishing an independent office within HUD to
regulate the financial safety of the GSEs.11 The House bill also
provided for the establishment of special affordable housing goals to
ensure that the GSEs meet the unaddressed needs of very low-income
families and lower-income families in lower income areas.12 The
Senate made substantial revisions to the House bill, including changes
to clarify the Secretary's authority to establish central cities and
low- and moderate-income goals and to modify provisions concerning fair
housing.13
\11\H.R. 2900, section 101.
\12\Id., at sections 121(n) and 122(l).
\13\S. 2733, 102d Cong., 2d Sess., sections 502, 504, and 514
(1992).
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In 1992--as the Department was preparing regulations governing
Freddie Mac and revising its Fannie Mae regulations--Congress enacted
FHEFSSA, which revamped the regulatory structure concerning the GSEs
and the GSEs' Charter Acts. In FHEFSSA, Congress chose to separate
authority over the GSEs' safety and soundness from authority to assure
that the GSEs accomplished their public purposes. FHEFSSA established a
new Office of Federal Housing Enterprise Oversight (OFHEO) charged with
new regulatory powers over the financial safety of the GSEs.14
FHEFSSA also granted the Secretary more specific powers and authorities
over the housing purposes and fair lending responsibilities of the
GSEs.
\14\Section 1311, and see, e.g., section 1313. Unless otherwise
specified, all section cites herein are cites to the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.
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The Act granted the Secretary the power to establish, monitor, and
enforce goals for the GSEs' purchases of mortgages financing housing
for low- and moderate-income families, housing located in central
cities, rural areas, and other underserved areas, and special
affordable housing meeting the unaddressed housing needs of targeted
families.15 Although the authority to establish goals previously
existed under the Charter Act and was implemented under the current
Fannie Mae regulations,16 FHEFSSA defined and expanded this
authority. Moreover, the Act provided that the goals would be achieved
based on income of owners and renters. The regulations, promulgated in
1978, had allowed a proxy of house price17 that was easier to
achieve.
\15\See generally, sections 1331-34.
\16\See 24 CFR 81.16(d) and 81.17.
\17\24 CFR 81.2(l)(3).
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Generally, the Act authorizes the Secretary to establish each of
the goals after consideration of certain prescribed factors relevant to
the particular goal.18 However, for a transition period of
calendar years 1993 and 1994, the Act established target percentage
amounts for purchases by the GSEs of mortgages on housing for low- and
moderate-income families and housing located in central cities--which
were based on the Fannie Mae regulations--and specific dollar amounts
for purchases of mortgages on special affordable
[[Page 9156]] housing.19 For the transition years, the Act set
targets for both GSEs that low- and moderate-income and central cities
mortgage purchases comprise at least 30 percent of the units financed
by the GSEs' total mortgage purchases for these years.20 The Act
also set targets for the special affordable housing goals in the
transition years,21 which, unlike the other goals, were set at no
less than a minimum number of dollars of mortgage purchases rather than
units financed. For the transition, the Act required that the Secretary
establish interim goals to improve the GSEs' performances relative to
the statutory targets, so that the GSEs would meet the targets by the
end of the transition period.22
\18\Sections 1332(b), 1333(a)(2), and 1334(b).
\19\Sections 1332(d), 1333(d), and 1334(d).
\20\Sections 1332(d)(1) and 1334(d)(1).
\21\Section 1333(d) (1) and (2).
\22\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
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The Act also established new fair lending requirements for the GSEs
under which the Secretary must, by regulation, prohibit the GSEs from
discriminating in their mortgage purchases because of ``race, color,
religion, sex, handicap, familial status, age, or national origin,
including any consideration of age or location of the dwelling or the
age of the neighborhood or census tract where the dwelling is located
in a manner that has a discriminatory effect.''23 Under the Act,
the Secretary also must: require the GSEs to submit data to assist the
Secretary in investigating whether a mortgage lender has failed to
comply with the Fair Housing Act and the Equal Credit Opportunity Act
(ECOA); obtain and make available to the GSEs information from other
regulatory and enforcement agencies on violations by lenders of the
Fair Housing Act and ECOA; direct the GSEs to take remedial action
against lenders found to have engaged in discriminatory lending
practices in violation of the Fair Housing Act or ECOA; and
periodically review and comment on the underwriting and appraisal
guidelines of each GSE to ensure that such guidelines are consistent
with the Fair Housing Act and the Act.24
\23\Section 1325(1).
\24\Section 1325 (2)-(6).
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The Act details the Secretary's authority to review and approve new
programs of the GSEs and establishes procedures under which the GSEs
may contest determinations on new program requests.25 The Act
affirms the Secretary's authority to require reports from the
GSEs26 and details specific data and reports that the GSEs must
provide.27 The Act assigns the Secretary other responsibilities,
including establishing a public use data base and implementing
requirements for the protection of proprietary information provided by
the GSEs.28 The Act also requires the Secretary to establish
procedures to ensure due process for the GSEs in exercising the
Secretary's regulatory authorities.29
\25\Section 1322.
\26\Section 1327.
\27\See sections 1381 (o and p) and 1382 (r and s).
\28\Sections 1323 and 1326.
\29\Sections 1322, 1336, and 1341-49.
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In light of the $850 billion in mortgage-backed securities that
were currently outstanding from the GSEs, their $190 billion combined
mortgage portfolios, and the GSEs' importance to the National economy,
Congress determined that the taxpayers needed increased protection from
potential financial losses or risks posed by the GSEs.30 The Act
therefore established a new independent financial regulator for the
GSEs within HUD--the Office of Federal Housing Enterprise Oversight
(OFHEO)31--to design and administer a stress test for capital
adequacy and to carry out all regulatory functions to ensure the
financial safety of the GSEs.32 In establishing a new regulatory
framework for regulation of the GSEs' financial safety and soundness,
the Act deleted several specific authorities of the Secretary,
including authority to approve stock offerings, the rate of dividends,
and changes in the GSEs' debt-to-capital ratio.33 The Act assigns
authority to approve dividends to the Director of OFHEO34 and
replaces the debt-to-capital ratio with a risk-based capital standard
and stress test administered by the Director of OFHEO.35 Under the
Act, the Secretary retains general regulatory power over both GSEs,
``(e)xcept for the authority of the Director of the (OFHEO) described
in section 1313(b) and all other matters relating to the safety and
soundness of the (GSEs) * * *.''36
\30\See, e.g., S. Rep. No. 102-282, 102d Cong., 2d Sess. 10
(1992) (hereinafter cited as ``S. Rep.'').
\31\Section 1311.
\32\See generally, section 1313.
\33\Sections 1381 (d)(2), (e)(1), and (k), and 1382(e).
\34\Sections 1381(d)(2) and 1382(e).
\35\Sections 1361-64.
\36\Section 1321.
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4. Previous Proposed Rule
On August 16, 1991, the Secretary published a proposed rule to
update the Fannie Mae regulations and establish new regulations
governing Freddie Mac.37 Prior to the promulgation of a final
rule, the President signed FHEFSSA into law on October 28, 1992. Since
the new Act required complete revision of the rule, the Secretary is
withdrawing the former proposed rule and issuing this new proposed
rule.
\37\56 FR 41022 (1991).
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5. Interim Housing Goals
On October 13, 1993, the Secretary published a Notice in the
Federal Register establishing the interim goals for the GSEs' purchases
of mortgages financing low- and moderate-income housing, housing in
central cities, and special affordable housing--applicable to the
transition years of 1993 and 1994--and requirements for implementation
of the goals.38
\38\58 FR 53048 and 53072 (1993).
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For the transition period of 1993 and 1994, the Act established
annual targets for the purchases by both GSEs of mortgages financing
housing for low- and moderate-income families and housing located in
central cities.39 The Act set these targets at 30 percent of the
units financed by mortgage purchases of the GSEs;40 the targets
were based on the goals established under HUD's Fannie Mae
regulations.41 For the transition period, the Act provided that,
where a GSE was not meeting a target as of January 1, 1993, the
Secretary must establish the annual goal so that the GSE would improve
its performance relative to the 30 percent target.42 Where a GSE
was meeting a target, the Act required the Secretary to establish the
goal so that the GSE would improve its performance relative to the 30
percent target.43 The Act also established dollar targets for the
GSEs' purchases of mortgages financing special affordable housing,
i.e., housing meeting the needs of and affordable to low-income
families in low-income areas and very low-income families.44 The
Secretary established these goals and implementation requirements in
the Interim Notice published in October 1993.45
\39\Sections 1332(d)(1) and 1334(d)(1).
\40\Sections 1332(d)(1) and 1334(d)(1).
\41\24 CFR 81.16(d) and 81.17.
\42\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
\43\Sections 1332(d)(2)(B) and 1334(d)(2)(B).
\44\Section 1333 (a)(1), (d)(1), and (d)(2).
\45\58 FR 53048 and 53072 (1993).
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The Notice established the goal that 30 percent of the units
financed by mortgages purchased by Fannie Mae in 1993 and 1994 should
be housing for low- and moderate-income families.46 The Notice
also established the goal that 28 percent of units financed by
mortgages purchased by Fannie Mae in 1993, and 30 percent in 1994,
should be on housing located in central cities.47 For the year
1993, Fannie Mae exceeded [[Page 9157]] the goal for low- and moderate-
income housing with 35.58 percent and is performing at a rate for
199448 that likely will result in Fannie Mae's exceeding the goal
and achieving 40 percent. In 1993, Fannie Mae did not meet the goal for
central cities and has developed a housing plan to increase its efforts
for 1994.
\46\58 FR 53048, 53061 (1993).
\47\Id. at 53063.
\48\Fannie Mae's report on its performance under the goal for
the first three quarters of 1994 provides that 43.29 percent of its
mortgage purchases count toward achievement of the goal for low- and
moderate-income families.
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The Notice established Freddie Mac's goal for purchases of
mortgages financing housing for low- and moderate-income families at 28
percent for 1993 and 30 percent for 1994.49 The Notice established
Freddie Mac's goal for purchases of mortgages financing housing located
in central cities for 1993 at 26 percent and 30 percent for
1994.50 For the year 1993, Freddie Mac exceeded the goal for low-
and moderate-income housing with 29.18 percent and is performing at a
rate for 199451 that likely will result in Freddie Mac's exceeding
the goal and achieving 35 percent. In 1993, Freddie Mac did not meet
the goal for central cities and has developed a housing plan to
increase its efforts for 1994.
\49\58 FR 53072, 53085 (1993).
\50\Id. at 53088.
\51\Freddie Mac's report on its performance under the goal for
the first three quarters of 1994 indicates that 36.31 percent of its
mortgage purchases count toward achievement of the goal for low- and
moderate-income families.
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C. Secretary's Approach to Regulating the Enterprises
The Secretary recognizes that the GSEs occupy a unique position in
this country's housing finance system. The GSEs were created by the
Congress, chartered for public purposes and receive significant public
benefits, but the GSEs are privately owned and operated. Because of
their status as government-sponsored enterprises, the GSEs receive
significant benefits not enjoyed by any other shareholder-owned
corporation in the mortgage market. The explicit benefits the GSEs
receive include: (1) conditional access to a $2.25 billion line of
credit from the U.S. Treasury;\52\ (2) exemption from securities
registration requirements of the Securities and Exchange Commission and
the states;\53\ (3) exemption from all State and local taxes except
property taxes;\54\ and (4) higher demand for the GSEs' securities,
since the Government gives those securities the attributes of and the
same preferred investment status as Treasury debt.\55\ These explicit
benefits are far outweighed by an implicit benefit--the market's
assumption that, even though no explicit Federal guarantee exists,\56\
should a GSE fail to meet its obligations, Congress, and ultimately the
American taxpayer, would assist the GSEs. As a result of this implicit
guarantee, the GSEs can borrow at near-Treasury rates, and they can
sell securities at prices that exceed those of wholly private
firms.\57\ Consequently, the GSEs' cost of doing business is less than
that of other competitors in the mortgage market.
\52\Sections 306(c)(2) of the Freddie Mac Act and 304(c) of the
Fannie Mae Charter Act.
\53\Sections 306(g) of the Freddie Mac Act and 304(d) of the
Fannie Mae Charter Act.
\54\Sections 303(e) of the Freddie Mac Act and 309(c)(2) of the
Fannie Mae Charter Act.
\55\See, e.g., 12 CFR 208, App. A, section III.C.2.
\56\The GSEs' obligations are not guaranteed by the United
States. See, e.g., sections 1302(4), 1381(f), and 1382(n) (requiring
each GSE to state in its obligations and securities that such
obligations and securities ``are not guaranteed by the United
States'').
\57\Congressional Budget Office, Controlling the Risks of
Government-Sponsored Enterprises, at 10 (April 1991).
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This competitive advantage, combined with the GSEs' solid
management, has resulted in enormous growth for both GSEs. In 1989, the
GSEs purchased $171 billion of mortgages; in 1993, $543 billion, a
three-fold increase. In 1993, the GSEs collectively purchased 70
percent of the mortgages originated in the conventional conforming loan
market.\58\ The GSEs' profitability has more than doubled in the same
period, with combined profits of $2.7 billion in 1993, compared to $1.2
billion in 1989. At the end of the first quarter of 1994, the combined
dollar amount of mortgages held in portfolio and mortgage-backed
securities outstanding between the two GSEs is nearly 2.5 times the
thrift industry's holdings and twice as large as the holdings by
commercial banks.\59\
\58\Fannie Mae Economics Department.
\59\Commercial banks held $555 billion, thrifts held $458
billion, and the GSEs held or backed $1,164 billion. Federal Reserve
Bulletin, Vol. 80, No. 8, Table 1.54, at A38 (August 1994).
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Because they are publicly created entities that enjoy substantial
publicly derived benefits, Congress requires the GSEs to carry out
public purposes not required of other private-sector entities in the
housing finance industry. The GSEs' Charter Acts require them to assist
in the efficient functioning of a secondary market for residential
mortgages, including mortgages for low- and moderate-income families,
and to promote access to mortgage credit throughout the nation,
including central cities, rural areas, and other underserved areas. The
Charter Act requirements create an obligation for the GSEs to ensure
that citizens throughout the country have the opportunity to enjoy
access to the public benefits provided by these federally related
entities.
The GSEs have been successful at achieving an important part of
their mission of providing stability in primary mortgage markets and
bringing liquidity to housing finance markets through standardization
and the development of mortgage-backed securities. Many home buyers
have benefitted from lower interest rates and increased access to
capital as a result of the GSEs' activities. The importance of the
secondary market and its impact on who is able to buy a home and which
communities have access to mortgage credit is substantial. Even lenders
intending to hold loans in portfolio originate loans using the GSEs'
standards, so that the lenders have the option to sell to the GSEs at a
future date.
The Act and the legislative history make clear that the GSEs should
be serving Americans across the income spectrum and throughout the
country. The GSEs do an excellent job of facilitating the availability
of mortgage credit for home buyers with more than moderate incomes and
for residents of suburban communities. The GSEs must also use their
entrepreneurial talents and position in the marketplace to ``ensure
that citizens throughout the country enjoy access to the public
benefits provided by these federally related entities.''\60\ The GSEs
are not expected to provide deep subsidies for the financing of
affordable housing on the scale needed to solve the nation's housing
problems. However, given the purposes for which Congress created these
enterprises and the substantial federal benefits that they receive, it
is essential that the GSEs' activities promote the achievement of
national housing goals.
\60\S. Rep. at 34.
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D. Leading the Industry
During the consideration of the Act, Congress noted its strong
concern that the GSEs were not doing enough to benefit low- and
moderate-income families or the residents of underserved areas that
lack access to credit.\61\ The Act specifically requires that in
establishing the goals, the Secretary consider the ability of the GSEs
to lead the industry. The intent of the Congress was clearly stated:
the GSEs should ``lead the mortgage finance industry in making mortgage
credit available for [[Page 9158]] low- and moderate-income
families''.\62\ The Act also clarified the GSEs' responsibility to
complement the requirements of the Community Reinvestment Act and fair
lending laws in order to expand access to capital to those
traditionally underserved by the housing finance market.
\61\See, e.g., S. Rep. at 34.
\62\S. Rep. at 34.
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Fannie Mae and Freddie Mac do not lead the mortgage finance
industry in expanding housing opportunities for low-income home buyers
and for families who must rent because they cannot afford to be
homeowners. The GSEs do not lead the mortgage finance industry in
providing access to mortgage credit for residents of communities that
are underserved. But the GSEs can and should provide this leadership.
As noted in the Act's legislative history, ``the GSEs need to provide
more leadership in all of these areas, and they have indicated a desire
to do so. But direct and potentially forceful federal oversight is the
only way to ensure that it will happen.''\63\
\63\S. Rep. at 11.
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The Secretary shares the concern of Congress about the GSEs' level
of activity in making mortgage credit available for lower-income
families. Loans originated for families with incomes below 80 percent
of area median income are less likely to be purchased by the GSEs. Five
out of six single-family mortgages purchased by the GSEs are for
borrowers with incomes above 80 percent of area median income. Almost
60 percent of the GSEs' single-family business is for borrowers with
incomes above 120 percent of area median income.
In considering whether the GSEs are leading the industry and in
establishing the appropriate levels for the housing goals, the level of
originations by the primary market must be examined. The primary market
is able to sell to the GSEs more loans for higher-income families than
loans for lower-income families. Based on 1993 mortgage market data,
the GSEs purchased 55 percent of the loans originated by the primary
market for borrowers with incomes above 120 percent of area median
income, but only 41 percent of the mortgages originated for borrowers
with incomes less than 60 percent of area median income. This occurred
notwithstanding that, in response to the Community Reinvestment Act and
their desire to meet the mortgage needs of a broad range of families,
lenders are originating many more mortgages for very low- and low-
income families than the GSEs are purchasing.
E. Establishing the Housing Goals
The Secretary recognizes that both GSEs have improved their
performance in 1993 in the provision of mortgages financing for low-
and moderate-income home buyers and central city residents. Both GSEs
have begun new programs to increase their ability to deliver the
benefits of their activities to traditionally underserved borrowers.
These activities are commendable and the Secretary looks forward to
seeing those initiatives carried forward. Both GSEs have also been
engaged in initiatives to communicate to lenders that the GSEs'
underwriting guidelines are not intended to prevent lenders from
originating loans for previously underserved segments of their
communities.
The Secretary notes these initiatives and the performance of the
GSEs under the 1993 housing goals. Both Fannie Mae and Freddie Mac have
made progress in carrying out their Charter-required activities to
expand access to credit. At the same time, greater accomplishments are
needed to assure that the GSEs fully realize their Charter Act
purposes. To meet the intent of the Act, the GSEs must purchase more
loans originated by the market for borrowers with lower incomes.
The Secretary does not intend that the GSEs do less business for
borrowers with high incomes in order to increase their purchases of
mortgages for lower-income families. Given the capacity of the GSEs, a
tradeoff between high-income and low-income business does not need to
occur. When the mortgage market spiked to a trillion dollars in volume
in 1993, the GSEs demonstrated their capacity to expand their volume
tremendously. The Secretary does not believe that the GSEs will have to
shrink one portion of their business to expand their focus on achieving
their Charter purposes of providing access to credit to all Americans.
This view has also been expressed by James A. Johnson, Chairman and
Chief Executive Officer of Fannie Mae, in Congressional testimony in
April 1994:
It is a governmental frame of reference to assume (Fannie Mae's)
resources are limited (as appropriations would be for a government
department) and then to 'assign' them through numerous subgoals to
categories of need. But the fact that Fannie Mae helps moderate-
income families in no way diverts (Fannie Mae) from supporting low-
income families.\64\
\64\Testimony before the Committee on Banking, Finance, and
Urban Affairs, Subcommittee on General Oversight, Investigations,
and the Resolution of Failed Financial Institutions, U.S. House of
Representatives, at 17 (April 20, 1994).
In setting the levels of the housing goals, the Secretary has
considered carefully the six factors stipulated in the Act: National
housing needs; economic, housing, and demographic conditions; the
previous performance and effort of the enterprises in achieving the
specific goal; the size of the market for that goal; the ability of the
GSEs to lead the industry; and the need to maintain the sound financial
condition of the enterprises.\65\ The Secretary has concluded that
these factors, as well as the requirement that the GSEs lead the
industry in affirmative efforts to meet the needs of lower-income
families and residents of central cities, rural areas, and other
underserved communities, dictate that the levels of the housing goals
should be increased for 1995-1996. The Secretary considered the
following factors which are analyzed in detail in the appendices:
\65\12 U.S.C. 4562.
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(1) Housing Needs. Homeownership is a key aspiration of most
Americans. Homeownership fosters family responsibility and self-
sufficiency, expands housing choice and economic opportunity and
promotes community stability. A homeowner has the most secure physical
environment in which to raise a family. Children of homeowners are more
likely to graduate from high school, less likely to commit crime, and
less likely to themselves have children as teenagers than children of
renters. Recent surveys indicate that lower-income families and
minority families who do not own their own homes will make considerable
sacrifices to purchase a home.
During the past decade, the goal of homeownership has become more
elusive for very low-, low-, and moderate-income families. The
homeownership rate in this country declined from on all-time high of
65.6 percent in 1980 to 63.9 percent in 1985, where it has remained
essentially unchanged. The families that bore the brunt of this decline
in homeownership are households who earn less than the median,
particularly single-parent households and households with children.
At the same time, housing needs of families who rent have also
increased. Finding affordable housing is by far the most common housing
problem for American families nationwide. Poor households compete for a
diminishing number of affordable apartments as low-cost units are lost
to disrepair or are upgraded to serve higher-income renters. The result
is growing numbers of low-income households who pay high shares of
their income for [[Page 9159]] inadequate housing. Six million low-
income families paid more than 50 percent of their income for rent,
leaving them with less money for other necessities like food, clothing,
health care, and education. The very lowest income renters (families
with incomes below 30 percent of area median income) are particularly
hard-hit by high rents relative to their incomes, with over 50 percent
of these families spending more than half of their income on rent.
The most unfortunate families have no homes. Precise counts of
homeless people are not available. An estimated 600,000 people are
homeless on any given night and as many as seven million Americans have
experienced homelessness during the late 1980s, some for brief periods
and some for years.\66\
\66\Priority: HOME! The Federal Plan to Break the Cycle of
Homeless, 17 (1994).
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(2) Economic, Housing, and Demographic Conditions. The Department
estimates that in 1995 originations for single-family mortgages will be
$615 billion. The demand for purchase mortgages will increase in 1995
and 1996, because of demographic trends, including high levels of
immigration, changing age and family composition of households, the
growth of the affluent elderly population, and potentially increased
homeownership by native-born minorities. In addition, although volatile
interest rates strongly influence both housing starts and mortgage
market activity, rates that are low by historic standards have improved
affordability for first-time home buyers, many of whom were closed out
of the market during the 1980s. Increasing income inequality and
changes in household composition will continue to create an acute need
for rental housing affordable to very low-income families, placing
additional pressure on the widespread shortages of rental housing
affordable to families with incomes below 30 percent of area median
income.
(3) Previous Performance of the GSEs. The GSEs exceeded the 1993
goals for low- and moderate-income housing. Neither enterprise met the
central cities goal for 1993. For the special affordable housing goal,
a two-year goal, both GSEs are on track to meet the single-family
portion of the goal. Fannie Mae should meet the multifamily portion of
the goal by the end of 1994. It is unclear whether Freddie Mac will
meet the multifamily portion of the goal by the end of 1994. The
Secretary notes that, during the transition period 1993-1994, both GSEs
have engaged in new marketing efforts, and introduced new programs,
products, and relationships in an effort to achieve the goals.
(4) Size of the Conventional Market for Each Goal. The Secretary
recognizes the importance of accurately determining, to the extent
possible given current data, the size of the various markets applicable
to each of the goals. HUD devoted significant analytical resources to
estimating market shares, using information from four major data
sources: The 1993 purchases by the GSEs, 1993 HMDA data, the American
Housing Survey, and the Residential Finance Survey. HUD estimates that
50 to 55 percent of the mortgage market in 1995-1996 will be composed
of mortgages from low- and moderate-income households. As a subset of
that market, at least 17-20 percent of the conventional conforming
market will be composed of mortgages for very low-income households and
low-income households in low-income areas. The market share for the
central cities, rural areas, and other underserved areas goal (as
redefined) is 21-23 percent.
(5) Ability of the Enterprises to Lead the Industry. The Secretary
believes that the GSEs are well-positioned to provide the leadership
that is needed to encourage the mortgage finance industry to better
serve very low-, low-, and moderate-income families and residents of
communities underserved by the mortgage markets. The GSEs' ability to
lead the industry flows from their dominant role in the mortgage
market, their ability--through their underwriting standards and new
programs and products--to influence the types of loans that primary
lenders are willing to make, their development and use of cutting-edge
technology, their competent and well-trained staff, and their financial
resources.
(6) Need to Maintain the Sound Financial Condition of the
Enterprises. The enterprises are very substantial corporations as
measured by their assets and profits. The Secretary has determined that
the GSEs can accomplish the goals established in this regulation in
such a way that limited, if any, risk is posed to their safety and
soundness. The goals would require reasonable increases in the GSEs'
purchases of mortgages that are affordable to very low-, low-, and
moderate-income households or finance units located in areas that meet
the proposed definition of underserved areas. Given the relatively
small size of the proposed increases compared to their current
business, the potential increase in the credit risk borne by the GSEs
will be limited.
F. Setting the Levels of the Housing Goals
In establishing the housing goals for 1995 and 1996, the Secretary
balanced the congressionally mandated factors, i.e., size of the
market, housing needs, safety and soundness considerations, economic
and demographic conditions, previous performance and the GSEs ability
to lead the industry.\67\ The Secretary was guided by the overarching
principle that both enterprises were created by Congress to serve
public purposes for which they receive public benefits, and that their
unique status requires that they lead the industry in expanding access
to mortgage credit for more Americans and communities. The factors and
the public purposes of the GSEs also require that the GSEs lead the
industry in affirmative efforts to meet the needs of lower-income
families and residents of central cities, rural areas, and other
underserved communities.\68\
\67\See Appendices A-C for the Secretary's analysis of these
factors.
\68\12 U.S.C. 4501.
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Based on a consideration of the factors, set forth fully in
appendices A, B and C to this rule, the Secretary proposes to establish
the goals for 1995 and 1996 for mortgage purchases for low and moderate
income housing at 38 percent for 1995 and 40 percent for 1996, the goal
for mortgage purchases for central cities, rural areas and other
underserved housing at 18 percent for 1995 and 21 percent for 1996, and
the goals for special affordable housing at 11 percent for 1995 and at
12 percent for 1996.
Based on a consideration of the factors, set forth in the same
appendices to the rule, the Secretary proposes to establish all three
goals for 1997 and 1998 so that the goals will move the GSEs steadily
over a reasonable period of years, including these two years, to a
level of mortgage purchases where the GSEs will be leading the industry
in purchasing mortgages meeting the goals. In carrying out this
objective, the Secretary proposes to establish the goals for 1997 and
1998 at levels ranging from the same amounts established for 1996 to
higher levels. The purpose of any higher levels would be to continue to
move the GSEs toward purchasing a greater proportion of mortgages
originated by the market. The goals for 1997 to 1998 are therefore
proposed for comment as a range; in finalizing the goals, the Secretary
will specify definite figures on this range. In order to finalize the
goals, the Secretary seeks responses from the public on what ``leading
the industry'' should mean and what the goals should be over this
period and in [[Page 9160]] the future to achieve this objective. The
Secretary anticipates at this time that future market conditions will
require additional adjustment of the goals by future rulemaking in the
latter part of the 1990s.
(1) Should the goals be established so that the GSEs are required
to lead the industry by buying at least the percentages of mortgages
that the market originates for each goal? If yes, at what levels and
over what period should the GSE goals be established to achieve this
objective and, specifically, at what levels should the 1997 and 1998
goals be established to meet this objective? In responding, please
note:
(A) For the housing goal for low- and moderate-income families--the
Secretary determined that for 1995 and 1996, 50 percent of the market
is comprised of mortgages qualifying under this goal.
(B) For the special affordable housing goal--the Secretary
determined that for 1995 and 1996, 17-20 percent of the market would be
mortgages qualifying under this goal.
(C) For the central cities, rural areas, and other underserved
areas goal--the Secretary determined that for 1995 and 1996, 21-23
percent of the market would be mortgages qualifying under this goal.
(2) Should leading the industry mean and should the goals be
established for future years so that the GSEs are required to purchase
(as a percentage of the GSEs' total purchases) a higher percentage of
mortgages than are originated by the market under each housing goal?
For example, if 16 percent of the mortgages originated and available
are expected to be originated for mortgages for very low-income
families, should the GSEs be expected to purchase, as a percentage of
their overall business, an amount greater than 16 percent of mortgages
on housing for very low-income families at some future date? If yes, at
what levels and over what period should the goals be established to
achieve this objective and, specifically, at what levels should the
1997 and 1998 goals be established to achieve this objective? Also,
what percentage over the market should be required?
(3) Should the goals be established such that the GSEs purchase an
equivalent proportion of loans originated by the market for borrowers
under 80 percent of area median income as they do for borrowers over
120 percent of area median income? If yes, at what levels and over what
period should the goals be established to achieve this objective and,
specifically, at what levels should the 1997 and 1998 goals be
established to achieve this objective?
(4) Should the goals be adjusted as the GSEs reach or fail to
achieve the goals or should the goals be established and the GSEs'
performance evaluated against relatively fixed goals? If the commenter
believes that the goals should be adjusted, how frequently or under
what conditions should the Secretary take action to adjust the goals?
(5) To what extent should the GSEs' share of the overall mortgage
market affect the levels of the goals? The GSEs currently purchase
approximately 70 percent of all conventional, conforming mortgages
originated. Should the goals increase as the GSEs' market share
increases? If yes, how should this work? How and in what manner should
the goals be adjusted?
G. Principles Governing Regulation
In considering these regulations, the Secretary has set forth the
following principles:
(1) To fulfill the intent of the Act, the GSEs should lead the
industry in ensuring that access to credit is made available for very
low-, low- and moderate-income families and residents of underserved
areas. The Secretary recognizes that, to lead the mortgage industry
over time, the GSEs will have to stretch to reach certain goals, which
is consistent with the Congressional statement that it ``fully expects
the enterprises will need to stretch their efforts to achieve'' the
goals.\69\
\69\S. Rep. at 35.
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(2) The Secretary's role as a regulator is to set direction through
the goals, but not to dictate the products or delivery mechanisms the
GSEs will use to achieve those goals. Regulating two enormous financial
enterprises in a dynamic market requires that the GSEs be allowed to
use their innovative capacities to determine how best to deliver
products to the primary market. Regulation should allow the GSEs to
maintain their flexibility and the ability to respond quickly to market
opportunities in order to meet the goals stipulated by the Secretary.
(3) Discrimination in lending--albeit often subtle and even
unintentional--has denied racial and ethnic minorities the same access
to credit to purchase a home that has been available to similarly
situated non-minorities. The GSEs have a critical role and position in
promoting access to capital by minorities and other historically
underserved groups and demonstrating to other private-sector market
players the profit potential in these traditionally underserved
markets.
(4) In addition to the GSEs' core business of purchasing single-
family-home loans, the GSEs also must assist in the creation of an
active secondary market for multifamily loans. As noted, this country
has a critical need for affordable rental housing to provide adequate
housing for families who cannot afford to become homeowners.
Availability of capital is a key constraint in the expansion of
development activity to build more rental housing.
(5) Parity between the two enterprises in the level of the goals
they are required to meet should be established. Both enterprises
operate in the same markets and have similar opportunities to purchase
mortgages that will satisfy the goals. Freddie Mac has no operational
or organizational constraints that would prevent it from meeting goals
that Fannie Mae could meet.\70\
\70\During the transition period of 1993-1994, the Act
established annual targets for the purchases by both GSEs of
mortgages financing housing for low- and moderate-income families
and housing located in central cities. Sections 1332(d)(1) and
1334(d)(1). For both GSEs, the Act set identical targets at 30
percent of the units financed by mortgage purchases of the GSEs.
Although the targets were identical, the Secretary established
differential goal levels for Freddie Mac and Fannie Mae, in order to
allow Freddie Mac sufficient time to reenter the multifamily market
in a prudent and organized manner. Freddie Mac had announced its
withdrawal from the multifamily market in 1990. In 1993, Freddie Mac
announced its reentry into the multifamily market, after it had
reorganized its multifamily division, greatly increased its
staffing, implemented new information systems, released a new
underwriting guide for multifamily properties, and established a
network of originators and servicers with proven local expertise.
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II. Section-by-Section Discussion of Proposed Changes to Fannie Mae
Regulations and New Freddie Mac Regulations (Part 81)
Subpart A--General
Section 81.1--Scope of Part
This section provides that these regulations implement the
authority of the Secretary concerning the GSEs under the Charter Acts
and FHEFSSA. The section states that subpart A contains definitions
applicable to this part; subpart B contains the housing goals; subpart
C contains Fair Housing requirements; subpart D sets forth program
review procedures for new programs; subpart E contains requirements for
reports to the Secretary; subpart F contains regulations dealing with
access to information; subpart G contains procedures available to the
GSEs; subpart H contains book-entry procedures; and subpart I contains
regulations dealing with regulatory examinations and other provisions.
The section provides that, except where the [[Page 9161]] Secretary and
the Director of the Office of Federal Housing Enterprise Oversight
share authority, this part does not implement any authority of the
Director of OFHEO.
Section 81.2--Definitions
This section defines terms which are relevant to the Secretary's
regulatory authorities. These terms relate to the housing goals, fair
housing/fair lending, new program approval, and collection,
dissemination and protection of GSE information furnished to the
Secretary. Some of the terms are defined in FHEFSSA, some are defined
under the Freddie Mac Act and the remainder were defined for these
regulations.
The Freddie Mac Act defines terms that are relevant to both GSEs
although the same terms are not defined under the Fannie Mae Charter
Act. The legislative history of FIRREA indicates that Congress intended
that competitive parity exist between the GSEs and that the regulatory
power granted to the Secretary be identical for both GSEs.71 The
proposed regulation, therefore, defines terms the same for both GSEs
even where the definitions were originally provided in the Freddie Mac
Act.
\71\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
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Defined terms that are relevant to all of the housing goals include
``Balloon mortgage'', ``Conventional Mortgage'', ``Dwelling unit'',
``Mortgage'', ``Mortgage purchase'', ``Multifamily Housing'',
``Refinancing'', ``Rental housing'', ``Residence'', ``Seasoned
mortgage'', ``Single family housing''. ``Conventional mortgage'' is
defined as a mortgage other than a mortgage as to which a GSE has the
benefit of any guaranty, insurance or other obligation by the United
States. ``Mortgage purchase'' is defined as a transaction where a GSE
buys or otherwise acquires with cash or other thing of value a mortgage
for its portfolio or for securitization. ``Multifamily housing'' means
a residence having more than four dwelling units. ``Single family
housing'' is a residence consisting of one to four dwelling units.''
Terms relating to the low- and moderate-income housing goals
include ``Low-income'', ``Median income'', ``Moderate income'',
``Rent,'' ``Utilities,'' and ``Utility allowance''. The term ``Low-
income'' is defined as income not in excess of 80 percent of area
median income, adjusted for family size for rental units but unadjusted
for owner-occupied units. ``Median income'' means, with respect to an
area, the unadjusted median family income of the area, as most recently
established by the Secretary; an area is the metropolitan statistical
area (MSA) if the property is located in an MSA--otherwise, an area is
the county in which the property is located. ``Moderate-income'' means
income not exceeding area median income and, in the case of rental
units, income not in excess of median income with adjustments for
family size. ``Rent'' is defined as contract rent if the cost of all
utilities are included in contract rent; if all utilities are not
included, ``Rent'' is contract rent plus the cost of those utilities or
contract rent plus a utility allowance. ``Utilities'' means charges for
electricity, gas, water, sewage disposal, fuel, and garbage collection.
Defined terms concerning the central cities, rural areas, and other
underserved areas goal include the terms ``Central cities'', ``Rural''
and ``Underserved areas''. As discussed fully below, in this preamble's
discussion of the housing goals, the term ``central cities'' is defined
as the underserved areas of any political subdivision designated as a
central city by the Office of Management and Budget. ``Rural area'' is
defined as the underserved areas located outside of any metropolitan
statistical area (MSA) designated by the Office of Management and
Budget. ``Underserved area'' is defined as a census tract: With a
median income at or below 120 percent of the area median income and a
minority population of 30 percent or greater; or with a median income
at or below 80 percent of area median income.
The special affordable housing goals have specific rules requiring
the definition of certain terms. These terms include ``Low-income
areas'', ``Portfolio of loans'' and ``Very low-income''. ``Low-income
area'' means a census tract in which the median income does not exceed
80 percent of area median income. ``Portfolio of loans'' means ten or
more loans. ``Very low-income'' is defined as income not exceeding 60
percent of the area median income--under the Act's definition, this
percentage is adjusted for family size for rental units but is not
adjusted for family size for owner-occupied units.
Terms concerning the fair housing provisions of these regulations
include ``Familial status'', ``Handicap'' and ``Minority''. The terms
``familial status'' and ``handicap'' are defined under these
regulations by reference to the definitions contained in the Fair
Housing Act regulations at 24 CFR 100.20 and 100.201. ``Minority''
includes American Indians, Alaskan Natives, Asian and Pacific
Islanders, African Americans, and Hispanics.
The defined term pertaining to the Secretary's new program approval
authority is ``New program.'' ``New program'' is defined in the Act and
under these regulations as a program for the purchasing, servicing,
lending on the security of, or otherwise dealing in conventional
mortgages that is significantly different from a program that: Was
approved or engaged in by the GSE at the time of the enactment of
FHEFSSA; or represents an expansion above limits expressly contained in
any prior approval.
Terms that are relevant to both the reports and information
provisions of the regulations include ``Mortgage data'', ``Proprietary
information'' and ``Public data''. ``Mortgage data'' is defined as data
obtained by the Secretary from the GSEs under the Fannie Mae Charter
Act and the Freddie Mac Act relating to the GSEs' mortgage purchases.
``Proprietary information'' is defined as all categories of information
and data submitted to the Secretary by the GSE which contain trade
secrets and commercial or financial information of the GSE which is
privileged or confidential and which, if released, would cause
substantial competitive harm. Although this definition parallels the
definition under Exemption 4 of the Freedom of Information Act (FOIA),
5 U.S.C. 552(b)(4), in determining which GSE information is
proprietary, the Department will not be bound by FOIA, its legislative
history, or Exemption 4 case law. ``Public data'' means all mortgage
data obtained by the Secretary from the GSEs which the Secretary
determines is not proprietary and should be made publicly available;
Appendix D to the regulations lists and describes this data.
Finally, the proposed regulation defines the terms: ``Act,''
``Day,'' ``Director,'' and ``Secretary.'' ``Act'' is defined to mean
the Federal Housing Enterprises Financial Safety and Soundness Act or
FHEFSSA. ``Day'' is defined as a calendar day rather than a working
day. ``Director'' means the Director of the Office of Federal Housing
Enterprise Oversight of the Department of Housing and Urban
Development. ``Secretary'' means the Secretary of Housing and Urban
Development.
Subpart B--Housing Goals
Background
The Secretary is required to establish, by regulation, annual
housing goals for each GSE. The goals include a low- and moderate-
income housing goal,72 a [[Page 9162]] special affordable housing
goal,73 and a central cities, rural areas and other underserved
areas housing goal.74 The Act provides that the goals are to be
established in a manner consistent with sections 301(3) of the Fannie
Mae Charter Act and 301(b)(3) of the Freddie Mac Act, which require the
GSEs ``to provide ongoing assistance to the secondary market for
residential mortgages (including * * * mortgages on housing for low-
and moderate-income families involving a reasonable economic return
that may be less than the return earned on other activities) * * *.''
Under the Act, the Secretary may, by regulation, adjust any housing
goal from year to year.75 The statute provides that, in
establishing these goals, the Secretary shall apply certain prescribed
factors, as described in Appendices A, B, and C.76 In this
regulation, the Secretary proposes to establish the three housing goals
for 1995 and 1996. The Secretary is also planning to establish the
level of the goals for 1997 and beyond in the final regulation.
\72\Section 1332.
\73\Section 1333.
\74\Section 1334.
\75\Section 1331(c).
\76\Sections 1332(b), 1333(a)(2), and 1334(b).
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In this regulation, each housing goal requires that a certain
percentage of the dwelling units financed by each GSE's total mortgage
purchases for the year be the type of dwelling units targeted by the
housing goal. For example, for 1995, the housing goal for low- and
moderate-income families is established at 38 percent--in other words,
38 percent of the dwelling units financed by each GSE's mortgage
purchases would have to be affordable to low- or moderate-income
families; thus, if a GSE's mortgage purchases financed 2 million
dwelling units, the proposed regulation would require that 38 percent
of those 2 million dwelling units, or 760,000 dwelling units, be
affordable to low- or moderate-income families.
A single mortgage can count for all three goals. For example, a
mortgage that finances a house for a low-income family in a central
city would count under the special affordable housing goal (low-income
family in a low-income area), the low- and moderate-income housing goal
(low-income borrower), and the central cities, rural areas, and other
underserved areas goal (central city). Under the housing goals for
1993, the majority of the mortgages that qualified for one goal also
qualified for a second goal.
Housing Goal for Low- and Moderate-Income Families
The Secretary is establishing an annual housing goal for each GSE's
purchase of mortgages on housing for low- and moderate-income families
(``the low- and moderate-income goal''). The Secretary's detailed
findings under the factors for establishing the goal are attached as
Appendix A. The annual goal for 1995 for each GSE's purchases of
conventional mortgages financing housing for low- and moderate-income
families is established at 38 percent of the total number of dwelling
units financed by each GSE's mortgage purchases in 1995. The annual
goal for 1996 is 40 percent. The final regulation shall establish the
annual goals for 1997 and 1998 and the Secretary intends that the 1998
goal apply thereafter, unless revised through subsequent rulemaking;
the Secretary seeks comment on the level of the goals for 1997, 1998,
and thereafter--see the questions listed above (in the leading the
industry discussion) and repeated at the end of this preamble.
Housing Goal for Central Cities, Rural Areas, and Other Underserved
Areas
The Secretary is establishing an annual goal for 1995 and 1996 for
the GSEs' purchase of mortgages on housing located in central cities,
rural areas, and other underserved areas. In accordance with the Act,
under this proposed rule, the Secretary is expanding and redefining
this goal from the central cities goal, which applied during the
transition years of 1993 and 1994, to a goal that is directed to
mortgage purchases in central cities, rural areas and other areas, with
a focus on underserved areas within those geographic locations.
``Underserved areas'' are those areas that experience problems with the
availability of mortgage credit.
For the transition period of 1993 and 1994, the goal was directed
solely to the GSEs' purchases of mortgages financing housing located
anywhere in ``central cities.'' The Act defined ``central cities'' for
the transition period as those cities designated as central cities by
the Office of Management and Budget (OMB). These provisions were
modelled on HUD's existing Fannie Mae regulations. The legislative
history of the Act states that for the transition period the goal only
applied to purchases in OMB-defined ``central cities'' to allow time to
gather data and establish an appropriate methodology to ``redefine and
expand'' the goal.77 The legislative history also provides that
``following the transition period, geographic areas relating to the
goal will be as determined by (the regulator).''78
\77\See S. Rep. at 38 and 65.
\78\S. Rep. at 65.
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Following the transition period, the Act requires the Secretary to
establish an annual goal for the purchase of mortgages located in
``rural areas and other underserved areas'' as well as ``central
cities.'' In establishing the central cities, rural areas, and other
underserved areas goal, Congress was concerned with the ``acute''
``housing problems'' in the nation's cities and with the ``neglected
and decaying'' parts of the cities.79 Congress directed HUD to
target ``areas with relatively poor access to mortgage credit,'' areas
with ``(i)nadequate access to mortgage credit,'' and areas suffering
from ``the vestiges of redlining.''80
\79\S. Rep. at 28.
\80\S. Rep. at 38; see also, id. at 34 (the GSEs must address
``the disinvestment in central cities and rural communities'').
``(R)edlining ha(s) effectively disadvantaged certain geographic
areas, particularly inner city and rural areas.'' Id. at 41. See
also, 138 Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of
Sen. Riegle) (the bill would provide ``a greater flow of credit to
people who otherwise have a very difficult time financing home
mortgages'').
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The legislative history provides that ``(t)he purpose of these
goals is * * * to service the mortgage finance needs of low- and
moderate-income persons, racial minorities and inner-city
residents.''81 Congress noted that ``* * * mortgage discrimination
and redlining have effectively disadvantaged certain geographic areas,
particularly inner city and rural areas.''82 In explaining the
conference bill on the floor of the Congress, Chairman Gonzalez stated:
``In establishing the definition of a central city and in determining
compliance with such a goal, the Secretary should, to the extent
possible, exclude purchases made in non-low income census tracts that
happen to otherwise be within the central cities area.''83
\81\S. Rep. at 34 (emphasis added); see also, id. at 32, and 138
Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of Sen.
Riegle) (``inner-city lending * * * is a very important part of this
legislation'').
\82\S. Rep. at 41 (emphasis added).
\83\ 138 Cong. Rec. H11453, H11457 (daily ed. Oct. 5, 1992).
Rep. Gonzalez made the identical statement at 138 Cong. Rec. H11077,
H11099 (daily ed. Oct. 3, 1992).
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The title of this goal also leads to the conclusion that Congress
intended this geographically targeted goal to focus on underserved
areas. ``Central cities, rural areas, and other underserved areas''
indicate that central cities and rural areas are intended to be proxies
for underserved areas. [[Page 9163]]
Expanding and Redefining the Goal
In accordance with the requirements of the Act, the Secretary is
expanding this goal for 1995 and 1996 to include rural and other
underserved areas as well as central cities. At the same time, the
Secretary has redefined the term ``central cities'' to encompass the
underserved areas of central cities and defined ``rural areas'' as the
underserved areas of non-metropolitan areas. The goal is, therefore,
intended to focus on communities within central cities, rural areas and
other areas which are ``underserved'' in terms of availability of
mortgage credit. This determination is based on the legislative intent,
the factors for establishing the goal, HUD's research on underserved
areas during the transition period, the results of two public forums
held with researchers, public-interest groups, other federal agencies,
and the GSEs, and data received from the GSEs during the transition.
Underserved Areas
The Act did not define the term ``underserved area'' but the
legislative history indicates that it should be defined as those areas
that lack access to mortgage credit. As detailed in Appendix B, the
Secretary considers ``underserved'' to mean those areas that have an
unmet demand for mortgage credit. Using 1993 HMDA data and 1990 Census
data, the Department analyzed mortgage application denial and
origination rates throughout the country, as well as reports and other
research on the availability of mortgage credit and mortgage flows. The
research indicated that pervasive and widespread disparities exist in
lending across the nation. The Department found, as have other
researchers, that the availability of mortgage credit to an area is
related to its minority concentration and income characteristics of its
residents. Two patterns are clear in the Department's research and that
of other researchers:
Census tracts with higher percentages of minority
residents have higher mortgage denial and lower loan origination rates
than all-white or predominately white census tracts; and
Census tracts with lower incomes have higher denial rates
and lower origination rates than higher income tracts.
As Appendix B details, HUD's research and that of others has found
that the location of a census tract--whether it is located within a
central city or a suburb--has minimal impact on whether the tract is
underserved.84 Mortgage flows in a census tract have far less to
do with the physical location of a tract, i.e., central city versus
suburb, than the minority concentration and median income of that
tract. The most thorough studies available demonstrate that areas with
lower incomes and higher shares of minority residents consistently have
poorer access to mortgage credit, with higher denial rates and lower
origination rates for mortgages. With income, minority composition, and
other relevant census tract variables controlled for, differences in
credit availability between central cities and suburbs are minimal.
\84\See, e.g., Robert B. Avery, Patricia E. Beeson, and Mark S.
Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA
Data,'' (presented at the Western Economic Association Annual
Meetings, Vancouver BC), July 1994, and William Shear, James
Berkovec, Ann Dougherty, and Frank Nothaft, ``Unmet Housing Needs:
The Role of Mortgage Markets,'' unpublished paper, June 1, 1994.
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Based on this research, the Secretary has determined that this goal
should target those areas in central cities, rural areas, and other
areas where: 30 percent or more of the residents in a census tract are
minority and the median income of families in the census tract is at or
below 120 percent of the area median income; or where the median income
of families in the census tract is less than 80 percent of the area
median income. The goal therefore is directed to census tracts in
central cities, rural areas, and all other parts of the country meeting
these criteria. (For purposes of defining ``rural areas,'' the
Secretary is seeking comments on whether counties or Block Numbering
Areas, which are equivalent to census tracts in rural areas, are the
appropriate geographic unit.)
The Department has conducted an intensive research effort on
identifying geographic areas underserved by the mortgage markets. This
research effort is ongoing and will continue during the period of
proposed rulemaking. Research underway includes the analysis of the
implications of alternative definitions of underserved areas in urban,
suburban, and rural communities. The Department will also engage in a
multi-year research effort to identify and analyze indicators of unmet
demand for mortgage credit. This long-term research effort will be used
by the Department in future years to review the level of the housing
goals established for the GSEs. In conducting this research effort on
identifying indicators of unmet demand, the Department fully intends to
consult with other Federal agencies including Treasury and with the
GSEs.
Central Cities
For purposes of this housing goal, the Secretary is defining
``central cities'' as the underserved areas of any political
subdivisions designated as central cities by the Office of Management
and Budget (OMB). Directing the goal to all areas of central cities
identified by the Office of Management and Budget (OMB) would not
appropriately target the GSEs' activities to areas that have a relative
lack of access to mortgage credit. OMB defines the central city or
central cities of a metropolitan statistical area based on population
and other factors that measure job location and commuting patterns. OMB
does not take into account mortgage credit availability or measures of
economic distress. As a result, the list of 545 central cities includes
very affluent and well served cities and excludes other obviously
distressed cities. For example, Palo Alto, California--with a per
capita income of $32,500 and a poverty rate of 2 percent--is a central
city but Compton, California--with a per capita income of $7,800 and a
poverty rate of 24 percent--is not a central city.
In addition, there are substantial regional variations in the
portion of state urban population that are included in central cities.
In the southern and western parts of the country, cities have often
expanded by annexing adjacent territory. This option was generally not
available to cities in the Northeast, which have retained their
historical boundaries. As a result, a substantially greater portion of
the population lives in central cities in the South and West than in
the more urbanized Northeastern states. This has led to perverse
results for the central cities goal in place for 1993: Central cities
accounted for more than 50 percent of both GSEs' mortgage purchases in
Arizona, New Mexico, and North Dakota. In New Jersey, on the other
hand, purchases in central cities accounted for only 4 percent of GSE
purchases.
James A. Johnson, Fannie Mae's Chairman and Chief Executive
Officer, in April 1994 testimony before a Congressional sub-committee
summarized some of the problems with using the OMB designation of
central cities:
Central cities are also of limited value as proxies for
distressed, needy, minority or low- and moderate-income census
tracts. Especially in older cities that are hemmed in by separately
incorporated suburbs and other communities, political jurisdictions
enforce artificial barriers to describing areas of need. Conversely,
where cities can annex neighboring communities as growth occurs, the
result is a central city that encompasses so much territory of such
diverse nature that [[Page 9164]] it loses much of its distinctive
urban character.85
\85\Testimony before the Committee on Banking, Finance, and
Urban Affairs, Subcommittee on General Oversight, Investigations,
and the Resolution of Failed Financial Institutions, U.S. House of
Representatives, at 17 (April 20, 1994).
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Rural Areas
Determining how to define ``rural areas'' within the context of
this goal is even more difficult than the complex analyses of HMDA and
Census data for cities and suburbs summarized in Appendix B. This
occurs for three interrelated reasons: (1) The general lack of accurate
data on mortgage flows and credit activity outside metropolitan
statistical areas (MSAs), (2) the scarcity of careful current studies
on access to mortgage credit in rural locations, and (3) the existence
of a variety of statutory and statistical definitions for ``rural.''
To address the many issues pertinent to developing an appropriate
and workable definition of ``rural areas'' for purposes of this rule,
the Department has consulted with rural demographers and economists at
the Department of Agriculture's Economic Research Service, the Census
Bureau, the Farmers Home Administration, and the Housing Assistance
Council. All of these issues were also discussed at a forum attended by
researchers from academia, the Department of Agriculture, the Census
Bureau, the Housing Assistance Council, the Congressional Budget
Office, public-interest groups, and the GSEs. The Secretary's decisions
about defining ``rural areas'' are based on these consultations as well
as ongoing analyses of data from the 1990 Census, the American Housing
Survey, and the Residential Finance Survey.
Framework for Defining Rural Areas
In considering the issue of how to define rural areas for the
central cities, rural areas, and other underserved areas goal, the
Department analyzed available data and research on mortgage flows and
credit access in rural locations, consulted with rural demographers and
economists at government agencies and elsewhere, and considered the
multiple existing definitions of ``rural'' currently in use. Based on
the evidence that income and housing needs vary as greatly between
nonmetropolitan counties and block numbering areas86 as they do
within MSAs, the Secretary has determined that the basic definition of
``underserved areas'' developed above--as areas with high minority
shares or low median family income--should also apply in rural areas,
that is, outside of MSAs. The Secretary has determined that for
purposes of this housing goal that ``rural areas'' are the underserved
areas in nonmetropolitan counties, i.e., outside of Metropolitan
Statistical Areas.
\86\For data collection in the 1990 Census, block numbering
areas (BNAs) are the non-metropolitan equivalent of census tracts--
subareas of counties that contain approximately 4,000 people.
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The Secretary seeks comments on whether the appropriate unit of
geographic focus for defining underserved areas in non-MSAs is the
county or the Block Numbering Area (the rural equivalent of census
tracts). In addition, the Secretary seeks comment on whether this
definition of rural should be expanded by including indicators of
access to metropolitan areas and/or indicators of jurisdictional size
(i.e., include small communities of less than 2,500 people). The
following section summarizes the factors the Secretary considered in
determining this proposed definition of rural and closes with questions
on which the Secretary solicits comments about the proposed definition.
(1) Unavailability of accurate data on mortgage flows and credit
activity in rural locations. HMDA data, the source used for most of the
studies of credit needs summarized in Appendix B, does not provide
information on mortgage activity outside of metropolitan statistical
areas (MSAs), and within MSAs census tracts may contain both rural and
urban segments.87 Other sources of mortgage flow information, like
the Federal Reserve Call Reports, do not detail locations of loans.
\87\Only lending institutions with offices in metropolitan
statistical areas (MSAs) report mortgage origination data under
HMDA. 12 U.S.C. 2803(a)(1).
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(2) Studies of access to mortgage credit. Researchers participating
in the Department's forum agreed that available studies do not show
that rural areas endemically have problems with access to credit,
although this (lack of) conclusion may stem from data unavailability. A
1990 study by the Urban Institute, for example, found little evidence
of a national rural home credit shortage, and attributed low mortgage
activity in some local markets to lack of demand in weak local
economies.88 Yet abundant anecdotal evidence exists that
underserved areas in rural communities require a special focus by the
GSEs, to redress years of historic neglect by the mortgage market.
According to the Housing Assistance Council, access to mortgage credit
appears worse as distance from metropolitan centers increases,89
while Department of Agriculture representatives judge that communities
with population below 2,500 or 5,000 are more likely than other rural
communities to lack access to credit. More generally, the forum
participants agreed that, as found for central cities, rural
communities with low income and minority concentrations were those more
likely to be underserved by the mortgage markets.
\88\The Urban Institute, The Availability and Use of Mortgage
Credit in Rural Areas (1990), examined data on ownership, mortgage
terms and conditions, and Federal program coverage, particularly for
moderate-income home buyers.
\89\Statement of Moises Loza, Executive Director of the Housing
Assistance Council (HAC), July 21, 1994, to the Subcommittee on
Environment, Credit, and Community Development of the House
Committee on Agriculture.
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A report by the Economic Research Service of the Department of
Agriculture shows that urban proximity is important: economic
conditions and housing problems tend to be worse in counties most
remote from metropolitan areas or smaller cities.90 In particular,
counties with ``persistent low-income,'' which are disproportionately
more rural and remote, have had little recent economic activity,
stagnation in real family income during the 1980s, and continue to have
the highest incidence of housing lacking complete plumbing. These high
poverty counties are concentrated in Appalachia and in areas with high
proportions of minority residents.
\90\Rural Conditions and Trends, Vol. 4, No. 3 (Fall 1993), a
special 1990 census issue, documents differences between counties in
population, education, employment, income, poverty, and housing.
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(3) Current Definitions of Rural. In considering a workable
definition of ``rural areas,'' the Secretary focused on three major
definitions in use: (i) The Census Bureau's official designation; (ii)
the Farmer's Home Administration's designation for several of its
programs; and (iii) the designation of ``non-metropolitan.'' In this
proposed rule, rural areas are defined as ``underserved areas''
``located outside of any Metropolitan Statistical Area designated by
the Office of Management and Budget.'' The reasons for choosing to
focus on non-metropolitan areas are described below:
(a) Census Bureau definition. The Census Bureau bases its
definition of rural on population size and density.91 Locations
that meet the rural definition are designated once per decade, based on
decennial Census results. There are two major disadvantages of using
the Census Bureau definition as part of a definition of rural areas for
this goal. First, few relevant intercensal data [[Page 9165]] sources
are based on the Census Bureau definition, complicating the work
required to establish market segments and set the level of the housing
goals. Second, geocoding addresses to rural locations based on this
definition would be difficult and burdensome for the GSEs, given the
current state of geographic information systems software. The Census
Bureau's 1992 Tiger/Line file's ability to provide accurate addresses
is weakest in rural areas, particularly for rural route
addresses.92
\91\See U.S. Bureau of the Census, 1990 Census of Population and
Housing: Guide, Part B. Glossary, 16-17 (1993) (hereinafter cited as
``Census Glossary'').
\92\The Tiger/Line files are the extract of the Census Bureau's
geographic data base and are produced for geocoding by data users.
They categorize all polygons and blocks as either rural or urban and
have address ranges for most of the country.
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(b) Farmers Home Administration's definition of rural. The Farmers
Home Administration (FmHA) defines rural areas eligible for several
programs, including the 515 loan program,93 and the definitions
vary among the programs. Generally, more locations qualify as ``rural''
under these definitions than under the Census Bureau's definition
because the FmHA definitions include places with populations above
2,500 and the Bureau would categorize such places as ``urban.''94
The most critical disadvantage in using a FmHA definition as the rural
identifier is that there is no central or machine-readable source of
information on areas defined by FmHA as rural; instead, local maps are
marked to show the appropriate boundaries and then stored in field
offices.
\93\42 U.S.C. 1490.
\94\Cf. 42 U.S.C. 1490 to Census Glossary at 16-17.
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(c) Non-Metropolitan Statistical Areas. The Secretary chose to
incorporate this designation into the definition of ``rural areas.''
First, geocoding and reporting would be straightforward, since MSAs are
composed of counties in most parts of the country. This definition
appears to correspond better to the parts of the country where
availability of mortgage credit has been an issue. The availability of
mortgage credit in the rural fringes of metropolitan areas appears to
be less of a problem than in rural communities distant from
metropolitan areas. Finally, most intercensal data, including
population and household estimates, employment, income estimates, etc.,
are produced at least annually at the county level.
Questions Related to the Definition of Rural Areas
The Secretary invites comment on the following questions:
(1) Should rural areas be based on the characteristics of Block
Numbering Areas or counties? Which of these two options makes better
sense for lenders and for GSE reporting? Which option better directs
goal performance at areas with poor access to mortgage credit?
(2) In establishing the definition for rural areas, should the
income and minority criteria (used for defining central cities and
other underserved areas) be supplemented with other indicator(s) of the
needs for better access to mortgage credit? Should population size
(e.g., communities below 2500 or non-metropolitan counties below
50,000) be considered as such an indicator?
(3) What are the relative merits of indicators of access to
metropolitan areas or nonmetropolitan cities such as the ``Beale'' or
``Ghelfi-Parker'' codes?95
\95\These indicators of urban influence were developed by the
Department of Agriculture's Economic Research Service. Linda M.
Ghelfi, ``County Classifications,'' Rural Conditions and Trends,
4(3): 6-11 (1993).
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(4) In New England, where MSAs are not composed of counties, should
the definition of rural areas include areas ``outside (P)MSAs'' or
``outside NECMAs''?
Other Underserved Areas
For purposes of this housing goal, the Secretary has determined
that ``other underserved areas'' are census tracts located in
metropolitan areas located outside of central cities and having the
minority and income characteristics described above. This definition
will cover suburban communities that lack access to credit.
Alternative Approaches to Defining the Central Cities, Rural Areas, and
Other Underserved Areas Goal
The Secretary considered alternative approaches to establishing
this goal. One alternative would be to simply expand the goal by
retaining all areas in all 545 OMB-designated central cities, all rural
areas, and all other underserved areas. If underserved areas are
defined as described above, this alternative approach would result in a
goal that targets nearly 70 percent of the country's population. The
Secretary decided this approach was inconsistent with the intent of the
Act.
Congress established the goals to ensure that Fannie Mae and
Freddie Mac take special consideration of specific housing needs in
carrying out their work. The goals are intended to be priority areas
for the GSEs as they carry out their Charter Act purposes. A goal that
encompasses so much of the nation's population and geography would be
unlikely to provide the GSEs with appropriate direction. Further, this
approach would lead to a dispersion of the GSEs' goal-oriented business
to a large number of communities that do not meet the Congressional
directive that they be areas with a relative lack of mortgage credit.
Finally, an overly-broad approach would result in less support for the
critical efforts of cities and rural communities to improve and
stabilize neighborhoods that, because of past practices and historic
patterns, have an unsatisfactory availability of mortgage credit.
The Size of the Goal
Because this goal has been redefined, the market of mortgages
originated and available for GSE purchase is different from and indeed
smaller than the market of mortgage originations for the 1993-1994
goal. The Secretary estimates that mortgages originated in underserved
areas of central cities, rural areas, and other areas comprise 21 to 23
percent of the conventional conforming mortgage market. Thus, the goal
is established at a percentage that is lower than the central cities
goal in the transition period (1993-94).
Based on a consideration of the factors for establishing the goal
detailed in Appendix B, the Secretary establishes the annual goal for
1995 for each GSE's purchases of mortgages financing housing located in
underserved areas at 18 percent of the total number of dwelling units
financed by each GSE's mortgage purchases. The goal for 1996 is 21
percent. The final regulation shall establish the annual goals for 1997
and 1998 and the Secretary intends that the 1998 goal apply thereafter,
unless revised through subsequent rulemaking; the Secretary seeks
comment on the level of the goals for 1997, 1998, and thereafter--see
the questions listed above (in the leading the industry discussion) and
repeated at the end of this preamble. In 1993, 15.9 percent of the
dwelling units financed by Fannie Mae's mortgage purchases were in
areas defined under the proposed definition of central cities, rural
areas, and other underserved areas, while Freddie Mac's performance was
14.4 percent.
Units will count toward this goal if the units are located in a
central city as redefined, a rural area as defined, or any other
underserved area. Through the use of geocoding or any similarly
accurate and reliable method, the GSEs are required to determine
whether units [[Page 9166]] financed under mortgages purchased by the
GSEs are located in central cities, rural areas, and other underserved
areas as defined by regulation.
Special Affordable Housing Goal--Background
This goal had no antecedent in the current Fannie Mae regulations.
The Act requires that the Secretary ``establish a special annual goal
designed to adjust the purchase by each (GSE) of mortgages on rental
and owner-occupied housing to meet the then-existing, unaddressed needs
of, and affordable to, low-income families in low-income areas and very
low-income families.''96
\96\Section 1333(a)(1).
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During the transition period (1993-1994), the Act required that
each GSE's mortgage purchases under the special affordable housing goal
be equally divided between mortgages on single family housing and
mortgages on multifamily housing.\97\ The multifamily goal was further
divided, with 45 percent of the goal devoted to mortgages on
multifamily housing where dwelling units were affordable to low-income
families.\98\ The remaining 55 percent of the dollar volume of
multifamily mortgages purchased had to comprise mortgages on
multifamily housing in which either: (1) ``at least 20 percent of the
units are affordable to families whose incomes do not exceed 50
percent'' of area median income;\99\ or (2) ``at least 40 percent of
the units are affordable to very low-income families.''\100\ Only the
portions of qualifying mortgages on multifamily properties that are
attributable to units affordable to low-income families contributed to
the achievement of this goal.\101\ Under the transition standard, where
at least 20 percent of the units were affordable to especially low-
income families (families whose incomes do not exceed 50 percent of
area median income) or at least 40 percent of the units were affordable
to very low-income families, all units from such multifamily projects
that were affordable to low-income families counted toward the goal.
\97\Section 1333(d)(1)-(2).
\98\Section 1333(d)(3)(A)(i).
\99\Section 1333(d)(3)(A)(ii)(I). The Department defined
``especially low-income families'' as those with incomes not in
excess of 50 percent of area median income.
\100\Section 1333(d)(3)(A)(ii)(II).
\101\Section 1333(d)(3)(C).
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The Act required that, for each GSE's mortgage purchases financing
single family housing to be counted toward achievement of the special
affordable housing goal, 45 percent of the dollar volume of single
family mortgages had to comprise mortgages of low-income families
living ``in census tracts in which the median income does not exceed 80
percent of the area median income.''\102\ The remaining 55 percent of
the dollar volume of single family mortgage purchases had to comprise
mortgages of very low-income families.\103\
\102\Section 1333(d)(3)(B)(i).
\103\Section 1333(d)(3)(B)(ii).
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The Special Affordable Housing Goal
Following the transition period, the Act does not specify the types
of mortgage purchases that shall count toward achievement of the
special affordable housing goal.\104\ Based on experience during the
transition, the Secretary concluded that determining GSE performance
under these provisions was cumbersome and did not clearly reflect the
number of especially low- and very low-income families actually served
under the multifamily portion of the special affordable housing goal.
Accordingly, as described below, the proposed regulation simplifies the
counting under this portion of the goal.
\104\See section 1333.
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The proposed regulation would substantially simplify the special
affordable housing goal to apply to ``rental housing and owner-occupied
housing.''\105\ Under the proposed regulation, rental housing would
include all units in multifamily housing and all units in single family
rental housing. The proposed regulation makes this change in part
because of the high percentage of renters in single family dwelling
units--41 percent of rental units in properties secured by
conventional, conforming mortgages are located in single family
properties.\106\
\105\See section 1333(a).
\106\Special tabulation derived from Bureau of the Census,
Housing and Household Economic Statistics Division, 1991 Residential
Finance Survey.
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The rental portion of the special affordable housing goal would be
targeted to very low-income families because of the substantial housing
needs of these renters. Five-eighths of renters with incomes below 50
percent of area median income pay more than 30 percent of their income
for housing, live in inadequate housing, or are overcrowded.\107\ Even
worse, almost half of the 7.4 million renters with incomes below 30
percent of area median income pay more than half of their income for
housing or live in severely inadequate housing.\108\ The high incidence
of severe housing problems among these extremely-low-income renters
reflects the severe shortages of units affordable to them.
\107\U.S. Department of Housing and Urban Development, Office of
Policy Development and Research, Worst Case Needs for Housing
Assistance in the United States in 1990 and 1991--A Report to
Congress, 4 (June 1994).
\108\U.S. Department of Housing and Urban Development, Office of
Policy Development and Research.
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Under the proposed regulation, only those rental units that are
affordable to very low-income families would count toward the goal
rather than all low-income units in buildings that had a certain
percentage of very low- or especially low-income units. Under the
owner-occupied housing portion of the goal, the dwelling units that
count toward the goal are units: (1) Located in low-income areas and
owned by low-income families; and (2) owned by very low-income
families.
The Act provides that, for each GSE, the special affordable housing
goal ``shall not be less than 1 percent of the dollar amount of the
mortgage purchases by the (GSE) for the previous year.''\109\ Although
the goal has been established to exceed one percent of each GSE's total
mortgage purchases in the preceding year, to maintain consistency, the
special affordable housing goal, like the other two goals, is expressed
as a percentage of dwelling units rather than dollars. The Secretary
determined that expressing this goal as a percentage of the previous
year's business was not preferable for several reasons: (1) Due to the
cyclicality of the mortgage market and the GSEs' business volume, use
of a fixed percentage of the previous year's purchases could make such
a goal less realistic in a year such as 1995, when total purchases are
projected to fall sharply from prior-year levels due to the decline in
refinancing activity; (2) conversely, in years of sharply increasing
activity, the goal represented by a set percentage of total mortgage
purchases in the previous year could represent an insufficient
commitment by the GSEs to special affordable housing; and (3) where a
GSE purchases (for a given sum) mortgages financing two dwelling units
that are affordable to families at 30 percent of area median income,
the GSE would be making a greater contribution to affordable housing
than if the GSE purchased (for the same sum) one mortgage that was
affordable to one family at 60 percent of area median income. A units-
based goal takes this consideration into account, but a strict dollar-
based goal would not.
\109\Section 1333(a).
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The proposed regulation provides that for 1995 the special
affordable housing goal will be 11 percent of the total
[[Page 9167]] number of dwelling units financed by each GSE's mortgage
purchases for 1995. The goal will be 12 percent for 1996. The goal is
equally divided between rental housing and owner-occupied housing,
i.e., for 1995 the goal for rental housing is 5.5 percent and the goal
for owner-occupied housing is 5.5 percent. For 1996, the goal is 6
percent for rental housing and 6 percent for owner-occupied housing.
The final regulation shall establish annual goals for 1997 and 1998 and
the Secretary intends that the 1998 goal apply thereafter, unless
revised through subsequent rulemaking; the Secretary seeks comment on
the level of the goals for 1997, 1998, and thereafter--see the
questions listed above (in the leading the industry discussion) and
repeated at the end of this preamble.
Performance Under the Special Affordable Housing Goal
In evaluating each GSE's performance in achieving this goal, the
Act requires that the Secretary give full credit toward achievement of
the special affordable housing goal for: (1) The purchase or
securitization of federally related mortgages that cannot be readily
securitized through the Government National Mortgage Association
(GNMA)\110\ or another Federal agency, where the GSE's participation
substantially enhances the affordability of the housing subject to such
mortgages,\111\ and the mortgages are on housing that otherwise
qualifies under this goal; (2) the purchase or refinancing of seasoned
loan portfolios where the seller has a specific program to use the
proceeds of such sales to originate new loans that meet the special
affordable housing goal and such purchases or refinancings support
additional lending for housing that otherwise qualifies under this
goal; and (3) the purchase of direct loans made by the Resolution Trust
Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC)
where the loans are not guaranteed by the RTC or the FDIC or other
Federal agencies, the loans include recourse provisions similar to
those offered through private mortgage insurance or other conventional
sellers, and such loans are for the purchase of housing that otherwise
qualifies under this goal.\112\
\110\A mortgage originated more than 2 years before a GSE
purchases it is an example of a mortgage that cannot be readily
securitized by GNMA.
\111\Mortgages that cannot be readily securitized through GNMA
or another Federal agency, and mortgages where a GSE's participation
substantially enhances the affordability of the housing subject to
the mortgages, include mortgages under the Home Equity Conversion
Mortgage (HECM) Insurance Demonstration Program (sec. 255 of the
National Housing Act), 12 U.S.C. 1715z-20, and under the Guaranteed
Rural Housing Loan program, 7 U.S.C. 1933.
\112\Section 1333(b)(1).
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This proposed regulation provides that entities qualify as sellers,
under (2) above, where the sellers currently operate on their own or
actively participate in an ongoing program that results in the
origination of loans meeting the special affordable housing goal; thus,
a GSE's purchase of such loans supports additional lending for housing
that will qualify under this goal. By encompassing active
participation, the proposed regulation allows purchases of portfolios
from sellers, who actively participate with qualified housing groups
that operate programs resulting in the origination of loans meeting
this goal, to count toward achievement of the goal. However, if a GSE
wants to count portfolio purchases toward achievement of this goal, it
must verify and monitor that the sellers currently operate or actively
participate in such ongoing programs that result in the origination of
additional loans meeting the requirements of this goal. Where a
seller's primary business is originating mortgages on housing that
qualifies under the special affordable housing goal, the proposed
regulation provides that such a seller is presumed to meet the
requirement for actively participating in program(s) supporting lending
meeting the special affordable housing goal.
Under the Interim Notices, no credit was given toward achieving the
special affordable housing goal for any purchases or securitization of
mortgages associated with the refinancing of existing GSE portfolios.
The intent of this prohibition was to preclude the GSEs from swapping
portfolios toward the end of the year in an effort to achieve the
special affordable housing goal. After reviewing the experience of the
transition period, the Secretary has determined that wholesale
exchanges of mortgages between the GSEs shall not count toward
achievement of the housing goal; however, refinancings of individual
mortgages should count toward the special affordable housing goal so
long as the refinancing is an individual ``arms-length'' refinancing by
a borrower. This is appropriate for several reasons: (1) The GSEs have
very little influence on whether a particular single family mortgagor
decides to refinance the mortgage--such refinancings are market driven
and normally due to decreases in interest rates, and the Secretary
concluded that such market driven refinancings should count toward the
goal; and (2) determining whether the GSE had purchased the previous
mortgage was time consuming and burdensome for the GSEs and for the
Department and yielded little incremental value in producing more
affordable housing finance.
General Requirements
Performance under the goals is determined by assessing the portion
or percentage of each GSE's business that satisfies each goal. In
determining this percentage, a fraction is used with the denominator of
the fraction measuring all mortgages purchased that could under
appropriate circumstances count towards such a goal and the numerator
including only those purchases that count toward the goal. The
denominator does not include GSE transactions or activities that are
not included in the terms ``mortgage'' or ``mortgage purchase.'' For
example, where a GSE purchases a non-conventional mortgage, such as a
mortgage insured or guaranteed by the Federal Housing Administration
(FHA), such a mortgage purchase shall not be included in the
denominator for purposes of determining that GSE's performance under
the housing goal for low- and moderate-income housing because
``mortgage purchase'' does not include the purchase of non-conventional
mortgages.
In establishing the goals for housing for low- and moderate-income
families, housing located in central cities, rural areas, and other
underserved areas, and special affordable housing, the Secretary may
consider the number of housing units financed by any multifamily
housing mortgage purchase.\113\ The Secretary has decided to count all
dwelling units, whether in multifamily or single family housing, under
these goals if the units otherwise meet the requirements of the Act and
this proposed regulation.
\113\See section 1331(b).
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Special Counting Rules Under the Goals
During the transition period, the Department analyzed the impact of
requirements under the Interim Notices concerning the extent various
types of transactions should count toward achievement of the goals.
Based on that analysis, the Secretary is proposing changes to or is
clarifying the treatment of certain transactions, including credit
enhancements, cooperative loans, refinancings, second loans, and risk-
sharing arrangements between the Department and the GSEs. In
determining the level of credit for [[Page 9168]] various transactions,
the Secretary developed certain principles to guide the determination,
and these principles will be used in the future when the Secretary
determines whether new types of transactions count toward the goals.
The principles are: (1) Where a transaction is substantially equivalent
to a mortgage purchase, the transaction generally should receive full
credit; (2) where a transaction is less risky than the risk associated
with the GSE's mortgage purchases, the amount of credit should be less
than full credit; and (3) where a transaction creates a new market or
increases liquidity in an existing market, the amount of credit should
generally be full credit.
(1) Credit Enhancements. Under this proposal, mortgages supported
by the following credit enhancements would count toward achievement of
the housing goals. Under these credit enhancement transactions, the GSE
guarantees housing finance bonds issued by any entity, including a
state or local housing finance agency; the GSE provides collateral in
the form of specific mortgages owned by the GSE; and the GSE's
guarantee has a credit risk substantially equivalent to the credit risk
the GSE would have assumed if it had securitized the mortgages financed
by the housing bonds. The Secretary will consider whether other types
of credit enhancements should count toward the housing goals and, if
other types are counted, whether those types of credit enhancements
should receive full or partial credit. The Secretary is seeking
comments on whether other types of credit enhancements should count.
(2) REMICs. The final regulation will provide whether real estate
mortgage investment conduits (REMICs) will count toward achievement of
any of the housing goals. The Secretary seeks public comment on REMICs
and requests views from the public on the following questions:
(i) Where a REMIC contains a GSE's mortgages or mortgage-backed
securities (MBS), should that type of REMIC count toward any of the
housing goals? How should double counting be avoided?
(ii) Where a REMIC does not contain a GSE's mortgages or MBS,
should that type of REMIC count toward any of the housing goals?
(iii) Should other types of REMICs be counted toward any of the
housing goals?
(iv) In determining whether any REMICs count toward achievement of
the housing goals, what should the Secretary consider?
(v) If any of these REMICs should count toward the housing goals,
should the REMICs receive full credit or some level of partial credit?
If partial credit, how should the level of credit be determined?
(vi) How should the final regulation deal with types of REMICs that
have not yet been created or used in the market? Should such REMICs
only count if that type of REMIC is reviewed by the Secretary and the
Secretary determines that the type of REMIC should count toward the
housing goals?
(3) Risk-sharing. Risk-sharing transactions would receive partial
credit toward achievement of the housing goals where: (1) The GSE's
risk-sharing arrangement is with the Department or another Federal
agency; and (2) the GSE and the agency acquire mortgages and share the
risks associated with those acquisitions. The credit to be awarded for
these risk-sharing activities is to be equal to the amount of the GSE's
risk under the risk-sharing arrangement.
For example, under section 542 of the Housing and Community
Development Act of 1992, codified as a note to 12 U.S.C. 1707, the
Department has entered into separate multifamily risk-sharing
agreements with Fannie Mae and Freddie Mac. Under those agreements,
each GSE shares risk of mortgage default through re-insurance with HUD
on a 50 percent expected loss basis. If, under these agreements, a GSE
shares the risk for 1,000 multifamily dwelling units and the GSE
certifies that its share of the risk is equal to 50 percent, that GSE's
performance under the low- and moderate-income housing goal would
include the following calculation: The numerator would include 50
percent of the dwelling units affordable to low- and moderate-income
families; and 500 dwelling units would be added to the denominator.
Where a GSE enters a risk-sharing arrangement, to receive credit
toward the goals, it must certify what the real percentage of risk is
and how that percentage was calculated--that percentage will then be
used in calculating the GSE's performance under the relevant goal. The
Department notes that in some risk-sharing arrangements, a GSE may
assume top loss or catastrophic loss. In those instances, the actual
risk assumed by the GSE clearly will not equal the percentage of the
risk stipulated, e.g., if a GSE assumes the first 20 percent of the
risk, its actual risk is higher than 20 percent.
(4) Participations. Where a GSE purchases only a portion of a
mortgage, that participation receives partial credit equivalent to the
percentage of the mortgage purchased. For example, if a GSE has a 20
percent participation in a mortgage, the denominator shall include 20
percent of the units financed by the mortgage and the numerator will
include that portion of the 20 percent of the units that meet the
requirements for the particular housing goal.
(5) Cooperative housing loans. The purchase of a mortgage on stock
in a cooperative housing unit (``a share loan'') is counted the same
way as the purchase of single family owner-occupied units and, thus,
affordability is based on the income of the owners. Where a GSE
purchases a mortgage on a cooperative building (``the blanket loan'')
and share loans for units in the same building, both purchases receive
full credit, i.e., the blanket loan counts under the housing goals in
the same manner as a multifamily mortgage purchase.
(6) Seasoned loans. Purchases of seasoned loans are treated the
same as purchases of recently originated mortgages and receive full
credit under the goals. However, such purchases shall not count if the
GSE already counted the mortgages under these housing goals or the
goals in the Interim Notice of Housing Goals. To ensure that the
housing covered by seasoned loans is affordable and counts, where a
mortgage is more than three (3) years old, affordability must be
determined based on income and/or rent level information at the time of
purchase by the GSE.
(7) Second loans. A second mortgage on a residential property will
be counted under the goals, if the property otherwise counts. The
Secretary is seeking comment on whether these loans should receive
partial or full credit toward the goals and, if partial credit, how the
amount of credit should be determined. These loans, many of which are
originated to pay for the costs of rehabilitating a single-family home,
are an important part of lending in underserved communities. Many low-
income homeowners cannot purchase new homes but seek to borrow funds to
make repairs to their existing homes to increase their habitability and
comfort. In many cases, however, these loans will have smaller unpaid
principal balances than loans originated for purchase.
(8) Tax Credit and Mortgage Revenue Bond Purchases. The Secretary
commends the GSEs' involvement in a wide variety of undertakings,
including equity investments in projects eligible for Low-Income
Housing Tax Credits (tax credits)\114\ and purchases of State and local
government housing bonds, [[Page 9169]] such as mortgage revenue
bonds,\115\ which serve significant purposes related to low- and
moderate-income housing. The Secretary has concluded, however, that--
although important in providing financing for low-income housing
development--these activities are not equivalent to ``mortgage
purchases'' and credit will not be granted toward the goals for these
activities. This approach is consistent with the language in the Senate
report concerning such activities: ``The (GSEs) are expected to
continue such investments, but to carry them out in addition to
initiatives necessary to meet the goals contained in this
legislation.''\116\
\114\26 U.S.C. 42.
\115\26 U.S.C. 143.
\116\Id. at 38. See also, id. at 31, and H.R. Rep. No. 102-206,
102d Cong., 1st Sess. 60 (1991) (hereinafter cited as ``H. Rep.'').
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(9) Second homes. Mortgages financing secondary residences would
not count toward achievement of any of the goals because the Secretary
has determined that the goals should be directed to increasing the
supply of primary residences, not secondary residences.
(10) Refinancings. The purchase of refinanced mortgages shall fully
count toward achievement of the housing goals except as provided in the
specific restrictions under the special affordable housing goal which,
generally, permits arms-length borrower-driven refinancings to count
toward achievement of the goal but excludes wholesale exchanges of
mortgages between the GSEs.
Affordability Determination Under the Goals
In analyzing a GSE's performance in achieving these goals, the
Secretary will, for mortgage purchases on owner-occupied dwelling
units, consider the mortgagors' income as required by the Act.\117\
\117\Sections 1332(c)(1) and 1333(c)(1)(A).
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For mortgage purchases on rental dwelling units, the Secretary will
consider, based on data at the time of mortgage purchase, the income of
prospective or actual tenants if available. Where such income
information is not available, rent on the dwelling units is used as a
proxy and compared to the rent levels affordable to very low-, low-,
and moderate-income families.\118\ To be considered affordable, the
rent cannot exceed 30 percent of the maximum income level of the
family's classification, i.e., very low-, low-, or moderate-income,
with adjustments for unit size.\119\
\118\Sections 1332(c) and 1333(c).
\119\Sections 1332(c)(2) and 1333(c)(2).
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Consistent with the Act,\120\ the Secretary is requiring that
tenants' income information be collected by each GSE where such income
information is available. Based on the legislative history, income
information is available ``when it is known by the lender because, for
example, such information is required as a condition of an existing
federal housing program.''\121\ Thus, where, as a condition of an
existing federal, state, or local housing program, income information
of tenants is required to be collected, such income information is
considered as known to a lender and, therefore, available to the GSEs.
\120\Sections 1332(c)(1)(B) and 1333(c)(1)(B).
\121\S. Rep. at 35.
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Where tenant income is not known to the lender, the 30 percent rent
proxy is to be used to monitor and evaluate each GSE's performance in
achieving the goals.\122\ (The Secretary notes that the 30-percent rent
standard prescribed by the Act for determining affordability under the
low- and moderate-income housing goal is too inclusive. In applying
this standard, it can be anticipated that more than 80 percent of
rental housing will be regarded as affordable to low- and moderate-
income families.)
\122\See sections 1332(c) and 1333(c).
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The term ``rent'' is not defined in the Act. Where the term
``rent'' is used in eligibility and affordability requirements for
government housing programs, the term means ``gross rent,'' which
includes all utilities, based on either actual data or allowances.
Likewise, this proposed regulation defines ``rent'' as gross rent,
i.e., contract rent including utilities or contract rent plus utilities
where some or all of the utilities are not included in the contract
rent.
Where all utilities are not included in rent, use of contract rent
is unsatisfactory and excludes a significant component of housing costs
from the rent calculation. Utility costs comprise a significantly
larger share of total housing costs for lower income families in
comparison with higher income families. Moreover, applying the rent
test, with rent exclusive of utility costs, would result in an even
more unrealistically inclusive test of affordability for rental
dwelling units than is the case using gross rent. If contract rent were
used, the Department projects that more than 95 percent of all rental
units would be classified as affordable to low- and moderate-income
families.\123\
\123\Using rent as defined in this Notice, consistent with
current law, 93 percent of existing rental dwelling units and 78
percent of recently constructed rental dwelling units qualify as
affordable to low- and moderate-income families.
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To resolve the problem of assuring consideration of gross rents
including utility costs, while at the same time providing workable
means for including those costs, this proposed regulation allows the
GSEs to use: Actual data on utilities; utility allowances based on data
from the American Housing Survey (AHS) and issued annually by the
Secretary; utility allowances established for the HUD Section 8 Program
(section 8 of the United States Housing Act of 1937, 42 U.S.C. 1437f);
and/or an alternative adjustment formula subject to approval by the
Secretary. The proposed regulation provides that, unless such an
alternative approach is approved by the Secretary, the GSEs shall use
actual data, the AHS-derived allowances, or the Section 8 allowances.
Where tenant income is not available, the Act requires that the
test for affordability of rental dwelling units be applied to units
``with appropriate adjustments for unit size as measured by the number
of bedrooms.''\124\ Thus, to determine whether a unit counts toward
achievement of a goal, rent on the unit is considered in terms of the
number of bedrooms in the unit. The Low-Income Housing Tax Credit
(LIHTC) provides an accepted formula for adjustments to determine
housing capacity, see 26 U.S.C. 42(g)(2)(C), and this proposed
regulation requires the use of those adjustments for these goals. These
adjustments assume that an efficiency houses one person, a one bedroom
unit houses 1.5 persons and each additional bedroom houses an
additional 1.5 persons.
\124\Sections 1332(c)(2) and 1333(c)(2).
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Income adjustments for family size, required under the Act to
determine whether a renter family's income qualifies as very low, low,
or moderate, are established for the HUD Section 8 program and use of
these adjustments is also required under this proposed regulation. To
determine which rental dwelling units qualify as affordable, this
proposed regulation combines the LIHTC unit size adjustment factors
with the Section 8 family size adjustment factors to develop the
necessary unit size adjustment factors to be applied to rent. For
example, under the LIHTC an efficiency is assumed to house one person;
under Section 8, for moderate-income, one person's rent may not exceed
70 percent of 30 percent of area median income; thus, an efficiency is
affordable for a moderate-income person if the rent does not exceed 21
percent [[Page 9170]] of area median income.\125\ Similarly, a two-
bedroom unit is assumed to house three persons; three persons' rent may
not exceed 90 percent of 30 percent of area median income; thus, a two-
bedroom unit is affordable for a moderate-income family if the rent
does not exceed 27 percent of area median income. These percentages are
included below under ``General Requirements.''
\125\Similarly, for purposes of determining affordability to
low-income families: An efficiency is assumed to house one person;
one person's rent may not exceed 70 percent of 30 percent of 80
percent of area median income (using family size to adjust income);
thus, an efficiency is affordable to a low-income family if the rent
does not exceed 16.8 percent of the area median income.
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In some instances, the LIHTC unit size adjustments and the Section
8 family size adjustments do not directly correspond to each other. For
example, under the LIHTC a one-bedroom apartment is assumed to house
1.5 persons but Section 8 does not provide a family size adjustment for
1.5 persons. Therefore, the HUD Section 8 adjustment factors for one
person (70 percent) and two persons (80 percent) have been averaged to
obtain a rent not in excess of 75 percent of 30 percent of area median
income, yielding a net one-bedroom unit size adjustment factor of 22.5
percent of area median income.\126\ Similar interpolations also are
made for three-bedroom and five-bedroom units.
\126\Similarly, for purposes of low-income affordability, the
same 75 percent figure is used to obtain a rent not in excess of 75
percent of 30 percent of 80 percent of area median income, yielding
a net unit size adjustment factor of 18 percent.
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In certain rare instances (normally in New England), it may be
unclear which area median income should be applied to determine the
affordability of certain dwelling units. Under the proposed regulation,
where a GSE knows that a property is located in a census tract that is
split between two different areas and it is not clear which area median
income should be used, the GSE must calculate a median income for the
split census tracts. The median income for such split areas equals: (A)
The percentage of the population of the census tract that is located in
the first area times the median income of that area; plus (B) the
percentage of the population of the geographic segment that is located
in the second area times the median income of that area.
For example, a GSE purchases a mortgage on a property located in a
census tract that is partially in a metropolitan statistical area (MSA)
and partially outside the MSA; seventy-five percent of the census
tract's population is in the MSA and the remaining 25 percent is
outside the MSA; the median income for the MSA is $40,000; the median
income for the county outside the MSA is $30,000. The median income for
the split census tract would be 75 percent of $40,000 plus 25 percent
of $30,000, or $37,500.
HUD seeks guidance on the appropriate reference for income in non-
metropolitan areas for determining affordability under the housing
goals for low- and moderate-income families and special affordable
housing and for defining low-income areas in the goal for central
cities, rural areas and other underserved areas. Should borrower and
area income in non-metropolitan areas be defined: (1) Relative to the
county median income; or (2) relative to the maximum of the county
median income or the median income of the non-metropolitan balance of
the State?
Housing Plans
The proposed rule provides procedures if a GSE fails to meet any
housing goal. If the Secretary determines that either GSE has failed to
meet any housing goal or there is a substantial probability that a GSE
will fail to meet a housing goal, the Secretary shall, by written
notice, preliminarily require that the GSE submit a housing
plan.127 The GSE would then have 30 days (which may be extended by
the Secretary) to respond in writing to the Secretary's notice.\128\
The GSE's response may include any information that the GSE considers
appropriate for the Secretary to consider in determining whether the
GSE failed to meet a housing goal, whether there is a substantial
probability that the GSE will fail to meet a housing goal, and whether
achievement of the housing goal was or is feasible.
\127\Section 1336(b)(1).
\128\Section 1336(b)(2).
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After reviewing the GSE's response, the Secretary shall issue a
final determination as to whether the GSE has failed or there is a
substantial probability that the GSE will fail to meet the housing
goal.\129\ Additionally, the Secretary shall determine whether
achievement of the housing goal was or is feasible based on market and
economic conditions and the GSE's financial condition.\130\ Where the
Secretary determines that the GSE has failed or there is a substantial
probability that the GSE will fail to meet the housing goal and that
achievement of the housing goal was or is feasible, the Secretary shall
require the GSE to submit a housing plan.\131\
\129\Section 1336(b)(3)(A).
\130\Id.
\131\Section 1336(c)(1).
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Each housing plan must be feasible and sufficiently specific to
enable the Secretary to monitor the GSE's performance under and
compliance with the plan.\132\ A housing plan must describe the
specific actions that the GSE will take to achieve the goal in the next
calendar year or, where the Secretary has determined that a substantial
probability exists that the GSE will fail to meet a goal in the current
year, the plan must describe the reasonable improvements the GSE will
make in the remainder of the year.\133\
\132\Section 1336(c)(2).
\133\Id.
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Subpart C--Fair Housing Requirements
The Act requires the Secretary, by regulation, to prohibit the GSEs
from discriminating in their mortgage purchase activities and to
require that the GSEs submit specified data to the Secretary on
mortgage lenders to assist the Secretary's investigative activities
under the Fair Housing Act and to assist investigative activities under
the Equal Credit Opportunity Act (ECOA).\134\ The Act also requires the
Secretary to: Obtain and provide to the GSEs information on violators
of the Fair Housing Act and ECOA; direct the GSEs to take action
against mortgage lenders found to discriminate; and periodically review
and comment on the GSEs' underwriting guidelines.\135\
\134\Sections 1325(1)-(3).
\135\Section 1325(4)-(6).
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In enacting FHEFSSA, Congress recognized the unique position and
responsibilities of the GSEs in the mortgage market and their
unparalleled capabilities to effectuate fair housing and fair lending
in that market. The GSEs are Federally sponsored and purchase a large
majority of all of the conventional mortgages originated by primary
lenders. The House Report on the Act stated:
While the Committee does not intend that the (GSEs) be
responsible for investigating and punishing acts of discrimination,
the Committee does expect the (GSEs) to use their considerable
influence over the mortgage market to ensure that lenders with which
they deal are acting in a nondiscriminatory manner.\136\
\136\H. Rep. at 57.
Discrimination on a prohibited basis is intolerable and socially
and economically destructive. The GSEs on many occasions have expressed
their commitment to combatting discrimination and advancing fair
lending. The Secretary, through this regulation, seeks to make concrete
the [[Page 9171]] GSEs' significant fair housing and fair lending
responsibilities under the Act.
These provisions are intended ultimately to further fair lending by
primary lenders. Accordingly, in developing these sections, the
Secretary consulted with Federal agencies that regulate lending
institutions including the Office of Comptroller of the Currency, the
Office of Thrift Supervision, the Treasury Department, and the Federal
Reserve. Those consultations proved extremely beneficial.
Responsibility for enforcement of the Act's fair housing provisions is
solely vested in the Department of Housing and Urban Development under
the Act, including the HUD Office of Federal Housing Enterprise
Oversight (OFHEO), and no provisions in this regulation may impede
those authorities. However, the Secretary has concluded that in the
implementation of these regulations further consultations in the
operational arrangements of these regulations would be valuable.
Consultation will assure needed coordination of regulatory actions
within the government and the provision of beneficial information and
views from the regulators to the Secretary. The regulations, therefore,
specifically require that memoranda of understanding will be
established with regulators to specify procedures for submission and
dissemination of information from the regulators to the Secretary and
to the GSEs. Also, prior to directing any remedial action by a GSE
against a lender, the Secretary would be required to solicit and fully
consider the views of the lender's regulator. Finally, at all points in
the process where warranted, including, without limitation, the
Secretary's review of the GSEs' underwriting guidelines and business
practices affecting lenders, the Secretary will fully consider the
views of the appropriate regulators in the standards used by such
regulators in similar circumstances.
Prohibitions Against Discrimination
The regulations generally prohibit the GSEs from discriminating in
any manner in their mortgage purchases because of race, color,
religion, sex, handicap, familial status, age or national origin,
including any consideration of the age or location of the dwelling or
the age of the neighborhood or census tract where the dwelling is
located in a manner that has a discriminatory effect. The proposed
regulation provides that the GSEs are liable for any discrimination by
them, or their officers, or employees, or agents in making mortgage
purchases. Just as the term ``mortgage purchase'' includes transactions
which are substantively similar to mortgage purchases for purposes of
the housing goal provisions, the term is similarly inclusive for
purposes of the restrictions against discrimination.
The regulation makes clear that prohibited conduct is subject to
certain exemptions. For example, while the regulations generally forbid
the GSEs from considering factors concerning the age and location of a
dwelling, or the area in which the dwelling is located in a manner that
has a discriminatory effect, these factors may be considered in certain
cases. The age of a dwelling may be used by an appraiser as a basis for
conducting more extensive inspections of structural aspects of the
dwelling. Location factors that may have a negative effect on a
dwelling's value may be properly considered in an appraisal and in
other aspects of the underwriting process.
The GSEs may also consider factors justified by business necessity,
including requirements of Federal law, relating to a transaction's
financial security or to protection against default or reduction of the
value of the security. For example, age or location may be considered
in circumstances other than appraisals, including requiring a different
loan-to-value ratio for an older, more expensive to maintain,
multifamily building. However, where a GSE's consideration of a factor
or factors has a disparate result based upon race, color, religion,
sex, handicap, familial status, age or national origin, including any
consideration of the age or location of the dwelling or the age of the
neighborhood or census tract where the dwelling is located, in order
for the factor or factors to continue to be considered, the factor must
be justified by business necessity. The business necessity must be
manifest and neither hypothetical nor speculative. Even if
consideration of the factor can be justified based on business
necessity, its use still may be impermissible if an alternative policy
or practice could serve the same purpose with less discriminatory
effect.
Business Practices Analysis and Underwriting and Appraisal Guidelines
The regulations provide that following their effective date and
periodically thereafter as requested by the Secretary, each GSE shall
conduct and submit to the Secretary a Business Practices Analysis to
further implement the prohibitions against discrimination under the Act
and facilitate the reporting requirements under sections 309(n)(2)(G)
of the Fannie Mae Act and 307(f)(2)(G) of the Freddie Mac Act137
and the underwriting and appraisal guideline review requirements under
the Act.138 The GSEs will develop a methodology for conducting the
Business Practices Analyses and the Secretary will review and comment
on the methodology.
\137\These Charter Act sections require the GSEs to ``assess
underwriting standards, business practices, repurchase requirements,
pricing fees, and procedures, that affect the purchase of mortgages
for low- and moderate-income families, or that may yield disparate
results based on the race of the borrower, including revisions
thereto to promote affordable housing or fair lending.''
\138\Section 1325(6).
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The Business Practices Analysis must assess the GSE's underwriting
standards and appraisal practices, repurchase requirements, pricing,
fees, procedures, and other business practices that affect the purchase
of mortgages for low- and moderate-income families or that may yield
disparate results based on the race, color, religion, sex, handicap,
familial status, age or national origin of the borrower. The analysis
shall specify revisions that will be made to promote affordable housing
and fair lending. If disparate results occur because of any business
practices, the GSE must demonstrate that a business necessity exists
for the practice or demonstrate how the GSE plans to remedy the
situation. The GSEs' Charter Acts as amended by FHEFSSA require an
analysis of business practices as part of a required report.139
The analysis will serve as a baseline for future reporting and as a
necessary action by the GSEs toward remedying any systemic practices
that are discriminatory and assuring that the GSEs are not in violation
of the prohibitions under this subpart.
\139\Fannie Mae Charter Act, section 309(n)(2)(G), and Freddie
Mac Act, section 307(f)(2)(G).
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The Secretary recognizes that, at least initially, this highly
important analysis will require a considerable amount of time to
complete. Accordingly, the Secretary specifically seeks comments
concerning the deadline for completing the initial analysis and the
time for review by the Secretary which should be included in the final
regulations.
Under the Act, the Secretary is required to review the GSEs'
underwriting and appraisal guidelines to ensure compliance with the
Fair Housing Act, the regulations promulgated thereunder, section 1325
of the Act, and these regulations.140 In implementing this
responsibility--in a manner intended to maximize industry self-
regulation--this proposal places initial responsibility on the GSEs
themselves, rather than the Department, [[Page 9172]] to review all
current guidelines and future revisions of the guidelines. Review of
the GSEs' current guidelines therefore will involve analyses by the
GSEs followed by Secretarial review and comment. The GSEs' analyses of
the current guidelines will occur for the first time, under this
regulation, as part of the Business Practices Analysis. The regulations
require that before instituting a revision, the GSE must certify that
after reasonable evaluation and analysis, the GSE has determined in
good faith that to the best of its knowledge the change will not be
discriminatory.
\140\Section 1325(6).
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The Secretary will provide comments and recommendations for changes
to guidelines and revisions to ensure consistency with the Fair Housing
Act. If a GSE does not make such changes or otherwise resolve comments
to the satisfaction of the Secretary, the Secretary may take action
under the Fair Housing Act.
In addition to requiring an analysis of the GSEs' business
practices as a means of effectuating fair lending, the Secretary seeks
comment concerning whether the GSEs should be required to develop a
fair lending plan to identify and address impediments to fair housing
and fair lending in the primary market. Lending discrimination remains
a pervasive and persistent problem in the mortgage industry. The
Secretary seeks comment on the following questions:
(1) Should the GSEs be required to prepare a fair lending plan?
(2) Could a fair lending plan offer new ways to lead the primary
lending market in eradicating discrimination? If so, how?
(3) What are the appropriate components of such a plan? and
(4) How would the plan effectuate fair housing/fair lending
objectives?
Submission of Information to Assist the Secretary
The GSEs are required to submit information and data to the
Secretary to assist in investigating whether any mortgage lender with
which the GSE does business has failed to comply with the Fair Housing
Act or ECOA.141 The regulation requires that the GSEs: (a) Respond
to a specific Secretarial request for information on a particular
lender or lenders; (b) provide information when the GSE becomes aware
of a questionable activity by a lender; and (c) develop and provide
data that could be generated by GSE data systems, e.g., relating data
on census tracts to lender mortgage sales. When investigating the
practices of a particular lender, GSE data could provide the Secretary
useful information on lending patterns of that lender and other lenders
in the same area.
\141\Sections 1325 (2)-(3).
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The Secretary invites the GSEs and the public to provide comments
on additional information that the GSEs could usefully gather on
lenders for the Secretary's review in connection with the enforcement
of the Fair Housing Act.
Submission of Information by the Secretary to the GSEs
The Secretary will obtain information from Federal, State, and
local enforcement agencies with information regarding violations of
ECOA, the Fair Housing Act, or State and local anti-discrimination
laws. The Secretary will provide this information to the GSEs. Such
information may indicate violations of the GSEs' underwriting
guidelines and/or representations or certifications from lenders. The
specific nature of the violation information to be obtained by the
Secretary and the procedures for referral applicable to Federal
financial regulators will be governed by memoranda of understanding
entered into between the Secretary and such regulators. The Secretary
shall also consult with such regulators on the nature of the
information to be provided to the GSEs. The Secretary is particularly
sensitive to ensuring that only relevant and legally appropriate
information--considering financial privacy and other pertinent
matters--is obtained and provided to the GSEs under this provision.
Although other provisions of the Act and regulations described below
allow the Secretary to direct sanctions against lenders found to
discriminate,142 these information dissemination provisions
neither directly nor indirectly require actions by the GSEs based upon
violation information provided by the Secretary. The regulations merely
provide that the GSEs may take appropriate action under their
procedures based on information provided by HUD concerning lender
violations of the Fair Housing Act or ECOA, i.e., the GSEs, in their
discretion, may choose to take action against lenders based on
violations of binding contractual arrangements with the GSEs forbidding
discrimination.
\142\Section 1325(5).
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Remedial Actions
The Secretary is required to direct the GSEs to take remedial
actions--including suspension, probation, reprimand, or settlement--
against lenders which have been found to have engaged in discriminatory
lending practices in violation of the Fair Housing Act and ECOA
following appropriate proceedings.143
\143\ Section 1325(5).
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For purposes of remedial action, a lender will have been found to
have violated ECOA only after a final determination on the matter has
been made by an appropriate United States District Court or any other
court of competent jurisdiction. A lender will have been found to have
violated the Fair Housing Act only after a final determination on the
matter has been made by a District Court, a HUD Administrative Law
Judge, or the Secretary. Based on such violations, the Secretary shall
direct the GSE to take remedial action(s) under this section. Prior to
the date the action is to be imposed, the lender may request and, if
the request is timely filed, will be entitled to a hearing before a HUD
Administrative Law Judge; such hearing shall be limited to review of
the appropriateness of the proposed remedial action only. The
determination on the underlying violation will not be subject to review
at the hearing.
To ensure regulatory coordination and avoid any unnecessary
regulatory burden, the Secretary will be required under the proposed
regulation, prior to directing any remedial actions under this section,
to solicit and fully consider the views of the particular lender's
Federal financial regulator concerning the action or actions
contemplated. Views will be solicited and considered in accordance with
the foregoing memoranda of understanding between the Secretary and such
regulators. The regulations address the lenders' due process rights and
factors that the Secretary may consider in determining an appropriate
action. The Act empowers the Director of OFHEO to enforce violations of
section 1325 by the GSEs. Potential violations are to be referred to
the Director by the Secretary.
The Fair Housing Act
The Secretary's regulatory authority under section 1325 of the Act
is in addition to the Secretary's responsibilities under the Fair
Housing Act144 and Executive Order 12,892.145 The Fair
Housing Act requires that the Secretary administer all HUD programs and
activities relating to housing and urban development (which would
include GSE oversight responsibilities) so as ``to affirmatively
further'' the [[Page 9173]] purposes of the Fair Housing Act.146
The Secretary is in the process of developing regulations under the
Fair Housing Act that will update HUD's current regulations concerning
fair housing and fair lending. Those forthcoming regulations will
supplement these GSE regulations. Nothing in these regulations is
intended to diminish in any manner the GSEs' responsibilities under the
Fair Housing Act.
\144\42 U.S.C. 3601-19.
\145\59 FR 2939 (1994).
\146\42 U.S.C. 3608(e)(5).
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Subpart D--Review of New Programs
Background
Under both Charter Acts, prior to amendment by FHEFSSA, the
Secretary had statutory authority to approve the GSEs' purchasing,
servicing, selling, lending on the security of or otherwise dealing in
conventional mortgages. Under provisions of FHEFSSA, the Secretary must
approve new programs unless the Secretary determines that the program
was not authorized under specific provisions of the GSEs' Charter Acts
or that the program was not in the public interest.147 Until one
year after the Director's regulations under section 1361(a) of FHEFSSA
are issued, the Director also must review new programs and, if the
Director determines that the new program would risk significant
deterioration of the GSE's financial condition, the new program must be
disapproved by the Secretary.148 The purpose of the Secretary's
approval is ``to ensure that (programs) are authorized by the relevant
(C)harter Act, not detrimental to housing availability and
affordability, and, for an undercapitalized (GSE),to ensure that such
programs (will) not worsen the financial condition of the
(GSE).''149
\147\Section 1322(b)(2).
\148\Section 1322(b)(2).
\149\S. Rep. at 15.
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Scope of Authority
The Secretary intends to make certain that the GSEs continue to
have sufficient latitude to develop innovative programs to serve
America's housing needs. In the area of housing finance, dramatic
innovations have occurred during the last 25 years, with the
introduction of the mortgage-backed security, the REMIC, and other
financing vehicles that have brought new sources of investment capital
into housing. The GSEs have either developed or refined these vehicles.
The Secretary wants to ensure that future innovations are also allowed
to develop without unnecessary impediment.
As noted in the House Report on the Act, ``(t)he Secretary's role
with regard to approval authority over new programs is not designed to
entangle Fannie Mae and Freddie Mac in unnecessary delays, bureaucratic
red tape, or extraneous consideration by HUD.''150 In reviewing
new programs, the Secretary will follow judiciously the standards for
review in the Act and will only disapprove a request for new program
approval where the program is not within the scope of the GSE's
statutory authority, the program is not in the public interest, or,
during the transition period, where the Director determines that the
new program would risk significant deterioration in a GSE's financial
condition.151
\150\H. Rep. at 55.
\151\Section 1322(b)(1).
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Each GSE is required to obtain the approval of the Secretary for
any ``new program'' before the GSE implements the program.152
Section 1303(13) of the Act defines ``new program'' as ``any program
for the purchasing, servicing, selling, lending on the security of, or
otherwise dealing in, conventional mortgages that--(A) is significantly
different from programs that have been approved under this Act or that
were approved or engaged in by (a GSE) before (October 28, 1992); or
(B) represents an expansion, in terms of the dollar volume or number of
mortgages or securities involved, of programs above limits expressly
contained in any prior approval.'' (Programs that were specifically
approved are referred to as ``approved programs.'')
\152\Sections 1322(a) of FHEFSSA, 305(c) of the Freddie Mac Act,
and 302(b)(6) of the Fannie Mae Charter Act.
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Under the Act, all GSE programs engaged in prior to October 28,
1992, which are referred to in the regulations as ``authorized
programs,'' are deemed to be approved even where the GSE did not
actually obtain approval from the Secretary and such programs need not
be submitted to the Secretary for further review. However, where
programs are significantly different from authorized programs, unless
such programs are otherwise approved they are ``new programs'' subject
to the Secretary's approval.
Under these regulations, the ``new program'' approval procedure
applies to ongoing ``programs,'' pilots, and demonstration programs
that ``significantly differ'' from authorized or approved programs.
``New program'' also would include a program that is expanded, in
dollar volume or number of mortgages or securities involved, above any
limits expressly contained in any prior approval by the Secretary.
Where a question exists as to whether an activity is a program, if
submission is otherwise required, the GSE must submit the activity for
Secretarial review. As noted in the legislative history, where a
planned program ``could reasonably raise significant questions'' as to
whether the program is within a GSE's statutory purposes or in the
public interest, that program ``should be viewed as significantly
different from existing programs and, therefore, must be submitted for
approval.''153 Accordingly, the GSEs shall submit programs for
review if the Secretary could reasonably consider the program to be
new, even where the GSE believes the program is not new. Where the GSE
does not believe that the program is new, the GSE may, in its
submission, fully explain its basis for that position.
\153\S. Rep. at 15.
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Fannie Mae undertakes certain housing related activities under
section 309(a) of its Charter Act, which authorizes Fannie Mae ``to do
all things as are necessary or incidental to the proper management of
its affairs and the proper conduct of its business.'' Freddie Mac has
similar authority under which Freddie Mac's ``(f)unds * * * may be
invested in such investments as (its) Board of Directors may
prescribe,'' and Freddie Mac has the power ``to determine its necessary
expenditures and the manner in which the same shall be incurred,
allowed, and paid.''154 Where any of these activities could be
regarded as new programs subject to the Secretary's review, the
proposed regulation would require the GSEs to submit requests for
program approval for those activities (under sections 309(a) of the
Fannie Mae Charter Act or 303(c)(9) or (d) of the Freddie Mac Act). The
purpose of this requirement is to ensure that the Secretary
appropriately reviews all new programs and ensures that the GSEs do
not, through use of their corporate powers, violate any provisions of
their Charter Acts such as the prohibition against the GSEs originating
mortgage loans.155
\154\Freddie Mac Act, sections 303(d) and 303(c)(9).
\155\See sections 304(a)(2)(B) of the Fannie Mae Charter Act and
305(a)(5)(B) of the Freddie Mac Act.
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Although new programs will be subject to Secretarial review, the
Secretary does not intend to interfere with the GSEs' other activities
under sections 309(a) of the Fannie Mae Charter Act or 303(c)(9) or (d)
of the Freddie Mac Act. The Secretary encourages the GSEs to continue
their activities under these provisions. [[Page 9174]]
Products
A program differs from a product. As noted in the legislative
history, ``(o)nce a program is approved, Fannie Mae and Freddie Mac are
expected and encouraged to develop a range of specific products under
the umbrella of the new program. The Secretary's prior approval
authority does not extend to the introduction of new products under an
approved program.''156
\156\ H. Rep. at 55.
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Significantly Different
To determine whether a planned GSE program is ``significantly
different'' from a GSE program that has been approved or authorized,
and, therefore, requires the Secretary's approval, the proposed
regulation provides that a program is significantly different if it
materially differs from the GSE's other approved or authorized programs
by entailing substantially greater risk or substantially expanding the
GSE's role in the housing markets by involving new categor(ies) of
borrowers, properties or other securities, borrowing purposes, or
credit enhancements. New programs do not include new activities that
are designed to refine approved or authorized programs by repackaging
features of those programs, making technical improvements, or creating
other nonmaterial variations.
Requested Comments on New Program Approval
In connection with new program approval, the Secretary seeks
comments on the following questions:
(1) The Act defines ``new program,'' generally, as a program that
is significantly different from GSE programs previously approved or
authorized. The Act does not define ``program,'' ``product,'' or
``significantly different.'' Should these term(s) be defined in the
final rule and, if so, how should the term(s) be defined?
(2) The Act requires the Secretary to approve a new program unless
the program is not authorized by the GSE's Charter Act or the Secretary
determines that the new program is not in the public interest. Should
the final rule include factors that the Secretary will consider in
determining whether a program is not in the public interest and, if so,
what factors should be included?
Procedures
Requests from a GSE for new program approval must be submitted in
writing and fully explain the program and whether the program is
implemented under the authority of sections 305(a) (1), (4), or (5) of
the Freddie Mac Act or 302(b) (2)-(5) of the Fannie Mae Charter Act.
Each program request shall include: An opinion from counsel setting
forth the statutory authority for the new program; a good faith
estimate of the anticipated dollar volume of the program over the
short- and long-term; a full description of the purpose and operation
of the proposed program, the market targeted by the program, the
delivery system for the program, the effect of the program on the
mortgage market, and material relevant to the public interest.
The Secretary and the Director (where the Director has new program
approval authority) may, within 45 days of receiving a request for new
program approval, determine that additional information from the GSE is
needed to make a decision on the request.157 When additional
information is needed by the Secretary or the Director, the Secretary
shall request such information from the GSE. The GSE must provide such
information within 10 days of the Secretary's request and, if the GSE
fails to do so, the Secretary may deny the request based on the GSE's
failure.
\157\ Section 1322(c)(2).
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The Secretary shall approve or disapprove new program requests
within 45 days, or 60 days if additional information is requested from
the GSE.158 When the Secretary approves a new program, the
Secretary shall provide written notice of the approval to the GSE. When
a new program is not approved, the Secretary shall submit an
explanatory report to the Committee on Banking, Finance and Urban
Affairs of the House of Representatives and the Committee on Banking,
Housing, and Urban Affairs of the Senate.159 If the Secretary
fails to approve or disapprove a new program within 45 days (or 60 days
where additional information is requested), the request shall be deemed
approved.160
\158\ Section 1322(c)(2).
\159\ Section 1322(c)(2).
\160\ Section 1322(c)(3).
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Where the Secretary disapproves a new program request from a GSE
under sections 305(a) (1), (4), or (5) of the Freddie Mac Act or 302(b)
(2)-(5) of the Fannie Mae Charter Act and these regulations, the GSE
may request within 30 days of the disapproval an opportunity to
supplement the administrative record at a meeting with the Secretary or
the Secretary's designee or in writing.161 A meeting will be
scheduled within 10 days of a request. Within 10 days after written
submission or a meeting, the Secretary will notify the GSE whether the
decision is withdrawn, modified or affirmed.
\161\See Section 1322(c)(4)(A).
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Where the Secretary disapproves a new program because it is not in
the public interest or because the Director determined that the program
would risk significant deterioration of the GSE's financial condition,
the Act162 and these regulations provide the GSE with notice of
and an opportunity for a hearing on the record concerning the
disapproval as provided in subpart G.
\162\ Section 1322(c)(4)(B).
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Subpart E--Reporting Requirements
Sections 309 (m) and (n) of the Fannie Mae Charter Act and 307 (e)
and (f) of the Freddie Mac Act require that the GSEs submit data about
their mortgage purchases to the Secretary and also submit reports to
Congress and the Secretary concerning the GSEs' housing activities. The
Act requires that the Secretary report to Congress by June 30 of each
year on the activities of the GSEs.163 These regulations implement
all of the applicable reporting requirements so that the Secretary is
capable of appropriately monitoring the GSEs' activities and reporting
to the Congress.
\163\ Section 1324.
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The current Fannie Mae regulations required Fannie Mae to submit
numerous reports to the Secretary. The Secretary has reviewed these
reporting requirements and determined that a simpler, more effective
and less burdensome reporting system should be instituted for both
GSEs.
Under the proposed regulations the following submissions would no
longer be required from Fannie Mae and would not be instituted for
Freddie Mac: A report on business activities (24 CFR 81.22), including
a description of any planned or proposed new business activities and
the GSE's competitive position in the marketplace; a general plan for
the conduct of the GSE's secondary market operations, a special budget
plan for the GSE's secondary market operations, a description of
pending legal proceedings, and details on each executive officer's
ownership of GSE securities, remuneration, and stock options (24 CFR
part 81, App. B); a report on each auction of commitments (24 CFR
81.23(a)(1)); a report on investors purchasing Fannie Mae securities
(24 CFR 81.23(a)(3)); a statement of the composition of the GSE's loan
portfolio (24 CFR 81.23(a)(4)); a report on the characteristics of home
loans purchased (24 CFR 81.23(a)(5)); a report on average yields of
mortgage loans purchased (24 CFR 81.23(a)(6)); a report on the lender
[[Page 9175]] groups from or to whom the mortgage loans were purchased
or sold (24 CFR 81.23(a)(7)); a report on the composition of revenues
received, expenditures made, and net income earned (24 CFR
81.23(a)(8)); a report on the distribution of holdings of the GSE's
common stock (24 CFR 81.23(a)(9)); and an estimate of the dollar
amounts of purchase commitments the GSE expects to issue in its FHA-VA
mortgage auction and in its conventional mortgage auction (24 CFR
81.24).
On the other hand, in enacting FHEFSSA, the lack of information on
the GSEs' mortgage purchases particularly concerned Congress.
[A]n information vacuum has severely impeded Congressional
efforts to measure Fannie Mae's compliance with regulatory housing
goals that have been in force since 1978. The Committee believes
that enactment of this bill will fill this vacuum on an expeditious
basis * * *. The bill requires the collection of data that are
central to understanding and evaluating the GSEs' single-family and
multifamily businesses.164
\164\ S. Rep. at 39; see also, H. Rep. at 60 (``One reason for
adopting the low-income housing provisions set forth in the
Committee bill is the Committee's frustration with the lack of
concrete information on [the GSEs'] current activity in the area of
housing for low-income persons.'')
The Act therefore required detailed reporting of mortgage data and
extensive annual reporting on GSE housing activities to both Congress
and the Secretary.165
\165\ See, e.g., sections 1324, 1327, 1328, 1381 (o and p), and
1382 (r and s).
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To ensure that the Secretary has the information needed to carry
out monitoring, compliance, and other regulatory responsibilities, the
GSEs shall submit the following:
(1) Quarterly submittals of detailed data and aggregations on
mortgage purchases (``the mortgage reports''); and
(2) An annual report (``the annual housing activities report'')
that details the GSE's actions toward meeting the housing goals and
other issues of concern to Congress as well as year-to-date mortgage
data.
The GSEs shall also provide a few periodic reports and the
Secretary may require special reports, additional analyses, or such
underlying data as the Secretary considers appropriate.
Mortgage Data
Each GSE is required to submit on a quarterly basis, except for the
fourth quarter, detailed data on each mortgage purchased (``mortgage
data'') in the previous quarter (within 60 days after the end of the
quarter). All data shall be submitted in a format specified by the
Secretary and shall be year-to-date data. Data will be provided on an
aggregate basis, and also on a loan-level basis (in computer-readable
format). Appendix D details the reporting formats and the data elements
required on each single-family and multifamily mortgage purchased. The
Secretary seeks comment on whether Appendix D should include additional
data.
The Annual Housing Activities Report
The regulations require each GSE to provide an Annual Housing
Activities Report (within 60 days after the end of each calendar year)
concerning its performance during the calendar year in achieving the
housing goals. The report must describe actions that the GSE has
undertaken during the preceding year or is planning to undertake to:
Promote and expand its attainment of its statutory purposes;
standardize credit terms and underwriting guidelines for multifamily
housing and securitize multifamily housing mortgages; and promote and
expand opportunities for first-time home buyers. The report also must
include annual compilations of mortgage data year-to-date and any other
information that the Secretary considers necessary for the report and
requests in writing. To reduce the reporting burden, the Secretary has
combined two annual reports required either by the Charter Act or the
Act into the Annual Housing Activities Report.
As part of the Annual Housing Activities Report, the Act requires
that each GSE include a discussion of its business practices.166
To the extent a Business Practices Analysis, required under subpart C,
encompasses the information required in this report and where the GSE
has conducted such a Business Practices Analysis within the preceding
three years, the GSE may reference such Analysis and use the Annual
Housing Activities Report to update the GSE's progress concerning any
problems referenced in the Analysis.
\166\ Sections 1381(p) and 1382(s).
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Subpart F--Access to Information
The Act requires the Secretary to establish a public use data base
and to release to the public certain categories of information
submitted by the GSEs concerning their mortgage purchases.167 The
Act also requires the protection of proprietary information the GSEs
submit to the Secretary.168 In characterizing the lack of
information on the GSEs' performance as ``an information
vacuum,''169 the Senate Committee noted that ``public access and
disclosure of information is a key tool for permitting appropriate
public scrutiny and oversight of the activities of the [GSEs] and in
evaluating possible improvements in housing finance markets.''170
The Act required a public use data base so that the public could obtain
information on the GSEs' performance toward meeting their Charter Act
purposes of serving a broad range of families and communities. In
addition, Congress intended for the GSE public use data base to
supplement HMDA data.171 Finally, the Senate Report stated:
``[E]very effort should be made to provide public disclosure of the
information required to be collected and/or reported to the
(Secretary), consistent with the exemption for proprietary data * * *.
The (Secretary) should also take such action as is necessary to protect
the privacy concerns of individual borrowers or renters.''172
\167\ Section 1323(a).
\168\ Sections 1323 and 1326.
\169\ S. Rep. at 39.
\170\Id. at 44.
\171\ See, e.g., S. Rep. at 39.
\172\ Id. at 40.
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Consistent with the legislative intent, the Department shall serve
as an information clearinghouse, facilitating an end to the
``information vacuum'' on GSE activities--as expeditiously as possible.
To achieve this objective, the Secretary intends that:
(1) Data on the GSEs' activities be made available to the widest
range of housing groups, state and local governmental entities,
academicians and other persons and entities so that--the efforts of the
GSEs in making housing finance available to all segments of the
population can be monitored by housing groups, State, and local
governments, and similar entities and areas of partnership with the
GSEs can be identified to expand housing opportunities;
(2) Data made available should be as inclusive as possible,
balancing the proprietary concerns of the GSEs;
(3) Data should supplement data available under the Home Mortgage
Disclosure Act (HMDA) to facilitate fair housing review and
enforcement; and
(4) Data should be available by all reasonable means.
Public Use Data Base
Consistent with the Act,173 the regulations establish a public
use data base for mortgage data submitted by the GSEs under section
309(m) of the Fannie Mae Charter Act and section 307(e) of the Freddie
Mac Act. This data concerns the characteristics of individual mortgage
purchases of the [[Page 9176]] GSEs, including, inter alia, census
tract, location, race and gender of mortgagors. This data may include
other characteristics such as the loan-to-value (LTV) ratio of the
mortgage, whether the loan was seasoned or whether the units were
owner-occupied. In accordance with the Act, these regulations provide
that the Secretary may not, by regulation or order, make available to
the public data that the Secretary determines are proprietary under
section 1326 of the Act except that the Secretary may not restrict
access to the income, census tract location, race, and gender data of
single family properties.174
\173\ Section 1323(a).
\174\ Section 1323(b)(2).
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The Secretary shall, from time to time, issues orders providing
that certain GSE information is proprietary and shall not be included
in the public use data base. The most current Secretarial orders will
be periodically published and included as Appendix F of this
regulation. On June 7, 1994, the Secretary published a Temporary Order
protecting GSE information deemed to be proprietary, pending public
comment and further review.175 As part of the process for
establishing the public use data base, the Secretary intends to
finalize a revised order early in 1995.
\175\59 FR 29514 (1994).
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In addition to not including proprietary information of the GSEs,
the public use data base will not include information the release of
which would invade personal privacy. Additionally, the data base will
not include information required to be withheld, including requirements
of the Trade Secrets Act, 18 U.S.C. 1905.
The Secretary will routinely disclose to the public information
contained in the GSEs' Annual Housing Activities Reports which are
submitted to the Secretary, the Committee on Banking, Finance and Urban
Affairs of the House of Representatives, and the Committee on Banking,
Housing, and Urban Affairs of the Senate, and comprise a detailed
picture of the GSEs' activities each year in relation to the housing
goals and the Fair Housing provisions of the Act. Proprietary
information from this report may be withheld if the GSEs request its
designation as proprietary and the Secretary determines that it is
proprietary.176 Under the Act, none of the information under
section 1323 or reports under section 1326 may be disclosed where the
Secretary issues a final decision, by regulation or order, determining
information is proprietary.177
\176\Section 1326.
\177\Section 1326(c).
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Requests for Proprietary Treatment
The regulations establish procedures for the GSEs to request
proprietary treatment of information submitted to the Secretary in
reports or otherwise. When a GSE submits information to the Secretary,
the GSE shall designate which of the information the GSE deems to be
proprietary; the GSE's submission must include the bases for the GSE's
assertion and a statement or certification from an officer or
authorized representative providing that the information is proprietary
and has not been disclosed to the public.
Determinations on Requests
The Secretary will review the information and the GSE's views. If
the Secretary determines the information is proprietary, the Department
will not disclose the data. The regulations then establish procedures
for the Secretary to issue a temporary order, an order or a regulation
to withhold proprietary information and to inform the public of the
withholding. If the Secretary does not determine that information that
is the subject of a GSE request is proprietary, the Secretary shall
provide the GSE with an opportunity for a meeting on the matter where
the GSE may provide comments and additional information on release.
After the meeting date, the Secretary shall determine, in writing,
which information is proprietary and shall provide the GSE with 10
days' notice before the information is made available to the public.
FOIA Requests
Information on the GSEs may be requested by the public pursuant to
the Freedom of Information Act (FOIA)178 and these regulations
provide guidance on FOIA's applicability to GSE information. For
purposes of FOIA, HUD is considered an agency responsible for the
regulation and supervision of financial institutions.179
Accordingly, where appropriate, the Secretary may invoke FOIA Exemption
(b)(8)180 to withhold GSE information ``contained in or related to
examination, operating, or condition reports prepared by, on behalf of,
or for the use of'' the Secretary.
\178\5 U.S.C. 552.
\179\Section 1319F.
\180\5 U.S.C. 552(b)(8).
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FOIA Exemption 4181 allows confidential business information
to be protected from disclosure, and the Trade Secrets Act182
forbids Government officers and employees from releasing trade secret
and other confidential business information. Executive Order No.
12,600183 requires that agencies notify submitters of FOIA
requests for confidential business information and afford submitters an
opportunity to comment before releasing information. If an agency
determines to release notwithstanding a submitter's objections, the
Executive Order requires that the agency notify the submitter a
reasonable time prior to release. The President of the United States,
by memorandum, dated October 4, 1993, to Heads of Departments and
Agencies, emphasized the importance of public disclosures under FOIA
and the implementing memorandum from the Attorney General, attached to
the President's memorandum, instructs agencies to disclose information
unless disclosure would harm an interest protected by a FOIA exemption.
The President's and the Attorney General's memoranda do not, however,
alter Executive Order 12600.
\181\ 5 U.S.C. 552(b)(4).
\182\ 18 U.S.C. 1905.
\183\ 3 CFR 235 (1988).
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Congressional Requests
If the Department receives a request on behalf of a Congressional
Committee or Subcommittee, the Comptroller General, a subpoena from a
court of competent jurisdiction, or is otherwise compelled by law to
release information determined to be proprietary, personal, or
otherwise withheld from the public, the Department will provide the
information in accordance with the request. In releasing proprietary
information under this provision, the Department will advise the
requester that the Secretary has determined that the information is
proprietary and that public disclosure of the information may cause
competitive harm to the GSEs. To the extent practical, the Department
will provide notice to the GSEs after a request under this paragraph is
received and before the Department provides information in response to
the request.
Subpart G--Procedures for Actions and Review
This subpart establishes procedures for hearings, disclosure of
orders and agreements between the Secretary and the GSEs, enforcement
of actions by the Secretary, and judicial review. These procedures
concern actions by the Secretary to enforce housing goal related
matters under subpart B and reporting violations under subpart E, and
actions by GSEs seeking review of new program denials under subpart D.
The Act empowers the Secretary to enforce requirements under the
housing [[Page 9177]] goals provisions through cease-and-desist orders
and to assess civil money penalties against the GSEs.184 In view
of the seriousness of these actions, the Act itself details the
procedural requirements for enforcement and rights of the GSEs during
the sanctions process.185 Because the Act details procedural
requirements, this subpart mainly restates and rarely augments these
procedures in the regulations.
\184\Sections 1341 and 1345.
\185\See, e.g., sections 1341-1348.
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Secretarial Enforcement Through Cease-and-Desist Orders and Civil Money
Penalties
The Secretary may issue a cease-and-desist order where a GSE fails
to: Submit a housing plan that complies with the Act; make a good faith
effort to comply with a housing plan approved by the Secretary; or
submit any information required under the reporting requirements under
the Fannie Mae Charter Act or the Freddie Mac Act.186 The
Secretary will provide the GSEs with written notice of the charges
which will fix a date for a hearing to be conducted by a HUD
Administrative Law Judge. If, based on the record of the hearing, the
Administrative Law Judge finds sufficient facts to sustain the action
or the GSE fails to appear at the hearing, the Administrative Law Judge
may issue and serve an order. The order may require the GSE to: (1)
Submit a housing plan, where the notice of charges was based on the
GSE's failure to submit a plan; (2) comply with a housing plan, where
the notice was based on the lack of good faith efforts of the GSE to
comply with a housing plan; or (3) provide the information, where the
notice of charges was based on the GSE's failure to submit information.
\186\Section 1341(a).
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Civil Money Penalties
The Secretary may impose civil money penalties on a GSE if the GSE
has failed to: Submit a housing plan in substantial compliance with the
Act; make a good faith effort to comply with a housing plan approved by
the Secretary; or submit information required under the GSEs' Charter
Acts.187 Civil money penalties shall not exceed the following: (1)
For failing to submit a housing plan, $25,000 for each day that the
failure occurs; and (2) for failing to make a good faith effort to
comply with a housing plan or failing to submit information, $10,000
for each day that the failure occurs.188
\187\Section 1345(a).
\188\Section 1345(b).
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Hearings, Enforcement and Judicial Review
Under this subpart, all hearings are on the record, heard before a
HUD Administrative Law Judge, and conducted in accordance with chapter
5 of title 5 of the United States Code and applicable HUD regulations.
The Secretary will make available to the public any final order and any
written agreement or other written statement for which a violation may
be redressed by the Secretary.189 The Secretary may withhold
release of an agreement or statement if the Secretary determines that
public disclosure would: seriously threaten the GSE's financial health
or security, or be contrary to the public interest.190
\189\ Section 1346(a).
\190\ Section 1346(c).
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To enforce any notice or order under this subpart, the Secretary
may request that the Attorney General bring an action against the GSE
in the United States District Court for the District of
Columbia.191 A GSE may obtain judicial review of a final order by
filing a petition praying that the United States Court of Appeals for
the District of Columbia modify, terminate, or set aside the
order.192
\191\Section 1344(a).
\192\Section 1343(a).
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Subpart H--Book-Entry Procedures
This subpart authorizes the GSEs' use of book-entry systems to
issue and maintain records of the GSEs' securities. The Secretary is
authorized to promulgate these provisions under section 1321 of
FHEFSSA, which confers on the Secretary general regulatory authority
and the authority to ``make such rules and regulations as shall be
necessary and proper'' to ensure that the purposes of the Act, the
Fannie Mae Charter Act, and the Freddie Mac Act are accomplished.
The GSEs currently issue and maintain records of their securities
by entries in record systems maintained by the Federal Reserve banks;
these systems are also used for U.S. Treasury securities. The Treasury
Department has promulgated regulations establishing book-entry
procedures.193 Treasury regulations194 permit the GSEs to use
the system provided regulations are in force authorizing book-entry.
Since 1978, HUD's Fannie Mae regulations (24 CFR 81.41 et seq.),
authorized Fannie Mae to use book-entry procedures and recently, by
regulation, the Secretary specifically extended the Fannie Mae book-
entry regulations to allow Fannie Mae to continue to use the book-entry
system pending the issuance of these comprehensive regulations.195
Freddie Mac currently operates under book-entry regulations (1 CFR part
462) that it promulgated in 1978.
\193\ See 31 CFR 306.115 et seq.
\194\ 31 CFR 306.0, n.1.
\195\ 59 FR 54366 (Oct. 28, 1994).
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Virtually all of the GSEs' debt and mortgage-backed securities
issuances and trading market depend on book-entry procedures. As of
September 30, 1994, Fannie Mae debt outstanding was $239.3 billion and
Fannie Mae MBS outstanding was $523.5 billion; as of that date, Freddie
Mac's debt outstanding was $82 billion and Freddie Mac's MBS
outstanding was $464 billion. Providing for use of book-entry GSE
securities instead of definitive GSE securities has increased
administrative efficiencies for investors, brokers and dealers as well
as the GSEs themselves and facilitated the investment of capital in the
GSEs' instruments. Use of the book-entry system facilitates the GSEs'
Charter Act purposes of assisting the secondary market by improving the
distribution of investment capital available for home
financing.196
\196\Fannie Mae Charter Act, sections 301(3) and (4), and
Freddie Mac Act, sections 301(b) (3) and (4).
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The regulations proposed in this subpart track the latest book-
entry procedures established by the Department of the Treasury at 31
CFR part 306, subpart O, which are applicable to Treasury securities.
The existing Fannie Mae book-entry regulations, 24 CFR part 81, subpart
E, tracked an earlier version of Treasury's regulation. Minor changes
have been made to adapt the Treasury regulation to the GSEs. In the
interest of ensuring that the GSEs may continue to use the book-entry
system and, at the same time, ensuring that the GSEs are subject to the
same regulations, these regulations would replace Fannie Mae's book-
entry regulations at 24 CFR 81.41 et seq. and would supersede Freddie
Mac's book-entry regulations at 1 CFR part 462.
Subpart I--Other Provisions
This subpart includes miscellaneous regulatory provisions
concerning equal employment opportunity and regulatory examinations.
The Secretary has general regulatory power over the GSEs and is
directed to make rules and regulations to ensure that the purposes of
the Charter Acts are accomplished.197 To monitor the GSEs'
compliance with the Secretary's regulatory authorities under the
Charter Acts, these regulations, and the Act, and to verify the GSEs'
data submissions and [[Page 9178]] reports, the Secretary shall conduct
regulatory examinations of the GSEs from time to time.
\197\Section 1321.
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FIRREA and this regulation require that the GSEs comply with
sections 1 and 2 of Executive Order 11478, providing for the adoption
and implementation of equal employment opportunity
requirements.198
\198\FIRREA, section 1216(b), codified as 12 U.S.C. 1833e(b).
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Specific Areas for Public Comment
Comment is invited on all aspects of the proposed regulation. In
addition, the Secretary requests comments on a number of specific
issues. A number of these questions are raised in the preamble and are
repeated below for the convenience of commenters:
(1) Measuring the Goals: The Act does not require that the goals be
established as a percentage of units financed by each GSE in any one
year (as required during the transition period for the low- and
moderate-income and central cities goals). The Secretary is interested
in considering alternative ways of measuring the goals.
(a) Should the Secretary establish the goals on a numerical,
instead of a percentage, basis? If so, should the goals be established
as:
(i) A certain number of mortgages purchased in one year?
(ii) A certain number of units financed in one year?
(iii) A certain dollar volume of mortgages purchased in one year?
(b) Should the Secretary establish the goals as shares of the
target mortgage markets, rather than as shares of each GSE's total
purchases; e.g., should each GSE purchase a specified percent of
mortgages originated for low- and moderate-income families?
If a commenter supports any of these alternatives or others not
described, the commenter should explain in full how such goals might be
established, taking into account data availability, and how the
Secretary would fulfill the responsibility under section 1326 of the
Act to monitor each GSE's compliance with the goals.
(2) Establishing the Future Level of the Goals: (a) Should the
goals be established so that the GSEs are required to lead the industry
by buying at least the percentages of mortgages that the market
originates for each goal? If yes, at what levels and over what period
should the GSE goals be established to achieve this objective and,
specifically, at what levels should the 1997 and 1998 goals be
established to meet this objective? In responding, please note:
(i) For the housing goal for low- and moderate-income families--the
Secretary determined that for 1995 and 1996, 50 percent of the market
is comprised of mortgages qualifying under this goal.
(ii) For the special affordable housing goal--the Secretary
determined that for 1995 and 1996, 17-20 percent of the market would be
mortgages qualifying under this goal.
(iii) For the central cities, rural areas, and other underserved
areas goal--the Secretary determined that for 1995 and 1996, 21-23
percent of the market would be mortgages qualifying under this goal.
(b) Should ``leading the industry'' mean and should the goals be
established for future years so that the GSEs are required to purchase
(as a percentage of the GSEs' total purchases) a higher percentage of
mortgages than are originated by the market under each housing goal?
For example, if 16 percent of the mortgages originated and available
are expected to be originated for mortgages for very low-income
families, should the GSEs be expected to purchase, as a percentage of
their overall business, an amount greater than 16 percent of mortgages
on housing for very low-income families at some future date? If yes, at
what levels and over what period should the goals be established to
achieve this objective and, specifically, at what levels should the
1997 and 1998 goals be established to achieve this objective? Also,
what percentage over the market should be required?
(c) Should the goals be established such that the GSEs purchase an
equivalent proportion of loans originated by the market for borrowers
under 80 percent of area median income as they do for borrowers over
120 percent of area median income? If yes, at what levels and over what
period should the goals be established to achieve this objective and,
specifically, at what levels should the 1997 and 1998 goals be
established to achieve this objective?
(d) Should the goals be adjusted as the GSEs reach or fail to
achieve the goals or should the goals be established and the GSEs'
performance evaluated against relatively fixed goals? If the commenter
believes that the goals should be adjusted, how frequently or under
what conditions should the Secretary take action to adjust the goals?
(e) To what extent should the GSEs' share of the overall mortgage
market affect the levels of the goals? The GSEs currently purchase
approximately 70 percent of all conventional, conforming mortgages
originated. Should the goals increase as the GSEs' market share
increases? If yes, how should this work? How and in what manner should
the goals be adjusted?
(3) Central Cities, Rural Areas, and Other Underserved Area Goal:
(a) Should rural areas be based on the characteristics of Block
Numbering Areas or counties? Which of these two options makes better
sense for lenders and for GSE reporting? Which option better directs
goal performance at areas with poor access to mortgage credit?
(b) In establishing the definition for rural areas, should the
income and minority criteria (used for defining central cities and
other underserved areas) be supplemented with other indicator(s) of the
need for better access to mortgage credit? Should population size
(e.g., communities below 2,500 or nonmetropolitan counties below
50,000) be considered as such an indicator?
(c) What are the relative merits of indicators of access to
metropolitan areas or nonmetropolitan cities such as the ``Beale'' or
``Ghelfi-Parker'' codes?199
\199\These indicators of urban influence were developed by the
Department of Agriculture's Economic Research Service. Linda M.
Ghelfi, ``County Classifications,'' Rural Conditions and Trends,
4(3): 6-11 (1993).
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(d) In New England, where MSAs are not composed of counties, should
the definition of rural areas include areas ``outside (P)MSAs'' or
``outside NECMAs''?
(4) Counting of Specific Transactions: (a) Second mortgages. Should
second mortgages receive full credit or partial credit? If partial
credit, how should the level of credit be determined?
(b) REMICs.
(i) Where a REMIC contains a GSE's mortgages or mortgage-backed
securities (MBS), should that type of REMIC count toward any of the
housing goals? How should double counting be avoided?
(ii) Where a REMIC does not contain a GSE's mortgages or MBS,
should that type of REMIC count toward any of the housing goals?
(iii) Should other types of REMICs be counted toward any of the
housing goals?
(iv) In determining whether any REMICs count toward achievement of
the housing goals, what factors should the Secretary consider?
(v) If any of these REMICs should count toward the housing goals,
should the REMICs receive full credit or some level of partial credit?
If partial credit, how should the level of credit be determined?
(vi) How should the final regulation deal with types of REMICs that
have not yet been created or used in the market? Should such REMICs
only count if that type of REMIC is reviewed by the Secretary and the
Secretary determines that the type of REMIC should count toward the
housing goals?
(5) Fair Lending Plan: (a) Should the GSEs be required to prepare a
fair lending plan?
(b) Could a fair lending plan offer new ways to lead the primary
lending market in eradicating discrimination? If so, how?
(c) What are the appropriate components of such a plan? and
(d) How would the plan effectuate fair housing/fair lending
objectives?
(6) Provision of Data: (a) Is there data, beyond that described in
the regulation, that the GSEs could usefully gather on lenders for the
Secretary's review in connection with the enforcement of the Fair
Housing Act and for review by other agencies in connection with the
enforcement of ECOA?
(b) In addition to the loan level data required under Appendix D,
what other loan level data should the Secretary collect from the GSEs?
(7) Affordability in Non-Metropolitan Areas: HUD seeks guidance on
the appropriate reference for income in non-metropolitan areas for
determining affordability under the housing goals for low- and
moderate-income families and special affordable housing and for
defining low-income areas in the goal for central cities, rural areas
and other underserved areas. Should borrower and area income in non-
metropolitan areas be defined: (a) Relative to the county median
income; or (b) relative to the maximum of the county median income or
the median income of the non-metropolitan balance of the State?
(8) New Program Approval: (a) The Act defines ``new program,''
generally, as a program that is significantly different from GSE
programs previously approved or authorized. The Act does not define
``program,'' ``product,'' or ``significantly different.'' Should these
term(s) be defined in the final rule and, if so, how should the term(s)
be defined?
(b) The Act requires the Secretary to approve a new program unless
the program is not authorized by the GSE's Charter Act or the Secretary
determines that the new program is not in the public interest. Should
the final rule include factors that the Secretary will consider in
determining whether a program is not in the public interest and, if so,
what factors should be included?
(9) Indicators of Unaddressed Needs: The Act states that the
special affordable housing goal is designed to meet the ``unaddressed
needs of * * * low-income families in low-income areas and very low-
income families.''\200\ But the Act does not indicate specifically what
these unaddressed needs are. The Department has presented its views
regarding ``unaddressed needs'' in Appendices A-C in detail, and the
Secretary will closely review the GSEs' performance relative to the
factors discussed therein. Specifically, the Secretary is committed to
a monitoring and research agenda that will examine: (i) How the GSEs
attempt to reach the 1995-96 goals (e.g., balance of rental and owner
occupied properties, single and multifamily loans); (ii) the changing
risk profiles of their businesses that result from the 1995-96 goals;
(iii) the potential for new affordable housing incentives that could
increase the pool of qualifying loans for purchase; (iv) how the goals
affect local portfolio lender business incentives (e.g., incentives to
sell seasoned portfolios to and obtain pre-origination purchase
commitments from the GSEs and competitive pressures on loan
originations); (v) how economic conditions affect the pool of potential
qualifying mortgage originations; and (vi) the extent to which
achieving the housing goals and meeting ``unaddressed needs'' require
the GSEs to take on unduly risky business. [[Page 9179]]
\200\ Section 1333(a)(1).
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The Secretary welcomes the views of others regarding ``unaddressed
needs.'' Specifically:
(a) What are appropriate definitions for and measures of
unaddressed needs?
(b) What is the magnitude of unaddressed needs? Are GSE goals
consistent with the level of unaddressed needs or do the goals require
the GSEs to take on unduly risky business?
(c) How can the Department best monitor unaddressed needs and how
the GSEs are addressing them?
(d) How should indicators of unaddressed needs be utilized in
setting the various goals for the GSEs?
Other Matters
Public Reporting Burden
The information collection requirements contained in this rule have
been submitted to the Office of Management and Budget under the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). The Department
has determined that the following provisions contain information
collection requirements.
Burden to Respondents
------------------------------------------------------------------------
Number of Frequency Hours
Information respondents of response required Total hours
------------------------------------------------------------------------
Business Practices
Analyses........... 2 1 500 1,000
------------------------------------------------------------------------
(Note: this is a one-time report, not an annual report.)
------------------------------------------------------------------------
Annual Frequency of
Information number of response Hours Total hours
respondents (per year) required
------------------------------------------------------------------------
Mortgage Data
Reports.......... 2 3 20 120
Annual Housing
Activities Report 2 1 40 80
Periodic Reports.. 2 61 0.08 10
Other Information
and Analyses..... 2 0.25 20 10
Fair Housing Act/
ECOA Information. 2 1 15 30
------------------------------------------------------------------------
[[Page 9180]]
Annual Costs to Respondents
------------------------------------------------------------------------
Hours Cost per
Information required hour Total cost
------------------------------------------------------------------------
Business Practices Analyses...... 1,000 $20 $20,000
Mortgage Data Reports............ 120 20 2,400
Annual Housing Activities Reports 80 20 1,600
Periodic Reports................. 10 20 200
Other Information and Analyses... 10 20 200
Fair Housing Act/ECOA Information
from GSEs....................... 30 20 600
------------------------------------------------------------------------
Annual Cost to Federal Government (For Reviewing Information)
------------------------------------------------------------------------
Hours Cost per
Information required hour Total cost
------------------------------------------------------------------------
Business Practices Analyses...... 4800 $30 $144,000
Mortgage Data Reports............ 1440 30 43,200
Annual Housing Activities Reports 400 30 12,000
Periodic Reports................. 122 30 3,660
Other Information and Analyses... 10 30 300
Fair Housing Act/ECOA Information
from GSEs....................... 40 30 1,200
------------------------------------------------------------------------
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that this rule does not have a significant
economic impact on a substantial number of small entities, other than
those impacts specifically required to be applied universally by the
Act.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4332). The finding is available for public inspection
during regular business hours in the Office of the General Counsel,
Rules Docket Clerk, room 10276, 451 Seventh Street SW., Washington, DC
20410.
Executive Order 12866
The Office of Management and Budget reviewed this proposed rule
under Executive Order 12866, Regulatory Planning and Review. Any
changes made to the rule as a result of that review are clearly
identified in the docket file, which is available for public inspection
at the Office of the Rules Docket Clerk, Office of General Counsel,
Room 10276, Department of Housing and Urban Development, 451 Seventh
Street, SW, Washington, DC. 20410-0500. A Regulatory Impact Analysis
(RIA) performed on this proposed rule is also available for review at
the same address.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this proposed rule will not have substantial direct
effects on states or their political subdivisions, or the relationship
between the federal government and the states, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the rule is not subject to review under the Order.
Promulgation of this rule expands coverage of the applicable regulatory
requirements pursuant to statutory direction.
Executive Order 12606, the Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this proposed rule does
not have potential for significant impact on family formation,
maintenance, and general well-being, and, thus, is not subject to
review under the order. No significant change in existing HUD policies
or programs will result from promulgation of this rule, as those
policies and programs relate to family concerns.
Regulatory Agenda
This rule was listed as Item 1722 in the Department's Semiannual
Agenda of Regulations published on November 14, 1994 (59 FR 57632,
57641), in accordance with Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects in 24 CFR Part 81
Accounting, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements, Securities.
Accordingly, part 81 in Title 24 of the Code of Federal Regulations
is proposed to be revised as follows:
PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL
MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN
MORTGAGE CORPORATION (FREDDIE MAC)
Subpart A--General
Sec.
81.1 Scope of Part
81.2 Definitions
Subpart B--Housing Goals
81.11 General.
81.12 Low- and moderate-income housing goal.
81.13 Central cities, rural areas, and other underserved areas
housing goal.
81.14 Special affordable housing goal.
81.15 General requirements.
81.16 Special counting requirements.
81.17 Income level definitions for owner-occupied units, actual
tenants, and prospective tenants (if family size is known).
81.18 Income level definitions for prospective tenants (if family
size is not known).
81.19 Rent level definitions for tenants (if income is not known).
81.20 Actions to be taken to meet the goals.
81.21 Notice and determination of failure to meet goals.
81.22 Housing plans.
Subpart C--Fair Housing
81.41 General.
81.42 Prohibitions against discrimination.
81.43 Review of underwriting guidelines. [[Page 9181]]
81.44 Submission of information to the Secretary.
81.45 Submission of information to the GSEs.
81.46 Remedial actions.
81.47 Violations of provisions by the GSEs.
Subpart D--New Program Approval
81.51 General.
81.52 Requirement for program requests.
81.53 Processing of program requests.
81.54 Review of disapproval.
Subpart E--Reporting Requirements
81.61 General.
81.62 Mortgage data.
81.63 Annual Housing Activities Report.
81.64 Periodic report.
81.65 Other information and analyses.
81.66 Submission of reports.
Subpart F--Access to Information
81.71 General.
81.72 Public use data base and public information.
81.73 GSE request for proprietary treatment.
81.74 Secretarial Determination on GSE request.
81.75 Mortgage data withheld by order and regulation.
81.76 Requests for GSE Information.
81.77 Protection of GSE Information.
Subpart G--Procedures for Actions and Review of Actions
81.81 General.
81.82 Cease-and-desist proceedings.
81.83 Civil money penalties.
81.84 Hearings.
81.85 Public disclosure of final orders and agreements.
81.86 Enforcement and jurisdiction.
81.87 Judicial review.
Subpart H--Book-Entry Procedures
81.91 Definition of terms.
81.92 Authority of Reserve Banks.
81.93 Scope and effect of book-entry procedure.
81.94 Transfer or pledge.
81.95 Withdrawal of GSE securities.
81.96 Delivery of GSE securities.
81.97 Registered bonds and notes.
81.98 Servicing book-entry GSE securities; payment of interest,
payment at maturity or upon call.
81.99 Treasury Department regulations; applicability to GSEs.
Subpart I--Other Provisions
81.101 Equal employment opportunity.
81.102 Examinations.
Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42
U.S.C. 3535(d) and 3601-3619.
Subpart A--General
Sec. 81.1 Scope of part.
(a) Authority. This part implements the regulatory power of the
Secretary of the Department of Housing and Urban Development over the
Federal National Mortgage Association (``Fannie Mae'') and the Federal
Home Loan Mortgage Corporation (``Freddie Mac'') (referred to
collectively as Government-sponsored enterprises (GSEs).) The Secretary
has general regulatory power respecting the GSEs and is required to
make such rules and regulations as are necessary and proper to ensure
that the provisions of the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 (FHEFSSA or the Act), codified generally at
12 U.S.C. 4501-4641; the Fannie Mae Charter Act, 12 U.S.C. 1716-1723h;
and the Freddie Mac Act, 12 U.S.C. 1451-59, are accomplished. Under
FHEFSSA, the Secretary's responsibilities include: establishing,
monitoring, and enforcing housing goals; regulating fair housing
requirements; approving new program requests; disseminating information
and protecting proprietary information; and requiring reports and data
submissions.
(b) Subparts. The provisions of this part are as follows: Subpart A
contains definitions and other general provisions relating to the
entire part; subpart B implements housing goal requirements; subpart C
implements Fair Housing requirements; subpart D sets forth procedures
for Secretarial review of requests for new program approval by the
GSEs; subpart E contains reporting requirements; subpart F sets forth
requirements for access to information; subpart G sets forth procedures
for Secretarial actions and review of actions; subpart H contains book-
entry procedures; and subpart I contains other provisions.
(c) Purposes of the GSEs. The purposes of the GSEs are to: Provide
stability in the secondary market for residential mortgages; respond
appropriately to the private capital market; provide ongoing assistance
to the secondary market for residential mortgages (including activities
relating to mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than the return
earned on other activities) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital
available for residential mortgage financing; and promote access to
mortgage credit throughout the Nation (including central cities, rural
areas, and underserved areas) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital
available for residential mortgage financing.
(d) Relation between this part and the authorities of OFHEO. The
Director of the Office of Federal Housing Enterprise Oversight (OFHEO)
will issue separate regulations implementing the Director's authority
respecting the GSEs. In this part, OFHEO and the Director are only
referenced when the Director's responsibilities are connected with the
Secretary's authorities.
Sec. 81.2 Definitions.
As used in this part, the term--
The Act or FHEFSSA means the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992, enacted as Title XIII of the Housing
and Community Development Act of 1992, and codified generally at 12
U.S.C. 4501-4641.
Affiliate means any entity that controls, is controlled by, or is
under common control with, a GSE.
AHS means the American Housing Survey.
Balloon mortgage means a mortgage providing for payments at regular
intervals, with a final payment (``balloon payment'') that is at least
five percent more than the periodic payments. The periodic payments may
cover some or all of the periodic principal and/or interest. Typically,
the periodic payments are level monthly payments that would fully
amortize the mortgage over a stated term and the balloon payment is a
single payment due after a specified period (but before the mortgage
would fully amortize) and pays off or satisfies the outstanding balance
of the mortgage.
Central cities means the underserved areas located in any political
subdivision designated as a central city by the Office of Management
and Budget of the Executive Office of the President.
Charter Act or Charter Acts means the Federal National Mortgage
Association Charter Act (Title III of the National Housing Act, 12
U.S.C. 1716 et seq.) (``Fannie Mae Charter Act'') and/or the Federal
Home Loan Mortgage Corporation Act (Title III of the Emergency Home
Finance Act of 1970, 12 U.S.C. 1451 et seq.) (``Freddie Mac Act'').
Contract rent means the total rent that is, or is anticipated to
be, specified in the rental contract payable by the tenant to the owner
for rental of a dwelling unit, including fees or charges for management
and maintenance services and those utility charges that are included in
the contract rent. In determining contract rent, rent concessions shall
not be considered, i.e., contract rent is not decreased by any rent
concessions. Contract rent is rent net of rental subsidies.
Conventional mortgage means a mortgage other than a mortgage as to
which a GSE has the benefit of any guaranty, insurance or other
obligation by the United States or any of its agencies or
instrumentalities. [[Page 9182]]
Day means a calendar day.
Director means the Director of the Office of Federal Housing
Enterprise Oversight of the Department of Housing and Urban
Development.
Dwelling unit means a single, unified combination of rooms designed
for use as a dwelling by one family and includes a dwelling unit in a
single family property, multifamily property, condominium, cooperative,
or planned unit development project.
ECOA means the Equal Credit Opportunity Act, 15 U.S.C. 1691 et seq.
Familial status has the same definition as is set forth at 24 CFR
100.20.
Family means one or more individuals who occupy the same dwelling
unit.
Family size means, for purposes of reporting on single family
mortgages purchased, the number of people in a family including the
borrower, the borrower's dependents, the co-borrower, and the co-
borrower's dependents.
Fannie Mae means the Federal National Mortgage Association and any
affiliate thereof.
FHEFSSA or The Act means the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992, codified generally at 12 U.S.C. 4501-
4651.
Freddie Mac means the Federal Home Loan Mortgage Corporation and
any affiliate thereof.
Government-sponsored enterprise or GSE means:
(1) The Federal National Mortgage Association (or ``Fannie Mae'')
and any affiliate thereof; and
(2) The Federal Home Loan Mortgage Corporation (or ``Freddie Mac'')
and any affiliate thereof.
Handicap has the same definition as is set forth at 24 CFR 100.201.
Lender means any entity that makes, originates, sells, or services
mortgages, and includes the secured creditors named in the debt
obligation and document creating the mortgage.
Low-income means:
(1) In the case of owner-occupied units, income not in excess of 80
percent of area median income; and
(2) In the case of rental units, income not in excess of 80 percent
of area median income, with adjustments for smaller and larger
families, as determined by the Secretary.
Low-income area or low-income census tract means a census tract in
which the median income does not exceed 80 percent of the area median
income.
Median income means, with respect to an area, the unadjusted median
family income for the area, as most recently determined and published
by the Secretary. An area means the metropolitan statistical area (MSA)
if the property is located in an MSA; otherwise, an area means the
county in which the property is located.
Minority means any individual who is included within any one or
more of the following racial and ethnic categories:
(1) American Indian or Alaskan Native--a person having origins in
any of the original peoples of North America, and who maintains
cultural identification through tribal affiliation or community
recognition;
(2) Asian or Pacific Islander--a person having origins in any of
the original peoples of the Far East, Southeast Asia, the Indian
subcontinent, or the Pacific Islands;
(3) African-American--a person having origins in any of the black
racial groups of Africa; and
(4) Hispanic--a person of Mexican, Puerto Rican, Cuban, Central or
South American, or other Spanish culture or origin, regardless of race.
Minority census tract means a census tract in which minority
residents comprise 30 percent or more of the total population in the
census tract.
Moderate-income means:
(1) In the case of owner-occupied units, income not in excess of
area median income; and
(2) In the case of rental units, income not in excess of area
median income, with adjustments for smaller and larger families, as
determined by the Secretary.
Moderate-income census tract means a census tract in which the
median income does not exceed 100 percent of the area median income.
Mortgage means a member of such classes of liens as are commonly
given or are legally effective to secure advances on, or the unpaid
purchase price of, real estate under the laws of the State in which the
real estate is located, or a manufactured home that is personal
property under the laws of the State in which the manufactured home is
located, together with the credit instruments, if any, secured thereby,
and includes interests in the stock or membership certificate issued to
a tenant-stockholder or resident-member by a cooperative housing
corporation, as defined in section 216 of the Internal Revenue Code of
1986, and on the proprietary lease, occupancy agreement, or right of
tenancy in the dwelling unit of the tenant-stockholder or resident-
member in such cooperative housing corporation.
Mortgage data means data obtained by the Secretary from the GSEs
under sections 309 (m) and (n) of the Fannie Mae Charter Act and 307
(e) and (f) of the Freddie Mac Act relating to the GSEs' mortgage
purchases. Appendix D of this part lists and details this data.
Mortgage purchase means a transaction in which a GSE buys or
otherwise acquires with cash or other thing of value, a mortgage for
its portfolio or for securitization.
Multifamily housing means a residence consisting of more than 4
dwelling units.
New program means any program, including a pilot or demonstration
program, for the purchasing, servicing, selling, lending on the
security of, or otherwise dealing in, conventional mortgages that:
(1) Is significantly different from programs that have been
approved under the Act or that were approved or engaged in by Fannie
Mae or Freddie Mac before October 28, 1992; or
(2) Represents an expansion, in terms of the dollar volume or
number of mortgages or securities involved, of programs above limits
expressly contained in any prior approval.
OFHEO means the Office of Federal Housing Enterprise Oversight of
the Department of Housing and Urban Development.
Ongoing program means a program that is expected to continue for
the foreseeable future.
Owner-occupied unit or owner-occupied dwelling unit means a single
family dwelling unit in which the borrower or co-borrower (on the
mortgage that financed the dwelling unit) resides.
Participation means a fractional interest in the principal amount
of a mortgage.
Portfolio of loans means 10 or more loans.
Proprietary information means all categories of information and
data submitted to the Secretary by a GSE that contain trade secrets or
privileged or confidential, commercial or financial information that,
if released, would cause the GSE substantial competitive harm.
Public data means all mortgage data submitted to the Secretary by
the GSEs that the Secretary determines is not proprietary and should be
made publicly available.
Real estate mortgage investment conduit (REMIC) means multi-class
mortgage securities issued by a tax-exempt entity.
Refinancing means a transaction where an existing mortgage is
satisfied or replaced by a new mortgage undertaken by the same
borrower. Refinancings do not include: [[Page 9183]]
(1) A renewal of a single payment obligation with no change in the
original terms;
(2) A reduction in the annual percentage rate of the mortgage as
computed under the Truth in Lending Act with a corresponding change in
the payment schedule;
(3) An agreement involving a court proceeding;
(4) A workout agreement, where a change in the payment schedule or
in collateral requirements is agreed to as a result of the mortgagor's
default or delinquency, unless the rate is increased or the new amount
financed exceeds the unpaid balance plus earned finance charges and
premiums for the continuation of insurance;
(5) The renewal of optional insurance purchased by the mortgagor
and added to an existing mortgage; and
(6) The renegotiation of a mortgage on a multifamily property where
the property has a balloon mortgage and the balloon payment is due
within one year of the date of the closing on the renegotiated
mortgage.
Rent means:
(1) The contract rent for a dwelling unit, but only where such
contract rent includes all utilities for the dwelling unit;
(2) Where the contract rent for a dwelling unit does not include
all utilities, the contract rent for the dwelling unit plus the actual
cost of utilities not included in the contract rent; or
(3) The contract rent for a dwelling unit plus a utility allowance
as set forth in this part.
Rental housing means multifamily dwelling units, and dwelling units
in single family housing that are not owner-occupied.
Rental unit or rental dwelling unit means a dwelling unit that is
not owner-occupied and is rented or available to rent.
Residence means a property where one or more families reside.
Residential mortgage means a mortgage on single family or
multifamily housing.
Rural area means the underserved areas located outside of any
metropolitan statistical area (MSA), primary metropolitan statistical
area (PMSA), or consolidated metropolitan statistical area (CMSA)
designated by the Office of Management and Budget.
Seasoned mortgage means a mortgage where the date of the mortgage
note is more than one year before the GSE purchased the mortgage.
Second mortgage means any mortgage that has a lien position
subordinate only to the lien of the first mortgage.
Secondary residence or second home means a dwelling where the
mortgagor maintains (or will maintain) a part-time place of abode and
typically spends (or will spend) less than the majority of the calendar
year. A person may have more than one secondary residence at a time.
Secretary means the Secretary of Housing and Urban Development and,
where appropriate, any person designated by the Secretary to perform a
particular function for the Secretary, including any officer, employee,
or agent of the Department.
Single family housing means a residence consisting of one to four
dwelling units. Single family housing includes condominiums and
dwelling units in cooperative housing projects.
State means the States of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, Guam, the Virgin Islands, American Samoa, the
Trust Territory of the Pacific Islands, and any other territory or
possession of the United States.
Underserved area means a census tract having:
(1) A median income at or below 120 percent of the area median
income and a minority population of 30 percent or greater; or
(2) A median income at or below 80 percent of area median income.
Utilities means charges for electricity, piped or bottled gas,
water, sewage disposal, fuel (oil, coal, kerosene, wood, solar energy,
or other), and garbage and trash collection. Utilities do not include
charges for telephone service.
Utility allowance means either:
(1) The amount to be added to contract rent when utilities are not
included in contract rent (also referred to as the ``AHS-derived
utility allowance''), as issued annually by the Secretary; or
(2) The utility allowance established under the HUD Section 8
Program (section 8 of the United States Housing Act of 1937, 42 U.S.C.
1437f) for the area where the property is located.
Very low-income means:
(1) In the case of owner-occupied units, income not in excess of 60
percent of area median income; and
(2) In the case of rental units, income not in excess of 60 percent
of area median income, with adjustments for smaller and larger
families, as determined by the Secretary.
Wholesale exchange means a transaction where one GSE buys or
otherwise acquires mortgages held in portfolio or securitized by the
other GSE, or where both GSEs swap such mortgages.
Subpart B--Housing Goals
Sec. 81.11 General.
The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 requires that the Secretary establish, by regulation, three
annual housing goals for the GSEs: A low- and moderate-income housing
goal; a central cities, rural areas, and other underserved areas
housing goal; and a special affordable housing goal. The Act requires
that the Secretary establish these goals after considering prescribed
factors and implement these goals in a manner consistent with Section
301(3) of the Fannie Mae Charter Act and Section 301(b)(3) of the
Freddie Mac Act, which provide that one purpose of each GSE is to
provide ongoing assistance to the secondary market for residential
mortgages (including mortgages securing housing for low- and moderate-
income families involving a reasonable economic return that may be less
than the return earned on other activities) by increasing the liquidity
of mortgage investments and improving the distribution of investment
capital available for residential mortgage financing. This subpart
establishes these goals, implements requirements for measuring
performance under the goals, and establishes procedures for monitoring
and changing the goals. The Act provides that from year-to-year the
Secretary may, by regulation, adjust any housing goal.
Sec. 81.12 Low- and moderate-income housing goal.
(a) Authority. Section 1332 of FHEFSSA requires the Secretary to
establish an annual goal for the purchase by each GSE of mortgages on
housing for low- and moderate-income families (``the low- and moderate-
income housing goal'').
(b) Purpose of goal. This goal is intended to achieve increased
purchases by the GSEs of mortgages on housing for low- and moderate-
income families.
(c) Factors. In establishing the low- and moderate-income housing
goals, the Act requires the Secretary to consider:
(1) National housing needs;
(2) Economic, housing, and demographic conditions;
(3) The performance and effort of the GSEs toward achieving the
low- and moderate-income housing goal in previous years;
(4) The size of the conventional mortgage market serving low- and
moderate-income families relative to the size of the overall
conventional mortgage market;
(5) The ability of the GSEs to lead the industry in making mortgage
credit [[Page 9184]] available for low- and moderate-income families;
and
(6) The need to maintain the sound financial condition of the GSEs.
(d) Consideration of factors. The Secretary fully considered these
factors in establishing the goals in this section. A statement
documenting the Secretary's considerations and findings with respect to
these factors, entitled ``Secretarial Considerations to Establish the
Low- and Moderate-Income Housing Goal,'' is Appendix A of this part.
(e) Goals. Based on the Secretary's consideration of the factors in
paragraph (c) of this section, the Secretary has established the
following goals for each GSE's purchases of conventional mortgages on
housing for low- and moderate-income families:
(1) The annual goal for 1995 shall be 38 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
1995;
(2) The annual goal for 1996 shall be 40 percent of the 1996
purchases;
(3) The annual goal for 1997 shall be a number ranging from 40
percent of the 1997 purchases to the proportion or percentage of
mortgages qualifying under the goal that are originated by that year's
market (``the amount of the market'') or the amount of the market plus
an additional percentage;
(4) The annual goal for 1998 shall be a number ranging from 40
percent of the 1998 purchases to the amount of the market or the amount
of the market plus an additional percentage; and
(5) The annual goal for each succeeding year after 1998 shall be a
number ranging from 40 percent of that year's purchases to the amount
of the market or the amount of the market plus an additional
percentage, or, if the Department does not set an annual goal for such
succeeding years, the goal for such years shall be the same as the most
recent goal established by the Secretary, pending further adjustment by
the Secretary through rulemaking.
(f) The Secretary shall monitor the GSEs' performance under this
goal and the GSEs' performance shall be measured as set forth in this
subpart.
Sec. 81.13 Central cities, rural areas, and other underserved areas
housing goal.
(a) Authority. Section 1334 of FHEFSSA requires the Secretary to
establish an annual goal for the purchase by each GSE of mortgages on
housing located in central cities, rural areas and other underserved
areas.
(b) Purpose of the goal. This goal is intended to achieve increased
purchases by the GSEs of mortgages financing housing in areas that are
underserved by mortgage credit.
(c) Factors. In establishing the central cities, rural areas, and
other underserved areas goals, the Act requires the Secretary to
consider:
(1) Urban and rural housing needs and the housing needs of
underserved areas;
(2) Economic, housing, and demographic conditions;
(3) The performance and efforts of the GSEs toward achieving the
central cities, rural areas, and other underserved areas housing goal
in previous years;
(4) The size of the conventional mortgage market for central
cities, rural areas, and other underserved areas relative to the size
of the overall conventional mortgage market;
(5) The ability of the GSEs to lead the industry in making mortgage
credit available throughout the United States, including central
cities, rural areas, and other underserved areas; and
(6) The need to maintain the sound financial condition of the GSEs.
(d) Consideration of Factors. The Secretary fully considered these
factors in establishing the goals in this section. A statement
documenting the Secretary's considerations and findings with respect to
these factors, entitled ``Secretarial Considerations to Establish the
Central Cities, Rural Areas, and Other Underserved Areas Housing Goal''
is Appendix B of this part.
(e) Goals. Based on the Secretary's consideration of the factors in
paragraph (c) of this section, the Secretary has established the
following goals for each GSE's purchases of conventional mortgages on
housing located in central cities, rural areas, and other underserved
areas:
(1) The annual goal for 1995 shall be 18 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
1995;
(2) The annual goal for 1996 shall be 21 percent of the 1996
purchases;
(3) The annual goal for 1997 shall be a number ranging from 21
percent of the 1997 purchases to the proportion or percentage of
mortgages qualifying under the goal that are originated by that year's
market (``the amount of the market'') or the amount of the market plus
an additional percentage;
(4) The annual goal for 1998 shall be a number ranging from 21
percent of the 1998 purchases to the amount of the market or the amount
of the market plus an additional percentage; and
(5) The annual goal for each succeeding year after 1998 shall be a
number ranging from 21 percent of that year's purchases to the amount
of the market or the amount of the market plus an additional
percentage, or, if the Department does not set an annual goal for such
succeeding years, the goal for such years shall be the same as the most
recent goal established by the Secretary, pending further adjustment by
the Secretary through rulemaking.
(f) Measuring performance. The Secretary shall monitor the GSEs'
performance under this goal. The GSEs shall determine on a mortgage-by-
mortgage basis, through geocoding or any similarly accurate and
reliable method, whether a mortgage finances dwelling unit(s) located
in a central city, rural area, or other underserved area.
Sec. 81.14 Special affordable housing goal.
(a) Authority. Section 1333 of FHEFSSA requires the Secretary to
establish a special annual goal designed to adjust the purchase by each
GSE of mortgages on rental and owner-occupied housing to meet the then-
existing unaddressed needs of, and affordable to, low-income families
in low-income areas and very low-income families.
(b) Purpose of the goal. This goal is intended to achieve increased
purchases by the GSEs of mortgages meeting the needs of low-income
families in low-income areas and very low-income families.
(c) Factors. In establishing the special affordable housing goals,
the Act requires the Secretary to consider:
(1) Data submitted to the Secretary in connection with the special
affordable housing goal for previous years;
(2) The performance and efforts of the GSEs toward achieving the
special affordable housing goal in previous years;
(3) National housing needs within the categories set forth in this
section;
(4) The ability of the GSEs to lead the industry in making mortgage
credit available for low-income and very low-income families; and
(5) The need to maintain the sound financial condition of the GSEs.
(d) Consideration of Factors. The Secretary fully considered these
factors in establishing the goals in this section. A statement
documenting the Secretary's considerations and findings with respect to
these factors, entitled ``Secretarial Considerations to Establish the
Special Affordable Housing Goal'' is Appendix C of this part.
(e) Goals. Based on the Secretary's consideration of the factors in
paragraph (c) of this section, the Secretary has established the
following annual special affordable housing goals for each GSE:
(1) Rental housing. For purchases of conventional mortgages
financing rental housing units meeting the then-existing,
[[Page 9185]] unaddressed needs of and affordable to very low-income
families:
(i) The annual goal for 1995 shall be 5.5 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
1995;
(ii) The annual goal for 1996 shall be 6 percent of the 1996
purchases;
(iii) The annual goal for 1997 shall be a number ranging from 6
percent of the 1997 purchases to the proportion or percentage of
mortgages qualifying under the goal that are originated by that year's
market (``the amount of the market'') or the amount of the market plus
an additional percentage;
(iv) The annual goal for 1998 shall be a number ranging from 6
percent of the 1998 purchases to the amount of the market or the amount
of the market plus an additional percentage; and
(v) The annual goal for each succeeding year after 1998 shall be a
number ranging from 6 percent of that year's purchases to the amount of
the market or the amount of the market plus an additional percentage,
or, if the Department does not set an annual goal for such succeeding
years, the goal for such years shall be the same as the most recent
goal established by the Secretary, pending further adjustment by the
Secretary through rulemaking.
(2) Owner-occupied housing. For purchases of conventional mortgages
financing owner-occupied dwelling units either located in low-income
areas and meeting the then-existing, unaddressed needs of and owned by
low-income families, or meeting the then-existing, unaddressed needs of
and owned by very low-income families:
(i) The annual goal for 1995 shall be 5.5 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
1995;
(ii) The annual goal for 1996 shall be 6 percent of the 1996
purchases;
(iii) The annual goal for 1997 shall be a number ranging from 6
percent of the 1997 purchases to the proportion or percentage of
mortgages qualifying under the goal that are originated by that year's
market (``the amount of the market'') or the amount of the market plus
an additional percentage;
(iv) The annual goal for 1998 shall be a number ranging from 6
percent of the 1998 purchases to the amount of the market or the amount
of the market plus an additional percentage; and
(v) The annual goal for each succeeding year after 1998 shall be a
number ranging from 6 percent of that year's purchases to the amount of
the market or the amount of the market plus an additional percentage,
or, if the Department does not set an annual goal for such succeeding
years, the goal for such years shall be the same as the most recent
goal established by the Secretary, pending further adjustment by the
Secretary through rulemaking.
(f) Performance. The Secretary shall monitor the GSEs' performance
under this goal.
(g) Double counting. Each mortgage purchase, or portion of a
mortgage where only a portion counts toward achievement of this goal,
shall count only once toward achievement of the goal, i.e., shall count
under only one subsection of the goal.
(h) Full credit activities. (1) As required by FHEFSSA, the
Secretary will give full credit toward achievement of the special
affordable housing goals for the following mortgage purchases by the
GSEs:
(i) (A) The purchase or securitization of federally insured or
guaranteed mortgages where:
(1) Such mortgages cannot be readily securitized through the
Government National Mortgage Association (GNMA) or any other Federal
agency;
(2) Participation of the GSE substantially enhances the
affordability of the housing subject to such mortgages; and
(3) The mortgages involved are on housing that otherwise qualifies
under the special affordable housing goal to be considered for purposes
of such goal.
(B) Mortgages under the Department's Home Equity Conversion
Mortgage (HECM) Insurance Demonstration Program, section 255 of the
National Housing Act, 12 U.S.C. 1715z-20, and the Farmers Home
Administration's Guaranteed Rural Housing Loan Program, 7 U.S.C. 1933,
meet the requirements of paragraphs (h)(1)(i)(A) (1) and (2) of this
section.
(ii) The purchase or refinancing of existing, seasoned portfolios
of loans where:
(A) The seller is engaged in a specific program to use the proceeds
of such sales to originate additional loans that meet the special
affordable housing goal; and
(B) Such purchases or refinancings support additional lending for
housing that otherwise qualifies under the goal.
(iii) The purchase of direct loans made by the Resolution Trust
Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC)
where such loans are:
(A) Not guaranteed by the RTC, FDIC, or other Federal agencies;
(B) Made with recourse provisions similar to those offered through
private mortgage insurance or other conventional sellers; and
(C) Made for the purchase of housing that otherwise qualifies under
the special affordable housing goal to be considered for purposes of
such goal.
(2) For purposes of determining whether a seller is engaging in a
specific program to use proceeds of sales to originate additional loans
that meet the special affordable housing goal under paragraph
(h)(1)(ii) of this section:
(i) A seller must currently operate on its own or actively
participate in an ongoing program that will result in originating
additional loans that meet the goal. Actively participating in such a
program includes actively participating with a qualified housing group
that operates a program resulting in the origination of loans that meet
the requirements of the goal;
(ii) To determine whether a seller meets the requirement in
paragraph (h)(2)(i) of this section, the GSE shall verify and monitor
that the seller meets the requirement and develop any necessary
mechanisms to ensure compliance with this requirement; and
(iii) Where a seller's primary business is originating mortgages on
housing that qualifies under this special affordable housing goal, such
seller is presumed to meet the requirements in paragraph (h)(2)(i) of
this section.
(3) For purposes of this section, full credit means that each unit
financed by a mortgage purchased by a GSE and meeting the requirements
of this section shall count toward achievement of the special
affordable housing goal for that GSE.
(i) No credit activities. As provided in FHEFSSA, neither the
purchase nor the securitization of mortgages associated with the
refinancing of a GSE's existing mortgage or mortgage-backed securities
portfolios shall receive credit toward the achievement of the special
affordable housing goal. In applying this restriction, refinancings
that result from the wholesale exchange of mortgages between the two
GSEs shall not count toward the achievement of this goal; refinancings
of individual mortgages shall count toward achievement of this goal
where the refinancing is an arms-length transaction that is borrower-
driven and the mortgage otherwise counts toward achievement of this
goal. For purposes of this paragraph, ``portfolios of mortgages''
includes mortgages retained by Fannie Mae or Freddie Mac and mortgages
utilized to back mortgage-backed securities.
Sec. 81.15 General requirements.
(a) General. The Secretary shall monitor and count the performance
of each GSE under each of the housing goals. In determining each GSE's
performance, the general requirements in this section shall apply.
[[Page 9186]]
(b) Calculating the numerator and denominator. Performance under
each of the housing goals is based on a fraction that is converted into
a percentage. The numerator of each fraction is the number of dwelling
units that count toward achievement of the housing goal. The
denominator of each fraction is, for all mortgages purchased, the
number of dwelling units that could count toward achievement of the
goal under appropriate circumstances. The denominators shall not
include GSE transactions or activities that are not included in the
terms ``mortgage'' or ``mortgage purchase.'' Where a GSE lacks
sufficient information to determine whether a mortgage purchase counts
toward achievement of a particular housing goal, such a mortgage
purchase shall be included in the denominator for that housing goal.
(c) Properties with multiple dwelling units. For the purposes of
counting toward the achievement of the goals, whenever the real
property securing a conventional mortgage contains more than one
dwelling unit, each such dwelling unit shall be counted as a separate
dwelling unit financed by a mortgage purchase.
(d) Credit toward multiple goals. For the purposes of counting
toward the achievement of the goals, a mortgage purchase (or dwelling
unit financed by such purchase) by a GSE in a particular year shall
count toward the achievement of each housing goal for which such
purchase (or dwelling unit) qualifies in that particular year.
(e) Counting owner-occupied units. For purposes of counting owner-
occupied dwelling units toward achievement of the low- and moderate-
income housing goal or the special affordable housing goal, mortgage
purchases financing such owner-occupied units shall be evaluated based
on the income of the mortgagors at the time of origination of the
mortgage. To determine whether mortgagors may be counted under a
particular family income level, i.e., very low-, low-, or moderate-
income, the income of the mortgagors is compared to the median income
for the area at the time of mortgage origination, using the appropriate
percentage factor provided under Sec. 81.17.
(f) Counting rental units.--(1) Use of income, rent.--(i)
Generally. For purposes of counting rental dwelling units toward
achievement of the low- and moderate-income housing goal or the special
affordable housing goal, mortgage purchases financing such rental units
shall be evaluated based on the income of actual or prospective tenants
where such data is available, i.e., known to a lender.
(ii) Availability of income information. (A) Each GSE shall require
lenders to provide tenant income information to the GSE, but only where
such information is known to the lender.
(B) Where such tenant income information is available for all
occupied units, the GSE's performance shall be based on the income of
the tenants in the occupied units. For unoccupied units that are vacant
and available for rent and for unoccupied units that are under repair
or renovation and not available for rent, the GSE shall use the income
of prospective tenants, if paragraph (f)(4) of this section is
applicable. If paragraph (f)(4) (income of prospective tenants) is
inapplicable, the GSE shall use rent levels for comparable units in the
property to determine affordability.
(2) Model units and rental offices. A model unit or rental office
in multifamily properties may count toward achievement of the housing
goals only if a GSE determines that:
(i) It is reasonably expected that the space will be occupied by a
family within one year;
(ii) The number of such units is reasonable and minimal; and
(iii) Such space otherwise meets the requirements for the goal.
(3) Income of actual tenants. Where the income of actual tenants is
available, to determine whether tenant(s) are very low-, low-, or
moderate-income, the income of the tenant(s) shall be compared to the
median income for the area, adjusted for family size as provided in
Sec. 81.17.
(4) Income of prospective tenants. Where income for tenants is
available to a lender because a project is subject to a Federal housing
program that establishes the maximum income for a tenant or a
prospective tenant in rental units, the income of prospective tenants
may be counted at the maximum income level established under such
housing program for that unit. Each GSE shall require lenders to
provide such prospective tenants' income information to the GSE where
such information is known to the lender. In determining the income of
prospective tenants, the income shall be projected based on the types
of units and market area involved. Where the income of prospective
tenants is projected, each GSE must determine that the income figures
are reasonable considering the rents (if any) on the same units in the
past and considering current rents on comparable units in the same
market area.
(5) Use of rent. Where the income of the prospective or actual
tenants of a dwelling unit is not available, performance under these
goals will be evaluated based on rent and whether the rent is
affordable to the income group targeted by the housing goal. A rent is
affordable if the rent does not exceed 30 percent of the maximum income
level of very low-, low-, or moderate-income families as provided in
Sec. 81.19. In determining contract rent for a dwelling unit, the
actual rent shall be used where such information (whether computerized,
automated, or not) is available.
(6) Timeliness of information. In determining performance under the
housing goals, each GSE shall use tenant information required under
this subsection as of the time of mortgage acquisition or, if
underwriting occurs within two years of the GSE's purchasing a
mortgage, the time of underwriting.
(g) Median income. (1) Where, for purposes of comparing a
mortgagor's income to the median income for an area, a GSE cannot
precisely determine whether the mortgage is on dwelling unit(s) located
in one area but can determine that the mortgage is on dwelling unit(s)
located in a census tract, or within a census place code, block-group
enumeration district, or nine-digit zip code, or another appropriate
geographic segment, that is partially located in more than one area
(``split area''), the GSE shall calculate a median income for the split
area. The median income for such split areas shall equal:
(i) The ratio of the population of the geographic segment that is
located in the first area to the total population of the split area
times the median income of that area; plus
(ii) The ratio of the population of the geographic segment that is
located in the second area to the total population of the split area
times the median income of that area.
(2) Where, for purposes of comparing the median income of a census
tract to the area median income, a mortgage is on dwelling unit(s)
located in a census tract that is partially located in more than one
area (``split area''), the GSE shall calculate a median income for the
split area as prescribed in paragraph (g)(1) of this section and that
area median income shall be compared to the median income of the census
tract.
(h) Sampling not permitted. Performance under the housing goals for
a particular year shall be based on a complete accounting of mortgage
purchases for that year; a sampling of such purchases is not
acceptable. [[Page 9187]]
(i) Newly available data. Where a GSE uses data to determine
whether a mortgage purchase counts toward achievement of any goal and
new data is released after the start of a calendar quarter, the GSE
need not use the new data until the start of the following quarter; the
GSE may continue to use the data that was available at the beginning of
the quarter.
Sec. 81.16 Special counting requirements.
(a) General. This section details the extent to which transactions
or activities of the GSEs count toward achievement of any of the
housing goals and, where the transaction or activity does count,
whether full credit or some level of partial credit shall be provided
for such transaction or activity. In determining the level of credit to
be counted for each transaction or activity, the Secretary considers
the following criteria:
(1) Where a transaction or activity is substantially equivalent to
a mortgage purchase, the GSE shall receive full credit for the
transaction or activity toward achievement of any of the housing goals;
(2) Where a transaction or activity has less than the normative
risk associated with the GSE's mortgage purchases, the GSE shall
receive less than full credit for the transaction or activity; and
(3) Where a transaction or activity creates a new market or adds
liquidity to an existing market, the GSE shall receive full credit for
the transaction or activity.
(b) Not counted. The following transactions or activities do not
count toward achievement of any of the housing goals and shall not be
included in the denominator in calculating either GSE's performance
under the housing goals:
(1) Equity investments in projects eligible for Low-Income Housing
Tax Credits (LIHTC), 26 U.S.C. 42;
(2) Purchases of State and local government housing bonds,
including mortgage revenue bonds;
(3) Purchases of non-conventional mortgages, including mortgages
insured under HUD's One- to Four-Family Home Mortgage Insurance Program
(section 203 (b) and (i) of the National Housing Act, 12 U.S.C. 1709
(b) and (i)), and mortgages guaranteed by the Department of Veterans
Affairs, except where such mortgages are acquired under a risk-sharing
arrangement with the Department or another Federal agency and except
where such mortgages are permitted to count toward achievement of the
special affordable housing goals under Sec. 81.14(h)(1)(i);
(4) Commitments to buy mortgages at a later date or time; and
(5) Mortgage purchases to the extent mortgage purchases finance any
dwelling units that are secondary residences.
(c) Other special rules.--(1) Credit enhancements.
(i) Credit enhancement transactions shall count toward achievement
of the housing goals where:
(A) The GSE provides specific mortgages it owns as collateral to
guarantee bonds issued to finance housing; such bonds may be issued by
any entity, including a State or local housing finance agency; and
(B) The GSE assumes a credit risk in the transaction by pledging or
guaranteeing repayment and such credit risk is substantially equivalent
to that assumed by the GSE if it had securitized the mortgages financed
by such State or local housing finance agency.
(ii) Dwelling units financed under this type of credit enhancement
transaction shall count toward a goal to the extent such dwelling units
otherwise qualify under this rule.
(2) Real estate mortgage investment conduits (REMICs).
[Reserved pending responses received on the questions contained in
the preamble].
(3) Risk-sharing. Mortgage purchases under risk-sharing
arrangements between the GSEs and the Department or any other Federal
agency under which the GSE and the agency acquire mortgages and share
the risk associated with such acquisition shall count toward
achievement of the housing goals on a partial credit basis equal to the
percentage of risk that the GSE takes under the risk-sharing
arrangement multiplied by the number of dwelling units that would have
counted toward the goal(s) if the GSE had purchased all of the
mortgages. In calculating performance under the housing goals, the
denominator shall include the number of dwelling units included in the
risk-sharing arrangement multiplied by the percentage of risk that the
GSE takes under the arrangement. The GSE shall provide a certification
to the Secretary stating the actual percentage of risk to the GSE for
each risk-sharing arrangement and explain how that percentage was
calculated; that percentage of risk shall be used to count toward
achievement of the housing goals.
(4) Participations. Participations purchased by a GSE shall receive
partial credit toward achievement of the housing goals equivalent to
the percentage of the mortgage that the GSE purchases.
(5) Cooperative housing. (i) For purposes of counting a GSE's
purchase of a mortgage on a cooperative housing unit (``a share loan'')
toward achievement of any of the housing goals, such a purchase is
counted in the same manner as a mortgage purchase of single family
owner-occupied units, i.e., affordability is based on the income of the
owner(s).
(ii) The purchase of a mortgage on a cooperative building (``a
blanket loan'') shall count toward achievement of the housing goals.
Where a GSE purchases both ``a blanket loan'' and mortgages for units
in the same building (``share loans''), both the blanket loan and the
share loan(s) shall count toward achievement of the housing goals.
(6) Seasoned mortgages. A GSE's purchase of a seasoned mortgage may
be treated as a mortgage purchase for purposes of these goals except as
provided under the special affordable housing goal and except where the
GSE has already counted the mortgages under a housing goal applicable
to 1993 or any subsequent year. For seasoned, single family mortgages
that are more than 3 years old when purchased by a GSE, the
affordability of the housing must be determined based on income and/or
rent level information at the time of purchase by the GSE. For
multifamily dwelling units, a seasoned, multifamily mortgage will be
counted toward achievement of the housing goals based on rental
information and area median income as of the time that the GSE
purchases the mortgage.
(7) Purchase of refinanced mortgages. The purchase of a refinanced
mortgage by a GSE shall count toward achievement of the housing goals
to the extent the mortgage qualifies, except to the extent that the
specific restrictions under the special affordable housing goal apply.
(8) Second mortgages. [Reserved pending responses received on the
questions contained in the preamble].
Sec. 81.17 Income level definitions for owner-occupied units, actual
tenants, and prospective tenants (if family size is known).
In determining whether a dwelling unit is affordable to very low-,
low-, or moderate-income families, where (for rental housing) family
size is known, the affordability of the unit shall be determined as
follows:
(a) Moderate-income means:
(1) In the case of owner-occupied units, income not in excess of
100 percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of [[Page 9188]] area median income corresponding to the
following family sizes:
------------------------------------------------------------------------
Percentage of
Number of persons in family area median
income
------------------------------------------------------------------------
1....................................................... 70
2....................................................... 80
3....................................................... 90
4....................................................... 100
5 or more............................................... *
------------------------------------------------------------------------
*100% plus (8% multiplied by the number of persons in excess of 4).
(b) Low-income means:
(1) In the case of owner-occupied units, income not in excess of 80
percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of area median income corresponding to the following family
sizes:
------------------------------------------------------------------------
Percentage of
Number of persons in family area median
income
------------------------------------------------------------------------
1....................................................... 56
2....................................................... 64
3....................................................... 72
4....................................................... 80
5 or more............................................... *
------------------------------------------------------------------------
*80% plus (6.4% multiplied by the number of persons in excess of 4).
(c) Very low-income means:
(1) In the case of owner-occupied units, income not in excess of 60
percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of area median income corresponding to the following family
sizes:
------------------------------------------------------------------------
Percentage of
Number of persons in family area median
income
------------------------------------------------------------------------
1....................................................... 42
2....................................................... 48
3....................................................... 54
4....................................................... 60
5 or more............................................... *
------------------------------------------------------------------------
*60% plus (4.8% multiplied by the number of persons in excess of 4).
Sec. 81.18 Income level definitions for prospective tenants (if family
size is not known).
In determining whether a rental dwelling unit is affordable to very
low-, low-, or moderate-income families and counts toward achievement
of one or more of these goals, the income of the prospective tenants
shall be adjusted for family size. If family size is not known, income
will be adjusted using unit size:
(a) For moderate-income, the income of prospective tenants shall
not exceed the following percentages of area median income with
adjustments depending on unit size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 70
1 bedroom............................................... 75
2 bedrooms.............................................. 90
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*104% plus (12% multiplied by the number of bedrooms in excess of 3).
(b) For low-income, income of prospective tenants shall not exceed
the following percentages of area median income with adjustments
depending on unit size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 56
1 bedroom............................................... 60
2 bedrooms.............................................. 72
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*83.2% plus (9.6% multiplied by the number of bedrooms in excess of 3).
(c) For very low-income, income of prospective tenants shall not
exceed the following percentages of area median income with adjustments
depending on unit size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 42
1 bedroom............................................... 45
2 bedrooms.............................................. 54
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*62.4% plus (7.2% multiplied by the number of bedrooms in excess of 3).
Sec. 81.19 Rent level definitions for tenants (if income is not
known).
For purposes of determining whether a rental dwelling unit is
affordable to very low-, low-, or moderate-income families, where the
income of the family in the dwelling unit is not known, the
affordability of the unit is determined based on unit size as follows:
(a) For moderate-income, maximum affordable rents to count as
housing for moderate-income families shall not exceed the following
percentages of area median income with adjustments depending on unit
size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 21
1 bedroom............................................... 22.5
2 bedrooms.............................................. 27
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*31.2% plus (3.6% multiplied by the number of bedrooms in excess of 3).
(b) For low-income, maximum affordable rents to count as housing
for low-income families shall not exceed the following percentages of
area median income with adjustments depending on unit size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 16.8
1 bedroom............................................... 18
2 bedrooms.............................................. 21.6
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*24.96% plus (2.88% multiplied by the number of bedrooms in excess of
3).
and
(c) For very low-income, maximum affordable rents to count as
housing for very low-income families shall not exceed the following
percentages of area median income with adjustments depending on unit
size:
------------------------------------------------------------------------
Percentage of
Unit size area median
income
------------------------------------------------------------------------
Efficiency.............................................. 12.6
1 bedroom............................................... 13.5
2 bedrooms.............................................. 16.2
3 bedrooms or more...................................... *
------------------------------------------------------------------------
*18.72% plus (2.16% multiplied by the number of bedrooms in excess of
3).
(d) Missing Information. Each GSE shall make every effort to obtain
the information necessary to make the calculations in this section. If
a GSE makes such efforts but cannot obtain data on the number of
bedrooms in particular units, in making the calculations on such units,
it shall be assumed that such units are efficiencies.
Sec. 81.20 Actions to be taken to meet the goals.
To meet the goals established in this rule, each GSE shall:
(a) Design programs and products that facilitate the use of
assistance provided by the Federal, State, and local governments;
(b) Develop relationships with nonprofit and for-profit
organizations that develop and finance housing and with State and local
governments, including housing finance agencies;
(c) Develop the institutional capacity to help finance low- and
moderate-income housing, including housing for first-time home buyers;
and [[Page 9189]]
(d) (1) Take affirmative steps to assist:
(i) Primary lenders to make housing credit available in areas with
concentrations of low-income and minority families; and
(ii) Insured depository institutions to meet their obligations
under the Community Reinvestment Act of 1977.
(2) The steps under paragraph (d)(1) of this section shall include
developing appropriate and prudent underwriting standards, business
practices, repurchase requirements, pricing, fees, and procedures.
Sec. 81.21 Notice and determination of failure to meet goals.
(a) Notice. If, based on a GSE's reports or other data available to
the Secretary, the Secretary determines that the GSE has failed or
there is a substantial probability that the GSE will fail to meet any
housing goal, the Secretary shall, by written notice to the GSE, issue
to the GSE a preliminary determination notice that shall propose to
require the GSE to submit a housing plan. Such notice shall include:
(1) The preliminary determination;
(2) The reasons for the determination;
(3) The information on which the Secretary based the determination;
and
(4) The proposal to require the GSE to submit a housing plan.
(b) Response period.--(1) In general. The GSE shall have 30 days
from the date of the preliminary determination notice (``response
period'') to submit any written information that the GSE considers
appropriate for consideration by the Secretary in determining whether:
(i) The GSE has failed to meet the housing goal;
(ii) A substantial probability exists that the GSE will fail to
meet any housing goal; or
(iii) Whether achievement of the relevant housing goal was or is
feasible.
(2) Extended period. If the Secretary determines that good cause
exists for extending the response period, the Secretary may extend the
response period for up to 30 days.
(3) Shortened period. If the Secretary determines that good cause
exists for shortening the response period, the Secretary may shorten
the response period.
(4) Waiver of right to comment. The GSE's failure to provide any
written information during the response period (as extended or
shortened, if applicable) shall constitute a waiver of any right of the
GSE to comment on the determination or the action of the Secretary on
the matters addressed in the notice.
(c) Consideration of information and final determination. After the
expiration of the response period or upon receipt of the GSE's
response, whichever occurs first, the Secretary shall consider the
GSE's response to the preliminary notice, if any, and finally
determine, in writing, whether:
(1) The GSE has failed or there is a substantial probability that
the GSE will fail to meet the relevant housing goal; and
(2) Considering market and economic conditions and the GSE's
financial condition, the achievement of the housing goals was or is
feasible.
(d) Notice to Congress. (1) The Secretary shall provide written
notice, including the Secretary's response to any information submitted
by the GSE during the response period, of:
(i) Each determination that the GSE has failed, or that there is a
substantial probability that the GSE will fail, to meet a housing goal;
(ii) Each determination that the achievement of a housing goal was
or is feasible; and
(iii) The reasons for each such determination.
(2) The Secretary shall provide such notice to the GSE; the
Committee on Banking and Financial Services of the House of
Representatives; and the Committee on Banking, Housing, and Urban
Affairs of the Senate.
Sec. 81.22 Housing plans.
(a) If the Secretary determines, under Sec. 81.21(c), that a GSE
has failed or there is a substantial probability that a GSE will fail
to meet any housing goal and that the achievement of the housing goal
was or is feasible, the Secretary shall provide notice to the GSE
requiring the GSE to submit a housing plan for approval by the
Secretary.
(b) Nature of plan. Each housing plan shall:
(1) Be feasible;
(2) Be sufficiently specific to enable the Secretary to monitor
compliance periodically;
(3) Describe the specific actions that the GSE will take:
(i) To achieve the goal for the next calendar year; or
(ii) If the Secretary determines that there is substantial
probability that the GSE will fail to meet a housing goal in the
current year, to make such improvements as are reasonable in the
remainder of the year; and
(4) Address any additional matters as required, in writing, by the
Secretary.
(c) Deadline for submission. The GSE shall submit a housing plan to
the Secretary within 30 days after issuance of a notice under paragraph
(a) of this section. The Secretary may extend the deadline for
submission of a plan, in writing and for a time certain, to the extent
the Secretary determines an extension is necessary.
(d) Review of housing plans.--(1) Standard. The Secretary shall
approve a housing plan if the Secretary determines that the plan:
(i) Is likely to succeed; and
(ii) Conforms with the appropriate GSE's Charter Act, the Act, and
any other applicable laws and regulations.
(2) Time period. The Secretary shall review each housing plan and
approve or disapprove the plan within 30 days of the Secretary's
receipt of the plan. The Secretary may extend this period for one 30-
day period if the Secretary determines such an extension is necessary
and shall provide written notice to the GSE of such extension.
(3) Notice to the GSE. The Secretary shall provide written notice
to the GSE of the approval or disapproval of a housing plan. If the
Secretary disapproves a housing plan, the notice shall include the
reasons for disapproval.
(e) Resubmission. If the Secretary disapproves an initial housing
plan submitted by a GSE, the GSE shall submit an amended plan
acceptable to the Secretary within 30 days of the Secretary
disapproving the initial plan; the Secretary may extend the deadline if
the Secretary determines an extension is in the public interest. If the
amended plan is not acceptable to the Secretary, the Secretary may
afford the GSE 15 days to submit a new plan.
Subpart C--Fair Housing
Sec. 81.41 General.
(a) Authority. This subpart is authorized under sections 1321,
1325, and 1327 of the Act; 309(n)(2)(G) of the Fannie Mae Charter Act;
307(f)(2)(G) of the Freddie Mac Act; and the Fair Housing Act (42
U.S.C. 3601-3619).
(b) Scope. The Act requires the Secretary, by regulation, to:
Prohibit discrimination by the GSEs in their mortgage purchases because
of race, color, religion, sex, handicap, familial status, age, or
national origin, including any consideration of the age or location of
a dwelling or age of the neighborhood or census tract where the
dwelling is located in a manner that has a discriminatory effect;
require that the GSEs submit information to the Secretary to assist
Fair Housing Act and Equal Credit Opportunity Act investigations;
advise the GSEs of Fair Housing Act and ECOA violations; review the
GSEs' underwriting and appraisal guidelines to ensure compliance with
the Fair Housing Act; and require that the GSEs take actions
[[Page 9190]] as directed by the Secretary following Fair Housing Act
and ECOA adjudications. The Act provides, generally, that the Director
of OFHEO shall enforce violations by the GSEs of FHEFSSA and
regulations in this subpart. This subpart establishes requirements
implementing the Secretary's authority and provides for referral of
cases to the Director.
Sec. 81.42 Prohibitions against discrimination.
(a) General. Neither GSE shall discriminate in any manner in making
any mortgage purchases because of race, color, religion, sex, handicap,
familial status, age, or national origin, including any consideration
of the age or location of the dwelling or the age of the neighborhood
or census tract where the dwelling is located in a manner that has a
discriminatory effect.
(b) Bases. In following the prohibition in paragraph (a) of this
section, the GSEs shall not discriminate based on:
(1) The race, color, religion, sex, handicap, familial status, age
or national origin of:
(i) The borrower or joint borrower, or applicant or joint
applicant;
(ii) Any persons associated with the borrower or joint borrower, or
applicant or joint applicant in connection with such mortgage or the
purposes thereof;
(iii) The present or prospective owners, lessees, tenants, or
occupants of the dwelling or dwellings securing such mortgage; or
(iv) Persons in neighborhoods or communities in which properties
secured by mortgages are located; or
(2) The age or location of the dwelling securing the mortgage or
the age of the neighborhood or census tract where the dwelling is
located or the housing stock in such neighborhood or census tract in a
manner that has a discriminatory effect.
(c) Liability. Each GSE shall be liable for violations of this
subpart that it or its officers, agents, or employees commit.
(d) Exemptions. Notwithstanding the prohibitions of paragraphs (a)
and (b) of this section:
(1) Certain factors concerning the age and location of a dwelling,
or the area in which the dwelling is located, properly may be
considered.
(i) The age of the dwelling may be properly considered in the
appraisal and underwriting process:
(A) To select comparable properties that have been sold or listed
recently in the neighborhood for an appraisal; and
(B) As a basis for conducting more extensive inspections of
structural aspects of the dwelling. The structural soundness of a
dwelling rather than its age may be considered in appraisal and other
aspects of the underwriting process.
(ii) Certain location factors that may have a negative effect on a
dwelling's value may be properly considered in an appraisal and in
other aspects of the underwriting process. These factors include recent
zoning changes, the number of abandoned homes in the immediate vicinity
of the property, the condition of streets, parks and recreation areas,
availability of public utilities and municipal services, and exposure
to flooding, land faults, and other natural or human-made environmental
hazards. Such factors, if used, must be specifically documented in the
appraisal. Location factors may be used to select comparable properties
that have been sold or listed recently in the neighborhood for an
appraisal.
(2) This section does not prevent consideration of factors
justified by business necessity, including requirements of Federal law,
relating to a transaction's financial security or to protection against
default or reduction of the value of the security. However, where such
factors have a disparate result on the basis of race, color, religion,
sex, handicap, familial status, age, or national origin, including any
consideration of the age or location of the dwelling or the age of the
neighborhood or census tract where the dwelling is located, as set
forth in paragraph (b) of this section, the factors cannot be
considered unless they both are justified by business necessity and no
less discriminatory alternative to such factors exists.
(3) Age of the borrower or co-borrower may be considered in the
underwriting process when required by statute, including the age
requirements for Home Equity Conversion Mortgages (HECMs), 12 U.S.C.
1715z-20.
(e) Business Practices Analysis. Within ____ days of the effective
date of this part, and thereafter periodically as requested by the
Secretary, each GSE shall complete a Business Practices Analysis.
(1) Each Business Practices Analysis shall include a complete
review of the GSE's business practices respecting the purchase of
mortgages, including, without limitation, its underwriting guidelines
and appraisal standards, repurchase requirements, pricing criteria,
fees, and other procedures and practices affecting mortgage purchases
that lead or could lead to discrimination because of race, color,
religion, sex, handicap, familial status, age, or national origin,
including any consideration of the age or location of the dwelling or
the age of the neighborhood or census tract where the dwelling is
located in a manner that has a discriminatory effect. The purpose of
the analysis is to determine whether any such business practices yield
disparate results because of race, color, religion, sex, handicap,
familial status, age, or national origin, including any consideration
of the age or location of the dwelling or the age of the neighborhood
or census tract where the dwelling is located in a manner that has a
discriminatory effect, and whether such disparate results are justified
by business necessity.
(2) Within ____ days after the effective date of this part, each
GSE shall submit for the Secretary's review and comment a detailed
outline and methodology for its Business Practices Analysis. Within
____ days following receipt of the outline and methodology, the
Secretary will respond with comments, if any.
(3) Following completion of its Business Practices Analysis, each
GSE shall report the results of the analysis to the Secretary. If a
Business Practices Analysis identifies practices yielding disparate
results affecting the protected classes under this subpart, the GSE
must:
(i) Set forth fully the basis for the GSE's conclusion that a
business necessity exists for the practice;
(ii) Present plans to end the practice; or
(iii) Report that the practice has ended.
Sec. 81.43 Review of underwriting guidelines.
(a) Each GSE shall analyze its underwriting and appraisal
guidelines to determine whether such guidelines comply with the Fair
Housing Act, the regulations promulgated thereunder, section 1325 of
the Act, and this subpart including whether any of the guidelines are
discriminatory on the basis of race, color, religion, sex, handicap,
familial status, age, or national origin, including any consideration
of the age or location of a dwelling or age of the neighborhood or
census tract where the dwelling is located in a manner that has a
discriminatory effect. Following the analysis, the GSE shall provide to
the Secretary a full report on the analysis, including, without
limitation, a description of remedies or plans to address any problems
reported.
(b) Each GSE shall undertake its first review and analysis of its
underwriting and appraisal guidelines as part of its Business Practices
Analysis under Sec. 81.42. Thereafter, each GSE shall conduct such a
review and analysis periodically as requested by the Secretary.
[[Page 9191]]
(c) The Secretary shall review and comment on each report. The
Secretary's comments shall specify any guidelines which are, in the
Secretary's judgment, inconsistent with the Fair Housing Act or ECOA.
(d) Revisions to underwriting guidelines. Each time a GSE revises
its underwriting or appraisal guidelines, the GSE shall submit a copy
of the revision to the Secretary and a certification by the GSE that
after reasonable evaluation and analysis, the GSE has determined in
good faith that, to the best of its knowledge, the change does not and
will not be discriminatory on the basis of race, color, religion, sex,
handicap, familial status, age, or national origin, including any
consideration of age or location of a dwelling, or age of a
neighborhood or census tract where the dwelling is located in a manner
that has a discriminatory effect. To the extent that a revision has or
will have disparate results on protected classes under this subpart,
the GSE must set forth fully the basis for the GSE's conclusion that a
business necessity exists for the practice. The Secretary may review
and comment on such changes after they are implemented.
(e) Additional requests for review. The GSEs shall, at such times
as requested by the Secretary, submit underwriting and appraisal
guidelines to the Secretary for the Secretary's review and comment.
(f) Day-to-day operations. Review of the GSEs' underwriting and
appraisal guidelines and revisions thereto shall not involve the
Secretary in the day-to-day operations of the GSEs. The Secretary shall
review underwriting guidelines to ensure compliance with the Fair
Housing Act, the regulations promulgated thereunder, section 1325 of
the Act, and this subpart.
Sec. 81.44 Submission of information to the Secretary.
(a) General. The GSEs shall submit information and data to the
Secretary to assist in investigating whether any mortgage lender with
which the GSE does business has failed to comply with the Fair Housing
Act or ECOA.
(b) Information requests and submissions.--(1) Information requests
by the Secretary. The Secretary may require the GSEs to submit
information to assist in Fair Housing Act or ECOA investigations of
lenders. Other Federal agencies responsible for the enforcement of ECOA
may submit requests for information through the Secretary or directly
to the GSEs. Requested information may include, without limitation,
information on mortgages sold by the lender or lenders under
investigation to the GSE, the mortgage sales of lenders operating in
the same or similar areas, and information on representations and
certifications to the GSEs by the lender or lenders under
investigation.
(2) Information from established data systems. The Secretary may
request that a GSE generate information or reports from its data
system(s) to assist a Fair Housing Act or ECOA investigation. Such
information may include, without limitation, comparing the loans
purchased by the GSE from a particular lender to data on the racial
composition of census tract(s) or providing data on loans sold to the
GSE by lenders operating in the same geographical area.
(3) Information available to a GSE. Whenever a GSE knows of
information relevant to a potential violation of the Fair Housing Act
or the Equal Credit Opportunity Act by a particular lender or lenders,
the GSE shall report such information to the Secretary.
(4) A GSE receiving any request(s) for information under this
subsection shall reply in a complete and timely manner with any and all
information that it possesses that is responsive to the request.
(c) ECOA. The Secretary shall submit any information received under
paragraph (b) of this section concerning compliance with the Equal
Credit Opportunity Act to appropriate Federal agencies responsible for
ECOA enforcement, as provided in section 704 of ECOA.
(d) Other assistance. The GSEs shall, at the request of the
Secretary or an official responsible for enforcing ECOA, provide other
assistance to the Secretary or other officials in investigating and
enforcing Fair Housing Act or ECOA violations. Such assistance may
include providing additional relevant materials and testimony
concerning information or data produced by the GSE.
Sec. 81.45 Submission of information to the GSEs.
(a) Obtaining and disseminating information. The Secretary shall
obtain information from other regulatory and enforcement agencies of
the Federal Government and State and local governments regarding
violations by lenders of the Fair Housing Act, the Equal Credit
Opportunity Act, and/or State or local fair housing/lending laws, and
make such information available to the GSEs as the Secretary deems
appropriate in accordance with applicable law, memoranda of
understanding, and other arrangements between the Secretary and Federal
financial regulators and other agencies.
(b) Permissible action. The GSEs may take appropriate action under
their procedures based on such information. Such violations may
constitute violations of the GSEs' underwriting guidelines and
representations or certifications of lenders.
Sec. 81.46 Remedial actions.
(a) General. The Secretary shall direct the GSEs to take one or
more remedial actions, including suspension, probation, reprimand or
settlement, against lenders found to have engaged in discriminatory
lending practices in violation of the Fair Housing Act and ECOA,
pursuant to a final adjudication on the record and an opportunity for a
hearing under subchapter II of chapter 5 of title 5, United States
Code.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
Indefinite suspension means that, until directed to do otherwise by
the Secretary, the GSEs will refrain from purchasing mortgages from a
lender.
Probation means that, for a fixed period of time specified by the
Secretary, a lender, that has been found to have violated the Fair
Housing Act or ECOA, will be subject automatically to more severe
sanctions than probation, e.g., suspension, if further violations are
found.
Remedial action means a reprimand, probation, temporary suspension,
indefinite suspension, or other remedial action.
Reprimand means a written letter to a lender from a GSE, which has
been directed to be sent by the Secretary, stating that the lender has
violated the Fair Housing Act or ECOA and warning of the possibility
that the Secretary may impose more severe remedial actions than
reprimand if any further violation occurs.
Temporary Suspension means that, for a fixed period of time
specified by the Secretary, the GSEs will not purchase mortgages from a
lender.
(c) Institution of remedial actions. (1) When a charge is issued
against a lender for violating the Fair Housing Act or ECOA, the
Secretary will notify each GSE. Such notice will inform the GSE of the
facts and that the GSE may take action under its procedures.
(2) The Secretary shall direct the GSE to take remedial action(s)
against a lender charged with violating ECOA only after a final
determination on the charge has been made by an appropriate United
States District Court or any other court of competent jurisdiction. The
Secretary shall direct the GSE to take remedial action(s) against a
lender charged with violating the Fair Housing Act only after a final
determination on [[Page 9192]] the matter has been made by a United
States Court, a HUD Administrative Law Judge, or the Secretary.
(3) Following a final determination sustaining a charge against a
lender for violating the Fair Housing Act or ECOA in accordance with
paragraph (c)(2) of this section, the Secretary shall determine the
remedial action(s) that the GSE is to be directed to take for such
violation.
(4) In determining the appropriate remedial action(s), the
Secretary shall solicit and fully consider the views of the Federal
financial regulator responsible for the subject lender concerning the
action(s) that are contemplated to be directed against such lender,
prior to directing any such action(s). In determining what action(s) to
direct, the Secretary in addition will also, without limitation,
consider the following:
(i) The gravity of the violation;
(ii) If a judgment by an Administrative Law Judge or a court has
previously been rendered against the lender for discriminatory actions,
the lender's response to that judgment, including the actions taken and
the timeliness of such actions;
(iii) The nature and extent of cases under substantially equivalent
State or local laws, or ECOA against the lender including cases which
were settled, conciliated, or otherwise resolved;
(iv) The nature and extent of fair housing enforcement actions or
judgments by HUD, the Department of Justice, or other regulatory
agencies, including cases that were settled or otherwise resolved;
(v) The nature and extent of private fair housing lawsuits and
judgments against the lender including cases that were settled,
conciliated, or otherwise resolved;
(vi) Whether the lender's actions demonstrate a discriminatory
pattern or practice or an individual instance of discrimination;
(vii) The impact or seriousness of the harm;
(viii) The number of people affected by the discriminatory act(s);
(ix) Whether the lender operates an effective program of self
assessment and correction;
(x) The extent of any actions or programs by the lender designed to
compensate victims and prevent future fair lending violations;
(xi) The effect of the contemplated action(s) on the safety and
soundness of the lender (in considering this factor the Secretary shall
solicit and fully consider the views of the regulator responsible for
regulating the lender and, where warranted, the Director); and
(xii) Any other information deemed relevant by the Secretary.
(d) Notice of remedial action(s). (1) Following the Secretary's
decision concerning the appropriate remedial action(s) that the GSE is
to be directed to take, the Secretary shall prepare and issue to the
GSE and the lender a written notice setting forth the remedial
action(s) to be taken and the date such remedial action(s) are to
commence. The Notice shall inform the lender of its right to request a
hearing on the appropriateness of the proposed remedial action(s),
within 20 days of receipt of the Notice, by filing a request with the
Docket Clerk, HUD Administrative Law Judge (ALJ).
(2) Where a lender does not timely request a hearing on a remedial
action, the GSE shall take the action in accordance with the Notice.
(e) Review and decision on remedial action(s). (1) Where a lender
timely requests a hearing on a remedial action, a hearing shall be
conducted before a HUD ALJ and a final decision rendered in accordance
with the procedures set forth in 24 CFR 30.10, 30.15, and part 30,
subpart E, to the extent such provisions are not inconsistent with this
subpart or the Act. The lender and the Secretary, but not the GSE,
shall be parties to the action. At such hearing, the appropriateness of
the remedial action for the violation(s) will be the sole matter for
review. The validity or appropriateness of the underlying determination
on the violation(s) shall not be subject to review at such hearing.
(2) The Secretary shall transmit to the GSEs each final decision by
the Department on a remedial action and any dispositive settlement of a
proceeding on such action.
(3) The GSE shall take the action(s) set forth in a final decision
by the Department on remedial action(s) or any dispositive settlement
of such a proceeding setting forth remedial action(s) in accordance
with such decision or settlement.
Sec. 81.47 Violations of provisions by the GSEs.
(a) The Act empowers the Director of the Office of Federal Housing
Enterprise Oversight to initiate enforcement actions for GSE violations
of the provisions of section 1325 of the Act and these regulations. The
Secretary shall refer violations and potential violations of section
1325 and these regulations to the Director.
(b) Where a private complainant or the Secretary is also proceeding
against a GSE under the Fair Housing Act, the Assistant Secretary for
Fair Housing and Equal Opportunity shall conduct the investigation of
the complaint and make the reasonable cause/no reasonable cause
determination required by section 810(g) of the Fair Housing Act. Where
reasonable cause is found, a charge shall be issued and the matter will
proceed to enforcement pursuant to sections 812(b) and (o) of the Fair
Housing Act.
Subpart D--New Program Approval
Sec. 81.51 General.
Sections 305(c) of the Freddie Mac Act and 302(b)(6) of the Fannie
Mae Act provide that neither GSE may implement any new program before
obtaining the approval of the Secretary under section 1322 of the Act.
Section 1322(a) provides that the Secretary shall require each GSE to
obtain the Secretary's approval before implementing any new program.
This subpart details the requirements and procedures for review of
requests for new program approval by the Secretary.
Sec. 81.52 Requirement for program requests.
(a) Before implementing a new program, a GSE shall submit a request
for new program approval (``program request'') to the Secretary for the
Secretary's review.
(b) Submission of a program request and Secretarial review is not
required where the program that the GSE proposes to implement is not
significantly different from:
(1) A program that has already been approved in writing by the
Secretary (hereinafter an ``approved program''); or
(2) A program that was engaged in by the GSE prior to October 28,
1992, the date of enactment of FHEFSSA (hereinafter an ``authorized
program'').
(c) Section 1303(13) of FHEFSSA approves all authorized programs.
(d) Approved programs remain subject to all limitations and
requirements under which such programs were being operated by the GSEs
on or before October 28, 1992.
(e) Significantly different programs. (1) A significantly different
program of a GSE is a program that materially differs from approved or
authorized programs of the GSE by:
(i) Entailing substantially greater risk than the average financial
risks under approved or authorized programs; or
(ii) Substantially expanding the GSE's role in the housing markets
by involving new categories of borrowers, properties or other
securities, borrowing purposes, or credit enhancements.
(2) Where a planned program reasonably raises questions as to
whether it is significantly different from existing programs, the GSE
shall submit a program request and may indicate in [[Page 9193]] its
request its views respecting whether the program is subject to the
Secretary's review.
(3) New activities that are designed to refine approved or
authorized programs by repackaging features of those programs, making
technical improvements, or creating other non-material variations are
not new programs.
(f) Requests by the Secretary. If a GSE does not submit a program
request for a program, the Secretary may request information about a
program and require that the GSE submit a program request. The GSE
shall comply with the request and may indicate in such response its
views respecting whether the program is subject to the Secretary's
review.
Sec. 81.53 Processing of Program Requests.
(a) Each program request submitted to the Secretary by a GSE shall
be in writing and shall be submitted to the Secretary and the Director,
Financial Institutions Regulation, U.S. Department of Housing and Urban
Development, Washington, D.C. For those requests submitted prior to the
date occurring one year after the effective date of the regulations
issued by the Director of OFHEO under section 1361(e) of FHEFSSA
establishing the risk-based capital test, the GSE shall simultaneously
submit the program request to the Director.
(b) Each program request shall include:
(1) An opinion from counsel stating the statutory authority for the
new program (Freddie Mac Act section 305 (a) (1), (4), or (5), or
Fannie Mae Charter Act section 302(b) (2)-(5));
(2) A good faith estimate of the anticipated dollar volume of the
program over the short- and long-term;
(3) A full description of:
(i) The purpose and operation of the proposed program;
(ii) The market targeted by the program;
(iii) The delivery system for the program;
(iv) The effect of the program on the mortgage market; and
(v) Material relevant to the public interest.
(c) Following receipt of a program request, the Secretary and,
where a program request is submitted before the date occurring one year
after the effective date of the regulations issued by the Director
under section 1361(e) of FHEFSSA establishing the risk-based capital
test, the Director shall review the program request.
(d) Transition standard for approval by the Secretary and the
Director. Program requests submitted by the GSEs before the date
occurring one year after the effective date of the regulations issued
by the Director under section 1361(e) of FHEFSSA establishing the risk-
based capital test shall be approved by the Secretary unless:
(1) The Secretary determines that the new program is not
authorized, for a Freddie Mac program, under sections 305(a) (1), (4),
or (5) of the Freddie Mac Act, or, for a Fannie Mae program, sections
302(b) (2)-(5) of the Fannie Mae Charter Act;
(2) The Secretary determines that such program is not in the public
interest; or
(3) The Director determines that such program would risk
significant deterioration of the GSE's financial condition.
(e) Permanent standard for approval by the Secretary. Program
requests submitted after the date occurring one year after the
effective date of the regulations issued by the Director under section
1361(e) of FHEFSSA establishing the risk-based capital test shall be
approved by the Secretary unless:
(1) The Secretary determines that the new program is not
authorized, for a Freddie Mac program, under sections 305(a) (1), (4),
or (5) of the Freddie Mac Act, or, for a Fannie Mae program, 302(b)
(2)-(5) of the Fannie Mae Charter Act; or
(2) The Secretary determines that the program is not in the public
interest.
(f) Time for review. Unless the Secretary and, where appropriate,
the Director of OFHEO, need additional information, a program request
shall be approved or disapproved within 45 days from the date it is
received by the Director, Financial Institutions Regulation and, where
applicable, the Director of OFHEO. If within 45 days after receiving a
request, the Secretary and/or the Director of OFHEO determine that
additional information is necessary to review the matter and request
such information from the GSE, the time period for consideration may be
extended for an additional 15 days.
(1) Where additional information is requested, the GSE must provide
the requested information to the Secretary and, where appropriate, the
Director, within 10 days of receipt of the request for additional
information.
(2) If the GSE fails to furnish requested information within 10
days after the request for information, the Secretary may deny the
GSE's request for approval based on such failure and so report to
Congress under paragraph (g) of this section.
(g) Approval or report. Within the 45-day period or, if the period
is extended, within 60 days following receipt of a program request, the
Secretary shall approve the request, in writing, or submit a report to
the Committee on Banking and Financial Services of the House of
Representatives and the Committee on Banking, Housing, and Urban
Affairs of the Senate, explaining the reasons for not approving the
request. If the Secretary does not act within the time period allowed,
the GSE's program request will be deemed approved.
Sec. 81.54 Review of disapproval.
(a) Programs disapproved as unauthorized. Where the Secretary
disapproves a program request on the grounds that the new program is
not authorized under sections 305(a) (1), (4), or (5) of the Freddie
Mac Act, or 302(b) (2)-(5) of the Fannie Mae Charter Act, the GSE may,
within 30 days of the date of receipt of the decision on disapproval,
request: An opportunity to review and supplement the administrative
record for the decision; and/or a meeting with the Secretary or the
Secretary's designee. If the request for either is timely, the
Secretary shall grant the request.
(1) Supplementing the record. A GSE seeking to supplement the
record in writing must submit written materials within 30 days after
the request to supplement is granted.
(2) Meeting. Upon receipt of a timely request from a GSE for a
meeting, the Secretary shall arrange such a meeting which shall be
conducted by the Secretary or the Secretary's designee within 10
business days of receipt of the request. Such a meeting shall not be on
the record and formal rules of procedure shall not apply. The GSE may
be represented by counsel and may present all relevant information and
materials to the Secretary or the Secretary's designee.
(3) Determination. Within 10 days after submission of the
information and materials presented in writing or a meeting, the
Secretary shall in writing withdraw, modify, or affirm the program
disapproval and shall provide the GSE with that decision.
(b) Program disproved under public interest determination. Where a
program request is disapproved because the Secretary determines that
the program is not in the public interest or because the Director
determined that the new program would risk significant deterioration of
the GSE's financial condition, the Secretary shall provide the GSE with
notice of, and an opportunity for, a hearing on the record
[[Page 9194]] regarding such disapproval. A request for a hearing must
be submitted by a GSE within 30 days of the Report to Congress under
Sec. 81.53(g). The procedures for such hearings are provided in subpart
G of this part.
Subpart E--Reporting Requirements
Sec. 81.61 General.
Sections 309(m) of the Fannie Mae Charter Act and 307(e) of the
Freddie Mac Act require each GSE to collect, maintain, and provide to
the Secretary data, in a form determined by the Secretary, on each
single family and multifamily mortgage purchased by each GSE. Sections
309(n) of the Fannie Mae Charter Act and 307(f) of the Freddie Mac Act
require each GSE to report on its housing activities under the housing
provisions of the Act to the Committee on Banking, Finance and Urban
Affairs of the House of Representatives, the Committee on Banking,
Housing, and Urban Affairs of the Senate, and the Secretary. Section
1327 of the Act provides that the Secretary shall require reports from
the GSEs as the Secretary considers appropriate, and section 1328
requires the Secretary to submit an annual report to the Congress on
the activities of the GSEs. This subpart establishes quarterly and
annual data submission and reporting requirements to carry out the
requirements of the GSEs' Charter Acts and FHEFSSA.
Sec. 81.62 Mortgage data.
(a) Required data. Under sections 309(m) of the Fannie Mae Charter
Act and 307(e) of the Freddie Mac Act, the GSEs are required to provide
the Secretary with the following data relating to mortgage purchases:
(1) For single family mortgages:
(i) The income, census tract location, race, and gender of
mortgagors under such mortgages;
(ii) The loan-to-value ratios of purchased mortgages at the time of
origination;
(iii) Whether a particular mortgage purchased is newly originated
or seasoned;
(iv) The number of units in the housing subject to the mortgage and
whether the units are owner-occupied; and
(v) Any other characteristics that the Secretary considers
appropriate and to the extent practicable.
(2) For multifamily mortgages:
(i) Census tract location of housing;
(ii) Income levels and characteristics of tenants (where such data
is available);
(iii) Rent levels for units in the housing;
(iv) Mortgage characteristics (such as the number of units financed
per mortgage and the amount of loans);
(v) Mortgagor characteristics (such as nonprofit, for-profit,
limited equity cooperative);
(vi) Use of funds such as new construction, rehabilitation,
refinancing);
(vii) Type of originating institution; and
(viii) Any other information that the Secretary considers
appropriate, to the extent practicable.
(b) Data elements and aggregated data. To implement the data
collection and submission requirements for mortgage data under
paragraph (a) of this section, each GSE shall collect and compile
computerized loan level data on each mortgage purchased. Appendix D of
this part details the loan level data.
(c) Mortgage reports. Each GSE shall submit to the Secretary
quarterly a Mortgage Report consisting of the loan level data compiled
under paragraph (b) of this section. Such data shall be aggregated and
the mortgage reports shall include the dollar volume, the number of
units, and the number of mortgages on owner-occupied and rental
properties purchased by the GSE that do and do not qualify under each
housing goal and subgoal as set forth in this part and aggregations of
the data in the formats specified, in writing, by the Secretary. The
GSEs shall submit the Mortgage Report for each of the first three
quarters within 60 days of the end of the quarter, and each Mortgage
Report shall provide data on both a quarterly and a year-to-date basis.
Any time prior to submission of the Annual Housing Activities Report,
the GSE may revise any of the quarterly reports for that year. The GSEs
shall submit to the Secretary computer-generated data included in the
Mortgage Report in the format specified by the Secretary.
Sec. 81.63 Annual Housing Activities Report.
(a) General. Sections 309(n) of the Fannie Mae Charter Act and
307(f) of the Freddie Mac Act require each GSE to report annually to
the Secretary and to the Congress concerning its housing activities
under the housing goal provisions of FHEFSSA. Under the Act, the report
must include:
(1) In aggregate form and by appropriate category:
(i) The dollar volume and number of mortgages on owner-occupied and
rental properties that relate to each of the housing goals;
(ii) The number of families served by the GSE; the income class,
race, and gender of home buyers served; the income class of tenants of
rental housing (to the extent such information is available); the
characteristics of census tracts; and the geographic distribution of
the housing financed;
(2) The extent to which the mortgages purchased by the GSE have
been used in conjunction with public subsidy programs;
(3) Information on the proportion of mortgages purchased by the GSE
and financing housing for first-time home buyers;
(4) In aggregate form and by appropriate category the mortgage data
required under Sec. 81.62 for the year;
(5) A comparison of the level of securitization by the GSE versus
portfolio activity by the GSE;
(6) An assessment of the GSE's underwriting standards, business
practices, repurchase requirements, pricing, fees, and procedures that
affect the purchase of mortgages for low- and moderate-income families
or that may yield disparate results based on the race of the borrower,
including revisions thereto to promote affordable housing or fair
lending;
(7) A description of trends in both the primary and secondary
multifamily markets, including a description of progress made and any
factors impeding progress toward the standardization and securitization
of mortgage products for multifamily housing;
(8) A description of trends in the delinquency and default rates
for mortgages secured by housing for low- and moderate-income families
bought by the GSE, a comparison of these rates with rates for families
above median income, and an evaluation of the impact of such trends on
the standards and levels of risk of mortgage products serving low- and
moderate-income families;
(9) A description of the seller servicing network of the GSE,
including the volume of mortgages purchased from minority-owned, women-
owned and community-oriented lenders and a description of the GSE's
efforts to facilitate relationships with such lenders;
(10) A description of the activities undertaken by the GSE with
nonprofit and for-profit organizations and with State and local
governments and housing finance agencies, including activities
supporting comprehensive housing affordability strategies under section
105 of the Cranston-Gonzalez National Affordable Housing Act; and
(11) Other information that the Secretary considers appropriate.
(b) To implement the requirements in paragraph (a) of this section
and to assist the Secretary in preparing the Secretary's Annual Report
to the [[Page 9195]] Congress, each GSE shall submit to the Secretary
an Annual Housing Activities Report including the information in
paragraph (a) of this section and mortgage year-to-date data as
specified, in writing, by the Secretary. Each GSE shall submit such
report, within 60 days after the end of each calendar year, to the
Secretary; the Committee on Banking and Financial Services of the House
of Representatives; and the Committee on Banking, Housing, and Urban
Affairs of the Senate. Each GSE shall make its Annual Housing
Activities Report available to the public at its principal and regional
offices. Before making such reports available to the public, the GSE
may exclude from the report any information that the Secretary has
deemed proprietary.
(c) Subpart C of this part requires each GSE to submit Business
Practices Analyses. To the extent such a Business Practices Analysis
encompasses the information required under paragraph (a)(6) of this
section, and where the GSE has conducted such a Business Practices
Analysis within the preceding three years, the GSE may, in connection
with meeting the requirements of paragraph (a)(6) of this section,
reference such Analysis and use the Annual Housing Activities Report to
update the GSE's progress concerning the GSE's most recent Business
Practices Analysis.
Sec. 81.64 Periodic reports.
Each GSE shall provide to the Secretary all releases of information
that are disclosed to entities outside of the GSE, at the time such
information is disclosed, including, but not limited to:
(a) Material prepared for the GSE's Housing Advisory Council;
(b) Press releases;
(c) Investor reports; and
(d) Proxy statements.
Sec. 81.65 Other information and analyses.
In addition to the regular reports required under this subpart, the
GSEs shall furnish to the Secretary the data underlying the reports
required under this subpart and conduct additional analyses, as
required by the Secretary. The GSEs shall submit additional reports
concerning their activities, as the Secretary considers appropriate and
requests.
Sec. 81.66 Submission of reports.
Each GSE shall submit all hard copy reports or other written
information required under this subpart to the Secretary and the
Director, Financial Institutions Regulation Staff, Department of
Housing and Urban Development, 451 7th Street, SW. Washington, DC.
20410. Each GSE shall submit computerized data, reports, and
information required under this subpart to the Director, Financial
Institutions Regulations Staff.
Subpart F--Access to Information
Sec. 81.71 General.
This subpart provides for the establishment of a public use data
base to make available to the public mortgage data that the GSEs are
required to submit to the Secretary under section 309(m) of the Fannie
Mae Charter Act, section 307(e) of the Freddie Mac Act, and subpart E
of this part. The Act provides that proprietary information and data
may not be made publicly available. This subpart establishes mechanisms
for the GSEs to designate information as proprietary and for the
Secretary to determine whether information is proprietary and to
withhold such proprietary information from the public. This subpart
provides procedures for disclosure of information submitted by or
relating to the GSEs under the Freedom of Information Act or at the
request of Congress and sets forth protections for treatment of GSE
information by the Secretary, Departmental officers and employees, and
contractors. This subpart provides that information submitted by or
relating to the GSEs that would constitute a clearly unwarranted
invasion of personal privacy shall not be disclosed to the public.
Sec. 81.72 Public use data base and public information.
(a) General. The Secretary shall establish and make available for
public use, in accordance with this section, a public use data base and
shall make available for public inspection and copying the GSE's Annual
Housing Activities Reports, except for information the Secretary
determines to be proprietary.
(b) Examination of submissions. Following receipt of mortgage data
and Annual Housing Activity Reports from the GSEs and any other
information submissions from the GSEs, the Secretary shall, as
expeditiously as possible, examine the submissions for information
that:
(1) Has been deemed proprietary under this part or subsequent
order;
(2) The GSE has designated as proprietary in accordance with
Sec. 81.73;
(3) Would constitute a clearly unwarranted invasion of personal
privacy if such information were released to the public; or
(4) Is required to be withheld under applicable laws or
regulations.
(c) Public data and proprietary data. The Secretary shall exclude
from the public use data base and from public disclosure all
information within the scope of paragraphs (b)(1), (b)(3), and (b)(4)
of this section and, following a determination under Sec. 81.74,
concerning data identified by the GSE as proprietary, the Secretary
shall place all public data in the public use data base.
(d) Access. The Secretary shall provide such means as the Secretary
determines are reasonable for the public to gain access to the public
use data base. To obtain access to the public use data base, the public
should contact the Director, Financial Institutions Regulation, 451 7th
St. SW. Washington, DC. 20410, (202) 708-1464 (this is not a toll-free
number).
(e) Fees. The Secretary may charge reasonable fees to cover the
cost of providing access to the public use data base. These fees will
include the costs of system access, computer use, copying fees, and
other costs.
Sec. 81.73 GSE request for proprietary treatment.
(a) General. A GSE may request proprietary treatment of data and
information submitted to the Secretary. Such a request does not in any
manner affect the GSE's responsibility to provide the information to
the Secretary.
(b) Request for proprietary treatment. Where a GSE seeks to have
information treated as proprietary information by the Secretary and
withheld from public disclosure, the GSE shall submit a Request for
Proprietary Treatment that shall:
(1) Clearly designate those portions of the information to be
treated as proprietary with a prominent stamp, typed legend, or other
suitable form of notice, stating ``Proprietary Information--
Confidential Treatment Requested by [name of GSE]'' on each page or
portion of each page. If such marking is impractical under the
circumstances, the GSE shall attach a cover sheet prominently marked
``Proprietary Information--Confidential Treatment Requested by (name of
GSE)'' to the information for which confidential treatment is
requested;
(2) Accompany its request with a certification by an officer or
authorized representative of the GSE that the information is
proprietary;
(3) Submit a statement explaining the reasons for the assertion
that the information is proprietary, including without limitation:
(i) A description of the information; the nature of the adverse
consequences to the GSE, financial or otherwise, that would result from
its disclosure and the reasons therefor, including any adverse
[[Page 9196]] effect on the GSE's competitive position. Conclusory
statements that particular information would be useful to competitors
or would impair business dealings, or similar statements, ordinarily
will not be considered sufficient to justify a determination that the
information is proprietary;
(ii) The existence and applicability of any prior determinations by
the Department, other Federal agencies, or a court, concerning similar
information;
(iii) The measures taken by the GSE to protect the confidentiality
of the information in question and of similar information prior to and
after its submission to the Secretary;
(iv) The extent to which the information is publicly available from
other entities, such as information available to the public through
local government offices or records, including deeds, recorded
mortgages, and similar documents;
(v) The difficulty of a competitor, including a seller/servicer,
obtaining or compiling the information; and
(vi) Such additional facts and such legal and other authorities as
the GSE may consider appropriate.
Sec. 81.74 Secretarial determination on GSE request.
(a) General. The Secretary shall review Requests for Proprietary
Treatment from the GSEs and other information, if any, that the
Secretary may elicit from other sources. The Secretary shall determine
whether the information designated as proprietary by the GSE is
proprietary information, or whether the information is not proprietary
and should be released notwithstanding the GSE's request. During the
time a request is pending determination by the Secretary, information
submitted by the GSE that is the subject of such request shall not be
disclosed to, or subject to the examination of data by, the public or
any person or representative of any person or agency outside of HUD.
(b) Determination to withhold. (1) Where the Secretary determines
that information is proprietary, the Secretary shall notify the GSE
that the request has been granted and may, in the discretion of the
Secretary, issue a temporary order, a final order or a regulation
providing that the information is not subject to public disclosure.
Where the Secretary determines that information is proprietary, the
Secretary shall not make such information publicly available.
(2) Such a temporary order, final order, or regulation shall:
(i) Document the reasons for the determination; and
(ii) Be provided to the GSE, made available to members of the
public, and published in the Federal Register, except that any portions
of an order that would reveal the proprietary information shall be
withheld from public disclosure.
(3) Publications of temporary orders shall invite public comments
where feasible.
(c) Determination not to withhold or to seek further information.
Where the Secretary determines, in response to a Request for
Proprietary Treatment, that information submitted by the GSE may not be
proprietary information, that the request may only be granted in part,
or that questions exist concerning the request, the following procedure
shall apply:
(1) The Secretary shall provide the GSE with an opportunity for a
meeting with departmental officers or employees to discuss the matter,
for the purpose of gaining additional information concerning the
request. Such meetings shall be informal and not on the record;
(2) Following the meeting, based on the Secretary's review of the
information and the GSE's views as to whether the information is
proprietary, the Secretary shall make a determination;
(3) If the Secretary determines to withhold the information as
proprietary, the procedures in paragraph (b) of this section shall
apply; and
(4) If the Secretary determines that any information covered by the
request is not proprietary, the Secretary shall provide notice in
writing to the GSE of the reasons for this conclusion, and such notice
shall provide that the Secretary shall not release the information to
the public for 7 days.
Sec. 81.75 Mortgage data withheld by order and regulation.
(a) List of withheld data. Appendix E of this part shall include a
list and appropriately identify those categories of mortgage data
(``data elements'') that the GSEs submit under sections 309(m) of the
Fannie Mae Charter Act and 307(e) of the Freddie Mac Act, and that are
determined to be proprietary information. Appendix E shall identify the
reasons data elements have been withheld.
(b) Updating of list. Following issuance of regulations or orders
to withhold mortgage data, the Secretary shall expeditiously update
Appendix E where needed to inform the public of any modifications to
the list of proprietary information.
Sec. 81.76 Requests for GSE Information.
(a) General. Information submitted to the Secretary by the GSEs is
subject to request under the Freedom of Information Act (FOIA), 5
U.S.C. 552. The Department shall process such FOIA requests in
accordance with the Department's FOIA and Privacy Act regulations, 24
CFR parts 15 and 16, and other applicable statutes, regulations, and
guidelines, including the Trade Secrets Act, 18 U.S.C. 1905, and
Executive Order 12,600.
(b) Protection from disclosure. In responding to requests for
information submitted by or relating to the GSEs, the Secretary may
invoke provisions of the Freedom of Information Act and FHEFSSA to
protect information from disclosure.
(1) Exemption (b)(8). Under section 1319F of the Act, the Secretary
may invoke FOIA exemption (b)(8) to withhold from the public any GSE
information contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of HUD.
(2) Other FOIA exemptions. Under 24 CFR part 15, the Secretary may
invoke other exemptions including, without limitation, exemption 4 (5
U.S.C. 552(b)(4)), to withhold from public disclosure confidential GSE
business information, and exemption 6 (5 U.S.C. 552(b)(6)), to protect
information that would constitute a clearly unwarranted invasion of
personal privacy.
(c) Requests for business information under Executive Order 12600.
The Department will process FOIA requests for confidential business
information of the GSEs to which FOIA exemption 4 may apply in
accordance with 24 CFR part 15 and the predisclosure notification
procedures of Executive Order 12600. Under these procedures, the
Secretary will not release records marked by the GSE as proprietary or
records that are reasonably expected to contain proprietary materials,
if at all, until the following occurs:
(1) The Secretary notifies the GSE that a request for such records
has been received;
(2) The GSE is provided a reasonable opportunity to provide
detailed comments on and objections to the release of the records; and
(3) Following receipt of any objection by a GSE, if the Secretary
determines not to sustain wholly the objection, the GSE must be
notified in writing of the Secretary's determination and given a brief
explanation of such decision. The Secretary shall provide such
notification enough in advance of a specified disclosure date so that
the GSE will have an opportunity to obtain judicial review.
(d) Release in response to requests on behalf of Congress, the
Comptroller [[Page 9197]] General, a Subpoena, or Other Legal Process.
If the Department receives a request on behalf of a congressional
committee or subcommittee, the Comptroller General, or a subpoena from
a court of competent jurisdiction, or is otherwise compelled by law to
release information determined to be proprietary under this section,
the Secretary shall provide the information in accordance with the
request without regard to the provisions of this section. In releasing
requested information under this paragraph, the Secretary will, where
applicable, include a statement with the information to the effect that
the GSE regards the information as proprietary, public disclosure of
the information may cause competitive harm to the GSE, and the
Secretary has determined that the information is proprietary under this
section. To the extent practicable, the Secretary will provide notice
to the GSE after a request under this paragraph is received and before
the information is provided in response to the request.
Sec. 81.77 Protection of GSE Information.
(a) Protection of information by officers and employees. The
Secretary will institute all reasonable safeguards to protect GSE
information, including, but not limited to, advising all departmental
officers and employees having access to information submitted by or
pertaining to either GSE of the legal restrictions against unauthorized
disclosure of such information under HUD Standards of Conduct
regulations, 24 CFR part 0; the government-wide Standards of Ethical
Conduct, 5 CFR part 2635; and the Trade Secrets Act, 18 U.S.C. 1905.
Officers and employees shall be advised of the penalties for
unauthorized disclosure ranging from disciplinary action under 24 CFR
part 0 and 5 CFR part 2635 to criminal prosecution.
(b) Protection of information by contractors. (1) In relevant
contracts and agreements where contractors have access to confidential
business information submitted by or pertaining to either GSE, the
Department shall include detailed provisions specifying that neither
the contractor nor any of its officers, employees, agents, or
subcontractors may release data submitted by or pertaining to either
GSE without HUD's authorization, and that unauthorized disclosure may
be a basis for:
(i) Terminating the contract for default;
(ii) Suspending or debarring the contractor; or
(iii) Criminal prosecution of the contractor, its officers,
employees, agents, or subcontractors under the Federal Criminal Code.
(2) Contract provisions shall require safeguards against
unauthorized disclosure, including training of contractor and
subcontractor agents and employees, and that the contractor indemnify
and hold HUD harmless against unauthorized disclosure of data belonging
to the GSEs or HUD.
Subpart G--Procedures for Actions and Review of Actions
Sec. 81.81 General.
This subpart sets forth procedures for the Secretary to issue
cease-and-desist orders and institute civil money penalties to enforce
housing goal provisions at subpart C of this part and information
submission and reporting requirements under subpart E of this part. The
subpart also provides procedures for hearings, enforcement of
Secretarial actions, public disclosure of agreements, and judicial
review of enforcement actions.
Sec. 81.82 Cease-and-desist proceedings.
(a) Issuance. The Secretary may issue and serve upon a GSE a notice
of charges for a cease-and-desist order, in accordance with this
section, if the Secretary determines:
(1) The GSE has failed to submit a housing plan that substantially
complies with Sec. 81.22 within the applicable period for submission
under that section;
(2) The GSE is engaging or has engaged, or the Secretary has
reasonable cause to believe that the GSE is about to engage, in any
failure to make a good faith effort to comply with a housing plan
submitted and approved by the Secretary; or
(3) The GSE has failed to submit any of the information required
under sections 309 (m) or (n) of the Fannie Mae Charter Act, or 307 (e)
or (f) of the Freddie Mac Act, or under Secs. 81.62 or 81.63 of this
part.
(b) Procedure for issuance.--(1) Notice of charges. The Secretary
shall notify the GSE in writing of the notice of charges. The
notification shall provide:
(i) A concise statement of the facts constituting the conduct upon
which the Secretary has relied in determining that an order should be
issued and the violations with which the GSE is charged;
(ii) Notice of the GSE's right to a hearing on the record on the
cease-and-desist order;
(iii) A time and date for a hearing on the record on whether the
order should issue;
(iv) The consequences of failing to contest the matter; and
(v) The effective date of the order if the GSE does not contest the
matter.
(2) Administrative Law Judge. The hearing and other proceedings
conducted under this section shall be presided over by a HUD
Administrative Law Judge, in accordance with Sec. 81.84 and 24 CFR
30.10, 30.15, and part 30, subpart E, to the extent such provisions are
not inconsistent with any of the procedures in these regulations or the
Act.
(3) Issuance of order. If the Administrative Law Judge finds, based
on the record, that any of the conduct specified in the notice of
charges sufficient to sustain the charges has been established by
substantial evidence (or a GSE consents to the order), the
Administrative Law Judge may issue and serve upon the GSE an order
requiring the GSE to:
(i) Submit a housing plan in compliance with Sec. 81.22;
(ii) Comply with the housing plan; or
(iii) Provide the information required under subpart E of this
part.
(4) Effective date. An order under this section shall be effective
upon the expiration of the 30-day period beginning on the service of
the order upon the GSE (except in the case of an order issued upon
consent, which shall become effective at the time specified therein),
and shall remain effective and enforceable as provided in the order,
except to the extent that the Secretary stays, modifies, terminates, or
sets aside the order as provided in Sec. 81.84(l).
Sec. 81.83 Civil money penalties.
(a) Imposition. The Secretary may impose a civil money penalty, in
accordance with the provisions of this section, on a GSE that has
failed:
(1) To submit a housing plan that substantially complies with
Sec. 81.22 within the applicable period required under the regulations;
(2) To make a good faith effort to comply with a housing plan for
the GSE submitted and approved by the Secretary; or
(3) To submit any of the information required under subsection (m)
or (n) of Section 309 of the Fannie Mae Charter Act, under subsection
(e) or (f) of section 307 of the Freddie Mac Act, or under Secs. 81.62
or 81.63.
(b) Amount of penalty. The Secretary shall determine the amount of
the penalty, and such penalty shall not exceed:
(1) For any failure described in paragraph (a)(1) of this section,
$25,000 for each day that the failure occurs; and
(2) For any failure described in paragraphs (a) (2) or (3) of this
section, [[Page 9198]] $10,000 for each day that the failure occurs.
(c) Factors in determining amount of penalty. In determining the
amount of a penalty under this section, the Secretary shall give
consideration to such factors as:
(1) The gravity of the offense;
(2) Any history of prior offenses;
(3) The GSE's ability to pay the penalty;
(4) The nature of the injury to the public caused by the failure;
(5) The benefits received by the GSE because of the GSE's failure;
(6) Deterrence of future violations that would result from the
penalty; and
(7) Other factors that the Secretary determines in the public
interest warrant consideration.
(d) Procedures.--(1) Notice of determination to impose civil money
penalties. The Secretary shall notify the GSE in writing of the
Secretary's determination to impose a civil money penalty by issuing a
Notice of Intent to Impose Civil Money Penalties (``Notice of
Intent''). The Notice of Intent shall provide:
(i) A concise statement of the facts constituting the conduct upon
which the Secretary has relied in determining that a civil penalty
should be imposed;
(ii) The amount of the civil money penalty that the Secretary
intends to impose;
(iii) Notice of the GSE's right to a hearing on the record on the
civil money penalty;
(iv) The procedures to follow to obtain such a hearing;
(v) The consequences of failing to request a hearing; and
(vi) The date the penalty shall be due unless stayed or rescinded.
(2) To appeal the Secretary's decision to impose a civil money
penalty, a GSE shall, within 20 days after receiving service of the
Notice of Intent, file a written Answer with the Chief Docket Clerk,
Office of Administrative Law Judges, Department of Housing and Urban
Development, at the address provided in the Notice of Intent.
(3) The hearing and other proceedings conducted under this section
shall be presided over by a HUD Administrative Law Judge, in accordance
with Sec. 81.84 and 24 CFR 30.10, 30.15, and part 30, subpart E, to the
extent such provisions are not inconsistent with any of the procedures
in these regulations or the Act.
(4) Issuance of order. If the Administrative Law Judge finds, on
the record made at a hearing, that any conduct specified in the notice
of charges has been established by a preponderance of the evidence (or
a GSE consents to the order pursuant to Sec. 81.84), the Administrative
Law Judge may issue an order imposing a civil money penalty.
(5) Consultation with the Director. In the Secretary's discretion,
the Director of the Office of Federal Housing Enterprise Oversight may
be requested to review any Notice of Intent, determination, order, or
interlocutory ruling arising from a hearing.
(e) Action to collect penalty. If a GSE fails to comply with an
order by the Secretary imposing a civil money penalty under this
section, after the order is no longer subject to review as provided by
sections 1342 and 1343 of the Act, the Secretary may request the
Attorney General of the United States to bring an action in the United
States District Court for the District of Columbia to obtain a monetary
judgment against the GSE and such other relief as may be available. The
monetary judgment may, in the court's discretion, include attorney fees
and other expenses incurred by the United States in connection with the
action. In an action under this subsection, the validity and
appropriateness of the order imposing the penalty is not subject to
review.
(f) Settlement by Secretary. The Secretary may compromise, modify,
or remit any civil money penalty that may be, or has been, imposed
under this section.
(g) Deposit of penalties. The Secretary shall deposit any civil
money penalties collected under this section into the general fund of
the Treasury.
Sec. 81.84 Hearings.
(a) Applicability. The hearing procedures in this section apply to
hearings on the record to review cease-and-desist orders, civil money
penalties, and new programs disapproved based upon a determination by
the Secretary that such programs are not in the public interest.
(b) Hearing requirements--(1) Hearings shall be held on the record
and in the District of Columbia.
(2) Hearings shall be conducted by a HUD Administrative Law Judge
authorized to conduct proceedings under 24 CFR part 30.
(c) Timing. Unless an earlier or later date is requested by a GSE
and such request is granted by the Administrative Law Judge, hearings
shall be fixed for a date not earlier than 30 days, nor later than 60
days, after: service of the notice of charges under Sec. 81.82; service
of the Notice of Intent to Impose Civil Money Penalt(ies) under
Sec. 81.83; or a request for a hearing under Sec. 81.54(b).
(d) Procedure. Hearings shall be conducted in accordance with the
procedures set forth in 24 CFR 30.10, 30.15, and part 30, subpart E, to
the extent that such provisions are not inconsistent with any of the
procedures in these regulations or the Act.
(e) Method of service. Any service required or authorized to be
made by the Secretary under this subpart may be made to the Chief
Executive Officer of a GSE or such other representative as the GSE may
designate in writing to the Secretary.
(f) Subpoena authority--(1) General. In the course of or in
connection with any hearing, the Secretary and/or the Administrative
Law Judge shall have the authority to:
(i) Administer oaths and affirmations;
(ii) Take and preserve testimony under oath;
(iii) Issue subpoenas and subpoenas duces tecum; and
(iv) Revoke, quash, or modify subpoenas and subpoenas duces tecum
issued by the Secretary.
(2) Witnesses and documents. The attendance of witnesses and the
production of documents provided for in this section may be required
from any place in any State at any designated place where such
proceeding is being conducted.
(3) Enforcement. The Secretary may request the Attorney General of
the United States to bring an action in the United States District
Court for the judicial district in which such proceeding is being
conducted or where the witness resides or conducts business, or in the
United States District Court for the District of Columbia, for
enforcement of any subpoena or subpoena duces tecum issued pursuant to
this section.
(4) Fees and expenses. Witnesses subpoenaed under this section
shall be paid the same fees and mileage that are paid witnesses in the
district courts of the United States. Any court having jurisdiction of
any proceeding instituted under this section may allow to any such
party such reasonable expenses and attorneys fees as the court deems
just and proper. Such expenses and fees shall be paid by the GSE or
from its assets.
(g) Failure to appear. If a GSE fails to appear at a hearing
through a duly authorized representative, the GSE shall be deemed to
have consented to the issuance of the cease-and-desist order, the
imposition of the penalty, or the disapproval of the new program,
whichever is applicable.
(h) Public hearings. All hearings shall be open to the public,
unless the Secretary, in the Secretary's discretion,
[[Page 9199]] determines that holding an open hearing would be contrary
to the public interest.
(i) Decision of Administrative Law Judge. After each hearing, the
Administrative Law Judge shall issue an initial decision and serve the
initial decision on the GSE, the Secretary, any other parties, and the
General Counsel of the Department.
(j) Review of initial decision--(1) At the Secretary's discretion.
The Secretary, in the Secretary's discretion, may review any initial
decision.
(2) Requested by a party. Any party may file within 15 days after
receipt of the initial decision a notice of appeal to the Secretary
seeking review of an initial decision. The Secretary shall decide
within 30 days after receipt of a notice of appeal whether to review or
to decline review of the initial decision.
(k) Final decision. (1) The initial decision will become the final
decision of the Department unless the Secretary or the Secretary's
designee issues a final decision within 90 days after the initial
decision is served on the Secretary. The Secretary by written notice to
the parties may extend such 90 day period for an additional 30 days.
(2) Issuance of final decision by Secretary. The Secretary or the
Secretary's designee may review any finding of fact, conclusion of law,
or order contained in the initial decision of the Administrative Law
Judge and may issue a final decision in the proceeding. Any decision
shall include findings of fact upon which the decision is predicated.
The Secretary or the Secretary's designee may affirm, modify, or set
aside, in whole or in part, the initial decision or may remand the
initial decision for further proceedings. The final decision shall be
served on all parties and the Administrative Law Judge.
(l) Decisions on remand. If the initial decision is remanded for
further proceedings, the Administrative Law Judge shall issue an
initial decision on remand within 60 days of the date of issuance of
the final decision, unless it is impractical to do so.
(m) Modification. The Secretary or the Secretary's designee may at
any time, modify, terminate, or set aside any order, upon such notice
and in such manner as the Secretary or designee considers proper. When
a petition for judicial review is timely filed as provided in
Sec. 81.87, and after the Secretary has filed the record in the
proceeding with the court, the Secretary or designee may modify,
terminate, or set aside any such order with permission of the court.
Sec. 81.85 Public disclosure of final orders and agreements.
(a) General. The Secretary shall make available to the public:
(1) Any written agreement or other written statement for which a
violation may be redressed by the Secretary, or any modification to or
termination of such agreement or statement, unless the Secretary, in
the Secretary's discretion, determines that public disclosure would be
contrary to the public interest, or determines under paragraph (b) of
this section that public disclosure would seriously threaten the GSE's
financial health or security;
(2) Any order that is issued with respect to any administrative
enforcement proceeding initiated by the Secretary under this subpart
and that has become final in accordance with Secs. 81.84 and 81.87; and
(3) Any modification to or termination of any final order made
public pursuant to this section.
(b) Delay of public disclosure under exceptional circumstances. If
the Secretary makes a determination in writing that the public
disclosure of any final order pursuant to paragraph (a)(1) of this
section would seriously threaten a GSE's financial soundness, the
Secretary may delay the public disclosure of such order for a
reasonable time.
(c) Documents filed under seal in public enforcement hearings. The
Secretary may file any document or part thereof under seal in any
hearing under this subpart if the Secretary determines in writing that
disclosure thereof would be contrary to the public interest.
(d) Retention of documents. The Secretary shall keep and maintain a
record, for not less than 6 years, of all documents described in
paragraph (a) of this section and all enforcement agreements and other
supervisory actions and supporting documents issued with respect to, or
in connection with, any enforcement proceeding initiated by the
Secretary under this subpart.
(e) Disclosures to Congress. This section shall not be construed to
authorize the withholding, or to prohibit the disclosure, of any
information to the Congress or any committee or subcommittee thereof.
Sec. 81.86 Enforcement and jurisdiction.
(a) Enforcement. If a GSE fails to comply with a final decision,
the Secretary may request the Attorney General of the United States to
bring an action in the United States District Court for the District of
Columbia for the enforcement of the notice or order. Such court has the
jurisdiction and power to order and require compliance with such notice
or order.
(b) Limitation on jurisdiction. Except as otherwise provided in
sections 1341-49 of the Act, no court has jurisdiction to affect, by
injunction or otherwise, the issuance or enforcement of any notice or
order under Secs. 81.82 or 81.83, or to review, modify, suspend,
terminate, or set aside any such notice or order.
(c) Other relief. The Secretary may obtain such other relief as may
be available, including attorney fees and other expenses, in connection
with the action.
(d) Interest. In the case of civil money penalties, interest on and
other charges for any unpaid penalty may be assessed in accordance with
31 U.S.C. 3717.
Sec. 81.87 Judicial review.
(a) Commencement. A GSE may obtain review of any final order issued
under Sec. 81.84 by filing in the United States Court of Appeals for
the District of Columbia Circuit, within 30 days after the date of
service of such order, a written petition praying that the order of the
Secretary be modified, terminated, or set aside. The clerk of the court
shall transmit a copy of the petition to the Secretary and the Chief
Docket Clerk, Office of Administrative Law Judges.
(b) Filing of record. Upon receiving a copy of a petition, the
Chief Docket Clerk, Office of Administrative Law Judges, shall file in
the court the record in the proceeding, as provided in 28 U.S.C. 2112.
(c) Jurisdiction. Upon the filing of a petition, such court shall
have jurisdiction, which upon the filing of the record by the Secretary
shall be exclusive (except as provided in Sec. 81.84(l)), to affirm,
modify, terminate, or set aside, in whole or in part, the order of the
Secretary.
(d) Review. Review of such proceedings shall be governed by chapter
7 of title 5, United States Code.
(e) Order To pay penalty. Such court has the authority in any such
review to order payment of any penalty imposed by the Secretary under
this subpart.
(f) No automatic stay. The commencement of proceedings for judicial
review under this section shall not, unless specifically ordered by the
court, operate as a stay of any order issued by the Secretary.
Subpart H--Book-Entry Procedures
Sec. 81.91 Definition of terms.
In this subpart, unless the context otherwise requires or
indicates:
Book-entry GSE security means a GSE security in the form of an
entry made as [[Page 9200]] prescribed in this subpart on the records
of a Reserve Bank.
Date of call means:
(1) With respect to GSE securities issued by Fannie Mae under
section 304 (d) and (e), the date fixed in the authorizing resolution
of the Board of Directors of Fannie Mae on which the obligor will make
payment of the security before maturity in accordance with its terms;
(2) With respect to GSE securities issued by Fannie Mae under
section 304(b) of the Fannie Mae Charter Act, the date fixed in the
offering notice issued by Fannie Mae; and
(3) With respect to GSE securities issued by Freddie Mac, the date
fixed in the authorizing resolution of the Board of Directors of
Freddie Mac on which Freddie Mac will make payment of the security
before maturity in accordance with its terms.
Definitive GSE security means a GSE security in engraved or printed
form.
GSE security means any obligation of a GSE (except short-term
discount notes and obligations convertible into shares of common stock)
issued under the Freddie Mac Act, or sections 304 (b), (d), or (e) of
the Fannie Mae Charter Act, in the form of a definitive GSE security or
book-entry GSE security.
Member bank means any national bank, State bank, or bank or trust
company that is member of a Reserve Bank.
Pledge includes a pledge of, or any other security interest in, GSE
securities as collateral for loans or advances or to secure deposits of
public monies or the performance of an obligation.
Reserve Bank means a Federal Reserve bank and its branches acting
as Fiscal Agent of a GSE and, when indicated, acting in its individual
capacity or as Fiscal Agent of the United States.
Sec. 81.92 Authority of Reserve Banks.
Each Reserve Bank is hereby authorized, in accordance with the
provisions of this subpart, to:
(a) Issue book-entry GSE securities by means of entries on its
records that shall include the name of the depositor, the amount, the
loan title (or series), and maturity date;
(b) Effect conversions between book-entry GSE securities and
definitive GSE securities;
(c) Otherwise service and maintain book-entry GSE securities; and
(d) Issue a confirmation of transaction in the form of a written
advice (serially numbered or otherwise) that specifies the amount and
description of any securities; that is, loan title (or series) and
maturity date, sold or transferred, and the date of the transaction.
Sec. 81.93 Scope and effect of book-entry procedure.
(a) (1) A Reserve bank as fiscal agent of a GSE may apply the book-
entry procedure provided for in this subpart to any GSE securities that
have been or are hereafter deposited for any purpose in accounts with
it in its individual capacity, under terms and conditions which
indicate that the Reserve bank will continue to maintain such deposit
accounts in its individual capacity, notwithstanding application of the
book-entry procedure to such securities. This paragraph is applicable,
but not limited, to securities deposited:
(i) As collateral pledged to a Reserve bank (in its individual
capacity) for advances by it;
(ii) By a member bank for its sole account;
(iii) By a member bank held for the account of its customers;
(iv) In connection with deposits in a member bank of funds of
States, municipalities, or other political subdivisions; or
(v) In connection with the performance of an obligation or duty
under Federal, State, municipal, or local law, or judgments or decrees
of courts.
(2) The application of the book-entry procedure under this
paragraph shall not derogate from or adversely affect the relationships
that would otherwise exist between a Reserve bank in its individual
capacity and its depositors concerning any deposits under this
paragraph. Whenever the book-entry procedure is applied to such GSE
securities, the Reserve bank is authorized to take all action necessary
in respect of the book-entry procedure to enable such Reserve bank in
its individual capacity to perform its obligations as depositary with
respect to such GSE securities.
(b) A Reserve bank, as fiscal agent of a GSE, shall apply the book-
entry procedure to GSE securities deposited as collateral pledged to
the United States under current revisions of Department of the Treasury
Circulars Nos. 92 and 176 (31 CFR parts 203 and 202), and may apply the
book-entry procedure, with the approval of the Secretary of the
Treasury, to any other GSE securities deposited with a Reserve bank, as
fiscal agent of the United States.
(c) Any person having an interest in GSE securities that are
deposited with a Reserve bank (in either its individual capacity or as
fiscal agent of the United States) for any purpose shall be deemed to
have consented to their conversion to book-entry GSE securities
pursuant to the provisions of this subpart and in the manner and under
the procedures prescribed by the Reserve bank.
(d) No deposits shall be accepted under this section on or after
the date of maturity or call of the securities.
Sec. 81.94 Transfer or pledge.
(a) (1) A transfer or a pledge of book-entry GSE securities to a
Reserve bank (in its individual capacity or as fiscal agent of the
United States), or to the United States, or to any transferee or
pledgee eligible to maintain an appropriate book-entry account in its
name with a Reserve bank under this subpart, is effected and perfected,
notwithstanding any provision of law to the contrary, by a Reserve bank
making an appropriate entry in its records of the securities
transferred or pledged. The making of such an entry in the records of a
Reserve bank shall:
(i) Have the effect of a delivery in bearer form of definitive GSE
securities;
(ii) Have the effect of a taking of delivery by the transferee or
pledgee;
(iii) Constitute the transferee or pledgee a holder; and
(iv) If a pledge, effect a perfected security interest therein in
favor of the pledgee.
(2) A transfer or pledge of book-entry GSE securities effected
under paragraph (a) of this section shall have priority over any
transfer, pledge, or other interest, theretofore or thereafter effected
or perfected under paragraph (b) of this section or in any other
manner.
(b) A transfer or a pledge of transferable GSE securities, or any
interest therein, that is maintained by a Reserve bank (in its
individual capacity or as fiscal agent of the United States) in a book-
entry account under this subpart, including securities in book-entry
form under Sec. 81.93(a)(3), is effected, and a pledge is perfected, by
any means that would be effective under applicable law to effect a
transfer or to effect and perfect a pledge of the GSE securities, or
any interest therein, if the securities were maintained by the Reserve
bank in bearer definitive form. For purposes of transfer or pledge
hereunder, book-entry GSE securities maintained by a Reserve bank
shall, notwithstanding any provision of law to the contrary, be deemed
to be maintained in bearer definitive form. A Reserve bank maintaining
book-entry GSE securities either in its individual capacity or as
fiscal agent of the United States is not a bailee for purposes of
notification of pledges of those securities under this section, or a
third person in possession for purposes of acknowledgment of transfers
thereof under this paragraph. Where transferable GSE securities are
recorded on the books of a depositary (a bank, [[Page 9201]] banking
institution, financial firm, or similar party that regularly accepts in
the course of its business GSE securities as a custodial service for
customers and maintains accounts in the names of such customers
reflecting ownership of or interest in such securities) for account of
the pledgor or transferor thereof, and such securities are on deposit
with a Reserve bank in a book-entry account hereunder, such depositary
shall, for purposes of perfecting a pledge of such securities or
effecting delivery of such securities to a purchaser under applicable
provisions of law, be the bailee to which notification of the pledge of
the securities may be given, or the third person in possession from
which acknowledgment of the holding of the securities for the purchaser
may be obtained. A Reserve bank will not accept notice or advice of a
transfer or pledge effected or perfected under this paragraph, and any
such notice or advice shall have no effect. A Reserve bank may continue
to deal with its depositor in accordance with the provisions of this
subpart, notwithstanding any transfer or pledge effected or perfected
under this section.
(c) No filing or recording with a public recording office or
officer shall be necessary or effective with respect to any transfer or
pledge of book-entry GSE securities or any interest therein.
(d) A Reserve bank shall, upon receipt of appropriate instructions,
convert book-entry GSE securities into definitive GSE securities and
deliver them in accordance with such instructions; no such conversion
shall affect existing interests in such GSE securities.
(e) A transfer of book-entry GSE securities within a Reserve bank
shall be made in accordance with procedures established by the bank not
inconsistent with this subpart. The transfer of book-entry GSE
securities by a Reserve bank may be made through a telegraphic transfer
procedure.
(f) All requests for transfer or withdrawal must be made prior to
the maturity or date of call of the securities.
Sec. 81.95 Withdrawal of GSE securities.
(a) A depositor of book-entry GSE securities may withdraw them from
a Reserve bank by requesting delivery of like definitive GSE securities
to itself, or on its order, to a transferee.
(b) GSE securities that are actually to be delivered upon
withdrawal may be issued either in registered or in bearer form.
Sec. 81.96 Delivery of GSE securities.
A Reserve bank that has received GSE securities and effected
pledges, made entries regarding them, or transferred or delivered them
according to the instructions of its depositor is not liable for
conversion or for participation in breach of fiduciary duty, even
though the depositor had no right to dispose of or take other action in
respect of the securities. A Reserve bank shall be fully discharged of
its obligations under this subpart by the delivery of GSE securities in
definitive form to its depositor or upon the order of such depositor.
Customers of a member bank or other depositary (other than a Reserve
bank) may obtain GSE securities in definitive form only by causing the
depositor of the Reserve bank to order the withdrawal thereof from the
Reserve bank.
Sec. 81.97 Registered bonds and notes.
No formal assignment shall be required for the conversion to book-
entry GSE securities of registered GSE securities held by a Reserve
bank (in either its individual capacity or as fiscal agent of the
United States) on the effective date of this subpart for any purpose
specified in Sec. 81.93(a). Registered GSE securities deposited
thereafter with a Reserve bank for any purpose specified in section
81.93 shall be assigned for conversion to book-entry GSE securities.
The assignment, which shall be executed in accordance with the
provisions of subpart F of 31 CFR part 306, as amended or revised, so
far as applicable, shall be to ``Federal Reserve Bank of
____________________, as fiscal agent of [name of the GSE], for
conversion to book-entry [name of the GSE] securities.''
Sec. 81.98 Servicing book-entry GSE securities; payment of interest,
payment at maturity or upon call.
Interest becoming due on book-entry GSE securities shall be charged
on the interest-due date and remitted or credited in accordance with
the depositor's instructions. Such securities shall be redeemed and
charged in the account on the date of maturity or call, and the
redemption proceeds, principal and interest shall be disposed of in
accordance with the depositor's instructions. For Fannie Mae, interest
becoming due on book-entry Fannie Mae securities shall be charged to
Fannie Mae's account at the New York Federal Reserve Bank.
Sec. 81.99 Treasury Department regulations; applicability to GSEs.
The provisions of Treasury Department Circular No. 300, 31 CFR part
306 (other than subpart O), as amended or recodified from time to time,
shall apply, insofar as appropriate, to GSE obligations for which a
Reserve bank shall act as Fiscal Agent of the GSE, and to the extent
that such provisions are consistent with agreements between the GSE and
the Reserve banks acting as Fiscal Agents of the GSE. Definitions and
terms used in Treasury Department Circular No. 300 should read as
though modified to effectuate the application of the regulations to the
GSEs.
Subpart I--Other Provisions
Sec. 81.101 Equal employment opportunity.
Fannie Mae and Freddie Mac shall comply with sections 1 and 2 of
Executive Order 11478 (3 CFR 803 (1966-70 Compilation), as amended by
Executive Order 12106, 3 CFR 263 (1978)), providing for the adoption
and implementation of equal employment opportunity, as required by
section 1216 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (12 U.S.C. 1833e).
Sec. 81.102 Regulatory examinations.
Each GSE may be examined at any time by the Secretary or any
contractors, agents, officers, or employees of the Department
(hereinafter ``the examiners'') to monitor compliance with the
Secretary's regulatory authorities under these regulations, the Act, or
the applicable Charter Act. The examiners shall have access, upon
request to a GSE, to any relevant books, accounts, financial records,
reports, files, or other papers, things, or property belonging to or in
use or used by the GSE.
Appendix A--Secretarial Considerations to Establish the Low- and
Moderate-Income Housing Goal
A. Establishment of Goal
In establishing the annual low- and moderate-income housing
goal, the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 requires the Secretary to consider:
1. National housing needs;
2. Economic, housing, and demographic conditions;
3. The performance and effort of the enterprises toward
achieving the low- and moderate-income housing goal in previous
years;
4. The size of the conventional conforming mortgage market
serving low- and moderate-income families relative to the size of
the overall conventional conforming mortgage market;1
\1\``Conventional'' mortgages are those which do not carry any
government guarantee or insurance. That is, conventional mortgages
exclude FHA, FmHA, and VA loans. ``Conforming'' loans are those
whose principal amount does not exceed the maximum allowed for
purchase by Fannie Mae or Freddie Mac. Currently, this limit is
$203,150 for 1-unit properties, except that it is 50 percent higher
in Alaska, Hawaii, Guam, and the Virgin Islands. The conforming loan
limit is adjusted annually based on the October-to-October
percentage increase in house prices, as determined by the Federal
Housing Finance Board's Monthly Interest Rate Survey. In practice,
the conforming loan limit has only been increased since 1990; in the
case of declines in house prices, the limit has been held constant.
[[Page 9202]]
5. The ability of the enterprises to lead the industry in making
mortgage credit available for low- and moderate-income families; and
6. The need to maintain the sound financial condition of the
enterprises.
B. Underlying Data
In considering the factors under the Act to establish these
goals, the Secretary relied upon data gathered from the American
Housing Survey, the 1990 Census of Population and Housing, the 1991
Residential Finance Survey, other government reports, the Home
Mortgage Disclosure Act (HMDA) reports, and the GSEs. The Secretary
used data provided by the GSEs to determine their prior performance
in meeting the needs of low- and moderate-income families and their
financial condition. These data included loan-level information on
all mortgages purchased by the GSEs in 1993.
Section C discusses each of the factors listed above. Section D
summarizes the Secretary's rationale for selecting the low- and
moderate-income goals for 1995 and 1996.
C. Consideration of the Factors
Overview of Sections C.1 and C.2. These sections cover a range
of topics on housing needs and economic and demographic trends that
are important for understanding mortgage markets. Certain
information, such as trends in income inequality, is provided
because it helps explain problems that the low- and moderate-income
housing goal is intended to address. Other information, such as
trends in refinancing activity, is provided because it describes the
market environment in which the GSEs must operate and is therefore
useful for gauging the reasonableness of specific levels of the low-
and moderate-income goal. Finally, information is provided that
documents the severe housing problems faced by lower income
families.
This information has led the Secretary to the following
conclusions:
Purchasing a home became increasingly difficult for
lower income and younger families during the 1980s. Low-income
families with children, who could most benefit from the advantages
of ownership, bore the brunt of the decline in ownership rates. The
share of the nation's children living in owner-occupied homes fell
from 71 percent to 63 percent between 1980 and 1991.
Very low-income renters often must pay an unduly high
share of their income for rent.
Several demographic changes will affect the demand for
housing over the next few years. The continued increase in
immigrants will increase the demand for both rental and owner-
occupied housing. Non-traditional households have become more
important as overall household formation rates have slowed. With
later marriage, divorce, and other non-traditional living
arrangements, the fastest growing household groups are single-parent
and single-person households.
The volume of mortgage originations is expected to fall
from its 1993 record level of one trillion dollars to about $600
billion in 1995. Purchase mortgages, including those for first-time
homebuyers, will replace refinance mortgages as the dominant
mortgage type.
The predominance of purchase mortgages, as opposed to
refinance mortgages, will make it easier for the GSEs to meet a
given low- and moderate-income goal. Historically, mortgages for
low- and moderate-income borrowers have represented a larger
proportion of purchase mortgages than of refinance mortgages.
The recent rise in interest rates from 25 year lows
could make it more difficult for marginal borrowers to afford
homeownership. However, interest rates continue to remain lower and
housing more affordable than was true for any previous extended
period since 1977. Borrowers will also be helped by the rising
incomes that accompany economic growth.
1. National Housing Needs
a. Housing Problems Among Low- and Moderate-Income Owners and Renters
Under the income definitions in the Act, almost three-fifths of
U.S. households qualified as ``low-'' or ``moderate-''income
families in 1991. Almost half of all homeowners (49 percent) had
incomes below their (unadjusted) area median family income, while 71
percent of renters had income below their area's HUD-adjusted median
family income.2
\2\HUD is required by statute to adjust median family income in
developing its official income cutoffs for each Metropolitan
Statistical Area (MSA) and non-metropolitan county. Income limits
based on HUD-Adjusted Area Median Family Incomes (HAMFI) are
adjusted (1) With upper and lower caps for areas with low or high
ratios of housing costs to income; (2) by setting state
nonmetropolitan average income as a floor for nonmetropolitan
counties; and (3) by household size. The adjusted annual estimates
of area median family income provide the base for the ``50 percent''
and ``80 percent'' of HAMFI cutoffs that are assigned to a household
of four. Household size adjustments then range from 70 percent of
the base for a 1-person household to 132 percent of the base for an
8-person household.
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Housing needs in 1991 varied sharply with income. One-eighth of
owners with moderate incomes (income 80 to 100 percent of area
median) and one-fourth of moderate-income renters had a housing
problem, compared to 17 percent of low-income owners and 44 percent
of low-income renters (with income 60 to 80 percent of area median).
Moreover, two-thirds of the 14 million households with incomes below
30 percent of median paid more than 30 percent of income for housing
or lived in inadequate or crowded housing.3
\3\Tabulations of U.S. Departments of Housing and Urban
Development and Commerce, American Housing Survey for the United
States in 1991 (April 1993) performed by HUD Office of Policy
Development and Research.
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b. Affordability Problems and Worst Case Housing Needs
Finding affordable housing is by far the most common housing
problem for American families nationwide.4 Between 1979 and
1991, shares of households paying more than 30 percent of their
income for housing fluctuated around 42 percent among renters and
rose from 17 percent to 20 percent among owners.5 Over this
period, the number of low-income renter households spending 50
percent or more of their income on housing rose from 4.3 million in
1978 to 6.0 million in 1991.6 Poor homeowners also pay high
proportions of their income for housing costs. Between 1978 and
1989, the share of poor homeowners spending over 60 percent of
income on housing rose from 30.6 percent to 33.1 percent.7
\4\Since the early 1980s, ``affordable housing'' has generally
been interpreted as housing in which the homeowner or renter pays no
more than 30 percent of family income for housing costs, including
utilities.
\5\U.S. Departments of Housing and Urban Development and
Commerce, American Housing Survey for the United States in 1991,
April 1993.
\6\1974-1979 figures from Nelson and Khadduri, ``To Whom Should
Limited Housing Resources Be Directed,'' 3 Housing Policy Debate 1,
16, 1992. 1991 figure from Worst Case Needs for Housing Assistance
in the United States in 1990 and 1991. HUD-1481-PDR, June 1994.
\7\Center on Budget and Policy Priorities and Low Income Housing
Service, A Place to Call Home, April 1989; and U.S. Departments of
Housing and Urban Development and Commerce, American Housing Survey
for the United States in 1989, July 1991.
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Although affordability problems affect two-fifths of low-income
renters and one-eighth of low-income owners, they are most frequent
and severe among the very lowest income owners and renters. In 1991,
when the average gross rent/income ratio for renters with incomes
above area median income was 23 percent, this ratio was 72 percent
for renters with incomes below 30 percent of area median income and
41 percent for renters with incomes between 30 and 49 percent of
median.8
\8\Tabulations of U.S. Departments of Housing and Urban
Development and Commerce, American Housing Survey for the United
States in 1991, April 1993, performed by HUD Office of Policy
Development and Research.
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Priority problems--defined as paying more than half of income
for rent and utilities, being displaced, or living in severely
inadequate housing--were heavily concentrated among renters with
incomes below 50 percent of area median. Half of renters with
incomes below 30 percent of median, and one-fourth of those with
incomes 31-50 percent of median, had these severe ``worst case''
housing needs.9
\9\Congress defines ``worst case needs'' for housing assistance
as unassisted renters with incomes below 50 percent of area median
income who have priority problems.
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According to HUD's third Congressionally-mandated study of worst
case needs, severe affordability problems were not only the
overwhelming cause of worst case needs but often a family's only
housing problem.10 [[Page 9203]] Fully 94 percent of the 5.3
million households with worst case needs reported severe rent burden
as a problem, and for almost three-fourths, severe rent burden was
their only problem.
\10\Worst Case Needs for Housing Assistance in the United States
in 1990 and 1991. HUD-1481-PDR, June 1994.
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The number of households with worst case needs increased by
nearly 400,000 between 1989 and 1991, rising most rapidly among
families with children. Large families were more likely than smaller
ones to have priority problems and the need to move to another
housing unit because of crowding or excessive rent burden. Between
1989 and 1991, worst case needs among very low-income families with
three or more children increased from 34.7 percent to 40.2 percent.
Elderly households were the least likely to have worst case needs.
c. Increasing Numbers of Homeless Individuals and Families
The homeless clearly have the most acute housing needs. Precise
counts of homeless individuals are difficult to determine, but a
study by the Urban Institute estimated that there were between
496,000 and 600,000 homeless persons in the United States during a
seven-day period in March 1987, and more than one million persons
were homeless at some time during that year.11 The
Congressional Budget Office estimated a one-day homeless population
of approximately 700,000 for 1991.12 The Census Bureau
supplemented its regular 1990 census operations with a special one-
night ``Street and Shelter Night'' count of the homeless, and found
more than 228,000 homeless individuals at emergency homeless
shelters and at pre-identified street locations on the night of
March 20, 1990.13 Recent studies of turnover in shelters
suggest, moreover, that the number ``who experience at least one
episode of homelessness * * * (over a one to five-year period) may
exceed the best estimates of single-shot street and shelter counts
by a factor of ten or more.''14
\11\Interagency Council on the Homeless, Executive Summary: The
1990 Annual Report of the Interagency Council on the Homeless, 1991.
\12\Ibid. at 21. This figure was based on a memorandum written
by the Congressional Budget Office which used the 1987 Urban
Institute study as its starting point and was updated using a 5
percent annual growth rate.
\13\Interagency Council on the Homeless, Fact Sheet, ``How Many
Homeless People Are There?,'' April 1991, No. 1-1.
\14\Interagency Council on the Homeless, Priority: Home! The
Federal Plan to Break the Cycle of Homelessness, 1994, p. 19.
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d. Unmet Demands for Homeownership
Homeownership is a key aspiration of most Americans and a basic
concern of government. Homeownership fosters family responsibility
and self-sufficiency, expands housing choice and economic
opportunity, and promotes community stability. Ownership also
improves access to the larger homes and better neighborhoods
particularly needed by those families with children. Children of
homeowners are more likely to graduate from high school, less likely
to commit crime, and less likely to have children as teenagers than
children of renters.15 Recent surveys indicate that lower-
income and minority families who do not own their homes will make
considerable sacrifices to attain this goal.
\15\These tendencies are especially strong for lower income
households. Children of low-income homeowners are 15 percent more
likely to stay in school than children of non-homeowners. Michelle
White and Richard Green, ``Measuring the Benefits of Homeowning:
Effects on Children,'' University of Chicago, unpublished paper,
February 1994.
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During the 1980s, the goal of homeownership became more elusive
for low- and moderate-income families. Ownership rates rose
dramatically in the late 1940s and 1950s, increasing from 43.6
percent to 61.9 percent between 1940 and 1960. During the 1960s,
homeownership rates rose more slowly, reaching 62.9 percent by 1970,
and--after several years of high house price appreciation--an all-
time high of 65.6 percent in 1980. In the early 1980s, historically
high interest rates, low price appreciation, and a series of deep
regional recessions caused the homeownership rate to decline to 63.9
percent by 1985. The rate increased only slightly between 1985 and
1993.
Declines in ownership rates during the 1980s were most
pronounced for younger, lower-income households, particularly
families with children. Although homeownership rates held steady or
increased among families where the head of the household was born
before or shortly after World War II, homeownership rates declined
among younger households with lower incomes:
Between 1980 and 1992, homeownership among younger households
dropped roughly 10 percentage points from 1980 levels, from 43.3
percent to 33.1 percent for households with the head aged 25 to 29,
and from 61.1 percent 50.0 percent for households with the head aged
30 to 34. These declines were concentrated among single-parent
households and married couples with children.16
\16\Joint Center for Housing Studies of Harvard University, The
State of the Nation's Housing, 1993, Table A-4.
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Homeownership rates fell by 4 percentage points each for
moderate-income households and low-income households during the
1980s, and by 3 percentage points for households below 50 percent of
area median, adjusted for family size. At each income level,
declines were greatest for families with children. Among very low-
income families with children, homeownership rates dropped by nearly
a fourth.17
\17\Kathryn Nelson and Jill Khadduri, ``To Whom Should Limited
Housing Resources Be Directed?'' Housing Policy Debate Vol. 3, 1992,
pp. 1-55, Table 3.
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The stability in ownership after 1985 resulted from increases
among elderly households and single individuals, offset by further
declines among families with children. Declines among families with
children were greatest at incomes 80-100 percent and 30-50 percent
of unadjusted area median income.
In sum, the families with children who could most benefit from
ownership were most adversely affected by declines in ownership.
Between 1980 and 1991, the dip in total ownership rate from 65.6 to
64.2 percent translated into a fall of seven percentage points among
families with children, from an ownership rate of 70.4 percent down
to 63.4 percent.
e. Obstacles to Increased Homeownership
Insufficient income, high debt burdens, and limited savings pose
obstacles for younger families in purchasing a home. As home prices
skyrocketed during the late 1970s and early 1980s, real incomes
stagnated, with earnings growth particularly slow for blue collar
jobs and less educated workers. The combination of relatively high
interest rates and slow income growth through most of the 1980s made
homeowner mortgage payments claim larger fractions of family income,
and increasing rents made saving for home purchase more difficult.
Thus, fewer households had the financial resources to meet down
payment requirements, closing costs, and monthly mortgage payments.
A 1991 survey by the National Association of Home Builders found
that one-fifth of first-time homeowners had to rely on their
relatives for most of their down payment.18 A survey by the
National Association of Realtors found that approximately one-third
of recent first-time homeowners relied on gifts and loans from
parents.19
\18\National Association of Home Builders, Profile of the New
Home Buyer Survey, 1991.
\19\National Association of Realtors, Survey of Homeowners and
Renters, 1991.
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In addition to low income, high debts are a primary reason
households cannot afford homes. Nearly 53 percent of renter families
have both insufficient income and excessive debt problems that may
cause difficulty in financing a home purchase. High debt-to-income
ratios frequently make potential borrowers ineligible for mortgages
based on the underwriting criteria established in the conventional
mortgage market.
In a recent study, the Census Bureau estimated that in 1991
nearly 90 percent of renters could not afford a modest home (priced
at the bottom twenty-fifth percentile) in their Census
division.20 Seventy-eight percent could not afford a home
priced at the tenth percentile. Such affordability problems are
especially pronounced among single-parent households. While almost
76 percent of married-couple renter families could not afford a
modestly priced home in their area using fixed-rate FHA financing,
the figure rises to 90.3 percent for single male householders and 96
percent for households headed by single women.
\20\Howard Savage and Peter Fronczek, Who Can Afford to Buy A
House in 1991? U.S. Bureau of the Census, Current Housing Reports
H121/93-3, July 1993.
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2. Economic, Housing, and Demographic Conditions
A number of economic, housing, and demographic considerations
have influenced the Secretary's determination of housing goals for
low- and moderate-income families. Increasing income inequality and
changes in household composition suggest that needs for housing
affordable to very low-income families will continue to be most
acute, placing additional pressure on the widespread shortages of
rental housing [[Page 9204]] affordable to incomes below 30 percent
of median income. Reacting to high vacancy rates in market-rate
housing, multifamily starts have been low in the last few years,
though starts have picked up in 1994. Although volatile interest
rates strongly influence both starts and mortgage market activity,
rates that are relatively low by historical standards have improved
affordability for first-time buyers.
a. Underlying Demographic Conditions
(1) Household Formations. The demand for housing and mortgages
depends heavily on household formations. During the 1970s, as the
leading edge of the baby boom generation (born between 1946 and
1964) entered adulthood, household formation surged to an annual
average of 1.7 million. Aided by rising incomes and low real
interest rates, household heads aged 25-34 purchased homes in record
numbers. During the 1980s, annual household growth fell slightly to
an average of 1.5 million. Many in the ``housing upgrade'' group
(aged 35-44) had benefitted from substantial increases in the prices
of their first homes, and were able to afford bigger and higher
quality homes during the 1980s. Household formation is expected to
drop sharply during the 1990s. The Census Bureau projects that the
older baby boomers (aged 45 to 54) will be the fastest growing
population group during this decade.
The effects of these demographic trends on housing demand have
been debated in the economics literature for several years. In 1989,
Gregory Mankiw and David Weil predicted that the aging of the baby
boomers and the small size of the following ``baby bust'' generation
would substantially reduce housing demand and cause housing prices
to collapse during the 1990s.21 Other researchers disagree.
Reductions in housing demand due to aging of the baby boom
generation could be offset by many factors, including rising
incomes, pent-up demand for homeownership by those priced out of the
housing market during the 1980s, and high levels of
immigration.22
\21\W. Gregory Mankiw and David N. Weil, ``The Baby Boom, the
Baby Bust, and the Housing Market,'' Regional Science and Urban
Economics, May 1989.
\22\See, for example, Joint Center for Housing Studies of
Harvard University, The State of the Nation's Housing 1994, 1994.
---------------------------------------------------------------------------
(2) Immigration. The continued increase in immigration during
the 1990s will help offset declines in the demand for housing caused
by the aging of the baby boom generation. During the 1980s, there
were 6 million legal immigrants into the United States, up from 4.2
million during the 1970s and 3.2 million during the 1960s. The
Hispanic population residing in the U.S. increased by 50 percent
during the 1980s, while the Asian population doubled. About one-
quarter of the Hispanics living in the U.S. in 1990 had immigrated
during the 1980s. Immigration is projected to add even more new
Americans in the 1990s than it did during the 1980s. Asians and
Pacific Islanders are expected to be the fastest growing group, with
annual growth rates that may exceed 4 percent in the 1990s. Total
population is now projected to rise by 25 million in each of the
decades from 1991 to 2020. The tendency of immigrants, particularly
Hispanics, to locate in certain ``gateway'' cities (e.g., Los
Angeles and Miami) will placed increased demands on the housing
stock in some major urban areas.
(3) Non-traditional Households. While overall growth in new
households has slowed, non-traditional households have become more
important. With later marriages, divorce, and other non-traditional
living arrangements, household growth has been fastest among single-
parent and single-person households. The number of single parents
with one or more children under 18 was 10.5 million in 1992; the
vast majority of those single parents were women.23 About 62
percent of Black families with children were single-parent families
in 1992, compared with 34 percent for Hispanics and 24 percent for
Whites. Since only 35 percent of single-parent households are
homeowners compared to 74 percent of married couples, their increase
should spur demand for rental housing and for affordable ownership
opportunities. In addition, HUD's analysis of the nation's worst
case housing needs shows that female-headed households suffer some
of the most severe housing problems.
\23\U.S. Department of Commerce, Bureau of the Census, How We're
Changing: Demographic State of the Nation: 1993. Special Studies
Series, P-23, No. 184, February 1993.
---------------------------------------------------------------------------
(4) Single Person Households are playing an increasingly
important role in the housing market. Singles accounted for one-
fourth of all households in 1990. While one-half owned their own
home, most of these were elderly people with little or no mortgage
debt and probably no intention of entering the housing market.
Never-married singles, on the other hand, have been a significant
factor in the homebuying market in large urban areas, according to
the annual Home Buyers Survey of the Chicago Title and Trust
Company. They accounted for a third of first-time homebuyers in 1992
and 1993, up from slightly over one-quarter of first-time buyers in
1990 and 1991, and as discussed above, ownership rates among non-
elderly single individuals rose steadily during the 1980s.24
Low interest rates during the past two years apparently enticed even
more single renters to become homeowners.
\24\Chicago Title and Trust Family of Insurers, Who's Buying
Homes in America, January 1992 and January 1993.
---------------------------------------------------------------------------
b. Economic Conditions
(1) Income Inequality. Growing inequality in the distribution of
income makes it more difficult for those at the bottom of the income
distribution to purchase adequate shelter. The share of the nation's
income received by the richest 5 percent of American families rose
from 18.6 percent in 1977 to 24.5 percent in 1990, while the share
received by the poorest 20 percent fell from 5.7 percent to 4.3
percent. This widening income inequality was due mainly to wage
rates becoming more unequal--as the economy moved away from
manufacturing to more advanced computer and knowledge-intensive
industries, the wages of unskilled, entry-level, and blue collar
workers have fallen relative to the wages of professional and
technical workers. The result has been an increase in the working
poor and a squeezing of the middle class.
(2) Interest Rates. Volatile interest rates continue to be a
major determinant of housing and mortgage market activity. As the
1980s began, mortgage interest rates were above 12 percent and rose
quickly to over 15 percent. After 1982, they drifted slowly downward
to the 9 percent range in 1987 before rising to over 10 percent in
the 1989-1990 period. Rates returned to 9.32 percent in 1991 and
then fell further to averages of 8.24 percent in 1992 and 7.20
percent in 1993. The October 1993 rate of 6.80 percent was the
lowest level in more than twenty years.25
\25\Council of Economic Advisers, Economic Indicators, September
1994 and Economic Report of the President, February 1994.
---------------------------------------------------------------------------
During 1992 and 1993, homeowners responded to the record low
rates by refinancing existing mortgages. While refinancing accounted
for less than 25 percent of mortgage originations in 1989-90 when
interest rates exceeded 10 percent, the sharp decline in interest
rates led refinancings to account for over 50 percent of all
mortgage originations in 1992 and 1993.26 Because of the heavy
refinancing activity, single-family mortgage originations surged
from less than $500 billion in 1990 to record levels of $894 billion
in 1992 and over $1 trillion in 1993.
\26\Monthly average refinancing data obtained from Freddie Mac's
Primary Mortgage Market Survey.
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Single-family housing starts have also responded to interest
rates, with record low volumes in 1981 and 1982, peaks in 1986 and
1987, and less severe lows in 1990 and 1991. Low interest rates and
economic recovery in 1992 and 1993 made homeownership more
affordable and helped turned the housing market around. Single-
family starts increased from less than 900,000 during the
recessionary years of 1990 and 1991 to 1.030 million in 1992 and
1.126 million in 1993. Volume in 1993 was almost 35 percent higher
than 1991's recessionary low of 840,000.
(3) First-time Home Buyers. First-time home buyers have been the
driving force in the recovery of the nation's housing market in the
past two years. First-time homebuyers are typically people in the
25-34 year-old age group that purchase modestly priced houses. As
the post-World War II baby boom generation ages, the percentage of
Americans in this age group has shrunk, from 28.3 percent of those
over age 25 in 1980 to 25.4 percent in 1992.27 Nonetheless, as
reported in a series of annual Home Buyers Surveys conducted by the
Chicago Title and Trust Company, first-time homebuyers have bucked
these demographic trends to increase their share of home sales.
During the 1980s, first-time buyers accounted for about 40 percent
of home sales; this figure rose to 45 percent in 1991, 48 percent in
1992, and 46 [[Page 9205]] percent in 1993.28 The 1992 figure
was the highest percentage for first-time buyers since the annual
Home Buyers Survey was initiated in 1976.
\27\U.S. Department of Commerce, Bureau of the Census, Money
Income of Households, Families, and Persons in the United States:
1992, Special Studies Series P-60, No. 184, Table B-25, October
1993.
\28\Chicago Title and Trust Family of Insurers, Who's Buying
Homes in America, January 1992, January 1993, and January 1994.
---------------------------------------------------------------------------
Among the active first-time buyers was a record contingent of
single-individual households. As noted above, the 1992 and 1993 Home
Buyers Surveys found that approximately 30 percent of first-time
buyers in these years were single, compared to 21 percent in 1991.
The more affluent, move-up home buyers, on the other hand, have
recently played a smaller role. A sluggish economy, uncertain
outlooks for many white-collar jobs, and slow house price
appreciation apparently have kept many trade-up buyers out of the
housing market.
Reflecting these trends, the average income for recent home
buyers has fallen. In 1991, one of every three buyers had a family
income of $50,000 or less; in 1993, those earning less than $50,000
accounted for 44 percent of all home buyers. Apparently, two years
of low interest rates induced many renters who had previously been
priced out of the market to try homeownership. A strong pent-up
demand to own a home should not be surprising given the large
reductions in homeownership rates experienced by several groups
during the 1980s (see Section C.1.d above). A recent survey of
renters by the National Association of Realtors (NAR) indicated that
only one-third prefer to remain renters for the foreseeable
future.29 Thus there are many potential home buyers among the
34 million households that are currently renting.
\29\National Association of Realtors, Survey of Homeowners and
Renters, 1991.
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c. Housing Conditions
(1) Affordability of Home Purchase. Potential home buyers in
1992 and 1993 enjoyed the most affordable market in almost twenty
years. The National Association of Realtors (NAR) tracks housing
affordability by measuring the degree to which an average family can
afford monthly mortgage payments on a typical house, assuming that
the family has enough cash for a 20 percent down payment.
Specifically, NAR's composite affordability index measures the ratio
of median family income to the income required to qualify for a
conventional loan on a median-priced house. After averaging slightly
over 110 between 1986 and 1991, the index jumped to 125 in 1992 and
137 in 1993.30 The 1993 figure indicates that the U.S median
family income was 37 percent more than was needed to qualify for a
mortgage on the nation's median priced house. The South and North
Central census regions were the most affordable for homebuyers, with
affordability indexes of 141 and 176, respectively, in 1993.
Affordability remained much more of a problem in the Northeast and
West, where NAR's indexes were around 110 to 117.
\30\See News Release, ``Housing Affordability Sustained Despite
Rise in Interest Rates'', National Association of Realtors, August
9, 1994.
---------------------------------------------------------------------------
In addition to its overall affordability index, NAR also
estimates the ability of first-time home buyers to purchase a
modestly-priced home. When this index equals 100, the typical first-
time buyer can afford the typical starter home under existing
financial conditions with a 10 percent down payment. NAR's first-
time home buyer index increased from 75 to 89 between 1991 and 1993.
The fact that this index remained below 100 indicates that the
monthly mortgage payment continued to place a significant burden on
first-time home buyers even during a period of record low interest
rates. The recent jump in interest rates reduced housing
affordability slightly. According to Freddie Mac' primary market
survey, interest rates for conventional, 30-year, fixed rate
mortgages increased from a 25 year low of 7.05 percent in the fourth
quarter of 1993 to 8.46 percent in the third quarter of 1994.31
This increase can be expected to make it more difficult for
potential first-time home buyers to qualify for conventional
mortgages, as reflected in the third dip in NAR's composite
affordability index from 142 in the fourth quarter of 1993 to 128 in
the third quarter of 1994. The first-time home buyer's index dropped
from 92.3 to 83.0 during this period. Both indexes would have fallen
further if incomes had not risen to partially offset the effects of
increased interest rates. However, interest rates continue to remain
lower and housing more affordable than was true for any previous
extended period since 1977. Moreover, as the economic recovery
continues, rising incomes should continue to offset the effects of
higher interest rates.
\31\The most recent surveys for the last weeks of November
showed that interest rates had settled in the neighborhood of 9.25
percent.
---------------------------------------------------------------------------
(2) Declines in the Number of Low Rent Units in the Housing
Stock. The rental housing stock considered affordable to poor
families (the number of units with rents less than $300 per month,
in constant 1989 dollars) fell from 9.9 million units in 1974 to 9.5
million units in 1985, and to 9.2 million units in 1991.32 Such
declines in the number of low-rent units, combined with sharp
increases in the number of poor families, underlie Congressional
concerns about the need to expand the supply of affordable rental
housing.33
\32\1974 and 1985 figures from Joint Center for Housing Studies
of Harvard University, The State of the Nation's Housing, 1992, p.
35. The 1991 figure is calculated from Exhibit 21 of the 1994 Joint
Center report on The State of the Nation's Housing.
\33\U.S. Senate, 1992. Report accompanying S.3031, the National
Affordable Housing Act Amendments of 1992. 102d Congress, 2d
Session, Report 102-232, p. 8.
---------------------------------------------------------------------------
Such shortages of rental units relative to renters occur mainly
among units affordable to renters with incomes below 30 percent of
area median. Analysis of Census data shows that nationally there
were only four units for every five renters with incomes below 30
percent of area median in 1990, while for renters with incomes below
50 percent of median nationally there was a surplus--1.24 units for
every renter.34 Similarly, at the state level, 30 states had
shortages of units affordable below 30 percent of median, while only
3 had shortages of units affordable below 50 percent of
median.35 Such shortages were strongly correlated with the
incidence of worst case needs by state. The combined effects of a
declining low-rent housing stock and the demand for rental units by
young families that are locked out of the homeownership market have
kept rents high for poor renter families.
\34\Amy Bogdon et al., National Analysis of Housing
Affordability, Adequacy, and Availability, HUD-1448-PDR, 1994, pp
52-53.
\35\U.S. Department of Housing and Urban Development, Worst Case
Needs for Housing Assistance in the United States in 1990 and 1991,
HUD-1481-PDR, 1994, Table 8.
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(3) Multifamily Production and Finance. This section discusses
three important trends in the multifamily industry, including recent
shifts in construction levels, projections for the mortgage market,
and shifts in financing trends. Peaks and troughs have characterized
multifamily construction since 1959. The most recent peak year was
1985, in which 576,000 multifamily units were started.\36\ The
downturn from this peak was particularly severe, and resulted from
lower net household growth and the loss of favorable tax treatment
due to the Tax Reform Act of 1986. For the last 3 years, multifamily
housing production has been at the lowest levels recorded since the
Government began collecting these data 35 years ago. In 1993 only
131,200 multifamily units were started, far below the annual average
of 435,000 units from 1964 through 1992.
\36\The record high was 906,200 multifamily units started in
1972.
---------------------------------------------------------------------------
While multifamily production will probably continue at below-
average rates for the next few years, signs indicate that this
sector of the housing industry has begun a modest recovery in 1994.
Much of what is being produced now is because of Low-Income Housing
Tax Credits--about 50,000 units in both 1992 and 1993. In addition,
an increasing share is being produced by non-traditional developers,
particularly community-based, nonprofit developers. Although current
production levels do not meet the demand for low-cost rental
housing, housing affordable to moderate income families is capturing
a large share of the multifamily units that are being produced.
Multifamily mortgage originations have paralleled the patterns
of multifamily construction starts. Conventional mortgage
originations peaked at $41 billion in 1986 (a year after the peak in
construction starts), and then declined every year to a trough of
about $25 billion in 1991 and 1992, while the 1993 level rose to
almost $29 billion. The 1994 level is projected to be about $33
billion, with an increase to the $35-$40 billion range for 1995 and
1996.
The decline in total multifamily lending in the late 1980s
accompanied a change in the structure of the market.\37\ In 1985,
thrift institutions originated a peak of 42 percent of multifamily
mortgages. However, their holdings have decreased by $41 billion
since 1988, due to defaults and write-offs, failure of institutions
and refinancing of thrift-held mortgages. Multifamily mortgages
remained close to 8.5 percent of total thrift assets from 1985 to
1992, but the high failure rate of these institutions has reduced
their total assets. The decline of thrift multifamily lending is
part of a larger pattern of more concentration in the multifamily
finance market. An additional pattern is the decline of long-term
and fixed rate financing. Over 60 percent of outstanding multifamily
debt either carries a variable interest rate, or will have a balloon
payment due in less than 10 years.
\37\The following discussion is drawn from The Hamilton
Securities Group Inc, The National Multi Housing Council, and The
National Apartment Association, ``A Report on the Multifamily
Mortgage Industry,'' 1994.
---------------------------------------------------------------------------
The lack of a strong secondary market for multifamily loans has
made it more difficult to obtain debt financing for multifamily
housing. In 1993, Fannie Mae purchased $4.6 billion in multifamily
mortgages, while Freddie Mac purchased $191 million. This compares
to almost $29 billion in total multifamily mortgage originations in
that year. Thus, the GSEs' purchases amounted to about 17 percent of
originations. Given that some of the GSEs' purchases were seasoned
loans, their share of the current market is even smaller. Freddie
Mac had been out of the multifamily business completely for nearly
five years, and only began in December 1993 to fully re-enter the
market. In 1993, Fannie Mae and Freddie Mac held or had securitized
about 10 percent of outstanding multifamily mortgage debt. State and
local housing finance agencies and insurance companies each held
another 10 percent of the outstanding debt. Depository institutions
held 36 percent, but as mentioned earlier, thrifts have decreased
holdings considerably in recent years. GNMA held 12 percent, pension
funds held 2 percent, and the remainder was spread in small shares
over a number of sources. The decline in direct federal subsidies
and the collapse of the thrift industry decreased the lending
sources for affordable multifamily housing. The country needs an
established secondary market for multifamily mortgages which has the
depth and resiliency of the single-family system to bring new
sources of primary financing into the market.
3. Performance and Effort of the GSEs Toward Achieving the Goal in
Previous Years
Each GSE submitted data on its 1993 performance to the
Secretary, in formats specified by the Department, and based on the
procedures specified by the Department in the Notice of Interim
Housing Goals published in the Federal Register on October 13, 1993.
This is the first time that such detailed information has been made
available on the GSEs' activities, which in 1993 involved the
purchase of 2.97 million mortgages on 3.24 million dwelling units by
Fannie Mae and the purchase of 2.32 million mortgages on 2.38
million dwelling units by Freddie Mac. Each GSE also submitted
detailed loan level data on each loan it purchased in 1993. HUD has
done extensive analyses to verify the GSEs' stated performance and
to measure aspects of their mortgage purchase activities in 1993 not
contained in the tables they submitted to the Department.
Fannie Mae's data for 1993 show that 31.8 percent of single
family dwelling units, 95.4 percent of multifamily dwelling units,
and 35.6 percent of total units financed by its mortgage purchases
were affordable to low- and moderate-income families. Thus there was
a significant increase in the low- and moderate-income percentage
from 28 percent in 1992, and Fannie Mae's performance substantially
exceeded the 30 percent goal established for Fannie Mae by the
Secretary.\38\ [[Page 9206]]
\38\Some mortgage purchases are not eligible for possible
inclusion under the low- and moderate-income goal, such as federally
guaranteed mortgages, second mortgages, mortgages on second homes,
and mortgages originated prior to January 1, 1993 that were missing
relevant borrower income or rent data. Such mortgages were excluded
from both the numerator and the denominator in calculating the low-
mod percentage. These exclusions amounted to 14 percent of Fannie
Mae's purchases and 9 percent of Freddie Mac's purchases.
---------------------------------------------------------------------------
Freddie Mac's data for 1993 show that 28.9 percent of single
family dwelling units, 94.3 percent of multifamily dwelling units,
and 29.2 percent of total units financed by its mortgage purchases
were affordable to low- and moderate-income families. Thus there was
a significant increase in the low- and moderate-income percentage
from 24 percent in 1992, and Freddie Mac's performance exceeded the
28 percent goal established for Freddie Mac by the Secretary.
On November 29, 1994 both enterprises reported on their
purchases for the first three quarters of the year. Fannie Mae
stated that 43.3 percent of its purchases were for low- and
moderate-income families, and the corresponding figure for Freddie
Mac was 36.3 percent. Thus both enterprises have sharply increased
their low- and moderate-income purchases above the 1993 level, and
both are running well above the 1994 goal of 30 percent.\39\ For all
periods, performance would be somewhat higher utilizing the scoring
provisions of this regulation, in contrast to those spelled out in
the Federal Register on October 13, 1993.
\39\A portion of the increase from 1993 reflects a decline in
the share of refinancings, which have been less common among low-
and moderate-income families.
---------------------------------------------------------------------------
For both enterprises, although they surpassed their low- and
moderate-income goals in 1993, more than 50 percent of their single-
family purchases and their total purchases were for families with
incomes in excess of 120 percent of area median income, as indicated
in the following table:
Distribution of Dwelling Units in Total GSE Purchases by Income Class of Mortgagor or Renter, 1993
[In percent]
----------------------------------------------------------------------------------------------------------------
Fannie Mae Freddie Mac
Income of mortgagor(s) or renter(s) relative -----------------------------------------------------------------
to area median income Single- Multi- Single- Multi-
family family Total family family Total
----------------------------------------------------------------------------------------------------------------
0%-60%........................................ 6.3 43.3 8.7 5.3 71.2 5.6
60%-80%....................................... 11.1 43.8 13.2 10.3 19.5 10.4
80%-100%...................................... 14.2 8.3 13.9 14.0 3.7 14.0
100%-120%..................................... 14.5 1.8 13.7 14.7 2.2 14.6
Exceeds 120%.................................. 53.8 2.8 50.6 55.7 3.4 55.4
-----------------------------------------------------------------
Total................................... 100.0 100.0 100.0 100.0 100.0 100.0
----------------------------------------------------------------------------------------------------------------
This indicates that achievement of the low- and moderate-income goal
in 1993 did not deter the GSEs from buying many mortgages on
properties purchased by higher income families.
4. Size of the Conventional Conforming Mortgage Market Serving Low-
and Moderate-Income Families Relative to the Overall Conventional
Conforming Market
This section explains the Secretary's methodology for estimating
the low- and moderate-income (``low-mod'') share of the mortgage
market. Ideally, computing this share would be straightforward,
consisting of three steps:
(1) Projecting the size of the four major property types
included in the conventional conforming mortgage market: (a) Single-
family owner-occupied dwelling units, (b) single-family owner-
occupied, two-to-four units (called ``2-4's''), (c) single-family
one-to-four investment units (called ``1-4's''), and (d) multifamily
units (properties with more than 4 units). Property types (b), (c),
and (d) consist of rental units. As noted below, property types (b)
and (c) must sometimes be combined due to data limitations; in this
case, they are referred to as ``single-family 1-4 rental units''.
(2) Projecting the percentage that are low- and moderate-income
for each of the above four property types (for example, the
percentage of those single-family owner- [[Page 9207]] occupied
dwelling units financed by mortgages in a particular year that are
occupied by households with incomes below the area median).
(3) Multiplying the four percentages in (2) by their
corresponding market shares in (1), thus arriving at an estimate
(weighted average) of the overall share of dwelling units financed
by mortgages that are occupied by low- and moderate-income families.
The four property types are analyzed separately because of their
differences in low-mod occupancy; rental properties tend to have
much higher percentages of low-income occupants than owner-occupied
properties. It is often necessary to distinguish between purchase
and refinance mortgages because purchase mortgages are more apt to
finance units occupied by low-income occupants.
Unfortunately, complete and consistent mortgage data are not
readily available to easily carry out the above three steps.
Therefore, HUD had to combine information from several data sources
in order to estimate the market shares. Two approaches were taken--
one based on American Housing Survey and Residential Finance Survey
data and one based on 1993 HMDA data and projections of the mortgage
market for 1995 and 1996. HUD also relied on the mortgage purchase
data for 1993 supplied by the GSEs. The following sections explain
HUD's methodology and present results of several sensitivity
analyses of the estimated size of the low-mod market.
a. American Housing Survey/Residential Finance Survey Method
To obtain an overall perspective of the mortgage market, data
from the American Housing Surveys for 1985, 1987, 1989, and 1991
were analyzed. This data showed that, overall, 30 percent of those
families who recently purchased or refinanced their homes, and who
obtained conventional mortgages below the conforming loan limits,
had incomes below the area median. Restricting the American Housing
Survey (AHS) analysis to 1991 (the latest year that for which data
is available) yields about the same estimate (31 percent) for the
low-mod share of single-family owner-occupied properties.
The AHS does not include data on mortgages for rental properties
(1-4 properties including (b) and (c) above and multifamily);
rather, it includes data on the characteristics of the existing
housing stock and recently completed rental properties. Current data
on the income of prospective or actual tenants has also not been
readily available for rental properties. Where such income
information is not available, the Act provides that a rent level is
affordable if it does not exceed 30 percent of the maximum income
level for the low-income or moderate-income category, with
appropriate adjustments for unit size as measured by the number of
bedrooms.
Analysis of the same four American Housing Surveys shows that
for 1-4 unit unsubsidized rental properties ((b) and (c) properties
are combined], 90 percent of all units, and 69 percent of units
constructed in the preceding three years had gross rent (contract
rent plus the cost of all utilities) less than or equal to 30
percent of area median family income. For multifamily unsubsidized
rental properties, the corresponding figures are 92 percent of all
units, and 83 percent of units constructed in the preceding three
years. Restricting the analysis to 1991 gave similar results--91
percent and 68 percent for 1-4 properties and 92 percent and 83
percent for multifamily properties. It should be noted that data for
recently completed units probably underestimate the low- and
moderate-income percentage of rental housing under the Act's
definition, because they exclude purchase and refinance transactions
on older buildings, which generally charge lower rents than newly-
constructed buildings.
The GSEs' 1993 purchase data for rental properties also provides
a useful reference point. Freddie Mac's data suggest a 66 percent
low-mod share for rental 1-4 properties and Fannie Mae's data
suggest a 73 percent low-mod share.\40\ The GSE percentages are
similar to the AHS low-mod share (69 percent) for recently completed
1-4 properties. On the multifamily side, Fannie Mae's data suggest a
95 percent low-mod share which is about the same as the AHS estimate
for existing properties. Freddie Mac's multifamily business is too
small to provide reliable data.
\40\Disaggregating the rental 1-4 category into its two
components, Freddie Mac's data showed a 54 percent low-mod share for
rental 2-4's and a 85 percent low-mod share for 1-4 investment
properties. Fannie Mae's data showed a 62 percent low-mod share for
rental 2-4's and a 86 percent low-mod share for 1-4 investment
properties. The low-mod percentages were practically the same for
purchase and refinance mortgages.
---------------------------------------------------------------------------
To calculate the size of the potential market for mortgages
financing housing for low- and moderate-income families, data on the
number of owner-occupied dwelling units, rental units in 1-4 unit
properties, and rental units in multifamily properties are
necessary. In determining the proportions of dwelling units in these
three different types of properties, HUD used data from the
Residential Finance Survey (RFS) on the number of properties with
conventional conforming mortgages acquired during the 1987-91
period, and the total number of dwelling units for each type of
property, derived from the same source. Based on this data, HUD
estimated that, of total dwelling units in properties financed by
recently acquired conventional conforming mortgages, 56.5 percent
were owner-occupied units, 17.9 percent were in 1-4 family rental
properties, and 25.6 percent were located in multifamily rental
properties.\41\ Applying the AHS percentages of affordable dwelling
units (30 percent of owner-occupied dwelling units, 69 percent of
single-family recently completed rental units, and 83 percent of
recently completed multifamily rental units) to these percentages of
properties results in an estimate that 51 percent of the dwelling
units secured by conventional mortgages, eligible for purchase by
the GSEs, are affordable to low- and moderate-income families.\42\
\41\Restricting the RFS analysis to 1991 resulted in only minor
changes to the market shares.
\42\The 51 percent figure was derived by adding the following:
(1) 16.95% (percentage of owner-occupied units [56.5%] times
percentage of those units that are affordable to low- and moderate-
income families [30%]); (2) 12.35% (percentage of rental units in 1-
4 family properties [17.9%] times percentage of those units that are
affordable to low- and moderate-income families [69%]); and (3)
21.25% (percentage of rental units in multi-family properties
[25.6%] times percentage of those units that are affordable to low-
and moderate-income families [83%]).
---------------------------------------------------------------------------
The 51 percent figure is based on the percentage estimates for
newly-constructed affordable rental units rather than the higher
estimates for all affordable rental units and GSE purchases. Using
the AHS low-mod estimates for the existing stock (90 percent for 1-4
properties and 92 percent for multifamily properties) increases the
low-mod share to 57 percent. Using the low-mod percentages of Fannie
Mae's 1993 rental purchases (75 percent for 1-4 properties and 95
percent for multifamily properties) suggests a 54 percent low-mod
share.
One concern with the Residential Finance Survey data is the
seemingly high percentage share of multifamily units, given that
multifamily mortgage originations have declined from their high
levels in the mid- to late-1980s. Between 1987 and 1991, annual
multifamily conventional mortgage originations averaged $32 billion,
representing 8.8 percent of total conventional mortgage
originations. In 1993, conventional multifamily originations stood
at $28.5 billion and, because of the record trillion dollars in
single-family mortgage originations, the multifamily share had
dropped to 3 percent. Based on estimates provided by the GSEs,
multifamily originations are expected to be about 7 percent of
conventional mortgage originations in 1995 and 1996. This increase
in the multifamily share for 1995 and 1996 is mainly due to the
projected decline in single family originations caused by the
collapse of the refinance market. Conventional multifamily
originations are expected to be about $35 billion in 1995 and 1996.
Sensitivity analysis can show the effect of shifting the
relative market importance of the different property categories. For
example, reducing the multifamily weight from 25.6 percent to 20
percent, and assuming the owner category is 65 percent and the
rental 1-4 category is 15 percent, yields the following estimates of
the low-mod share of the market: 46 percent using AHS data for
recently completed rental properties, 51 percent using AHS data for
existing rental properties, and 50 percent using Fannie Mae data to
estimate the low-mod shares for rental 1-4 and multifamily
properties.
b. HMDA/Market Projection Method
HUD's second approach for estimating the low-mod share more
explicitly considers the relative importance of the various property
types in the 1995 and 1996 mortgage market. This second approach
uses 1993 HMDA data and projections of mortgage originations for
1995 and 1996 including shifts in the mortgage market, such as a
reduction in refinance activity.\43\ The mortgage origination
[[Page 9208]] projections are based on HUD's Survey of Mortgage
Lending Activity (SMLA). The HMDA data are expressed in terms of
number of loans rather than number of units, thus undercounting
single-family 1-4's and multifamily units. SMLA data are also
expressed in dollar terms rather than in terms of the number of
dwelling units. Neither data source distinguishes between single-
family owner-occupied one-unit properties and single-family owner-
occupied rental properties. Therefore, several assumptions must be
made to derive low-mod estimates for the conforming conventional
market. The following six steps outline how the low-mod share was
estimated under this approach:
\43\The HMDA data were mainly needed because its census tract
level information was necessary for estimating the size of the
underserved area market in Appendix B. However, HMDA data also
provide income information for single-family borrowers; thus, it was
decided to use these data as an alternative to the AHS data for
estimating the low-mod share in this Appendix and for estimating the
very low-income share in Appendix C. Unfortunately, HMDA does not
provide any useful income information for rental properties. The
data used in the analysis exclude loans less than $15,000, those
with loan-to-income ratios that exceed six, and loans to non-owner
occupants.
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(1) Single-family (1-4) mortgage originations for 1995 are
estimated to be $615 billion, a reduction of $395 billion from the
record setting $1,010 billion in 1993.\44\ The reduction is due to
the decline in refinance activity which is projected to fall from
almost 60 percent of originations in 1993 to 15 percent in 1995.
\44\Fannie Mae, Freddie Mac, and the Mortgage Bankers
Association have provided HUD with estimates of 1995 mortgage
originations. The single-family and multifamily origination data
reported in this section are based on the projections of these
organizations and the Department. Except for a slightly higher
estimate for multifamily originations, the 1996 market is expected
to be similar to the 1995 market. Therefore, the discussion focuses
on the 1995 market. The various market estimates for the 1995 market
reported in Appendices A, B, and C serve as a proxy for the 1996
market.
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(2) To derive single-family unit projections, the following
assumptions were made:\45\ the average conventional loan amount
equals $107,000; conforming originations equal 81 percent of the
conventional market; units per 2-4 rental property equal 2.25; and
units per 1-4 investment property equal 1.35. Property shares for
the 1995 single-family, conventional conforming mortgage market are
assumed to be 88 percent for single-family owner-occupied, 2 percent
for single family 2-4's, and 10 percent for single family 1-4's.
\45\The average loan amount is derived from the Federal Housing
Finance Board's monthly survey of major lenders which reports
mortgage terms and conditions. The proportions of conventional
originations that are conforming is derived from the Residential
Finance Survey, and is consistent with GSE estimates.
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(3) Multifamily originations are projected to increase from $30
billion in 1993 to $33 billion in 1995. The average per unit loan
amount is projected to be $32,500; sensitivity analysis was
conducted for lower amounts.\46\
\46\In 1993, Fannie Mae's per unit multifamily loan amount was
$24,679 and Freddie Mac's was $17,695. Both agencies project about
$26,000 for 1995. Given the uncertainty about the correct market
average per loan amount, sensitivity analysis was done using an
average of $30,000 for the market. This had the effect of raising
the estimated low-mod market share in step (6) by less than one
percentage point.
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(4) Under the above ``base case'' assumptions, shares of
dwelling units to be financed in the 1995 mortgage market are
projected to be 68 percent for single family owner-occupants, 4
percent for single family 2-4's, 10 percent for single family 1-4's,
and 18 percent for multifamily.
(5) Estimates of the percentage of dwelling units occupied by
low- and moderate-income families were as follows: 38.2 percent for
single family owner-occupied purchase mortgages and 29.3 percent for
single family owner-occupied refinance mortgages--both estimates are
based on 1993 HMDA data; and 62 percent for single family 2-4's, 91
percent for single family 1-4's, and 93 percent for multifamily. The
low-mod percentages for the three rental categories were based on
1993 GSE data and 1991 AHS data.\47\
\47\Little data exists on the low-mod shares for the two single-
family rental property types; for this reason, it was necessary to
use the GSE data. Fannie Mae's low-mod percentages for 2-4 and 1-4
properties were 62 percent and 87 percent, respectively. Freddie
Mac's were somewhat lower at 54 percent and 85 percent,
respectively. The American Housing Survey, which combines these two
property categories shows a 69 percent low-mod share for recently
build 1-4 rental units and a 91 percent low-mod share for the
existing stock. The 2-4 low-mod share (63 percent) is based on
Fannie Mae's data which is probably a conservative estimate for the
overall 2-4 market. The 1-4 low-mod share (91 percent) is consistent
with both the AHS and GSE data. The multifamily low-mod share (93
percent) is consistent with both the AHS and Fannie Mae's data.
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(6) Applying the above low-mod shares to the property type
weights in (4) suggests that 54 percent of the dwelling units
financed by conventional conforming mortgages in 1995 will be
occupied by low- and moderate-income families.
The 1992 share of the single-family owner-occupied mortgage
market accounted for by low- and moderate-income borrowers was less
than the 1993 share reported above. According to 1992 HMDA data,
33.5 percent (25.1 percent) of single-family owner-occupied purchase
(refinance) mortgages were taken out by low-mod borrowers.
Substituting these 1992 figures for the 1993 HMDA data (38.2 percent
and 29.3 percent, respectively) in step (5) suggests that 50 percent
of the dwelling units financed by conventional conforming mortgages
in 1995 will be occupied by low- and moderate-income families.
Averaging the 1992 and 1993 HMDA data suggests a 52 percent low-mod
share for the market.
When conducting this market analysis, an issue arose concerning
interpretation of the above HMDA estimates of the low-mod market.
The low-mod shares are derived by comparing individual borrower
incomes reported on the mortgage application with the median income
of the metropolitan area where the borrower lives. If the borrower's
income is less than metropolitan area median income, the borrower's
loan is classified as a low-mod loan. Unfortunately, the median
income for individual metropolitan areas are only available from the
decennial censuses; estimates are required for the years between the
censuses. HUD provides area median income projections that are used
both by the Federal Reserve Board to classify HMDA loans and by the
GSEs to classify their loans for purposes of the low-mod and special
affordable housing goals.48 Recently available Census data on
1993 median income for the nation as a whole suggest that HUD
overestimated 1993 area median incomes by about seven percent, on
average. Comparing actual borrower incomes to overestimated area
median incomes leads to an overestimate of the percentage of low-mod
borrowers in the GSE and HMDA data bases. Rerunning the 1993 HMDA
data but reducing area median incomes by seven percent causes the
low-mod share of purchase mortgages to decline from 38.2 percent to
32.8 percent, and the low-mod share of refinance mortgages to fall
from 29.3 percent to 24.2 percent. Substituting these lower,
adjusted percentages into steps (5) and (6) above reduces the low-
mod share for the overall market to 50 percent.
\48\To obtain annual estimates of area median incomes, HUD
starts with area median incomes from the 1990 census and projects
them forward based on trends in national median income which is
available annually on a lagged basis. These metropolitan area income
projections, which are also used in HUD's rental assistance programs
to define eligibly for subsidy, must be made prior to the program
year in which they apply. They are made in the quarter preceding the
applicable program year and are based on national Census data
available at that time. For example, the 1993 income projections
were made in the fourth quarter of 1992 and they were based on
Census median income data from a March 1992 survey that measured
mid-1991 income levels for the nation as a whole. HUD used the
survey data to project metropolitan area income estimates from the
1990 Census to mid-1991, and then applied a four percent annual
income growth rate to derive a 1993 income estimate for each
metropolitan area. For further information, see ``FY93 Income Limits
Briefing Material'' which is available from HUD.
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Because of uncertainty about the property type weights,
additional sensitivity analyses were conducted for the market
importance of each property type as well as for the low-mod shares
of each property type. For example, the property weights in (4) for
the three rental categories are less than those referenced earlier
based on the Residential Finance Survey data. Because the rental
property types exhibit a higher low-mod share, increasing their
weights increases HUD's estimate of the mortgage market's low-mod
share. The single-family rental property low-mod shares based on GSE
data are less than those reported earlier based on AHS data.
Therefore, substituting the AHS data for the GSE data increases the
overall estimate of the low-mod share of the market.
HUD also conducted several sensitivity analyses of assumptions
made in steps (1)-(3); in most instances, the estimated low-mod
share was in the 50-55 percent range.
c. Caveat: Low-Mod Market Share Estimate May Be Lower Than Market Share
The above estimate of the low-mod market will continue to be
refined as more data become available to HUD. However, two caveats
about the 50 percent estimate should be kept in mind. First, the
low-mod market may be greater than 50 percent because it was
[[Page 9209]] necessary to exclude certain HMDA loans that may be
more targeted to low-income borrowers than those loans included in
HUD's analysis. Second, the 50 percent estimate does not take into
account the fact that small, second loans may qualify as low-mod in
1995 and 1996. This section explains these issues.
(1) HMDA Data. The above analysis of HMDA data is limited to
those cases where geocoded information is available on the 1993 HMDA
file (that is, information is available to identify the census tract
and the metropolitan area of the mortgaged property). There were
approximately 804,000 conventional conforming loans in the HMDA file
without enough information to identify the metropolitan area (or the
census tract) where the property was located. These loans
represented 13.2 percent of all conventional conforming loans in
1993.49 The relative income of the borrower (i.e., borrower
income relative to the median income of the metropolitan area) could
not be computed for these non-geocoded loans.
\49\As noted earlier, loans less than $15,000, those with loan-
to-income ratios that exceed six, and loans to nonowner-occupants
are excluded.
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HUD analysis suggests that the non-geocoded loans are more
likely to be loans for low-income borrowers than the geocoded loans
used earlier to determine the low-mod market share. HUD repeated its
analysis of the geocoded loans but, instead of using the
metropolitan area median income as the base for each borrower's
income, HUD used the national metropolitan median income as the base
income. The national-metro-median-income approach and the
metropolitan-area-median-income approach suggested somewhat similar
low-mod shares for the conventional conforming market in 1993, 31.9
percent and 29.6 percent, respectively. The incomes of borrowers
taking out non-geocoded loans were then analyzed using the national-
metro-median-income approach. This suggested a 45.2 percent low-mod
share for non-geocoded loans, which is greater than the 31.9 percent
obtained for the geocoded loans using the national-metro-median-
income approach. Therefore, not including the non-geocoded loans in
the analysis leads to an underestimate of the market's low-mod
share.
(2) Eligibility of Second Mortgages. This regulation might allow
the GSEs to count second mortgages for partial credit because they
play a role in the financing of rehabilitation in underserved
areas.50 In 1993, the GSEs purchased only a small number of
second mortgages: Fannie Mae purchased 641 seconds, representing
$28.5 million, and Freddie Mac purchased 27 seconds, representing
$1.4 million. It is unclear how the GSEs would react to the fact
that seconds might be eligible under the goals. One scenario might
involve a substantial increase in their purchases of small home
improvement loans in inner city areas which would increase their
performance under the goals. Another scenario might involve only
incremental changes to their current business which would only
marginally increase their performance under the goals. It is also
unclear how to delineate the overall market in which the GSEs might
be operating, because their past purchases have been so small.
Admittedly, they could purchase second mortgages in all segments of
the market (from inner city low-income loans to suburban high-income
loans); however, given their current small share of the overall
market, it might not be appropriate to assume their purchases would
cover the entire market.
\50\On the other hand, second mortgages may be used for purposes
totally unrelated to housing, such as making other purchases, paying
off debts, etc. Because the rates on seconds are often below other
consumer borrowing rates (especially those on credit card debt) and
because interest on second mortgages is tax-deductible, there are
strong incentives to use second mortgages for purposes other than
housing rehabilitation.
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The HMDA data does include information on home improvement loans
(HILs). In 1993, 620,000 home improvement loans were originated,
with an average loan amount of $20,700. Using RFS data, for the
period 1989-1991, the average loan amount for HILs was $26,700. The
loan distribution for all HILs shows that 59 percent of these loans
were for amounts less than $15,000. Compared with purchase
mortgages, HILs are more targeted to lower income borrowers. Almost
47 percent of conforming conventional owner-occupied HILs went to
low-mod borrowers, compared with 31 percent for purchase
mortgages.51
\51\Restricting the analysis to purchase mortgages over $15,000,
as was done in the earlier calculation of the low-mod market, gives
a 38.2 percent share for borrowers with less than the area median
income.
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In 1993, GSE purchases accounted for only 5.7 percent of the HIL
market. Fannie Mae bought 21,100 (3.4 percent) of HILs and Freddie
Mac bought 14,300 (2.3 percent) of these mortgages. The distribution
of HILs purchased by the GSEs differed from the distribution of the
total market. Only 31 percent of the GSEs' HILs went to low-mod
borrowers, compared with 47 percent for the market as a whole. But
54 percent of the HILs bought by both GSEs were for borrowers with
incomes over 120 percent of area median income; this compares with
40 percent for the market as a whole.
d. Conclusions
Based on the above findings as well as numerous sensitivity
analyses, the Secretary concludes that 50 percent is a conservative
estimate of the mortgage market's low-mod share for 1995 and 1996.
5. GSEs' Ability to Lead the Industry
The Secretary believes that in light of the benefits that Fannie
Mae and Freddie Mac receive from their Charter Acts and the
``implicit guarantee'' of their obligations resulting from their
agency status, the GSEs can and should provide the leadership that
is needed to encourage the mortgage finance industry to better serve
low- and moderate-income borrowers. The GSEs' ability to lead the
industry depends on their dominant role in the mortgage market,
their ability--through their underwriting standards and new programs
and products--to influence the types of loans that private lenders
are willing to make, their utilization of cutting edge technology,
their highly competent and well-trained staffs, and their financial
resources.
a. Dominant Role in Market
Fannie Mae and Freddie Mac together purchased approximately 71
percent of all conventional conforming single-family mortgages in
1993--up from 17 percent in 1980, 33 percent in 1985, 52 percent in
1991, and 65 percent in 1992.52 Most of the mortgages purchased
by both GSEs are securitized, but sizable amounts are held in
portfolio--in fact Fannie Mae and Freddie Mac have the first- and
fourth-largest mortgage portfolios, respectively, of all mortgage
lenders in the United States. The GSEs now hold or securitize about
30 percent of the total dollar volume of mortgages outstanding,
compared to about 7 percent in 1980, and they have accounted for
over 40 percent of the net increase in mortgages outstanding between
1980 and 1992 and over 70 percent of the net increase between 1989
and 1992.53
\52\Estimates provided by Fannie Mae's Economics Department,
1993.
\53\John C. Weicher, ``The New Structure of the Housing Finance
System,'' Federal Reserve Bank of St. Louis Review, July/August
1994, pp. 51-52.
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The dominant position of the GSEs is reinforced by their
relationship to other market institutions. Banks and savings and
loans are both their competitors and their customers--they compete
as portfolio lenders, but at the same time they sell mortgages to
the GSEs and buy mortgage securities from them, and also buy the
debt securities that the GSEs use to finance their
portfolios.54
\54\Id., pp. 52-53.
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b. Set Underwriting Standards for Market
The GSEs' underwriting guidelines are followed by virtually all
mortgage originators, including lenders who do not sell many of
their mortgages to Fannie Mae or Freddie Mac.55 The guidelines
are also commonly followed in underwriting ``jumbo'' mortgages,
which exceed the maximum principal amount which can be purchased by
the GSEs (the conforming loan limit), because such mortgages might
eventually be sold to the GSEs as the principal balance is amortized
and the conforming loan limit is increased. By setting the credit
standards against which lower income families will be judged, the
GSEs can influence the rate at which mortgage funds will flow to
low-income borrowers and underserved neighborhoods. Congress
realized the crucial role played by the GSEs' underwriting
guidelines and it required each enterprise to submit a study on its
guidelines to the Secretary, the Committee on Banking, Finance and
Urban Affairs of the House of Representatives, and the Committee on
[[Page 9210]] Banking, Housing, and Urban Affairs of the Senate in
October 1993. In addition, the Secretary is required to periodically
review the GSEs' underwriting and appraisal guidelines.
\55\The underwriting guidelines published by the two GSEs are
not identical, but they are very similar in most aspects. And since
November 30, 1992, Fannie Mae and Freddie Mac have provided lenders
the same Uniform Underwriting and Transmittal Summary (Fannie Mae
Form 1008/Freddie Mac Form 1077), which is used by originators to
collect certain mortgage information that they need for data entry
when mortgages are sold to either GSE.
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c. Leading Edge Technology
With regard to technology, both GSEs have been in the forefront
of new developments. For example, Fannie Mae has developed
FannieMaps, a computerized mapping service offered to
lenders, nonprofit organizations, and state and local governments to
help them implement community lending programs in underserved areas.
Both enterprises have been developing automated underwriting systems
designed to reduce the time required to process loan applications.
d. Staff Resources
Both enterprises are well-known throughout the mortgage industry
for the expertise of their staffs in carrying out their current
programs, researching and developing improvements to the mortgage
market in general, developing innovative new programs, and
conducting research which may lead to new programs in the future.
Their key executives frequently testify before Congressional
committees on a wide range of housing issues, and both GSEs have
developed extensive working relationships with a broad spectrum of
mortgage market participants including various nonprofit groups and
government housing authorities.
e. Financial Strength
The benefits that accrue to the GSEs because of their agency
status have made them two of the nation's most profitable
businesses. Fannie Mae's profits have increased from $807 million in
1989 to $1.2 billion in 1990, $1.4 billion in 1991, $1.6 billion in
1992, and $1.9 billion in 1993, and for the first three quarters of
1994 they were accruing at an annual rate of $2.1 billion. Fannie
Mae's return on equity averaged 28.9 percent over the 1989-93
period--far above the rates achieved by most financial corporations.
In addition, Fannie Mae's dividends per share more than quadrupled
over this period, rising from $0.43 in 1989 to $1.84 in 1993.
Freddie Mac has shown similar trends. Freddie Mac's profits have
increased from $414 million in 1990 to $555 million in 1991, $622
million in 1992, and $786 million in 1993, and for the first three
quarters of 1994 they were accruing at an annual rate of $975
million. Freddie Mac's return on average equity averaged 22.5
percent over the 1989-93 period--also well above the rates achieved
by most financial corporations. Freddie Mac's dividends per share
rose 66 percent over this period, rising from $0.53 in 1989 to $0.88
in 1993.
One measure of the strength of the GSEs was provided by a recent
Business Week ranking of American corporations. This survey found
that Fannie Mae was second of all companies in total assets and
Freddie Mac ranked 23rd; with regard to total profits, Fannie Mae
ranked 14th and Freddie Mac ranked 55th.56
\56\Business Week, March 28, 1994, p. 131.
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Under the 1992 Act, beginning with the second quarter of 1994,
the GSEs must meet fully phased-in minimum core capital requirements
of 2.5 percent of on-balance sheet assets and 0.45 percent of
outstanding mortgage-backed securities and other off-balance sheet
obligations, except as adjusted by the Director of OFHEO. For the
transition period ending in the first quarter of 1994, the
corresponding percentages were 2.25 percent and 0.40 percent
respectively. The Director has found both GSEs adequately
capitalized as of June 30, 1993, September 30, 1993, December 31,
1993, and March 31, 1994. For the last period, both GSEs also
exceeded the fully phased-in capital requirements.
f. Conclusions About Leading the Market
In light of these factors, the Secretary has determined that the
GSEs have the ability to lead the industry in making mortgage credit
available for low- and moderate-income families. However, as
discussed in Section D, HUD is concerned about the current level of
the GSEs' assistance to the lower-income end of the market. Existing
data indicate that there is room for the GSEs to improve their
performance--low- and moderate-income units are estimated to
comprise at least 50 percent of the conventional conforming market,
while in 1993 the GSEs performed at rates of 29 percent (Freddie
Mac) and 36 percent (Fannie Mae). The low- and moderate-income goals
that HUD sets in Section D (38 percent in 1995 and 40 percent in
1996) are intended to move the GSEs closer to the market standard.
By using their immense resources to improve their performance and
meet these goals, the GSEs will be making a good first step toward
closing their current market gap.
6. The Need To Maintain the Sound Financial Condition of the GSEs
Congress directed the Secretary of HUD to consider the safety
and soundness of the GSEs, along with the five other factors, in
formulating the level and direction of the housing goals.57 As
part of these regulations, HUD has prepared a Regulatory Impact
Analysis (RIA) that examines the costs and benefits of the housing
goals. The detailed RIA provides a complete discussion of the issues
summarized below as well as quantitative estimates of the impact of
the goals on the GSEs. Based on that analysis, HUD concludes that
achieving the housing goals described in the proposed rule will
result in limited, if any, net increase in risk to the sound
financial condition of the GSEs' operations.
\57\HUD's independent Office of Federal Housing Enterprise
Oversight (OFHEO) has the primary responsibility for monitoring the
safety and soundness of the GSEs. OFHEO is currently building the
stress-test models necessary for analyzing the capital strength of
the GSEs and establishing appropriate capital levels. HUD expects
that OFHEO will take into account in its required capital levels the
GSEs' housing-goal-related purchases.
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The RIA examines the extent to which the three housing goals
will affect the capital levels of the GSEs. The RIA does this by
assessing the extent to which achieving the housing goals will
affect the profitability of the GSEs. Profitability is used as an
approximation for sound financial condition, since losses could
reduce the GSEs' level of capital. The principal cost from mortgage
loan purchases of any kind is that of loan default, or credit risk.
Below is a summary of the RIA's main findings regarding the
potential credit costs of meeting the three goals.
Goals-oriented purchases are already made by the GSEs
in the course of their ongoing operations. The relevant question is
the impact of additional units required in order to meet regulatory
targets. The goals are not mutually exclusive, so that loan
purchases required to meet them are not additive. Thus the required
level of additional purchases is not as great as it would be if each
goal were unique to itself. HUD finds that, under a variety of
potential GSE strategies, the dollar amounts of additional loan
purchases are small relative to the total volume of business being
undertaken by the GSEs. For example, baseline projections show
Fannie Mae purchasing over $170 billion of loans in 1995. The amount
of additional purchases required for it to meet the regulatory
targets will likely be less than $1.5 billion. Because its past
goals-oriented purchases have been less than Fannie Mae's, Freddie
Mac will likely require a larger degree of additional targeted
purchasing to meet the goals. HUD's baseline purchase volume
projection for Freddie Mac in 1995 is about $130 billion, and
additional purchase requirements to satisfy the goals could be as
high as $6 billion, depending on Freddie Mac's business strategy.
The additional loans required to meet the housing goals
are profitable business under the baseline consensus economics
scenario examined in the RIA.
Historically, moderate- and middle-income loans have
the lowest overall default rates of all borrower income cohorts. If
the GSEs continue their 1993 purchase patterns, loans required to
meet the low- and moderate-income goal will be primarily from loans
to households with incomes in the ``moderate'' 80-100 percent of
median cohort. Therefore, there is unlikely to be any significant
increase in credit risk exposure associated with the low- and
moderate-income goal.
The potential size of goals-qualifying purchase pools
for single-family owner-occupied property loans is enlarged by the
statutory definition of median income used for these rules. HUD must
use median family income, unadjusted for household size, to
determine eligibility under the housing goals. The median-family
income figures then used to determine goals qualification are
roughly equal to the median incomes of three-person households. As a
result, many smaller-sized households with above median income--when
adjusted for family size--will count as below median for purposes of
meeting the housing goals.58 This same issue also enhances the
credit quality of special [[Page 9211]] affordable loan purchases.
In that case, small-sized owner households can qualify as below 60
percent of median income simply because the dollar threshold is
effectively defined for a three-person household.59
\58\HUD adjustments for family size cost-of-living factors would
reduce the effective median income measure for 1-person households
by 22 percent, that of 2-person households by 11 percent, and would
increase that of 4-person households by 20 percent.
\59\Based on national income distributions, there are 4.2
million one- and two-person households who qualify as below median
income according to the housing goals, but whose real income is
above median when adjustments for size are factored in. Likewise,
there are 2.85 million four-to-six person households who do not
qualify as having below median income for goals purposes, but whose
incomes are below median when adjusted for household size. On net,
then, using an overall family median income has the potential for
increasing the pool of potentially goals-qualifying mortgage loans
for GSE purchase.
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Under the special affordable housing goal, the GSEs
will increase their purchases of very low-income loans.
Historically, these loan purchases have primarily had loan-to-value
ratios below 80 percent, so that credit risk is minimal. In 1993,
about 75 percent of the very low-income loans purchases by the GSEs
had downpayments in excess of 20 percent.
Under an economic downturn, such as the 1980s-type
economics scenario in the RIA, additional goals-oriented loan
purchases only have projected losses on Freddie Mac single family
special affordable loans. These would be more than offset by
remaining profits on other loans. Because of its much heavier use of
a retained portfolio, Fannie Mae would have a much larger cushion
against losses in an economic downturn.
The GSEs have the ability to purchase loans with higher
default risk without commensurately higher credit risk. They can do
this through combinations of requiring deeper mortgage insurance
coverage and charging higher guarantee fees.60 Resulting price
increases to lower-income borrowers could be more than offset by
other innovations which are now driving down the cost of mortgage
originations for all borrowers.
\60\The limits to this in the competitive mortgage originations
market are not yet known, but both GSEs recently increased the depth
of mortgage insurance required on low downpayment loans.
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As a group, multifamily loans have a higher default
potential than do single-family loans. Appropriately underwritten
multifamily loans also earn higher guarantee fees for the GSEs,
offsetting their higher credit risk. Yet the analysis developed in
the RIA shows a discernable risk-return tradeoff with respect to
multifamily lending: Higher profit margins under stable economic
conditions, but larger potential losses in economic downturns.
Fannie Mae has virtually eliminated this loss potential by holding a
much larger percentage of multifamily loan purchases in retained
portfolio. Freddie Mac could follow much the same strategy as it
increases its multifamily business. The housing goals are structured
such that the GSEs can meet the goals without significantly
increasing their credit risk from multifamily purchases much beyond
that imbedded in current baseline multifamily purchase targets for
1995 and 1996.
Guarantee fee income from securitized loans is
sufficient to cover the expected credit costs of any additional
goals-oriented purchases under baseline consensus economics. The
much larger profit margins on their retained portfolios allow the
GSEs to compete on guarantee fee prices, and still provide financial
cushions against potential economic downturns.
Increased retention in portfolio of additional,
targeted loans purchased to help satisfy the housing goals is one
possible way to hedge any increased credit risk. HUD's analysis
finds that guarantee fees alone are insufficient to provide the
earnings necessary to prevent losses on these loans in the event of
a severe economic downturn. Portfolio earnings are five-to-eight
times as large as guarantee fee income, as a percent of dollar loan
volumes. The increase in total portfolio holdings required to fully
protect against credit risk in the economic downturn scenario
developed by HUD is so small as to not raise concerns about exposing
the GSEs to any greater interest-rate risk.
Lenders, the GSEs, and private mortgage insurers are
implementing changes in mortgage marketing and underwriting that
extend homeownership opportunities to below-median-income households
without measurably increasing credit risk. These changes are
increasing the pool of potential loan purchases that are both sound
investments and qualify under the regulatory goals.
These same risk-mitigation measures and alternative
underwriting criteria should increase loan originations in minority
and low-income neighborhoods and directly increase the GSEs'
abilities to meet the central cities, rural areas, and other
underserved areas goal. In addition, about 60 percent of underserved
area home buyers have incomes above median income, which strengthens
the credit quality of targeted purchases in these areas.
D. Determination of the 1995 and 1996 Low- and Moderate-Income Housing
Goals
The annual goal for 1995 for each GSE's purchases of mortgages
financing housing for low- and moderate-income families is
established at 38 percent of the total number of dwelling units
financed by each GSE's mortgage purchases. The 1996 goal is
established at 40 percent. These goals represent an increase over
the 1994 goal of 30 percent. Several considerations, many of which
have been reviewed in earlier sections of this Appendix, led to the
choice of these goals.
1. Housing Need
Almost three-fifths of American households qualify as low- and
moderate-income under the Act's definitions--half of owners and 70
percent of renters. Data from the Census and from the American
Housing Surveys demonstrate that housing problems and needs for
affordable housing are indeed substantial among low- and moderate-
income families. These households, particularly those with very low
incomes, are burdened by high rent payments and will likely continue
to face serious housing problems, given the dim prospects for
earnings growth in entry-level occupations.
With respect to homeownership, many younger, minority, and lower
income families did not realize their goal of homeownership during
the 1980s due to the slow growth of earnings, high real interest
rates, and continued house price increases. Recently, low interest
rates and low inflation have improved affordability conditions and
first-time homeowners have become a major driving force in the home
purchase market. A large pent-up demand for homeownership exists on
the part of low-income families closed out of the market during the
1980s, particularly families with children in need of larger units
and better neighborhoods.
Several demographic changes will put strains on the housing
finance system during the 1990s. The continued increase in
immigrants will increase demand for both rental and owner-occupied
housing. Non-traditional households have become more important as
overall household formation rates have slowed. With later marriages,
divorce, and other non-traditional living arrangements, the fastest
growing household groups are single-parent and single-person
households.
2. GSE Performance Shows Mixed Results
The Charter Acts require that the GSEs provide ongoing
assistance to the secondary market including mortgages for low- and
moderate-income families. The GSEs certainly have been assisting the
overall secondary market, increasing their share of purchases of
conventional conforming single family mortgage origination from 42
percent in 1989 to 70 percent in 1993. In fact, most industry
observers would agree that the recent growth in the secondary market
was the reason the decline of the thrift industry had only minor
effects on the nation's housing finance system.
However, the Secretary is concerned about the GSEs' assistance
to the lower income end of the market. Figure A.1 presents the
distribution of the GSEs' single-family mortgage purchases by income
category. In 1993, homeowners with incomes less than 60 percent of
median represented only 5 percent of GSE purchases, and those with
incomes less than 80 percent of median represented only 15 percent
of GSE purchases. Families with incomes over 120 percent of median,
on the other hand, accounted for over 55 percent of single-family
mortgages purchased by the GSEs.
The market is originating many more loans for lower income
homebuyers than the GSEs are purchasing. (See Figure A.2, which
compares GSE performance with the market). The GSEs, based on 1993
HMDA data, purchased a much smaller proportion of conforming
mortgages originated for very low-income homebuyers than of
mortgages originated for high-income homebuyers (41 percent versus
55 percent). The HMDA data suggest that there is room in the lower
income end of the homebuyer market for the GSEs to improve their
performance.
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The Secretary is particularly concerned about the level of
Freddie Mac's activity in the multifamily area. In 1993, Freddie Mac
purchased $191 million in multifamily mortgages, compared with
almost $5 billion in purchases by Fannie Mae. Given the
affordability problems faced by renters and the need for a well-
functioning secondary market for multifamily loans, it is imperative
that Freddie Mac's multifamily business be increased. The 1995 and
1996 low-mod goals are intended to encourage Freddie Mac's expansion
of its multifamily activities.
3. Market Feasibility and Changing Market Conditions
The potential size of the market for low- and moderate-income
mortgages is a major determinant of the GSEs' agencies' ability to
reach a specific low-mod goal. As detailed in Section C.4, the low-
mod mortgage market is quite large, accounting for at least 50
percent of dwelling units financed by conventional conforming
mortgages. Figure A.3 compares recent GSE performance, the 1995 and
1996 goals, and the size of the low-mod market. Given the size of
the market, the 1995 and 1996 goals are feasible.
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The GSEs' performance under the housing goals will be heavily
influenced by overall housing market activity in 1995 and 1996. Low
interest rates caused 1993 to be a record year for mortgage
originations as refinancings accounted for about 70 percent of the
GSEs' business. First-time home buyers were the driving force on the
home-purchase side of the market. As explained above, the 1995 and
1996 market is expected to be quite different. Single-family
mortgage originations are projected to decline by almost 40 percent
between 1993 and 1995, from one trillion dollars to $615 billion.
This market fall-off is due entirely to the collapse of the
refinance market which is expected to decline from over 55 percent
of mortgage activity in 1992 and 1993 to below 20 percent in 1995
and 1996. HUD considered these expected market changes when setting
housing goals for 1995 and 1996. HUD's analysis suggested the
following effects:
The projected market shift from refinance to purchase
mortgages should increase the low- and moderate-income proportion of
mortgage market activity because purchase mortgages are more apt to
be obtained by lower-income borrowers than are refinance mortgages.
For instance, in 1993, 33 percent of Fannie Mae's single-family
purchase mortgages qualified as low-mod versus only 27 percent of
its refinance mortgages.
The substantial decline in single-family mortgage
originations, combined with the GSEs' stated intentions to increase
purchases of multifamily mortgages, should increase the low- and
moderate-income proportion of each GSE's business because
practically all multifamily units qualify as low-mod under the Act's
definitions. Section C.4 provided estimates of the increase in the
multifamily share of the market in 1995 and 1996.
The recent rise in interest rates from 25 year lows
could make it more difficult for lower-income borrowers to qualify
for mortgages underwritten according to GSE guidelines. However,
interest rates continue to remain lower and housing more affordable
than was true for any previous extended period since 1977. Higher
interest rates should be partially offset by other demand factors
such as rising incomes during the economic recovery and a continued
strong first-time homebuyer market due to the pent-up demand for
homeownership on the part of renters left out of the market during
the 1980s. Furthermore, lenders, the GSEs, and private mortgage
insurers are implementing changes in mortgage marketing and
underwriting that will extend homeownership opportunities to lower-
income households. These changes are increasing the pool of
potential loan applicants that qualify under the low-mod goal.
4. Parity Between the GSEs
The Secretary is establishing identical goals for both Fannie
Mae and Freddie Mac. Freddie Mac consistently lags behind Fannie Mae
on the housing goals. In part, this is due to Freddie Mac's limited
multifamily activity--their 1993 multifamily mortgage purchases
accounted for only 1.6 percent of their overall low-mod performance
(versus 16 percent for Fannie Mae). Freddie Mac has used the past
four years to rebuild its multifamily operations and has recently
brought on new staff, developed new systems, and is pursuing an
aggressive acquisition strategy. On the single-family side, Freddie
Mac serves the same lenders and offers the same products as Fannie
Mae. Therefore, it should be able to match Fannie Mae's performance
in achieving the goals. Moreover, the legislative history supports
the idea of parity after the transition period, noting that
``because the enterprises have essentially equal opportunities,
their respective annual goals should generally be set at comparable
levels.''61
\61\Senate Report 102-282, p. 36.
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5. Conclusions
To conclude, the Secretary has determined that the 1995 and 1996
goals set forth above address national housing needs and current
economic, housing, and demographic conditions, and that they take
into account the GSEs' performance in the past in purchasing low-
and moderate-income mortgages, as well as the size of the
conventional mortgage market serving low- and moderate-income
families. Moreover, the Secretary has considered the GSEs' ability
to lead the industry as well as the GSEs' financial condition. The
Secretary has determined that the goals are necessary and
achievable.
Based on a consideration of the factors, the Secretary proposes
to establish all three goals for 1997 and 1998 so that the goals
will move the GSEs steadily over a reasonable period of years,
including these two years, to a level of mortgage purchases where
the GSEs will be leading the industry in purchasing mortgages
meeting the goals. In carrying out this objective, the Secretary
proposes to establish the goals for 1997 and 1998 at levels ranging
from the same amounts established for 1996 to higher levels. The
purpose of any higher levels would be to continue to move the GSEs
toward purchasing a greater proportion of targeted mortgages
originated by the market.
Appendix B--Secretarial Considerations To Establish the Central Cities,
Rural Areas, and Other Underserved Areas Housing Goal
A. Establishment of Goal
The Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (FHEFSSA) requires the Secretary to establish an annual
goal for the purchase of mortgages on housing located in central
cities, rural areas, and other underserved areas.
In establishing this annual housing goal, the Act requires the
Secretary to consider:
1. Urban and rural housing needs and the housing needs of
underserved areas;
2. Economic, housing, and demographic conditions;
3. The performance and effort of the enterprises toward
achieving the central cities, rural areas, and other underserved
areas housing goal in previous years;
4. The size of the conventional mortgage market for central
cities, rural areas, and other underserved areas relative to the
size of the overall conventional mortgage market;
5. The ability of the enterprises to lead the industry in making
mortgage credit available throughout the United States, including
central cities, rural areas, and other underserved areas; and
6. The need to maintain the sound financial condition of the
enterprises.
As described in Section 1334(d) of the Act, the annual target
for this goal for the 1993-94 transition period was that 30 percent
of units financed by mortgages purchased by each enterprise should
be located in ``central cities,'' as designated by the Office of
Management and Budget. Starting in 1995, this interim target is to
be replaced with a goal targeting areas with relatively poor access
to credit in ``central cities, rural areas, and other underserved
areas.''1 The Secretary has defined ``central city'' as the
underserved area of any political subdivision designated as a
central city by OMB. The Secretary has defined ``rural area'' as any
underserved area located outside of any metropolitan statistical
area (MSA) designated by OMB. The Secretary has determined that
``underserved areas'' are defined as census tracts or non-
metropolitan counties where: Minorities comprise 30 percent or more
of the residents and the median income of families does not exceed
120 percent of the area median income; or where the median income of
families does not exceed 80 percent of the area median income.
\1\FHEFSSA, section 1334(a).
---------------------------------------------------------------------------
Section B reports findings on access to mortgage credit and
Section C addresses the six factors listed above. Section D
summarizes the Secretary's rationale for selecting the goals for
central cities, rural areas, and other underserved areas for 1995
and 1996.
B. Underlying Data and Identifying Underserved Areas
1. Introduction and Overview
For the post-transition period, the Secretary was charged with
redefining and expanding this goal from the transition target of
``central cities'' to include ``rural areas and other underserved
areas.'' The legislative history shows that Congress intended that
the goal target geographic areas with ``relatively poor'' or
``inadequate'' access to mortgage credit and areas suffering from
``the vestiges of redlining.''2
\2\Senate Report at 38.
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Data on mortgage credit flows are far from perfect, and issues
regarding the identification of areas with inadequate access to
credit are both complex and controversial. For this reason, before
considering housing needs, past enterprise performance, and the size
of the conventional market in ``underserved'' areas, it is essential
to define ``underserved areas'' as accurately as possible from
existing data. To provide essential background for understanding the
Secretary's proposed definition of underserved areas for this goal,
this section carefully reviews the evolving literature investigating
access to credit and reports findings from HUD's analysis of 1993
HMDA data.
Two main points are made in this section: [[Page 9217]]
The existence of substantial geographic disparities in
mortgage credit is well documented. Research has demonstrated that
areas with lower incomes and higher shares of minority population
consistently have poorer access to mortgage credit, with higher
mortgage denial rates and lower origination rates for mortgages.
Thus, the income and minority composition of an area is a good proxy
for determining whether that area is being underserved by the
mortgage market.
The research strongly supports a targeted definition of
underserved areas. Studies conclude that characteristics of the
applicant and the neighborhood where the property is located are the
major determinants of mortgage denials and origination rates. Once
these characteristics are accounted for, other influences such as
central city location play only a minor role in explaining
disparities in mortgage lending.
2. Evidence About Access to Credit
The viability of neighborhoods--whether urban, rural, or
suburban--depends on the access of their residents to mortgage
capital to purchase and improve houses. While neighborhood problems
are caused by a wide range of factors, including substantial
inequalities in the distribution of the nation's income and wealth,
there is increasing agreement that imperfections in the nation's
housing and mortgage markets are hastening the decline of distressed
neighborhoods. Disparate denial of credit based on geographic
criteria can lead to disinvestment and neighborhood decline. There
is growing evidence that discrimination and other factors, such as
inflexible and restrictive underwriting guidelines, limit access to
mortgage credit and leave potential borrowers in certain areas
underserved.3
\3\Because of concern about these problem issues, Federal
agencies have formed an Interagency Task Force on Fair Lending to
establish a uniform policy against discriminatory lending. At the
same time, both Fannie Mae and Freddie Mac have made efforts to make
their underwriting guidelines more flexible to allow alternative
mechanisms for low-income borrowers to demonstrate creditworthiness.
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a. Early Credit Flow Studies
Most studies of geographical disparities have used Home Mortgage
Disclosure Act (HMDA) data. A number of studies using the early HMDA
data sought to test for the existence of geographical redlining,
which is the refusal of lenders to make loans in certain
neighborhoods regardless of the creditworthiness of the individual
applicant.4 Consistent with the redlining hypothesis, these
studies found lower volumes of loans going to low-income and high-
minority neighborhoods.5 However, such analyses were criticized
because they did not distinguish between demand and supply
effects6--that is, whether loan volume was low because people
in high-minority and low-income areas were unable to afford home
ownership and therefore were not applying for mortgage loans, or
because lenders refused to make loans in these areas. Moreover, the
early HMDA data were incomplete because non-depository lenders
(e.g., mortgage bankers, who originate most FHA loans) were not
included.
\4\Prior to 1990, HMDA data showed only the total number and
aggregate dollar volume of loans made in each census tract for
depository institutions; no information was reported on individual
borrowers or on applications denied.
\5\These studies, which were conducted at the census tract
level, typically involved regressing the number of mortgage
originations (relative to the number of properties in the census
tract) on characteristics of the census tract including its minority
composition. A negative coefficient estimate for the minority
composition variable was often interpreted as suggesting redlining.
For a discussion of these models, see Eugene Perle, Kathryn Lynch,
and Jeffrey Horner, ``Model Specification and Local Mortgage Market
Behavior,'' Journal of Housing Research, Volume 4, Issue 2, 1993,
pp. 225-243.
\6\For critiques of the early HMDA studies, see Andrew Holmes
and Paul Horvitz, ``Mortgage Redlining: Race, Risk, and Demand,''
The Journal of Finance, Volume 49, No. 1, March 1994, pp. 81-99; and
Michael H. Schill and Susan M. Wachter, ``A Tale of Two Cities:
Racial and Ethnic Geographic Disparities in Home Mortgage Lending in
Boston and Philadelphia,'' Journal of Housing Research, Volume 4,
Issue 2, 1993, pp. 245-276.
---------------------------------------------------------------------------
Like early HMDA studies, an analysis of deed transfer data in
Boston found lower rates of mortgage activity in minority
neighborhoods.7 The discrepancies held even after controlling
for income, house values and other economic and non-racial factors
that might explain differences in demand and housing market
activity.8 In addition, a larger percentage of transactions in
such neighborhoods were financed by the seller or other non-
traditional institutional lenders (e.g., credit unions, governments,
universities, business leaders, real estate trusts, and pension
funds). Greater seller financing may suggest unmet demand for
mortgages, since it is not likely that minority sellers prefer, more
than whites, to finance the sale of their homes rather than being
paid in cash.9 The study concluded that ``the housing market
and the credit market together are functioning in a way that has
hurt Black neighborhoods in the city of Boston.''10
\7\Katherine L. Bradbury, Karl E. Case, and Constance R. Dunham,
``Geographic Patterns of Mortgage Lending in Boston, 1982-1987,''
New England Economic Review, September/October 1989, pp. 3-30.
\8\Using an analytical approach similar to that of Bradbury,
Case, and Dunham, Anne Shlay found evidence of fewer mortgage loans
originated in black census tracts in Chicago and Baltimore. See Anne
Shlay, ``Not in That Neighborhood: The Effects of Population and
Housing on the Distribution of Mortgage Finance within the Chicago
SMSA,'' Social Science Research, Volume 17, No. 2, 1988, pp. 137-
163; and ``Financing Community: Methods For Assessing Residential
Credit Disparities, Market Barriers, and Institutional Reinvestment
Performance in the Metropolis,'' Journal of Urban Affairs, Volume
11, No. 3, 1989, pp. 201-223.
\9\Analysis of 1985 American Housing Survey data also showed a
greater reliance on non-institutional financing by low- and
moderate-income owners in both metropolitan and rural areas. See the
Urban Institute.
\10\Holmes and Horvitz, and Schill and Wachter conduct more
rigorous tests of the redlining hypothesis that control for several
characteristics of the neighborhood, including credit risk. Their
findings are reviewed in Section 2.e below.
---------------------------------------------------------------------------
b. Improved HMDA Data--Wider Coverage and Mortgage Denial Rates
HMDA reporting was expanded in 1990 to provide information on
the disposition of loan applications (originated, approved but not
accepted by the borrower, denied, withdrawn, or not completed), to
include the activity of large independent mortgage companies, and to
provide information on the race and income of individual loan
applicants. An additional expansion in 1993 covered mortgage
companies that originated 100 or more home purchase loans in the
preceding calendar year. HUD's analysis using the expanded HMDA data
for 1993 shows that high-minority and low-income census tracts have
both higher loan application denial rates and lower loan origination
rates.11
\11\HUD's previous analysis of 1992 HMDA produced comparable
results. For a similar analysis based on 1992 HMDA data, see Glenn
B. Canner, Wayne Passmore, and Dolores S. Smith, ``Residential
Lending to Low-Income and Minority Families: Evidence from the 1992
HMDA Data,'' Federal Reserve Bulletin, Volume 80, February 1994, pp.
79-108.
---------------------------------------------------------------------------
Table B.1 presents denial and origination rates by the minority
composition and median income of census tracts for metropolitan
areas. The tract minority and income data are grouped by deciles.
Two patterns are clear:
Census tracts with higher percentages of minority
residents have higher mortgage denial rates and lower mortgage
origination rates than all-white or substantially-white tracts. For
example, the denial rate for census tracts that are over 80 percent
minority is about two-and-a-half times that for census tracts with
less than 10 percent minority.12
\12\The denial rates in Table B.1 are for purchase mortgages.
Denial rates are several percentage points lower for refinance loans
than for purchase loans, but denial rates follow the same pattern
for both types of loans: Rising with minority concentration and
falling with increasing income.
---------------------------------------------------------------------------
Census tracts with lower incomes have higher denial
rates and lower origination rates than higher income tracts. The
average number of mortgage originations in high-income census tracts
(i.e., tracts with a median income over 120 percent of area median)
was 12.7 per 100 owner-occupants; this compares with a range of 3.6
to 6.6 originations for the census tract deciles with income less
than 80 percent of area median.
Denial rates increase in increments ranging from 1.6 to 3.0
percent as one moves from low-minority to 60-percent-minority
tracts. They decline in decrements ranging from 1.0 to 3.4 percent
as tract income increases from 60 percent of area median to over 120
percent of area median.
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Table B.2 aggregates the data in Table B.1 into six minority and
income combinations that exhibit very different credit flows. The
low-minority (less than 30 percent minority), high-income (over 120
percent of area median) group had a denial rate of 8.4 percent and
an origination rate of 18.0. The high-minority (over 50 percent),
low-income (under 80 percent of area median) group has a denial rate
of 26.6 percent and an origination rate of only 4.7. The other
groupings fall between these two extremes.
The advantages of HUD's underserved area definition can be seen
by examining the minority-income combinations highlighted in Table
B.2. The sharp differences in denial rates and origination rates
between the underserved and remaining served categories illustrate
that HUD's definition delineates areas that have significantly less
success in receiving mortgage credit. Underserved areas have almost
twice the average denial rate of served areas (22.0 percent versus
11.9 percent) and half the average origination rate (7.0 versus
14.1). HUD's definition does not include high-income (over 120
percent of area median) census tracts even if they meet the minority
threshold. The mortgage origination rate (14.2) for high-income
tracts with a minority share of population over 30 percent is
slightly above the average (14.1) for all served areas.
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c. Recent HMDA Studies--Controlling for Applicant Credit Risk
An important question is whether variations in denial rates
reflect lender bias against certain kinds of neighborhoods and
borrowers, or simply the credit quality of the mortgage (as
indicated by the applicant's available assets, credit rating,
employment history, etc.). The technical improvements offered by
recent studies of credit disparities have attempted to control for
credit risk factors that might influence a lender's decision to
approve a loan. Without fully accounting for the creditworthiness of
the borrower, racial differences in denial rates cannot be
attributed to lender bias. The best example of accounting for credit
risk is the study by researchers at the Federal Reserve Bank of
Boston, which analyzed mortgage denial rates.13 To control for
credit risk, the Boston Fed researchers included 38 borrower and
loan variables indicated by lenders to be critical to loan
decisions. They found that minorities' higher denial rates could not
be explained fully by income and credit risk factors. Blacks and
Hispanics were about 60 percent more likely to be denied credit than
Whites, even after controlling for credit risk characteristics such
as credit history, employment stability, liquid assets, self-
employment, age, and family status and composition. Although almost
all highly-qualified applicants of all races were approved,
differential treatment was observed among borrowers with lesser
qualifications.14
\13\Alicia H. Munnell, Lynn E. Browne, James McEneaney, and
Geoffrey M. B. Tootell, ``Mortgage Lending in Boston: Interpreting
HMDA Data,'' Federal Reserve Bank of Boston, Working Paper Series,
No. 92-7, October 1992.
\14\This study was the subject of substantial criticism with
regard to data quality and model specification, but even after
accounting for these problems, the race conclusions were found to
persist in a re-estimation of the model by Fannie Mae. See James H.
Carr and Isaac F. Megbolugbe, ``The Federal Reserve Bank of Boston
Study on Mortgage Lending Revisited,'' Journal of Housing Research,
Volume 4, Issue 2, 1993, pp. 277-313. Other criticisms, however,
have also been mentioned. For instance, the fact that the credit
risk variables included in the model are correlated with the
minority variable suggests that the latter may be picking up the
effects of still other credit risk variables omitted from the model.
See John Straka, ``Boston Federal Reserve Study of Mortgage
Discrimination,'' Secondary Mortgage Markets, Volume 10, No. 1,
Winter 1993, pp. 8-9, for a useful discussion of other aspects of
the Boston Fed study.
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A recent HUD study also found minority denial rates to be higher
in ten metropolitan areas, even after controlling for credit
risk.15 In addition, the higher denial rates observed in
minority neighborhoods were not purely a reflection of the higher
denial rates experienced by minorities. Whites experienced higher
denial rates in some minority neighborhoods than in some
predominantly white neighborhoods.
\15\ICF Incorporated, Ann B. Schnare, and Stuart A. Gabriel,
``The Role of FHA in the Provision of Credit to Minorities,''
prepared for the U.S. Department of Housing and Urban Development,
April 25, 1994.
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The Boston Fed and HUD studies concluded that the effect of
borrower race on mortgage rejections persists even after controlling
for legitimate determinants of lenders' credit decisions. Thus, they
give some legitimacy to denial rate comparisons such as those in
Tables B.1 and B.2. However, the independent race effect identified
in these studies is still difficult to interpret. In addition to
lender bias, access to credit can be limited by loan characteristics
that reduce profitability16 and by underwriting standards that
have disparate effects on minority and lower income borrowers and
neighborhoods.17
\16\Lenders are discouraged from making smaller loans in older
neighborhoods. Since upfront loan fees are frequently determined as
a percentage of the loan amount, such loans generate lower revenue
and thus are less profitable to lenders.
\17\Standard underwriting practices may exclude lower income
families that are, in fact, creditworthy. Such families tend to pay
cash, leaving them without a credit history. In addition, the usual
front-end and back-end ratios applied to applicants' housing
expenditures and other on-going costs may be too stringent for lower
income households, who typically pay higher shares of their income
for housing than higher income households.
---------------------------------------------------------------------------
d. Recent HMDA Studies--Controlling for Neighborhood Risk and Demand
and Tests of the Redlining Hypothesis
Two recent statistical studies sought to test the redlining
hypothesis by more completely controlling for differences in
neighborhood risk and demand. These studies do not support claims of
racially induced mortgage redlining--the explanatory power of
neighborhood race is reduced to the extent that the effects of
neighborhood risk and demand are accounted for. However, these
studies cannot reach definitive conclusions about redlining because
of the correlation of neighborhood race with other explanatory
variables included in their models.
First, Andrew Holmes and Paul Horvitz used 1988-1991 HMDA data
to examine the flow of conventional mortgage originations across
census tracts in Houston.18 Their regression model included as
explanatory variables the economic viability of the loan and
residents of the tract (e.g., house value, income, age distribution
and education level), measures of demand (e.g., recent movers and
change in owner units between 1980 and 1990), and measures of credit
risk (defaults on government-insured loans and change in tract house
values between 1980 and 1990). To determine the existence of racial
redlining, the model also included as explanatory variables the
percentages of Black and Hispanic residents in the tract and the
increase in the tract's minority percentage between 1980 and 1990.
Most of the neighborhood risk and demand variables were significant
determinants of the flow of conventional loans in Houston. The
coefficients of the racial composition variables were insignificant
which led Holmes and Horvitz to conclude that allegations of
redlining could not be supported, at least in the Houston market.
\18\Holmes and Horvitz also analyzed the flow of government-
insured loans and obtained what are now standard results in the
literature--compared with conventional loans, government-insured
loans are more targeted to lower income and risky neighborhoods.
---------------------------------------------------------------------------
One of their more interesting findings, however, was that the
racial composition variables became significant and negative, thus
suggesting the existence of redlining, when they re-estimated their
model twice, once without the credit risk variables and once without
the demand variables. This finding is consistent with earlier credit
flow studies that concluded that redlining exists. Holmes and
Horvitz caution against relying on findings from these earlier
studies because they did not adequately account for differences in
neighborhood risk and demand. The authors conclude that ``a claim of
racially based geographic discrimination in mortgage lending must be
based on a consideration of race after (emphasis added) taking
account of variables that are rationally connected with the
economics of the mortgage lending process.''19
\19\Holmes and Horvitz, page 97. The authors recognize that many
of the risk and demand variables in their model are rather highly
correlated with the racial composition variables also included in
their model. Thus, one could argue that their risk and demand
variables are serving, to a certain extent, as proxies for race,
which would mean that their results suggest a high degree of
redlining in the Houston market. Holmes and Horvitz dismiss this
argument by stating that several of their non-racial variables are
reasonable proxies for other prudent lending variables such as
wealth and job stability for which they did not have direct data.
---------------------------------------------------------------------------
In the second study, Michael Schill and Susan Wachter attempt to
improve on earlier studies of redlining by examining whether
mortgage denials are related to neighborhood racial
composition.20 Schill and Wachter argue that HMDA data on
mortgage rejections, first released in 1990, allow researchers to
address perhaps the major shortcoming of earlier credit flow
studies--the inability to separate demand influences from supply
influences. Analyzing information on whether lenders accept or
reject individual loan applicants permits Schill and Wachter to
study the determinants of the supply decision separately.21
\20\Schill and Wachter. Although its methodology and findings
are similar to those of studies discussed in the next section, it is
informative to review Schill and Wachter's study in detail because
it illustrates issues that must be dealt with before one can reach
definitive conclusions about redlining.
\21\Perle also agrees that micro-based models of mortgage denial
rates are more appropriate for studying redlining than macro-based
credit flow models that fail to separate demand and supply effects.
---------------------------------------------------------------------------
In their empirical work, Schill and Wachter focused on loan
acceptances rather than denials. Their model posits that the
probability that a lender will accept a specific mortgage
application depends on characteristics of the individual loan
application22 and characteristics of the neighborhood where the
property collateralizing the loan is located. Because they rely on
public data, Schill and Wachter do not have information on several
loan and property risk variables, such as loan-to-value ratio, that
are known to affect the mortgage [[Page 9222]] decision. To
compensate for the lack of these variables, the study includes
neighborhood risk proxies that are likely to affect the future value
of the properties.23 Finally, to test for the existence of
racially-induced lending patterns across census tracts, Schill and
Wachter include the percentage of persons in the census tract that
are Black and Hispanic.
\22\Individual loan characteristics include loan size (economies
of scale cause lenders to prefer large loans to small loans) and all
individual borrower variables included in the HMDA data (the
applicant's income, sex, and race).
\23\Their neighborhood risk proxies include median income and
house value (inverse indicators of risk), percent of households
receiving welfare, median age of houses, homeownership rate (an
inverse indicator), vacancy rate, and the rent-to-value ratio (an
inverse indicator). A high rent-to-value ratio suggests lower
expectations of capital gains on properties in the neighborhood.
---------------------------------------------------------------------------
The authors tested their model for conventional mortgages in
Philadelphia and Boston. They first estimated their model including
as explanatory variables only the individual loan and racial
composition variables. The applicant race variables--whether the
applicant is Black or Hispanic--showed significant negative effects
on the probability that a loan will be accepted. Schill and Wachter
state that this finding does not provide evidence of individual race
discrimination because applicant race is most likely serving as a
proxy for credit risk variables omitted from their model (e.g.,
credit history, wealth and liquid assets). In this first analysis,
the percentage of the census tract that is Black also shows a
significant and negative coefficient, a result that is consistent
with redlining. However, when the neighborhood risk proxies are
included in the model along with the individual loan variables, the
percentage of the census tract that is Black becomes insignificant.
Thus, similar to Holmes and Horvitz, Schill and Wachter state that
``once the set of independent variables is expanded to include
measures that act as proxies for neighborhood risk, the results do
not reveal a pattern of redlining.''24
\24\Schill and Wachter, page 271. Munnell, et al. reached
similar conclusions in their study of Boston. They found that the
race of the individual mattered, but that once individual
characteristics were controlled, racial composition of the
neighborhood was insignificant.
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In their conclusion, however, Schill and Wachter state that
while their results do not support the hypothesis of redlining, they
cannot say definitively that neighborhood race is unrelated to
lenders' decisions to accept or reject loan applications. One reason
for their hesitancy is that many of their individual loan variables
(as well as their neighborhood risk variables) are correlated with
the racial composition of the census tract. For instance, the
applicant's race variable (i.e., whether the applicant is Black or
Hispanic) remains highly significant and negative in all their
estimations. Because of the high degree of racial segregation that
exists in urban areas, the applicant race variable is positively
correlated with the census tract race variable. It may be that the
applicant race variable is picking up effects that should properly
be attributed to the census tract race variable.25 If this were
the case, Schill and Wachter's conclusions about the existence of
racially induced redlining would necessarily change.
\25\In their study of individual loan denial rates, Avery,
Beeson, and Sniderman obtain significant and positive coefficients
for the individual applicant's race. Unlike Schill and Wachter, they
found that denial rates were higher in low-income tracts even after
controlling for the effects of the applicant's race and income.
Although denial rates were not higher overall for purchase and
refinance loans in minority tracts after controlling for the race of
the applicant, denial rates were higher in minority tracts for white
applicants. In other words, minorities have higher denial rates
wherever they attempt to borrow, but whites face higher denials when
they attempt to borrow in areas dominated by minorities. In
addition, denial rates were higher in minority areas for home-
improvement loans. See Robert B. Avery, Patricia E. Beeson, and Mark
S. Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA
Data,'' Working Paper Series 94-16, Federal Reserve Bank of
Cleveland, October 18, 1994.
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e. Geographic Dimensions of Underserved Areas--Targeted Versus Broad
Approaches
An important issue for the GSE regulations is whether geographic
areas under this goal should be broadly or narrowly defined. Is
central city location an adequate proxy for lack of access to
mortgage credit? What is gained by more targeted neighborhood-based
definitions of underserved areas? This section reports findings from
three studies that address these questions. All three support
defining underserved areas in terms of the minority and/or income
characteristics of census tracts, rather than in terms of a broad
definition such as all areas of all central cities.
HUD's Analysis. Tables B.1 and B.2 documented the relatively
high denial rates and low mortgage origination rates in underserved
areas as defined by HUD. This section extends that analysis by
comparing underserved and served areas within central cities and
suburbs. Figure B.1 shows that HUD's definition targets central city
neighborhoods that are experiencing problems obtaining mortgage
credit. The 22.2 percent denial rate in underserved areas of central
cities is twice the 11.2 percent denial rate in the remaining areas
of central cities. Similarly, the average mortgage origination rate
(per 100 owner occupants) in underserved areas of central cities is
6.2, much lower than the average of 13.1 for the remaining areas of
central cities.
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A broad, inclusive definition of ``central city'' that includes
all areas of all central cities would include the ``remaining''
portions of central cities. Figure B.1 shows that these areas, which
account for approximately half of the central city population,
appear to be well served by the mortgage market. They are not
experiencing problems obtaining access to mortgage credit.\26\
\26\Section D below will provide additional reasons why central
city location should not be used as a proxy for underserved areas.
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HUD's definition also targets in the suburbs as well as in
central cities--for example, the average denial rate in underserved
suburban areas is almost twice that in the remaining areas of the
suburbs. Low-income and high-minority suburban tracts appear to have
credit problems similar to their central city counterparts. These
suburban tracts, which account for 23 percent of the suburban
population, should also be included in the definition of underserved
areas. Thus, the advantage of HUD's targeted definition of
underserved areas is illustrated by sharp differences in measures of
mortgage access between served and underserved areas within both
central cities and suburbs.
William Shear, James Berkovec, Ann Dougherty, and Frank Nothaft,
economists at Freddie Mac, recently completed an analysis of
mortgage flows and application acceptance rates in 32 metropolitan
areas that also supported a targeted definition of underserved
areas.\27\ These researchers regressed the number of mortgage
originations per 100 properties in the census tract on several
independent variables that are intended to account for some, but
admittedly not all, of the demand and supply (i.e., credit risk)
influences at the census tract level. Examples of the demand and
supply variables at the census tract level include: Tract income
relative to the area median income, the increase in house values
between 1980 and 1990, the percentage of units boarded up, and the
age distributions of households and housing units. The tract's
minority composition and central city location were included to test
if these characteristics are associated with underserved
neighborhoods after controlling for the demand and supply variables.
Several of their findings relate to the issue of defining
underserved areas:
\27\William Shear, James Berkovec, Ann Dougherty, and Frank
Nothaft, ``Unmet Housing Needs: The Role of Mortgage Markets,''
presented at mid-year meeting of the American Real Estate and Urban
Economics Association, June 1, 1994. See also Susan Wharton Gates,
``Defining the Underserved,'' Secondary Mortgage Markets, 1994
Mortgage Market Review Issue, pp. 34-48.
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Black and Hispanic census tracts have lower rates of
applications, originations, and acceptance rates. For instance, the
regression estimates suggest that all-White census tracts would have
an average 10.5 originations per 100 properties, while all-Black and
all-Hispanic census tracts would have about 7 originations per 100
properties.
Tract income influences mortgage flows--tracts at 80
percent of median income are estimated to have 8.6 originations per
100 owners as compared with 10.8 originations for tracts over 120
percent of median income.
Once census tract influences are accounted for, central
city location has only a minimal effect on credit flows.
Shear, Berkovec, Dougherty, and Nothaft recognized that it is
difficult to interpret their estimated minority effects--the effects
may indicate lender discrimination, supply and demand effects not
included in their model but correlated with minority status, or some
combination of these factors. They explain the implications of their
results for measuring underserved areas as follows:
* * * While it is not at all clear how we might rigorously
define, let alone measure, what it means to be underserved, it is
clear that there are important housing-related problems associated
with certain location characteristics, and it is possible that, in
the second or third best world in which we live, mortgage markets
might be useful in helping to solve some of these problems. We then
might use these data to help single out important areas or at least
eliminate some bad choices. * * * The regression results indicate
that income and minority status are better indicators of areas with
special needs than central city location.\28\
\28\Shear et al., p. 18.
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Robert Avery, Patricia Beeson, and Mark Sniderman of the Federal
Reserve Bank of Cleveland recently presented a paper specifically
addressing the issue of underserved areas in the context of the GSE
legislation.\29\ Their study examines variations in application
rates and denial rates for all individuals and census tracts
included in the 1990 and 1991 HMDA data base. They seek to isolate
the differences that stem from the characteristics of the
neighborhood itself rather than the characteristics of the
individuals that apply for loans in the neighborhood or lenders that
happen to serve them. Similar to the two studies of redlining
reviewed in the previous section, Avery, Beeson and Sniderman
hypothesize that variations in mortgage application and denial rates
will be a function of several risk variables such as the income of
the applicant and changes in neighborhood house values; they test
for independent racial effects by adding to their model the
applicant's race and the racial composition of the census tract.
Econometrics are used to separate individual applicant effects from
neighborhood effects.
\29\See Avery, et al.
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Based on their empirical work, Avery, Beeson and Sniderman reach
the following conclusions: