Risk-Based Capital; Technical Amendment

Federal RegisterNov 1, 2002

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1750

RIN 2550-AA26

Risk-Based Capital; Technical Amendment

AGENCY:

Office of Federal Housing Enterprise Oversight, HUD.

ACTION:

Final rule.

SUMMARY:

The Office of Federal Housing Enterprise Oversight (OFHEO) is adopting technical amendments to Appendix A to Subpart B of 12 CFR part 1750 Risk-Based Capital. The amendments are intended to enhance the accuracy of the calculation of the

risk-based capital requirement for the Enterprises.

EFFECTIVE DATE:

November 1, 2002.

FOR FURTHER INFORMATION CONTACT:

Jeannine Schroeder, Manager of Operations, Office of Risk Analysis and Model Development, telephone (202) 414-8881 or Jamie Schwing, Associate General Counsel, telephone (202) 414-3787 (not toll free numbers), Office of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Background

OFHEO published a final regulation setting forth a risk-based capital stress test on September 13, 2001, 12 CFR part 1750 (the Rule), which formed the basis for determining the risk-based capital requirement for the federally sponsored housing enterprises—Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises).

Risk-based Capital, 66 FR 47730 (September 13, 2001), 12 CFR part 1750,

as amended

, 67 FR 11850 (March 15, 2002), 67 FR 19321 (April 19, 2002).

On September 12, 2002, OFHEO published a notice of proposed rulemaking (NPRM), 67 FR 57760, which proposed twelve technical and corrective amendments to the Rule. One commenter, Freddie Mac, expressed concern regarding the appropriate effective date for a proposed technical amendment that corrected a table that utilized original loan-to-value ratios rather than amortized original loan-to-value ratios (amendment number eight in the list of 12 amendments in the preamble of the NPRM). Freddie Mac also requested a delay in the effective date for two amendments relating to the implementation of Financial Accounting Standard 133 (FAS 133) in the Rule (amendments numbered 11 and 12 in the list of 12 amendments in the preamble of the NPRM).

OFHEO also received comments requesting additional time to comment upon these two amendments. Subsequently, OFHEO reopened and extended the comment period regarding the two FAS 133-related proposed amendments, noting that it might move to final action on any of the other ten.

OFHEO is also reviewing, and will delay action on, a proposed technical amendment regarding the definition of “unamortized balance” (amendment number seven in the list of 12 amendments in the preamble of the NPRM). OFHEO has determined to adopt as final immediately, the following eight proposed amendments as to which there were no issues remaining and to defer final action on the other four proposed amendments until after the extended comment period closes on October 29, 2002.

Financial Account Standards Board Statement of Financial Accounting Standard 133, “Accounting for Derivative Instruments and Hedging Activities,” June 1998.

Risk-Based Capital, 67 FR 61300 (September 20, 2002).

(1) Provisions relating to new activities are updated to cross-reference the Prompt Supervisory Response and Corrective Action regulation, 12 CFR part 1777, in paragraph 3.11.3[c] and to correct a typographical error in paragraph 3.11.2[a];

(2) Out-of-date third party sources of information related to interest rate indexes (

e.g.

30-year CMT, Bloomberg Tickers) are updated to reflect currently available indexes and to update the Rule to incorporate a reference to the applicable U.S. Treasury Department methodology. Specifically, the 30-year constant maturity yield is no longer reported by the Federal Reserve in the H.15 Release. In its place, the U.S. Treasury Department has developed a methodology using its “Long-Term Average Rate” and “Extrapolation Factors” designed to generate a substitute for the 30-year CMT yield series discontinued in February 2002. Similarly, the Bloomberg tickers for the Federal Agency Cost of Funds are being updated. Table 3-18 and paragraphs 3.3.1[b] and 3.3.2 are amended to reflect these changes;

(3) Credit Ratings in Table 3-30 are updated to include certain credit ratings used in the marketplace that were not listed in the original table. Specifically, Moody's assigns an additional rating from VMIG1 through VMIG3 to quantify the risks of the demand feature of variable-rate demand obligations and Standard & Poor's rates short term issuances as SP-1+, SP-1, SP-2, and SP-3;

(4) Paragraph 3.6.3.4.3.1 [a] 3. a. on single family default and prepayment explanatory variables is replaced in full, including equations, to correct the parenthetical (q= −7, −6,...0, 1,...40);

(5) Table 3-35, in which the explanatory variable categories for Relative Spread (RS

) in the explanatory variable column were identified incorrectly, is replaced and a typographical error in paragraph 3.6.3.6.3.3[a]1. is corrected;

(6) The equation related to mortgage credit enhancement procedures at paragraph 3.6.3.6.4.3 is corrected to reflect the fact that in extreme circumstances (

i.e.

, when defaults are zero), an equation in section 3.6.3.6.4.3 Mortgage Credit Enhancement Procedures produces “divide by zero” errors in the computer code;

(7) A typographical error in the equation in 3.7.3.1[g]2. for calculating haircuts for mortgage backed securities is corrected by changing a specified addition sign (+) to a multiplication sign (×); and

(8) Table 3-68 is revised to reflect that the Table relates to long caps and floors.

In order to make these eight adjustments applicable to the first fully enforceable risk-based capital calculation for each Enterprise, OFHEO has determined that the amendments shall be effective immediately and shall apply to any data submissions from the Enterprises received after the effective date. Waiver of the normal 30-day delay in effective date is in the public interest because these changes rectify errors in the code and in the language of the rule that could mislead the public if left unamended. In some cases they simply reflect changes that have already been implemented in the computer software used to implement the stress test and are necessary for the stress test to be operational. Moreover, both Enterprises have participated in data and software validation processes with OFHEO for the past year and have been aware of the pendency of these technical changes, which have no material impact on capital requirements, for many months.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

This document contains amendments to the Rule, which was designated a major rule by the Office of Management and Budget (OMB). The amendments address provisions of the Rule that are out-of-date, incorrect or contain typographical errors. OFHEO has determined that the amendments to the Rule are not economically significant for purposes of Executive Order 12866. Further, they implement technical changes and do not involve novel policy issues. Therefore, these amendments are not a “significant rule” under Executive Order 12866.

Paperwork Reduction Act

These amendments do not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 3501

et seq.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601

et seq.

) requires that a

regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation does not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the regulation under the Regulatory Flexibility Act. The General Counsel of OFHEO certifies that this regulation is not likely to have a significant economic impact on a substantial number of small business entities because the regulation is applicable only to the Enterprises, which are not small entities for purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1750

Capital classification, Mortgages, Risk-based capital.

Accordingly, for the reasons stated in the preamble, OFHEO amends 12 CFR part 1750 as follows:

PART 1750—CAPITAL

1. The authority citation for part 1750 continues to read as follows:

Authority:

12 U.S.C. 4513, 4514, 4611, 4612, 4614, 4615, 4618.

2. Amend Appendix A to subpart B of part 1750 as follows:

a. Revise Table 3-18 in paragraph 3.1.3.1[c];

b. Revise paragraph 3.3.1[b];

c. In paragraph 3.3.2, add the following sentence after the word “Appendix.”: “Inputs for the 30-year CMT yield after February 15, 2002 are estimated according to the Department of Treasury methodology using long-term average rates and extrapolation factors.”

d. Revise Table 3-30 in paragraph 3.5.3[a]2.a.;

e. Revise paragraph 3.6.3.4.3.1[a]3.a.;

f. Revise Table 3-35 in paragraph 3.6.3.4.3.2[a]1.;

g. In paragraph 3.6.3.6.3.3[a]1., remove the term “GL

” both places it appears and replace it with the term “GLS

”;

h. In paragraph 3.6.3.6.4.3[a]5., after the words “Defaulted UPB:” and before the equation, add the following equation:

ER85AD02.000

i. Revise paragraph 3.7.3.1[g]2.;

j. Revise Table 3-68 in paragraph 3.8.3.6.1[e]2.;

k. In paragraph 3.11.2[a], remove the cross-reference “1750.2(c)” and replace it with the cross-reference “1750.12(c)”; and

l. Revise paragraph 3.11.3[c].

The revisions and additions read as follows:

Appendix A to Subpart B of Part 1750—Risk-Based Capital Test Methodology and Specifications

3.1.3.1 * * *

[c] * * *

Table 3-18—Interest Rate and Index Inputs

Interest Rate Index

Description

Source

1 MO Treasury Bill

One-month Treasury bill yield, monthly simple average of daily rate, quoted as actual/360

Bloomberg Generic 1 Month U.S. Treasury bill

Ticker: GB1M (index).

3 MO CMT

Three-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

6 MO CMT

Six-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

1 YR CMT

One-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

2 YR CMT

Two-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

3 YR CMT

Three-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

5 YR CMT

Five-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

10 YR CMT

Ten-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

20 YR CMT

Twenty-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield

Federal Reserve H.15 Release.

30 YR CMT

Thirty-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield; after February 15, 2002, estimated according to the Department of Treasury methodology using long-term average rates and extrapolation factors as referenced in OFHEO guideline 402

Federal Reserve H.15 Release, Extrapolation Factors used for estimation, U.S. Dept. of Treasury.

Overnight Fed Funds (Effective)

Overnight effective Federal Funds rate, monthly simple average of daily rate

Federal Reserve H.15 Release.

1 Week Federal Funds

1 week Federal Funds rate, monthly simple average of daily rates

Bloomberg Term Fed Funds U.S. Domestic

Ticker: GFED01W(index).

6 Month Fed Funds

6 month Federal Funds rate, monthly simple average of daily rates

Bloomberg Term Fed Funds U.S. Domestic

Ticker: GFED06M(index).

Conventional Mortgage Rate

FHLMC (Freddie Mac) contract interest rates for 30 YR fixed-rate mortgage commitments, monthly average of weekly rates

Federal Reserve H.15 Release.

FHLB 11th District COF

11th District (San Francisco) weighted average cost of funds for savings and loans, monthly

Bloomberg Cost of Funds for the 11th District

Ticker: COF11 (index).

1 MO LIBOR

One-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360

British Bankers Association.

Bloomberg Ticker: US0001M (index).

3 MO LIBOR

Three-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360

British Bankers Association.

Bloomberg Ticker: US0003M (index).

6 MO LIBOR

Six-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360

British Bankers Association.

Bloomberg Ticker: US0006M (index).

12 MO LIBOR

One-year London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360

British Bankers Association.

Bloomberg Ticker: US0012M (index).

Prime Rate

Prevailing rate as quoted, monthly average of daily rates

Federal Reserve H.15 Release.

1 MO Federal Agency COF

One-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360

Bloomberg Generic 1 Month Agency Discount Note Yield.

Ticker: AGDN030Y (index).

3 MO Federal Agency COF

Three-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360

Bloomberg Generic 3 Month Agency Discount Note Yield.

Ticker: AGDN090Y (index).

6 MO Federal Agency COF

Six-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360

Bloomberg Generic 6 Month Agency Discount Note Yield.

Ticker: AGDN180Y (index).

1 YR Federal Agency COF

One-year Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360

Bloomberg Generic 12 Month Agency Discount Note Yield.

Ticker: AGDN360Y (index).

2 YR Federal Agency COF

Two-year Federal Agency Fair Market Yield, monthly simple average of daily rates

Bloomberg Generic 2 Year Agency Fair Market Yield.

Ticker: CO842Y (index).

3 YR Federal Agency COF

Three-year Federal Agency Fair Market Yield, monthly simple average of daily rates

Bloomberg Generic 3 Year Agency Fair Market Yield.

Ticker: CO843Y (index).

5 YR Federal Agency COF

Five-year Federal Agency Fair Market Yield, monthly simple average of daily rates

Bloomberg Generic 5 Year Agency Fair Market Yield.

Ticker: CO845Y (index).

10 YR Federal Agency COF

Ten-year Federal Agency Fair Market Yield, monthly simple average of daily rates

Bloomberg Generic 10 Year Agency Fair Market Yield.

Ticker: CO8410Y (index).

30 YR Federal Agency COF

Thirty-year Federal Agency Fair Market Yield, monthly simple average of daily rates

Bloomberg Generic 30 Year Agency Fair Market Yield.

Ticker: CO8430Y (index).

15 YR fixed-rate mortgage

FHLMC (Freddie Mac) contract interest rates for 15 YR fixed-rate mortgage commitments, monthly average of FHLMC (Freddie Mac) contract interest rates for 15 YR

Bloomberg FHLMC 15 YR, 10 day commitment rate.

Ticker: FHCR1510 (index).

7-year balloon mortgage rate

Seven-year balloon mortgage, equal to the Conventional Mortgage Rate less 50 basis points

Computed.

3.3.1 * * *

[b] The process for determining Interest Rates is as follows: first, identify the values for the necessary Interest Rates at time zero; second, project the ten-year CMT for each month of the Stress Period as specified in the 1992 Act; third, project the 1-month Treasury yield, the 3-month, 6-month, 1-, 2-, 3-, 5-, 20-year, and 30-year CMTs; fourth, project non-treasury Interest Rates, including the Federal Agency Cost of Funds Index; and fifth, project the Enterprises Cost of Funds Index, which provides borrowing rates for the Enterprises during the Stress Period, by increasing the Agency Cost of Funds Index by 10 basis points for the last 108 months of the Stress Test. Guidance in determining interest rates is available under OFHEO Guideline No. 402, “Risk Based Capital Process for Capturing and Utilizing Interest Rates Files,” which is available on OFHEO's Web site,

http://www.OFHEO.Gov.

3.5.3 * * *

[a] * * *

2. * * *

a. * * *

Table 3-30—Rating Agencies Mappings to OFHEO Ratings Categories

OFHEO Ratings Category

AAA

BBB

Below BBB and Unrated

Standard & Poor's Long-Term

AAA

BBB

Below BBB and Unrated

Fitch Long-Term

AAA

BBB

Below BBB and Unrated

Moody's Long-Term

Aaa

Baa

Below Baa and Unrated

Standard & Poor's Short-Term

A-1+

SP-1+

A-1

SP-1

A-2

SP-2

A-3

SP-3, B or Below and Unrated

Fitch Short-Term

F-1+

F-1

F-2

F-3

B and Below and Unrated

Moody's

Prime-1

MIG1

VMIG1

Prime-1

MIG1

VMIG1

Prime-2

MIG2

VMIG2

Prime-3

MIG3

VMIG3

Not Prime, SG and Unrated

Fitch Bank Individual Ratings

A/B

B/C

C/D

D/E

Moody's Bank Financial Strength Rating

Any rating that appears in more than one OFHEO category column is assigned the lower OFHEO rating category.

3.6.3.4.3.1 * * *

[a] * * *

3. * * *

a. Compare mortgage rates for each quarter of the Stress Test and for the eight quarters prior to the start of the stress test (q = −7, −6,...0, 1,...40):

ER85AD02.001

Note:

For this purpose, MCON

is required for the 24 months (eight quarters) prior to the start of the Stress Test. Also, MIR

MIR

for

< 0.

3.6.3.4.3.2. * * *

[a] * * *

1. * * *

Table 3-35—Coefficients for Single Family Default and Prepayment Explanatory Variable

Explanatory Variable (V)

30-Year Fixed-Rate Loans

Default

Weight

(β

)

Prepayment

Weight

(γ

)

Adjustable-Rate Loans (ARMs)

Default

Weight

(β

)

Prepayment

Weight

(γ

)

Other Fixed-Rate Loans

Default

Weight

(β

)

Prepayment

Weight

(γ

)

0 ≤ A

≤ 4

−0.6276

−0.6122

−0.7046

−0.5033

−0.7721

−0.6400

5≤ A

≤ 8

−0.1676

0.1972

−0.2259

0.1798

−0.2738

0.1721

9≤ A

≤ 12

−0.05872

0.2668

0.01504

0.2744

−0.09809

0.2317

13 ≤ A

≤ 16

0.07447

0.2151

0.2253

0.2473

0.1311

0.1884

17 ≤ A

≤ 20

0.2395

0.1723

0.3522

0.1421

0.3229

0.1900

21 ≤ A

≤ 24

0.2773

0.2340

0.4369

0.1276

0.3203

0.2356

25 ≤ A

≤ 36

0.2740

0.1646

0.2954

0.1098

0.3005

0.1493

37 ≤ A

≤ 48

0.1908

−0.2318

0.06902

−0.1462

0.2306

−0.2357

49 ≤ A

−0.2022

−0.4059

−0.4634

−0.4314

−0.1614

−0.2914

LTV

ORIG

LTV

ORIG

≤ 60

−1.150

0.04787

−1.303

0.08871

−1.280

0.02309

60<LTV

ORIG

≤70

−0.1035

−0.03131

−0.1275

−0.005619

−0.06929

−0.02668

70<LTV

ORIG

≤ 75

0.5969

−0.09885

0.4853

−0.09852

0.6013

−0.05446

75<LTV

ORIG

≤80

0.2237

−0.04071

0.1343

−0.03099

0.2375

−0.03835

80<LTV

ORIG

≤90

0.2000

−0.004698

0.2576

0.004226

0.2421

−0.01433

90< LTV

ORIG

0.2329

0.1277

0.5528

0.04220

0.2680

0.1107

PNEQ

0< PNEQ

≤ 0.05

−1.603

0.5910

−1.1961

0.4607

−1.620

0.5483

0.05< PNEQ

≤ 0.1

−0.5241

0.3696

−0.3816

0.2325

−0.5055

0.3515

0.1< PNEQ

≤ 0.15

−0.1805

0.2286

−0.1431

0.1276

−0.1249

0.2178

0.15< PNEQ

≤ 0.2

0.07961

−0.02000

−0.04819

0.03003

0.07964

−0.02137

0.2< PNEQ

≤ 0.25

0.2553

−0.1658

0.2320

−0.1037

0.2851

−0.1540

0.25< PNEQ

≤ 0.3

0.5154

−0.2459

0.2630

−0.1829

0.4953

−0.2723

0.3< PNEQ

≤ 0.35

0.6518

−0.2938

0.5372

−0.2075

0.5979

−0.2714

0.35< PNEQ

0.8058

−0.4636

0.7368

−0.3567

0.7923

−0.3986

1.303

−0.3331

0.8835

−0.2083

1.253

−0.3244

RLS

0<RLS

ORIG

≤ 0.4

−0.5130

−0.4765

−0.4344

0.4<RLS

ORIG

≤ 0.6

−0.3264

−0.2970

−0.2852

0.6<RLS

ORIG

≤ 0.75

−0.1378

−0.1216

−0.1348

0.75<RLS

ORIG

≤ 1.0

0.03495

0.04045

0.01686

1.0<RLS

ORIG

≤ 1.25

0.1888

0.1742

0.1597

1.25<RLS

ORIG

≤ 1.5

0.3136

0.2755

0.2733

1.5<RLS

ORIG

0.4399

0.4049

0.4045

0.4133

−0.3084

0.6419

−0.3261

0.4259

−0.3035

≤ −0.20

−1.368

−0.5463

−1.195

−0.20 <RS

≤ −0.10

−1.023

−0.4560

−0.9741

−0.10 < RS

≤ 0

−0.8078

−0.4566

−0.7679

0< RS

≤ 0.10

−0.3296

−0.3024

−0.2783

0.10 < RS

≤ 0.20

0.8045

0.3631

0.7270

0.20 < RS

≤ 0.30

1.346

0.7158

1.229

0.30 < RS

1.377

0.6824

1.259

≤ −0.20

0.08490

0.6613

−0.20 < PS

≤ −0.10

0.3736

0.4370

−0.10 < PS

≤ 0

0.2816

0.2476

0< PS

≤ 0.10

0.1381

0.1073

0.10 < PS

≤ 0.20

−0.1433

−0.3516

0.20 < PS

≤ 0.30

−0.2869

−0.5649

0.30 < PS

−0.4481

−0.5366

YCS

< 1.0

−0.2582

−0.2947

−0.2917

1.0 ≤ YCS

< 1.2

−0.02735

−0.1996

−0.01395

1.2 ≤ YCS

< 1.5

−0.04099

0.03356

−0.03796

1.5 ≤ YCS

0.3265

0.4608

0.3436

IREF

0.1084

−0.01382

PROD

ARMs

0.8151

0.2453

Balloon Loans

1.253

0.9483

15−Year FRMs

−1.104

0.07990

20−Year FRMs

−0.5834

0.06780

Government Loans

0.9125

−0.5660

BCal

LTV

ORIG

≤ 60

2.045

60<LTV

ORIG

≤70

0.3051

70<LTV

ORIG

≤ 75

−0.07900

75<LTV

ORIG

≤80

−0.05519

80<LTV

ORIG

≤90

−0.1838

90< LTV

ORIG

0.2913

Intercept (β

, γ

)

−6.516

−4.033

−6.602

−3.965

−6.513

−3.949

3.7.3.1 * * *

[g] * * *

2. Compute:

ER85AD02.002

3.8.3.6.1 * * *

[e] * * *

2. * * *

Table 3-68—Calculation of Monthly Cash Flows for Long Caps and Floors

Instrument

Cash Flows

Cap

(I−K) × N × D if I > K; O if I ≤K

Floor

(K−I) × N × D if I < K; O if I ≥K

3.11.3 * * *

[c] OFHEO will provide the Enterprise with its estimate of the capital treatment as soon as possible after receiving notice of the New Activity. In any event, the Enterprise will be notified of the capital treatment in accordance with the notice of proposed capital classification provided for in § 1777.21 of this chapter.

Dated: October 17, 2002.

Armando Falcon, Jr.

Director, Office of Federal Housing Enterprise Oversight.

[FR Doc. 02-26863 Filed 10-31-02; 8:45 am]

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