# 2010-2011 Enterprise Affordable Housing Goals; Enterprise Book-Entry Procedures > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-3310 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** February 26, 2010 - **Citation:** 75 FR 9034 ## Text FEDERAL HOUSING FINANCE AGENCY 12 CFR Parts 1249 and 1282 RIN 2590-AA26 2010-2011 Enterprise Affordable Housing Goals; Enterprise Book-Entry Procedures AGENCY: Federal Housing Finance Agency. ACTION: Proposed rule. SUMMARY: Section 1128(b) of the Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) to provide for the establishment, monitoring and enforcement of new affordable housing goals effective for 2010 and 2011 for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises). Section 1332(a) of the Safety and Soundness Act, as amended by HERA, requires the Federal Housing Finance Agency (FHFA) to establish three single-family owner-occupied purchase money mortgage goals and a single-family refinancing mortgage goal. Section 1333(a) of the Safety and Soundness Act requires FHFA to establish a multifamily special affordable housing goal, as well as providing for a multifamily special affordable housing subgoal. FHFA is issuing and seeking comments on a proposed rule that would establish new affordable housing goals for 2010 and 2011, consistent with the Safety and Soundness Act, as amended. The proposed rule would also revise and update the rules for counting mortgages for purposes of the affordable housing goals to ensure clarity and consistency with the new goals. DATES: Written comments must be received on or before April 12, 2010. ADDRESSES: You may submit your comments, identified by regulatory information number (RIN) 2590-AA26, by any one of the following methods: • U.S. Mail, United Parcel Post, Federal Express, or Other Mail Service: The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA26, Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. • Hand Delivered/Courier: The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA26, Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The package should be logged at the Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m. • E-mail: Comments to Alfred M. Pollard, General Counsel, may be sent by e-mail to RegComments@fhfa.gov. Please include “RIN 2590-AA26” in the subject line of the message. • Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by e-mail to FHFA at RegComments@fhfa.gov to ensure timely receipt by the Agency. Please include “RIN 2590-AA26” in the subject line of the message. FOR FURTHER INFORMATION CONTACT: Nelson Hernandez, Senior Associate Director, Housing Mission and Goals, (202) 408-2993, Brian Doherty, Manager, Housing Mission and Goals, (202) 408-2991, Paul Manchester, Principal Economist, Housing Mission and Goals—Quantitative Analysis, (202) 408-2946, Sharon Like, Associate General Counsel, (202) 414-8950, Lyn Abrams, Attorney, (202) 414-8951, or Kevin Sheehan, Attorney, (202) 414-8952. These are not toll-free numbers. The mailing address for each contact is: Office of General Counsel, Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877-8339. SUPPLEMENTARY INFORMATION: I. Comments FHFA invites comments on all aspects of the proposed rule, and will revise the language of the proposed rule as appropriate after taking all comments into consideration. Copies of all comments will be posted without change, including any personal information you provide, such as your name and address, on the FHFA Internet Web site at http://www.fhfa.gov. In addition, copies of all comments received will be available for examination by the public on business days between the hours of 10 a.m. and 3 p.m., at the Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an appointment to inspect comments, please call the Office of General Counsel at (202) 414-3751. II. Background A. Establishment of FHFA Effective July 30, 2008, HERA amended the Safety and Soundness Act to create FHFA as an independent agency of the Federal Government. 1 HERA transferred the safety and soundness supervisory and oversight responsibilities over the Enterprises from the Office of Federal Housing Enterprise Oversight (OFHEO) to FHFA. HERA also transferred the charter compliance authority and responsibility to establish, monitor and enforce the affordable housing goals for the Enterprises from the Department of Housing and Urban Development (HUD) to FHFA. FHFA is responsible for ensuring that the Enterprises operate in a safe and sound manner, including maintenance of adequate capital and internal controls, that their operations and activities foster liquid, efficient, competitive, and resilient national housing finance markets, and that they carry out their public policy missions through authorized activities. 2 1 See Division A, titled the “Federal Housing Finance Regulatory Reform Act of 2008,” Title I, § 1101, Public Law 110-289, 122 Stat. 2654 (2008), codified at 12 U.S.C. 4501 et seq. 2 See 12 U.S.C. 4513. Section 1302 of HERA provides, in part, that all regulations, orders and determinations issued by the Secretary of HUD (Secretary) with respect to the Secretary's authority under the Safety and Soundness Act, the Federal National Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Act (together, the Charter Acts), shall remain in effect and be enforceable by the Secretary or the Director of FHFA, as the case may be, until modified, terminated, set aside or superseded by the Secretary or the Director, any court, or operation of law. The Enterprises continue to operate under regulations promulgated by OFHEO and HUD until FHFA issues its own regulations. 3 The Enterprises are government-sponsored enterprises (GSEs) chartered by Congress for the purpose of establishing secondary market facilities for residential mortgages. 4 Specifically, Congress established the Enterprises 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, and promote access to mortgage credit throughout the nation. 5 3 See HERA at section 1302, 122 Stat. 2795. 4 See 12 U.S.C. 1716 et seq.; 12 U.S.C. 1451 et seq. 5 Id. B. Statutory and Regulatory Background Prior to HERA, the Safety and Soundness Act provided the Secretary of HUD with the authority to establish, monitor and enforce affordable housing goals for the Enterprises. 6 HUD issued regulations establishing affordable housing goals for the Enterprises, which were periodically updated, most recently in 2004, when HUD established new housing goal levels for 2005 through 2008. 7 HUD's regulations provided for the housing goal levels for 2008 to continue in effect in 2009 and each year thereafter until replaced by new annual housing goals established by HUD. 8 In August 2009, FHFA issued a final rule that adopted many of the existing housing goals provisions in a new part 1282 of title 12 of the Code of Federal Regulations. As authorized by section 1331(c) of the Safety and Soundness Act, the final rule also revised the levels of the existing affordable housing goals in light of current market conditions. 9 6 See 12 U.S.C. 4561 et seq. (2008). 7 See 24 CFR part 81 (2008). 8 See 24 CFR 81.12 through 81.14 (2008). 9 See 74 FR 39873 (Aug. 10, 2009). The Safety and Soundness Act, as amended by HERA, requires the Director of FHFA to establish new affordable housing goals effective for 2010 and beyond. The new housing goals include four goals for single-family, owner-occupied housing, one multifamily special affordable housing goal, and one multifamily special affordable housing subgoal. 10 The single-family housing goals target purchase money mortgages for low-income families, families that reside in low-income areas, and very low-income families, and refinancing mortgages for low-income families. 11 The multifamily special affordable housing goal targets multifamily housing affordable to low-income families, and the multifamily special affordable housing subgoal targets multifamily housing affordable to very low-income families. 12 10 See 12 U.S.C. 4561 and 4563(a)(2). 11 See 12 U.S.C. 4562. 12 See 12 U.S.C. 4563. C. Conservatorship On September 6, 2008, the Director of FHFA appointed FHFA as conservator of the Enterprises in accordance with the Safety and Soundness Act, as amended by HERA, to maintain the Enterprises in a safe and sound financial condition. The Enterprises remain under conservatorship at this time. III. Prospective and Market-Based Goals Following passage of the Safety and Soundness Act, HUD established housing goals for Fannie Mae and Freddie Mac in October 1993, 13 and revised and expanded those goals in 1995, 14 2000, 15 and 2004. 16 Multi-year goals were set in the 1993 housing goals rule for 1993-94 (subsequently extended to 1995), in the 1994 housing goals rule for 1996-99 (with the goal levels for 1999 continuing in effect for 2000), in the 2000 housing goals rule for 2001-03 (with the goal levels for 2003 continuing in effect for 2004), and in the 2004 housing goals rule for 2005-08. 13 See 58 FR 53048 (Oct. 13, 1993) and 58 FR 53072 (Oct. 13, 1993). 14 See 60 FR 61846 (Dec. 1, 1995). 15 See 65 FR 65044 (Oct. 31, 2000). 16 See 69 FR 63580 (Nov. 2, 2004). In each case, the numerical goals were established up to four years in advance. The goals were set as specific minimum goal-qualifying percentages of all dwelling units financed by mortgages acquired by each Enterprise in a given year, except for the special affordable multifamily subgoal, which was set as a minimum dollar volume of this type of business. In the 2004 final rule, HUD added three single-family home purchase subgoals, which were similarly set as specific minimum goal-qualifying percentages of all home purchase mortgages financed by the Enterprises on owner-occupied properties in metropolitan statistical areas (MSAs). HUD set the goals for 1993-2008 based on the six factors as specified in the Safety and Soundness Act. The most important such factors were past performance on the goals and, especially, for the home purchase subgoals, HUD's estimates of the goal-qualifying shares of home purchase mortgages in the primary mortgage market on properties in MSAs. For the overall goals, HUD's estimates of the goal-qualifying shares of all dwelling units financed in the primary market by the Enterprises in each year were also important. For example, HUD estimated that low- and moderate-income units would account for 50-55 percent of all units financed in the primary mortgage market for 2003-04, and 51-56 percent of all units financed in 2005-08. The low- and moderate-income goal was set at 50 percent for 2003-04, and was later established to increase in accordance with the market range over the 2005-08 period—specifically, 52 percent for 2005, 53 percent for 2006, 55 percent for 2007, and 56 percent for 2008. A similar approach was followed with regard to the overall underserved areas and special affordable goals for 2005-08. As recent market developments show, it can be difficult to forecast the goals-qualifying shares of the primary mortgage market several years in advance. The forecasts developed by HUD were based on the assumption of a “home purchase market environment,” a market environment in which purchase mortgages dominate over refinancing mortgages. However, when market conditions result in higher than average refinance activity, the actual market goals-qualifying shares can be significantly different from the forecast because the actual refinance share would dominate. A second reason for the divergence between forecasted and actual shares of goals-qualifying units in the primary mortgage market is the variation in the affordability of housing, such as measured by the National Association of Realtors (NAR) housing affordability index. If the price of a product or service declines, it is more affordable to the consumer. In this respect, housing is no different from any other product. A third reason for divergence is the variance in the size of the multifamily mortgage market over time. Under the previous goals counting regime, multifamily units played a significant role in whether an Enterprise met the goals. A fourth reason for the divergence is the change in the size of the share of the mortgage market accounted for by Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgages. As discussed below, the market share of mortgages insured by FHA increased dramatically in recent years, from a monthly low of 2.5 percent in October 2005 to 32 percent in December 2008. As measured after the fact, HUD's market estimates often differed significantly from the actual goals-qualifying shares of the primary market. Specifically, the actual low- and moderate-income share of the primary market in 2003 was 53 percent, which was within HUD's 2001-2003 forecasted range of 50-55 percent, but when the share increased to 58 percent for 2004, it exceeded the upper end of the range. The low- and moderate-income share of the primary market remained high, at 57 percent for 2005, above HUD's 2005-2008 forecasted range of 51-56 percent, but then decreased to 55 percent for 2006 and 52 percent for 2007. Thus, over the 2005-2007 period, the low- and moderate-income goals increased steadily, while the low- and moderate-income share of the primary mortgage market decreased steadily. While the Enterprises are in conservatorship, FHFA expects the Enterprises to continue to fulfill their core statutory purposes, including their support for affordable housing. The affordable housing goals are one set of measures of that support. FHFA does not intend for the Enterprises to undertake uneconomic or high-risk activities in support of the goals. Further, the fact that the Enterprises are in conservatorship should not be a justification for withdrawing support from these market segments. While in conservatorship the Enterprises have tightened their underwriting standards to avoid poor quality mortgages that have contributed substantially to their losses. Maintaining sound underwriting discipline going forward is important for conserving the Enterprises' assets and for supporting their mission in a manner in which the achievement of housing goals directly relates to actual market conditions. In light of these circumstances and the difficulties in anticipating market deviations from the normal home purchase environment in the traditional approach to goal-setting, FHFA proposes in this rule to measure the Enterprises' single-family goal performance relative to benchmark levels for the goals-qualifying shares of the Enterprises' mortgage purchases, as well as relative to the actual goals-qualifying shares of the primary mortgage market. A dual approach prevents exclusive reliance on multi-year mortgage market forecasts. The primary disadvantage of this approach is that information on the goals-qualifying shares of the current single-family primary market is not available until the release of Home Mortgage Disclosure Act (HMDA) data in late summer of the following year, approximately nine months after the rating period. However, FHFA believes that the market-based approach proposed in this rule is an appropriate measure of mission achievement under the housing goals for the Enterprises, especially while they are operating in conservatorship, and that the overall advantages of this approach outweigh the disadvantages. In 2010, FHFA expects to begin to conduct a monthly survey of single-family mortgage originations pursuant to section 1324(c) of the Safety and Soundness Act, as amended by HERA, and make data collected under that survey available to the public. 17 Release of that data is likely to provide detailed information on home mortgage lending activity more frequently and in a timelier manner than does the public release of the data collected under HMDA. FHFA will use the survey data in its monitoring of Enterprise affordable housing goals performance in 2010 and subsequent years. 17 12 U.S.C. 4544(c). This proposed rule would establish single-family housing goals that include (1) an assessment of Enterprise performance as compared to the actual share of the market that meets the criteria for each goal, and (2) a benchmark level to measure Enterprise performance. The benchmark levels for performance are intended to provide greater certainty for the Enterprises in establishing strategies for meeting the affordable housing goals. An Enterprise would be found to have failed to meet a housing goal if its annual performance falls below both the benchmark level and the actual share of the market that meets the criteria for a particular housing goal for that year. An Enterprise would not be found to have failed to meet a goal if it achieves the benchmark level for that goal, even if the actual market size for the year is higher than the benchmark level, because for planning purposes the Enterprises need to be able to rely on the benchmarks that FHFA has set. 18 18 See 12 U.S.C. 4561(b), acknowledging “the need for the enterprises to reasonably and sufficiently plan their operations and activities in advance, including operations and activities necessary to meet such annual goals.” The proposed approach to setting goals, involving both the setting of a prospective target and an assessment of actual market opportunity, is a departure from past practice at HUD, as well as in the transitional housing goals established by FHFA for 2009. FHFA has determined that this approach is appropriate in light of the difficulties of predicting the market, especially in light of recent market turmoil, but also in view of the difficulty in making those projections accurately even in more stable economic environments. FHFA views this approach as fully consistent with Congressional intent in granting goal-setting power to the regulator, in light of the many provisions that Congress inserted into the statute to enable the goals to be adjusted to reflect changing market conditions or otherwise suggesting that the goals should be set in light of market conditions. Those provisions include: The requirement that the agency calculate the preceding three-year average percentages of goal-eligible originations for each goal category, and take that information into account in setting the single-family goals; 19 the authority to adjust goals, when they have been set for more than one year, based on market conditions; 20 the discretionary authority to adjust a goal in response to a petition, partly in response to market conditions and the risk of “over-investment”; 21 and provisions for relief from enforcement if goals are determined not to have been feasible. 22 19 12 U.S.C. 4562(e)(2)(A). 20 12 U.S.C. 4562(e)(3). 21 12 U.S.C. 4564(b)(1), (2). 22 12 U.S.C. 4566(b). IV. Changes in Structure of Housing Goals for 2010-2011 The proposed rule would modify the structure of the housing goals established by HUD for 2005-2008, and subsequently extended and modified for 2009 by FHFA, in a number of ways for 2010-2011. There would be no overall goals for 2010-2011 covering all of each Enterprise's mortgage purchases, as in the past. Rather, there would be four separate goals for purchases of single-family mortgages and two goals for purchases of multifamily mortgages. These changes, many of which are required by changes made by HERA in the governing statute, are described in more detail below. Enterprise goal performance under each of the single-family housing goals is measured using a fraction of qualifying mortgage purchases as a percent of total mortgage purchases. Neither the numerator nor the denominator includes Enterprise transactions or activities that are not mortgage purchases as defined by FHFA or that would be specifically excluded as ineligible under proposed § 1282.16(b). The 2010-2011 single-family goals, as proposed, would establish separate goals for home purchase mortgages and refinancing mortgages. This differs from past treatment, which combined such purchases for the overall goals. In addition, the proposed rule would count only conventional loans for purposes of the housing goals. This means that certain FHA loans that previously counted toward the goals, such as Home Equity Conversion Mortgages (HECMs), will no longer be counted. Second liens, which also counted toward the goals in the past, would be excluded from counting for purposes of the housing goals in the future. The Enterprises have purchased very few second liens in the past. Under the 2010-2011 goals, mortgages financing rental units in single-family properties, which were previously included in the goals, would no longer be counted. However, FHFA will continue to monitor the Enterprises' purchases of such mortgages with regard to rental units in both 2-4 unit owner-occupied housing and investor-owned 1-4 unit rental housing. The 2010-2011 multifamily goals would be based on the numbers of affordable dwelling units financed, rather than being specified in minimum dollar terms. The special affordable multifamily subgoal in effect prior to 2010 applied to purchases of mortgages on housing for families with incomes below 60 percent of area median income (AMI) and for families with incomes between 60 percent and 80 percent of AMI living in low-income areas. The overall multifamily goal for 2010-2011 is somewhat broader in its coverage than the previous special affordable multifamily goal, applying to mortgages on housing for families with incomes no greater than 80 percent of AMI, regardless of location. However, the 2010-2011 very low-income multifamily subgoal would be targeted to households with slightly lower incomes. The qualifying household income for purposes of the 2010-2011 multifamily subgoal would be at or below 50 percent of AMI. The 2010-2011 low-income home purchase and refinancing goals in the proposed rule would target households with lower incomes than the past low- and moderate-income goals. The past low- and moderate-income goals included families with incomes up to 100 percent of AMI. Under the proposed rule, the low-income home purchase and refinancing goals would include only families with incomes no greater than 80 percent of AMI. The 2010-2011 low-income areas home purchase goal would be somewhat more targeted than the past underserved areas home purchase subgoal. For example, the new low-income areas housing goal includes families in census tracts with incomes up to 80 percent of AMI, while the underserved areas home purchase subgoal included families in census tracts with incomes up to 90 percent of AMI. The narrower scope of the low-income areas housing goal may be seen by comparing performance on the underserved areas home purchase subgoal in 2008 (approximately 30 percent for both Enterprises) with what their performance would have been on the low-income areas home purchase goal in 2008 (approximately 15 percent for both Enterprises). V. Analysis of Single-Family Housing Goals Section 1332(e)(2) of the Safety and Soundness Act, as amended by HERA, requires FHFA to consider the following seven factors in setting single-family housing goals: (1) National housing needs; (2) Economic, housing, and demographic conditions, including expected market developments; (3) The performance and effort of the Enterprises toward achieving the housing goals under this section in previous years; (4) The ability of the Enterprise to lead the industry in making mortgage credit available; (5) Such other reliable mortgage data as may be available; (6) The size of the purchase money conventional mortgage market, or refinance conventional mortgage market, as applicable, serving each of the types of families described, relative to the size of the overall purchase money mortgage market or the overall refinance mortgage market, respectively; and (7) The need to maintain the sound financial condition of the Enterprises. 23 23 12 U.S.C. 4562(e)(2). FHFA's consideration of the size of the market for each housing goal includes consideration of the percentage of goals-qualifying mortgages under each housing goal, as calculated based on HMDA data for the three most recent years for which data is available. 24 24 See 12 U.S.C. 4562(e)(2)(A). A. Analysis of Factors for Single-Family Housing Goals FHFA's analysis of each of the factors is set forth below. 1. National Housing Needs With the collapse of subprime and Alt-A lending, tighter credit conditions, and stricter underwriting standards, single-family mortgage originations fell 38 percent in 2008. The Enterprises' share of single-family mortgage-backed securities (MBS) issuance rose to over 73 percent in that year, however, and the credit risk characteristics of their purchases began to improve. Falling house prices caused equity in homes to decline sharply. The resetting of interest rates on poorly underwritten adjustable rate mortgages (ARMs) originated in recent years, deteriorating household balance sheets, rising unemployment, continued credit tightening, and the deepening recession contributed to increases in mortgage delinquency and home foreclosure rates as well as sharply lower housing starts and sales. The decline in home prices that began in 2007 accelerated sharply in 2008. Continued tightening in lender credit policies, large inventories of unsold homes, significant volumes of homes in foreclosure, rising unemployment, and increasing pessimism among potential homebuyers combined to drive home prices down further. Despite improving housing affordability, the U.S. homeownership rate declined since peaking at 69 percent in 2004. In the third quarter of 2009, the homeownership rate was 67.6 percent, down from the 67.9 percent in the third quarter of 2008. 25 The homeownership rate for married couples with children declined from 78.8 percent in the third quarter of 2008 to 77.9 percent in the third quarter of 2009. 26 The homeownership rate for Black households declined markedly from 48.2 percent in the third quarter of 2008 to 46.8 percent in the third quarter of 2009. 27 Between 2000 and 2005, the homeowner vacancy rate—the proportion of the homeowner inventory that is vacant for sale—averaged about 1.7 percent. However, that rate increased 70 basis points in 2006 alone, to 2.7 percent in the fourth quarter, and has inched up generally every year since, reaching 2.9 percent in the first and fourth quarters of 2008. That was the highest rate since the Census Bureau began collecting that statistic in 1956. The persistently high rate reflects both the high level of foreclosures and declining home sales. 25 U.S. Housing Market Conditions, 3rd Quarter 2009. Department of Housing and Urban Development at 87. 26 U.S. Housing Market Conditions, 3rd Quarter 2009. Department of Housing and Urban Development at 89. 27 U.S. Housing Market Conditions, 3rd Quarter 2009. Department of Housing and Urban Development at 88. A recent NAR study of homebuyers and sellers between July 2008 and June 2009 shows the number of first-time homebuyers rose to 47 percent of all homebuyers, from 41 percent in the prior year's study. The median age for first-time homebuyers was 30 years and the median income was $61,600. The typical first-time homebuyer purchased a home costing $156,000, down from $165,000 in the prior year's study. The study found that 55 percent of entry level buyers financed their purchase with an FHA loan, and another 8 percent used the VA loan program. 28 28 “NAR Survey Shows First-Time Home Buyers Set Record in Past Year.” Press Release. National Association of Realtors. Nov. 13, 2009. 29 “HMDA Data Show Huge Decline in 2008 Mortgage Activity—Except at Government Insured Programs.” Inside Mortgage Finance. Oct. 2, 2009 at 8. According to FHFA's Monthly Interest Rate Survey (MIRS), the average loan-to-value ratio (LTV ratio) of single-family, conventional, purchase money mortgages, which increased rapidly from 73.6 percent in 2003 to 79.3 percent in 2007, fell to 76.7 percent in 2008. The proportion of such loans with LTV ratios greater than 90 percent dropped sharply from 2007's level of 29 percent—the highest level recorded—to 18 percent in 2008. HMDA data for 2008 indicated that applications from Black borrowers fell by 48 percent, and applications from Hispanic borrowers fell by 55 percent. 29 Originations rose somewhat in the first two quarters of 2009 over the last two quarters of 2008, but the $410 billion in mortgage originations in the third quarter of 2009 showed a decline of more than 25 percent over the second quarter's $550 billion. 30 30 “Mortgage Origination Volume Dropped Sharply in 3Q09, But 2009 May End on a Rising Trend.” Inside Mortgage Finance. Oct. 30, 2009 at 3-4. One of the key catalysts of the current economic crisis was falling housing prices after the substantial increase that began in 2000. From January 2000 through the May 2006 peak, the S&P/Case-Shiller housing price index rose by approximately 105 percent, only to fall by more than 30 percent since then. The less volatile FHFA housing price index, which reflects the book of business of the Enterprises, peaked later and has since declined about 11 percent. Changes in mortgage underwriting, particularly for affordable products, had a direct impact on the national housing market. During the boom, as house price appreciation reduced affordability, low documentation Alt-A loans, interest-only loans and ARMs proliferated. Subprime market share tripled to more than 20 percent of the market. Lenders accepted more loans with higher LTV ratios and lower borrower credit scores. The Joint Center for Housing Studies report, “State of the Nation's Housing 2009,” describes the effect of loosened mortgage underwriting standards on the housing market. In 2005, a household with median owner income of about $57,000 and spending 28 percent of income on mortgage principal and interest could qualify for a 30-year, fixed-rate loan of $225,000. If the same borrower took out an ARM loan at a discounted interest rate, the maximum loan amount increased to $265,000. By adding an interest-only feature to that ARM and qualifying the household based on the initial interest-only payments, the potential loan size grew to $356,000. Allowing the borrower to spend 38 percent of income on mortgage costs meant that the mortgage loan could total approximately $482,000. Interagency regulatory guidance on nontraditional and subprime loans issued in 2006 and 2007, including guidance to the Enterprises by OFHEO, contributed to limiting the numbers of such loans as underwriting standards were subsequently strengthened. 31 31 See Office of Federal Housing Enterprise Oversight, “OFHEO Director James B. Lockhart Commends Enterprises on Implementation of Subprime Mortgage Lending Guidance,” News Release (Sept. 10, 2007), available at http://www.fhfa.gov/webfiles/1608/LockhartcommendsENTERPRISEsreSubprime91007.pdf. See also Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Statement on Subprime Mortgage Lending, 72 FR 37569-37575 (July 10, 2007); and Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Interagency Guidance on Nontraditional Mortgage Product Risks, 71 FR 58609-58618 (Oct. 4, 2006). A result of the crisis is that the mortgage market has returned to more traditional and prudent lending standards. Mortgage underwriting standards in the near term can be expected to continue to be more conservative than earlier in the decade. The decline in housing prices has made housing more affordable. A composite index of housing affordability for the third quarter of 2009 showed that families earning the median income had 159.2 percent of the income needed to purchase a median-priced existing single-family home, a figure 24 percent higher than the 128.6 percent reported for the third quarter of 2008, although down from the 169.2 percent affordability level of the prior quarter. 32 Housing price declines have brought standard affordability ratios closer to or even above historical levels. In one national survey of 122 metropolitan areas, the number of areas where the home price is less than three times the median household income has declined to the same level as in 2003. 33 While the unemployment rate may decline in 2010 and 2011, or at a minimum the rate of unemployment may level off, there are concerns as to whether jobs will return in areas where excess single-family housing units are located. 34 32 U.S. Housing Market Conditions, 3rd Quarter 2009. Department of Housing and Urban Development at 17. 33 “State of the Nation's Housing 2009.” Joint Center for Housing Studies of Harvard University at 9. 34 Emile J. Brinkmann, Mortgage Bankers Association. Senate Banking, Housing and Urban Affairs Committee. Oct. 20, 2009 at 3. From April 2008 through December 2008, eligible first-time homebuyers received a $7,500 tax credit. From January 2009 through the end of November 2009, the tax credit was revised to include an $8,000 non-refundable tax credit. On November 5, 2009, the Congress enacted H.R. 3548, the Unemployment Compensation Extension Act, which extended and expanded the $8,000 non-refundable homebuyer tax credit. Under the legislation, qualifying first-time homebuyers receive the $8,000 tax credit if they sign a contract by April 30, 2010, and close by June 30, 2010. To encourage “move up” homebuyers, the legislation allows homebuyers who purchase a new primary residence to qualify for a $6,500 tax credit, provided they owned their current home for at least five consecutive years in the previous eight years. 35 35 “House Clears Extension of Jobless Benefits, Homebuyer's Tax Credit.” Congressional Quarterly Today Online News. Nov. 5, 2009. 2. Economic, Housing and Demographic Conditions The current turmoil in the housing and mortgage markets has created less than favorable conditions for expansions in credit to borrowers on the margins of homeownership. The adverse market conditions include: (1) Tightened credit underwriting practices; (2) sharply increased standards of private mortgage insurance (MI) companies; (3) increased role of FHA in the marketplace; (4) collapse of the private label mortgage-backed securities (PLS) market; and (5) increasing unemployment. These developments contribute to a decrease in the overall number of single-family loans likely to qualify for affordable housing goals credit. Tightened credit underwriting practices. In general, more conservative underwriting standards in the mortgage market will likely result in fewer goals-qualifying loans and a lower percentage of goal-qualifying loans in the market. Underwriting standards in the mortgage market generally, and at Fannie Mae and Freddie Mac, tightened considerably in 2008 and 2009 in response to declining market conditions and early payment defaults, among other factors, and such standards can be expected to remain in place in the near future. In May 2008, responding to changes in private MI underwriting, Fannie Mae revised its down payment policy to lower the maximum allowable LTV ratio for loans underwritten by Desktop Underwriter (DU) and for manually underwritten loans. The implementation of Fannie Mae's updated DU Version 8.0, effective in December 2009, generally reduces the allowable “back-end” borrower debt-to-income ratio—the portion of a borrower's income that goes toward paying debts—to 45 percent. In addition, it eliminates DU recommendations for Expanded Approval II and Expanded Approval III loans, loans which historically counted heavily toward the housing goals. 36 If the DU 8.0 revisions had been in effect for all of 2009, substantially fewer goals-qualifying loans would have been underwritten. The changes to DU will likely have a similar effect in 2010 and 2011. Freddie Mac has similarly tightened its underwriting standards. 36 Desktop Originator/Desktop Underwriter Release Notes. DU Version 8.0. DODU 0909. Fannie Mae. Sept. 22, 2009. DU 8.0 will allow a back-end ratio of up to 50 percent for case files with strong compensating factors. Sharply increased standards of private mortgage insurers. Much like tighter credit underwriting standards generally, higher underwriting standards of private MI providers have resulted in fewer goal-qualifying loans and a lower percentage of goal-qualifying loans in the market. As a result of stress in the mortgage markets, beginning in late 2007, MI providers implemented major changes in the types of risk they were able to insure. MI providers that had experienced substantial ratings downgrades acted to minimize losses by imposing stricter underwriting standards on loans with high LTVs. In October 2009, Standard and Poor's put five MI providers on credit watch for potential downgrades, citing economic developments that were having a negative effect on the MI providers' book of business. 37 For the first nine months of 2009, private MI activity was down more than 60 percent from the previous year. MGIC, the largest mortgage insurer, reported a $517.8 million net loss for the third quarter of 2009, an amount equal to more than half of the MI industry's loss for the period. 38 In addition, MI providers have implemented measures in “declining markets” that have sharply limited the insurability of certain higher-LTV mortgage loans. 37 “FHA Ends 2009 Fiscal Year With a Bang, Topping $100 Billion in Quarterly Originations for the First Time.” Inside Mortgage Finance. Oct. 30, 2009 at 8. 38 “Private MIs Continue to Take a Beating as FHA Rockets to New Record Market Share.” Inside Mortgage Finance. Nov. 13, 2009 at 3-4. As a result of these conditions, the availability of MI for high-LTV or low credit score loans is much reduced relative to what it was a few years ago. These developments limit the ability of MI providers to write new business and reduce the overall mortgage lending volume, particularly for higher-LTV mortgages, which historically have tended to be more likely to count for purposes of the housing goals. Increased role of FHA in the marketplace. Another factor that has had substantial marketplace impact is the increase in the share of mortgages insured by FHA and mortgages guaranteed by the VA. These loans generally are pooled into mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA). Purchases of mortgages insured by FHA and mortgages guaranteed by the VA ordinarily do not receive goals credit. In general, the impact of the FHA market on the percentage of loans in the conventional market that qualify for a particular goal depends on: (1) The goal-qualifying size of the overall market; (2) the share of the market accounted for by FHA mortgages; and (3) the extent to which FHA mortgages have goals qualifying characteristics. The market share of mortgages insured by FHA and mortgages guaranteed by the VA has risen dramatically. In the third quarter of 2009, FHA endorsed a record $104.2 billion in mortgages, which brought the agency's total production to $360.7 billion for the government's fiscal year, or nearly a billion dollars a day. 39 A key reason for this growth is that Fannie Mae and Freddie Mac generally cannot buy loans with original LTV ratios greater than 80 percent without some form of credit enhancement. With the stresses on private mortgage insurers, borrowers without substantial down payments are increasingly dependent on government insurance programs. Nearly 80 percent of FHA's purchase-loan borrowers in 2009 were first-time homebuyers, and in the second quarter of 2009, nearly half of all first-time buyers in the housing market used FHA-insured loans. 40 To ensure long-term actuarial soundness, FHA announced several policy changes on January 20, 2010 that could have the effect of limiting its role in the mortgage market, including: (1) Reducing the maximum permissible seller concession from the current 6 percent to 3 percent, which is in line with marketplace norms; (2) requiring a minimum credit score of 580 for new borrowers seeking to qualify for the 3.5 percent downpayment program; and (3) increasing the up-front mortgage insurance premium by 50 basis points, to 2.25 percent. In addition, FHA asked for a change in the law to allow it the ability to increase the maximum annual mortgage insurance premium. 41 39 “FHA Ends 2009 Fiscal Year With a Bang, Topping $100 Billion in Quarterly Originations for the First Time.” Inside Mortgage Finance. Oct. 30, 2009 at 8. 40 “HUD Secretary, FHA Commissioner Report on FHA's Finances.” HUD Press Release No. 09-214. Nov. 12, 2009. 41 “FHA Announces Policy Changes to Address Risk and Strengthen Finances.” HUD Press Release No. 10-001. Jan. 20, 2010. Collapse of private label securities market. In the middle part of the decade—the period covered by the prior HUD rule on affordable housing goals—Fannie Mae and Freddie Mac were major purchasers of the AAA-rated tranches of PLS that contained substantial amounts of subprime mortgages. While the size and nature of the Enterprises' subprime holdings differed, these purchases had an impact on the achievement of the housing goals for each Enterprise, particularly for the home purchase subgoals. Such loans were not a large factor in the mortgage marketplace in 2008 or 2009. OFHEO provided guidance to the Enterprises in 2007 incorporating interagency policy guidance from the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Reserve Board and the National Credit Union Administration. The guidance restricted the purchase of such securities by the Enterprises when certain terms of mortgages backing those securities are harmful to the borrower. 42 42 On August 10, 2007, OFHEO issued letters directing the Enterprises to apply the principles and practices of the interagency Statement on Subprime Mortgage Lending to their purchases of subprime loans in the regular flow of business, including bulk purchases. OFHEO directed that, not later than September 13, 2007, nontraditional and subprime loans purchased by Fannie Mae and Freddie Mac as part of PLS transactions comply with the Interagency Guidance on Nontraditional Mortgage Product Risks and the Statement on Subprime Mortgage Lending. This application to PLS conformed to the underwriting provisions of the guidance. Further, OFHEO directed that the Enterprises adopt such business practices and take such quality control steps as necessary to ensure the orderly and effective implementation of the guidance with respect to the purchase of PLS. OFHEO News Release (Sept. 10, 2007). Increasing unemployment. Unemployment and underemployment have an effect on mortgage default rates, and on the number of borrowers seeking and obtaining a purchase money mortgage or a refinance. According to the Bureau of Labor Statistics of the U.S. Department of Labor, the unemployment rate rose from 9.8 percent to 10.1 percent in October 2009, as nonfarm payroll employment continued to decline. Construction employment decreased by 62,000 jobs in October. 43 The unemployment rate declined to 10.0 percent in November 2009, 44 and it remained at that level in December 2009. 45 The average duration of unemployment has also increased significantly over the last year. 43 “The Employment Situation—October 2009.” Economic News Release USDL-09-1331. Bureau of Labor Statistics. U.S. Department of Labor. Nov. 6, 2009. 44 “The Employment Situation—November 2009.” Economic News Release USDL-09-1479. Bureau of Labor Statistics. U.S. Department of Labor. Dec. 4, 2009. 45 “The Employment Situation—December 2009.” Economic News Release USDL-09-1583. Bureau of Labor Statistics. U.S. Department of Labor. Jan. 18, 2010. NeighborWorks, a national network of community-based organizations actively involved in foreclosure mitigation counseling, has estimated that the two leading causes of mortgage default rates were a reduction in income (28 percent of defaults) and loss of income (17 percent of defaults). 46 The high rates of unemployment and underemployment are likely to continue to have a significant impact on the size of the mortgage market going forward. 46 NeighborWorks, National Foreclosure Mitigation Counseling Program Update, Jan. 23, 2009. Refinancings. In 2009, Fannie Mae and Freddie Mac refinanced 4 million mortgage loans through November. Refinancing volumes are strongly influenced by mortgage interest rates and LTV ratios on existing mortgages. Under the umbrella of the Administration's Making Home Affordable program, the Home Affordable Refinance Program (HARP) is an effort by the Enterprises to enhance the opportunity for owners to refinance. Under this program, homeowners whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mae who are current on their mortgages have the opportunity to reduce their monthly mortgage payments to take advantage of low monthly mortgage interest rates, which Freddie Mac's January 21, 2010 weekly report indicated had fallen to 4.99 percent for a 30-year, fixed-rate mortgage. For homeowners with a current LTV ratio between 80 and 125 percent, the Enterprises will refinance mortgages without requiring additional mortgage insurance. Demographic conditions. In establishing the 2010 goals, FHFA analyzed current demographic trends for their possible effect on housing demand. Analysis of current trends reveals that by 2008, household formation rates were already on the decline. In addition, the recession and unemployment have reduced immigration, which in the past has been a driver of housing demand. It is still too early to assess the impact of the current economic downturn on housing demand, particularly given regional variations in impact and mitigating factors, such as increased affordability of housing ownership. In the long-term, housing demand is likely to increase as a result of population growth, immigration, and future household formation by the generation born between 1981 and 2000. 47 However, the impact of long-term demographic conditions on short-term goals performance would be minimal. 47 “State of the Nation's Housing 2009.” Joint Center for Housing Studies of Harvard University. 3. The Performance and Effort of the Enterprises Toward Achieving the Housing Goals in Previous Years Section 1332(a) of the Safety and Soundness Act, as amended by section 1128 of HERA, requires FHFA to establish three single-family home purchase mortgage goals for the Enterprises: A goal for low-income families; a goal for families that reside in low-income areas; and a goal for very low-income families. Revised section 1332(a) also requires FHFA to establish a goal for single-family refinancing mortgages for low-income families. The following section reviews what performance would have been on these four single-family goals if they had been in effect over the 2001-08 period. Low-Income Families Housing Goal. The affordable housing goals in the Safety and Soundness Act, as amended, apply to the Enterprises' acquisitions of “conventional, conforming, single-family, purchase money mortgages financing owner-occupied housing” for the targeted groups. Accordingly, they are similar in structure to the home purchase subgoals established by HUD for Fannie Mae and Freddie Mac for 2005-08, and subsequently extended and modified for 2009 by FHFA. One difference is that the subgoals established by HUD applied only to mortgages on properties in metropolitan areas, while the new goals apply to mortgages on properties in all locations. The low-income families housing goal applies to mortgages made to “low-income families,” defined as families with incomes no greater than 80 percent of AMI. 48 Past performance on this goal, if it had been in effect in previous years, is shown in Table 1. As indicated, Fannie Mae's performance would have risen markedly between 2001 and 2003, and then, with the exception of 2006, would have fallen steadily between 2003 and 2008. Its performance last year, at 23.2 percent, would have been the lowest of the period. Freddie Mac's performance generally would have risen between 2001 and 2005, and then declined between 2005 and 2008. Its performance last year would have been 24.5 percent, also the lowest of the period. 48 12 U.S.C. 4502(14). BILLING CODE P EP26FE10.000 Very Low-Income Families Housing Goal. The Safety and Soundness Act, as revised by HERA, defines a “very low-income” owner-occupied property as one occupied by a family with income no greater than 50 percent of AMI. 49 Past performance on this goal, if it had been in effect in previous years, is shown in Table 2. As indicated, Fannie Mae's performance would have risen from 6.8 percent in 2001 to 9.0 percent in 2003 and 2004, and then, with the exception of 2006, generally decreased, to 5.6 percent in 2008, the lowest in the period. Freddie Mac's performance on this goal would have changed little over the 2001-08 period, remaining in the range of 6.2 percent to 7.0 percent. 49 12 U.S.C. 4502(24). EP26FE10.001 Low-Income Areas Housing Goal. The low-income areas housing goal targets the Enterprises' purchases of mortgages in specified geographic areas, in a manner similar to the previous underserved areas goal. The Safety and Soundness Act, as revised by HERA, now defines a “low-income area” as a census tract or block numbering area in which the median income does not exceed 80 percent of AMI, including families with incomes not greater than 100 percent of AMI who reside in minority census tracts and in designated disaster areas. 50 It defines a “minority census tract” as a census tract that has a minority population of at least 30 percent and a median family income of less than 100 percent of AMI. 51 50 12 U.S.C. 4502(28). 51 12 U.S.C. 4502(29). According to the 2000 census, of the 66,144 unique census tracts, there were 18,613 low-income tracts. There were 25,254 tracts with a minority population of at least 30 percent, of which 5,711 had a tract income greater than 80 percent of AMI but less than or equal to 100 percent of AMI. Accordingly, based on the 2000 census, there were 24,324 tracts that would be targeted by this goal, excluding tracts in designated disaster areas, but only families with incomes no greater than AMI would be included in the 5,711 high-minority, moderate-income tracts. Past performance on the low-income areas housing goal, if it had been in effect in previous years, excluding designated disaster areas, is shown in Table 3. As indicated, Fannie Mae's performance would have varied over time. It would have reached its highest level, 19.3 percent, in 2002, and its lowest level, 15.1 percent, in 2008. Freddie Mac's performance would have peaked at 19.3 percent in 2002, then fallen sharply to 13.3 percent in 2003, and would have been 15.2 percent in 2008. EP26FE10.002 Refinancing Housing Goal. Under the Safety and Soundness Act, as revised by HERA, the refinancing housing goal is targeted to low-income families, i.e., families with incomes no greater than 80 percent of AMI. It applies to mortgages that are “given to pay off or prepay an existing loan secured by the same property.” Thus, the goal would not apply to home equity loans. Past performance on this goal, if it had been in effect in previous years, is shown in Table 4. As indicated, Fannie Mae's performance would have peaked in 2004, following the 2001-03 refinance boom, and declined thereafter, to a low of 23.1 percent last year. Freddie Mac's performance would have peaked in 2005, and then also declined, to 23.9 percent in 2008. EP26FE10.003 BILLING CODE C Interpreting Past Goal Performance Data. Past performance is not necessarily a good indicator of future goal performance, due to changes in mortgage interest rates, home prices, credit availability, and other factors. This subsection briefly discusses the role of the purchase of PLS in achieving past performance, and the possible effects of changes in underwriting guidelines recently adopted by the Enterprises. Also, FHFA has partial-year data which allow calculation of each Enterprise's performance in the first three quarters of 2009 relative to the proposed 2010-2011 goals. Such data are proprietary, but preliminary full- year data will be included in the final rule for the 2010-2011 goals. The Enterprises purchased PLS in recent years primarily due to anticipated profitability, to maintain market share, and because some PLS, especially those containing subprime mortgages, helped achieve the housing goals. The performance data in Tables 1-4 include the effects of these PLS purchases. Elsewhere in the proposed rule is a discussion regarding counting mortgages included in PLS toward the affordable housing goals in 2010-2011. In response to the housing crisis and their financial difficulties, including the performance of PLS, the Enterprises have adopted more conservative underwriting guidelines. As previously discussed, those changes will affect goal performance. 4. The Ability of the Enterprises To Lead the Industry in Making Mortgage Credit Available As background for the statutory requirement to consider the Enterprises' “ability * * * to lead the industry in making mortgage credit available,” a Senate committee report on legislation leading to the enactment of the Safety and Soundness Act in 1992 expressed concern that Enterprise purchases had not kept pace with market originations of mortgages to low- and moderate-income borrowers. 52 FHFA shares that concern and has defined the proposed Enterprise housing goals in part against that history. FHFA believes that, in fact, the Enterprises have played a leading role in sustaining the mortgage market during the recent crisis. 52 S. Rep. No. 102-282, at 10-11 (1992). Leading the industry in making mortgage credit available includes making mortgage credit available to primary market borrowers at differing income levels. It also includes the ability of the Enterprises to respond to pressing mortgage needs in the current market, such as the threat of a loss of a home by the borrower, for example, by implementing the loan modification and refinance programs under the Administration's Making Home Affordable Program, and by supporting State and local housing finance agencies. The Enterprises' ability to respond is reflected through the introduction of safe and sound innovative products, technology and process improvements. In the current market environment, the Enterprises, along with FHA and VA, now lead the market. From 1997-2003, the Enterprises' share of mortgage originations grew to almost 55 percent. From 2004-2006, the private mortgage market predominated, and the Enterprises' market share dropped to below 35 percent. After the private mortgage market began to deteriorate in 2007, the Enterprises' share of the single-family mortgage market grew to about 75 percent, with FHA and VA accounting for the bulk of the balance. 53 53 Address by Edward DeMarco, Acting Director of the Federal Housing Finance Agency, New England Mortgage Bankers 22nd Annual Conference, Oct. 1, 2009 at 5. At the same time, the Enterprises have been severely stressed by the financial crisis. As described below, they have suffered losses that have depleted their capital and resulted in their being sustained only by multi-billion-dollar infusions of capital from the U.S. Treasury under the Senior Preferred Stock Purchase Agreements. In this environment, in which FHFA as conservator is also exercising a statutory mandate to conserve and preserve the Enterprises' assets, it is especially important that the Enterprises not take on undue additional credit risk by purchasing mortgages in any defined segment in quantities beyond what market originations reasonably provide. FHFA has taken into account all of the foregoing considerations in assessing the Enterprises' ability to lead the industry. 5. Other Mortgage Data The primary source of reliable mortgage data for establishing the affordable housing goals is the HMDA data reported by originators. Enterprise mortgage purchase data are compared to HMDA data to evaluate the Enterprises' performance with respect to leading or lagging the housing market under specific goals. FHFA also uses other reliable data sources including the American Housing Survey (AHS), Census demographics, commercial sources such as Moody's, 54 and other industry and trade research sources, e.g., Mortgage Bankers Association (MBA), 55 Inside Mortgage Finance Publications, 56 NAR, 57 National Association of Home Builders (NAHB), 58 and the Commercial Mortgage Securities Association. 59 The FHFA MIRS, 60 previously administered by the Federal Housing Finance Board, a predecessor agency to FHFA, is used to complement forecast models for home purchase loan originations by making intra-annual adjustments prior to the public release of HMDA mortgage data. In the development of economic forecasts, FHFA uses data and information from Wells Fargo, PNC, Fannie Mae, Freddie Mac, The Wall Street Journal Survey and Forcast.org. In addition, FHFA uses market and economic data from the Bureau of Labor Statistics, the Federal Reserve Board, the Department of Commerce Bureau of Economic Analysis, and FedStats. 61 54 http://www.moodys.com/. 55 http://www.mbaa.org/. 56 http://www.imfpubs.com/. 57 http://www.realtor.org/. 58 http://www.nahb.org/. 59 http://www.cmsaglobal.org/CMSA_Resources/Research/Market_Statistics/Market_Statistics/. 60 http://www.fhfa.gov/Default.aspx?Page=250. 61 http://www.fedstats.gov/other.html. 6. Market Size In general, the single-family mortgage market environment of 2009 is expected to extend to 2010, with modest improvements in 2011. Much of FHFA's estimates of the mortgage market rely on the Federal Reserve continuing to support low interest rates. 62 Other quantifiable factors influencing FHFA's outlook for the mortgage market include general growth in the economy, employment and inflation. Other factors that are less easily quantified include the effect of the extension and expansion of the homebuyer tax credit on the mortgage market. Activity in the subprime market is expected to be minimal through 2011. 62 “The [Federal Open Market] Committee will maintain the target range for the Federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the Federal funds rate for an extended period.” Board of Governors of the Federal Reserve System, Press Release, Nov. 4, 2009. The composition of the mortgage market will be influenced by FHA's market share, which rose significantly in 2008-2009 and continues to be high, and by the rate of refinancing. Given that underwriting standards are expected to be tight in 2010 and 2011, FHA will most likely continue to have a much larger presence in the mortgage market. In addition, rising interest rates or a combination of depressed housing prices and high LTV ratios could push down the number of homeowners refinancing their mortgages, lowering the refinance rate. The outlook for the housing and mortgage markets over the 2010-2011 period remains guarded. Both of these markets will be heavily influenced by general economic factors as well as internal market forces. In developing its Economic and Mortgage Outlook ( see Table 5, below) FHFA uses an average of forecasted values for key economic indicators drawn from several industry sources. 63 On average, industry forecasters project the economy to rebound in 2010 and 2011, with real Gross Domestic Product (GDP) growing at a rate of 2.6 and 2.8 percent, respectively. Industry assessments on housing markets are generally reserved. If unemployment remains high, at approximately 10 percent, it would have a negative impact on the housing market. There are also concerns over the impact of the overall economy on housing markets. According to the MBA, “[h]ousing markets are beginning to slowly recover from the worst recession in decades, but are vulnerable to additional macroeconomic shocks.” 64 Industry forecasters expect that inflation will remain low, and the minutes of the November 2009 meeting of the Federal Open Market Committee (FOMC) indicate that the FOMC expects core inflation to slow somewhat further over the next two years and inflation to be subdued for some time. The FOMC has also concluded that “economic conditions were likely to warrant exceptionally low [Federal funds rates] for an extended period.” 65 Mortgage interest rates are currently dependent on Federal policies and somewhat independent of the Federal funds rate, but for the period between 2010 and 2011, FHFA is not assuming a substantial increase in mortgage interest rates. 63 These forecasts include those by the Mortgage Bankers Association, Fannie Mae, Freddie Mac, the National Association of Realtors, Wells Fargo, Wall Street Journal Forecast Survey, PNC Financial and forecast.org. 64 Mortgage Bankers Association, Mortgage Finance Commentary, Nov. 10, 2009. 65 See Federal Open Market Committee of the Federal Reserve System, Minutes of the Federal Open Market Committee, Nov. 3-4, 2009. Accessed at http://www.federalreserve.gov/monetarypolicy/fomcminutes20091104.htm. BILLING CODE P EP26FE10.004 Mortgages insured by FHA are likely to continue to represent a significant share of the mortgage market in 2010 and 2011. These loans generally are pooled into mortgage-backed securities guaranteed by GNMA. Purchases of mortgages insured by FHA and VA ordinarily do not receive affordable housing goals credit. As shown in Figure 1, the market share of all mortgages insured by FHA increased dramatically, from a low of 2.5 percent in 2005 to a high of 32 percent in December 2008. A key reason for this growth is that Fannie Mae and Freddie Mac generally cannot buy loans with original LTV ratios greater than 80 percent without some form of credit enhancement. With the stresses on private mortgage insurers, borrowers without substantial down payments are increasingly dependent on government insurance programs. Since FHA's market share increase appears to coincide with the demise of the subprime market, it would be easy to conclude that for high-risk borrowers, FHA loans are replacing loans from subprime lenders. However, FHA's internal data indicate that the average riskiness of the loans they insure has actually decreased, i.e., credit risk scores increased, since late 2007. 66 66 See FHA Outlook, a monthly statistical summary of application insurance endorsement, delinquency and claim information on FHA single family programs. Available at http://www.hud.gov/offices/hsg/comp/rpts/ooe/olmenu.cfm. EP26FE10.005 With the increase in the FHA loan limit in 2008, FHA is able to endorse larger mortgages. These mortgages would otherwise have been originated as conventional mortgages. In 2008, nearly 80 percent of FHA's endorsements of refinancing mortgages came from mortgages that were previously conventional mortgages, and this share increased throughout the year. 67 FHA's market share for home purchase mortgages increased from 3.8 percent in January 2007 to 32 percent in December 2008. The share of FHA endorsed refinancing loans increased from 4 percent in 2007 to 15 percent of the conforming market in 2008. As expected, these additional mortgages reduced the share of FHA mortgages that were for low- and very low-income borrowers. While the share of FHA loans for lower-income borrowers decreased, the share of lower-income borrower loans increased in the conventional conforming market between 2007 and 2008 ( see Table 6). 67 Id. 2008 was the first year FHA reported refinance endorsements by whether they were a refinance of a conventional mortgage or an FHA mortgage. EP26FE10.006 BILLING CODE C The experience for the low-income areas goal is different. While FHA endorsed more loans on properties located in low-income areas, it endorsed an even larger number of loans in higher-income areas. As a result, the low-income areas share of FHA's mortgages decreased. However, unlike the borrower-income based goals, the low-income area share of the conventional market also decreased. While the volume of conventional conforming mortgages in 2008 was 50 percent of that in 2007, the volume of conventional conforming mortgages from low-income areas in 2008 was only 40 percent of the level in 2007. The low-income area share of the conventional conforming market fell by 240 basis points between 2007 and 2008. As shown in Table 5, FHA market share is expected to be 30 percent in 2009, 2010 and 2011. The impact from the first-time homebuyer tax credit is unclear. Additional first-time homebuyers taking advantage of the $8,000 tax credit will likely have a positive impact on the housing goals. The additional repeat homebuyers who qualify for the $6,500 tax credit (there is a five-year occupancy requirement) will likely have a negative impact on the housing goals. For the proposed rule, FHFA has assumed that the homebuyer tax credit will have no significant impact on the share of conventional loans to low- and moderate-income borrowers or on the share of conventional loans that support housing purchases in lower-income areas. FHFA's estimates of the market performance for the three single-family owner-occupied property purchase money mortgage housing goals and the refinancing mortgage housing goal are provided in Table 6. FHFA estimates that the low-income and very low-income borrower mortgage shares of the home purchase mortgage market will be 24 percent to 30 percent and 6 percent to 9 percent, respectively, in 2010 and 2011. The share of goal-qualifying mortgages in low-income areas in the home purchase mortgage market is estimated to be 11 percent to 15 percent in 2010 and 2011. With a projected refinance rate of 46 percent in 2010 (down from 67 percent in 2009), FHFA estimates that 19 percent to 30 percent of refinance mortgages will be made to low-income borrowers. The refinance rate is expected to fall to 37 percent in 2011, resulting in an estimate that the low-income borrower mortgage share of the refinance mortgage market will be 19 percent to 33 percent in that year. To arrive at these estimates, FHFA used econometric methods to extend the trends of the market performance for each goal, based on a monthly time series database provided by the Federal Financial Institutions Examination Council (FFIEC) and the Federal Reserve Board. A detailed description of FHFA's analysis of the mortgage market for 2010 and 2011 market model methodology, is contained in a document entitled “Market Estimates for the 2010 and 2011 Enterprise Single-Family Housing Goals,” which is available at http://www.fhfa.gov. Sustainable Mortgages An alternative to defining the market for determining whether a mortgage is eligible to count toward the housing goals would be to focus on the sustainability of the mortgage. Under this approach, the housing goals would be defined in such a way that only mortgages that support sustainable home ownership would count toward the goals. This would require a standard to differentiate between mortgages that are sustainable and mortgages that are likely not to be sustainable. One approach would be to use historical data on the cumulative default rates (CDRs) of mortgages acquired by the Enterprises and make a determination, based on statistical models that predict CDR, whether mortgages with specific characteristics promote sustainable homeownership. The higher the predicted CDR of a mortgage with specific characteristics, the higher the probability the mortgage will default sometime within its life. FHFA would determine that mortgages with expected CDRs above some point did not promote sustainable homeownership. It might also be possible to establish a statistical correlation between a mortgage's expected CDR and the spread between the yield on the loan and some benchmark interest rate. If so, it might be possible to use that spread as a basis for determining whether mortgages promoted sustainable homeownership. Both Enterprises use statistical models to calculate expected CDR as part of their business decision strategy. FHFA could rely on Enterprise statistical models or develop its own models to estimate CDRs for the purpose of determining whether mortgages acquired by the Enterprises had estimated CDRs above a specified threshold. FHFA would also have to develop estimates of the share of single-family mortgages originated each year that had estimated CDRs above and below that threshold. To develop its own statistical models, FHFA could use loan-level mortgage data obtained from the Enterprises and leased from private vendors. Data obtained through the mortgage market survey required by section 1324(c) of the Safety and Soundness Act, as amended by HERA, might also be useful. FHFA invites comments on this alternative to estimating the market and counting single-family mortgages toward the housing goals. 7. Financial Condition of the Enterprises In the first two full years of the current housing crisis—from July 2007 through the first half of 2009—combined losses at the Enterprises totaled $165 billion. In the first half of 2009, the Enterprises reported combined losses of $47 billion. The financial performance of both Enterprises is dominated by credit-related expenses and losses that stem principally from purchases of PLS and purchases and guarantees of mortgages originated in 2006 and 2007. Since the establishment of the conservatorship for the Enterprises in September 2008, the combined losses of the two Enterprises depleted their capital and required them to draw from the U.S. Treasury under the Senior Preferred Stock Purchase Agreements. FHFA's duties as conservator require the conservation and preservation of the assets of the two Enterprises. Given the importance of the Enterprises to the housing market, any goal-setting must be closely linked to putting the Enterprises in sound and solvent condition. Over the long term, such actions will assist homeowners and neighborhoods while saving the Enterprises money. In 2009, FHFA attempted to align the Enterprises' affordable housing goals with safe and sound practices and market reality, and the housing goals requirements for 2010 and 2011 must be similarly aligned. B. Single-Family Housing Goal Levels Based on the factors described above, proposed § 1282.12 would establish the benchmark levels for the single-family housing goals for 2010 and 2011 as follows: Housing goals for low-income families. The benchmark level of the annual goal for each Enterprise's purchases of purchase money mortgages on owner-occupied single-family housing for low-income families would be 27 percent of the total number of such mortgages purchased by that Enterprise. Housing goals for families in low-income areas. The benchmark level of the annual goal for each Enterprise's purchases of purchase money mortgages on owner-occupied single-family housing for families in low-income areas would be 13 percent of the total number of such mortgages purchased by that Enterprise. Housing goals for very low-income families. The benchmark level of the annual goal for each Enterprise's purchases of purchase money mortgages on owner-occupied single-family housing for very low-income families would be 8 percent of the total number of such mortgages purchased by that Enterprise. Housing goals for refinancing mortgages. The benchmark level of the annual goal for each Enterprise's purchases of refinancing mortgages on owner-occupied single-family housing for low-income families would be 25 percent of the total number of such mortgages purchased by that Enterprise. VI. Analysis of Multifamily Housing Goals Section 1333(a)(4) of the Safety and Soundness Act, as amended by HERA, requires FHFA to consider the following six factors in setting multifamily special affordable housing goals: (1) National multifamily mortgage credit needs and the ability of the Enterprise to provide additional liquidity and stability for the multifamily mortgage market; (2) The performance and effort of the Enterprise in making mortgage credit available for multifamily housing in previous years; (3) The size of the multifamily mortgage market for housing affordable to low-income and very low-income families, including the size of the multifamily markets for housing of a smaller or limited size; (4) The ability of the Enterprise to lead the market in making multifamily mortgage credit available, especially for multifamily housing affordable to low-income and very low-income families; (5) The availability of public subsidies; (6) The need to maintain the sound financial condition of the Enterprise. 68 68 12 U.S.C. 4563(a)(4). A. Analysis of Factors for Multifamily Housing Goals FHFA's analysis of each of the factors is set forth below. 1. National Multifamily Mortgage Credit Needs Due to the credit crisis, traditional sources of multifamily credit, primarily commercial mortgage-backed securities (CMBS), life insurance companies, commercial banks, and thrifts, have significantly reduced lending or stopped lending completely. This has left Freddie Mac and Fannie Mae as the principal sources of financing for most multifamily mortgages. FHA, another active source of multifamily credit, has capacity constraints that limit its ability to significantly expand lending through its insured programs. With multifamily property prices having fallen by almost 34 percent from the third quarter of 2008 to the third quarter of 2009, 69 many properties that would have been eligible for refinance through Enterprise programs lack enough equity to meet Enterprise loan underwriting standards. Declining multifamily property prices will adversely affect owners who financed with interest-only loans over the past decade. As these loans become due, properties with non-amortizing loans will not have accumulated sufficient additional equity over the term of the loan to counter the effects of declining property values. 69 Moody's/Real CPPI Report, Jan. 2010. While obtaining multifamily credit is difficult for most owners, demand for new multifamily housing credit has also waned. According to the U.S. Census Bureau, multifamily housing starts plummeted by 47 percent from September 2008 to December 2009. 70 Sales of multifamily properties are far below normal levels in part because property owners are waiting for property values to stabilize. Many other multifamily property owners, unable to refinance, have been granted extensions by lenders, or in the case of loans securitized through CMBS, by the servicer. On the positive side, the maturations of multifamily loans acquired by the Enterprises and backing CMBS issuances are unlikely to begin to increase significantly until after 2010. 70 “New Residential Construction in December 2009.” U.S. Census Bureau, Joint Release, U.S. Department of Housing and Urban Development, Jan. 20, 2009. While the Enterprises have primarily purchased the highest-rated CMBS tranches, they may be indirectly affected by increasing CMBS delinquency rates. According to a March 2009 report by Deutsche Bank, delinquencies on CMBS issuances began to accelerate in late 2008, and should peak at 6 to 7 percent in late 2010. 71 According to December 2009 data released by the MBA, 72 delinquencies on CMBS issuances rose slightly from 3.89 percent to 4.06 percent in the third quarter of 2009. The CMBS delinquency rate in the third quarter of 2008 was 0.63 percent. As properties collateralizing CMBS issuances become delinquent, foreclosures and workouts will increase, further depressing prices of all commercial properties, including multifamily properties. This will make refinancing maturing multifamily loans more challenging for the Enterprises. 71 Commercial Real Estate Outlook Q1 2009, Deutsche Bank, Mar. 2009. 72 MBA Commercial/Multifamily Mortgage Delinquency Report, Dec. 7, 2009. While multifamily delinquencies remain relatively low for both Fannie Mae 73 and Freddie Mac, 74 0.062 percent and 0.014 percent respectively, there is growing concern among multifamily property owners and investors about properties that are overleveraged or generating negative cashflows. Depending on the magnitude of distressed properties requiring restructuring, both Fannie Mae's and Freddie Mac's multifamily activity could exceed FHFA forecasts. 73 Fannie Mae: Monthly Summary, November 2009, Table 9. 74 Freddie Mac: Monthly Volume Summary: November 2009, Table 6. 2. Past Performance HUD established dollar-based multifamily subgoals for the Enterprises for the years 1996 through 2008. HERA extended the 2008 subgoals through 2009, subject to review by FHFA, and in its August 10, 2009 final rule on the housing goals, FHFA increased these 2009 subgoals modestly, from $5.49 billion to $6.56 billion for Fannie Mae, and from $3.92 billion to $4.60 billion for Freddie Mac. HERA changed the structure of the multifamily housing goal for 2010 and beyond. The multifamily housing goal for 2009 is set in terms of units for very low-income families and low-income families in low-income areas. The scope of the goal is broader for 2010-2011, covering units affordable to all low-income families (those with incomes no greater than 80 percent of AMI) regardless of property location. Section 1333(a)(2) of the Safety and Soundness Act, as revised by HERA, requires the Director to establish “additional requirements for the purchase by each enterprise of mortgages on multifamily housing that finance dwelling units affordable to very low-income families,” with “very low-income” families defined as those with incomes no greater than 50 percent of AMI. 75 To implement this provision, FHFA is proposing to establish a multifamily housing subgoal for very low-income families. FHFA invites comment on this proposed requirement. 75 12 U.S.C. 4563(a)(2). Section 1333(a)(3) of the Safety and Soundness Act, as revised by HERA, provides that the Director shall require each Enterprise to report on its purchases of mortgages on multifamily housing “of a smaller or limited size that is affordable to low-income families.” The provision defines small multifamily projects as those containing 5 to 50 units or as those with mortgages of up to $5,000,000. The Director may adjust the definition to include projects containing different numbers of units or with mortgages of different amounts. The provision further states that the Director may establish additional requirements related to such units by regulation. 76 76 12 U.S.C. 4563(a)(3). FHFA proposes to define such small multifamily properties as those containing 5 to 50 units, which is consistent with industry standards. FHFA already requires reporting by the Enterprises for purchases of mortgages secured by such properties. FHFA invites comments on whether additional requirements for small multifamily properties should be considered. Multifamily special affordable housing goal. Both Enterprises played major roles in funding multifamily units for low-income families between 2001 and 2008, as shown in Table 7. Fannie Mae financed an average of 417,000 such units over this period, peaking at 538,000 units in 2003, while Freddie Mac financed an average of 364,000 units, peaking at 492,000 units in 2007. However, as discussed elsewhere in the proposed rule, the Enterprises followed different approaches to the multifamily market, with Freddie Mac relying to a significant extent on the purchase of CMBS, while Fannie Mae depended to a greater extent on the direct purchase of multifamily loans originated by its Delegated Underwriting and Servicing (DUS) lenders. As indicated in Table 7, Fannie Mae's financing of low-income multifamily units fell by 16 percent, from 532,000 units in 2007 to 448,000 in 2008 units. Financing fell more sharply at Freddie Mac, by 44 percent, from 492,000 units in 2007 to 276,000 units in 2008. This difference reflects the drop in CMBS purchases by Freddie Mac. As a result, Freddie Mac's financing of such units was 62 percent of Fannie Mae's financing, the lowest ratio of the 2001-08 period. BILLING CODE P EP26FE10.007 Very low-income multifamily subgoal. HERA revised the definition of “very low-income” families as it pertains to the Enterprises' housing goals. Under the housing goals established by HUD for 1993-2008, “very low-income” referred to borrowers with incomes no greater than 60 percent of AMI, or for rental units, to units affordable to families with incomes in this range, with adjustments for family size. This definition was changed by HERA to refer to borrowers with incomes no greater than 50 percent of AMI, or for rental units, to units affordable to families with incomes in this range, with adjustments for family size. 77 The new definition of “very low-income” families is consistent with that used in some other housing programs. 77 12 U.S.C. 4502(24). Enterprise financing of rental units for very low-income families over the 2001-08 period is reported in Table 8. On average, Fannie Mae funded 94,000 such units each year, and Freddie Mae funded 86,000 such units. The same general pattern prevailed over time as that shown in Table 7, with a modest drop in funding by Fannie Mae and a substantial drop (55 percent) by Freddie Mac. As a result, the number of such units financed by Freddie Mac in 2008 was 49 percent of the number financed by Fannie Mae, the lowest ratio of this period. EP26FE10.008 Financing of low-income units in small multifamily properties. As discussed above, HERA recognizes the important role played by small multifamily housing as a source of affordable rental housing. According to the 2007 AHS, multifamily properties containing 5-49 units (a slightly different definition than the 5-50 unit definition in HERA) constituted 77 percent of all multifamily units and 74 percent of multifamily units constructed in the previous 4 years. Table 9 reports additional information on small multifamily properties affordable to low-income families. Both Enterprises increased their financing of low-income multifamily units between 2001 and 2003, from 24,000 units to 155,000 units for Fannie Mae, and from 44,000 units to 138,000 units for Freddie Mac. This increase was motivated at least in part by the favorable counting treatment that HUD allowed for financing goal-qualifying units in small multifamily properties over the 2001-03 period. Under this counting treatment, each goal-qualifying unit counted twice in the numerator and once in the denominator in calculating goal performance. As indicated in Table 9, both Enterprises decreased their roles in the small multifamily market after the expiration of the favorable HUD counting treatment—for Fannie Mae, an average of 49,000 units for 2004-07, and for Freddie Mac, an average of 24,000 such units. Fannie Mae financed 44,000 low-income small multifamily units in 2008, approximately equal to the average for 2004-07, while Freddie Mac financed only 2,078 such units in 2008, a decrease of 91 percent from its 2004-07 average. FHFA is concerned about Freddie Mac's virtual exit from this business and seeks comment on whether small multifamily low-income housing subgoals should be established for future years. EP26FE10.009 BILLING CODE C 3. Market Size The multifamily mortgage market is likely to remain relatively unchanged in 2010 as compared to 2009, and the dollar amount of multifamily loans financed in 2010 will likely be similar to that of 2009, approximately $40-45 billion. Poor property fundamentals, especially declines in property value, will affect the type of properties and owners that can access multifamily credit. If the multifamily market begins to recover in 2011, multifamily originations may increase. Projections of such activity, however, are uncertain. Accordingly, for purposes of this rulemaking, the multifamily goals for both 2010 and 2011 are based on the overall multifamily market for 2009 and Enterprise multifamily performance in the years 2004-2008, taking into account the average percent of very low-income and low-income purchases by the Enterprises in those years. As in prior years, the multifamily goals are set separately for each Enterprise. Unlike prior years, the multifamily goals are measured in units rather than dollar volume. The proportion of multifamily affordable units available for financing in 2010 and 2011 will likely be below historical levels due to weakness in the multifamily housing market. Steep declines in multifamily property prices since mid-2007 have caused a significant loss of equity for owners, many of whom can no longer qualify for Enterprise financing without placing substantial cash into the property. The loss of equity for most owners has meant that only financially strong properties and borrowers will qualify for Enterprise financing. These properties often have a much lower proportion of affordable units. Another factor that will likely constrain Enterprise multifamily loan production in 2010 and 2011 will be the relatively small dollar amount of loans maturing in the Enterprise portfolios in 2010 and 2011. The MBA expects only $26 billion in total maturing multifamily mortgages in 2010. However, the volume of maturing loans is expected to increase from 2011 onward. 78 78 Multifamily Housing News: MBA Says Large Amounts of Multifamily Loans Will Mature in 2011 and After, Feb. 11, 2009. For well over a decade, Freddie Mac relied upon purchases of CMBS and structured deals involving large portfolios of affordable multifamily loans to meet applicable affordable housing goals. Beginning in 2006 and 2007, CMBS made up a significant portion of Fannie Mae's affordable multifamily purchases. These sources of affordable units are now either unavailable or do not meet Enterprise standards. Therefore, based on the factors discussed above, multifamily affordable purchases in the very low-income category are likely to be near historical lows in 2009 overall. The effect, though, will be more pronounced at Freddie Mac. The percentage of very low-income multifamily purchases in 2010 for Freddie Mac will be below its average for 2004 to 2008. Fannie Mae is expected to have a very low-income purchase volume near its average for the past several years. 4. Ability of the Enterprise To Lead the Market in Making Multifamily Mortgage Credit Available As described above in the context of the single-family goals, Congress in enacting the Safety and Soundness Act was concerned that the Enterprises were lagging behind market originations of mortgages for the benefit of low- and moderate-income households. FHFA has been cognizant of that concern in setting goals for the Enterprises. With the current credit crisis negatively affecting the commercial real estate market, the Enterprises have become market leaders by default. The disciplined underwriting and credit standards they bring to the industry have contributed to relatively low delinquency rates. Compared to the industry, the Enterprises have relatively conservative multifamily underwriting parameters. With the fundamentals of multifamily real estate very weak ( e.g., high vacancy rates, stagnant rents and falling property values), the Enterprises have enhanced their credit standards to reduce risk exposure, which has meant that owners of the strongest performing properties are more likely to obtain credit from lenders selling to the Enterprises. As noted previously, Fannie Mae and Freddie Mac comprise a large portion of the multifamily market. As a result, in 2009 they not only led the multifamily market, they effectively were the market. 5. Availability of Public Subsidies Public subsidies for multifamily housing have been affected by the mortgage credit crisis. Low-income housing tax credits (LIHTCs), an important source of equity for new low-income housing, have fallen in value. However, on October 19, 2009, FHFA announced, in conjunction with the Treasury Department and HUD, an initiative to support State and local housing finance agencies (HFAs) through a new bond purchase program that will support new lending by HFAs, and a temporary credit and liquidity program that will improve the access of HFAs to liquidity for outstanding HFA bonds. Fannie Mae and Freddie Mac each played critical roles in this program, which helped support low mortgage rates and expand resources for low- and middle-income borrowers who want to purchase or rent homes that are affordable over the long term. On January 13, 2010, the Treasury Department, FHFA and HUD announced the completion of all transactions under the initiative, which involved more than 90 HFAs. The Enterprises actively purchase mortgages on properties with HUD Housing Assistance Plan (HAP) contracts. Newly constructed or rehabilitated properties usually receive forward commitments from the Enterprises with part of the new equity coming from LIHTCs. The remaining Section 8 properties are refinancings where the property owners sign long-term use agreements with HUD and receive a HAP contract in return. The Enterprises can also assist State and local HFAs by credit enhancing HFA bonds, and by offering permanent financing for properties rehabilitated through the Neighborhood Stabilization Program and other HUD grants. 6. Financial Condition of Enterprises As previously discussed, in the first two full years of the current housing crisis—from July 2007 through the first half of 2009—combined losses at the Enterprises totaled $165 billion. In the first half of 2009, the Enterprises reported combined losses of $47 billion. The financial performance of both Enterprises is dominated by credit-related expenses and losses stemming principally from purchases of PLS and purchases and guarantees of mortgages originated in 2006 and 2007. Since the establishment of the conservatorship for the Enterprises in September 2008, the combined losses of the two Enterprises depleted their capital and required them to draw from the U.S. Treasury under the Senior Preferred Stock Purchase Agreements. FHFA's duties as conservator require the conservation and preservation of the assets of the two Enterprises. Given the importance of the Enterprises to the housing market, any goal setting must be closely linked to putting the Enterprises in sound and solvent condition. Over the long term, such actions will assist homeowners and neighborhoods while saving the Enterprises money. In 2009, FHFA attempted to align the Enterprises' affordable housing goals with safe and sound practices and market reality, and the housing goals requirements for 2010 and 2011 must be similarly aligned. B. Multifamily Housing Goal Levels As a result of the changes in HERA, the proposed rule would establish the multifamily affordable housing goals for each Enterprise separately from the single-family housing goals beginning in 2010. Qualifying multifamily units previously had been included with single-family affordable purchases in the overall goals. Additional requirements for multifamily housing were imposed under a multifamily special affordable subgoal. The multifamily affordable goals for each Enterprise in 2010 and 2011 would be established in terms of low-income and very low-income units financed annually. Estimates of Enterprise multifamily purchase volume in 2009 were used by FHFA as a proxy for 2010 volumes. With uncertainty as to the path of the economy's recovery, FHFA's estimation for 2011 origination volume is unchanged from 2010. The proposed rule would set the multifamily goal levels using the average percentage of very low-income and low-income purchases in 2008 for both Enterprises. The year 2008 was chosen, rather than the average for 2004-2008, because 2008 performance more closely reflects current market conditions. Multifamily loan purchase volumes for 2010 were estimated using 2009 part-year volumes. The average low- and very low-income origination rates were multiplied by the expected origination volumes for 2010 and 2011 to derive low- and very low-income unit volumes for the Enterprises. Freddie Mac multifamily volume has not kept pace with Fannie Mae's volume since the beginning of the credit crisis in 2008, especially for very low-income units, due in part to Freddie Mac's reliance on CMBS and structured purchases from banks and thrifts. Those sources of mortgages are not now readily available and are likely to reappear in only limited volumes in the near term. Fannie Mae, on the other hand, is better positioned than Freddie Mac to purchase affordable units through its flow business. For example, Fannie Mae has a group dedicated to purchasing mortgages on small multifamily properties (5 to 50 units). Smaller properties, in general, have higher percentages of affordable units than larger properties. Furthermore, Fannie Mae's DUS program allows it to share credit losses with lenders. Mortgages on small multifamily properties, however, are often more at risk of delinquency and default than other multifamily mortgage property types. Perhaps more importantly, mortgages on small properties are usually more expensive to originate and underwrite than mortgages on large properties because the costs, mostly fixed, are spread over fewer units. 79 The DUS program helps Fannie Mae mitigate some of that credit risk of purchasing affordable multifamily units. 79 “Why do Small Multifamily Properties Bedevil Us?” Shekar Narasimhan, The Brookings Institution, Nov. 2001, http://www.brookings.edu/articles/2001/11metropolitanpolicy_narasihan.aspx. Since Fannie Mae will likely purchase significantly more multifamily units in 2010 than Freddie Mac, based on 2009 data, the proposed rule would set different goals for each of the Enterprises, as was done in previous years. Based on 2008 Enterprise affordable housing performance, FHFA anticipates that for low-income units and very low-income units, multifamily mortgages acquired by Freddie Mac will finance fewer units than multifamily mortgages acquired by Fannie Mae in 2010 and 2011. The disparity will be even greater for very low-income units. Freddie Mac will likely purchase multifamily loans that finance about half as many very low-income units as will be financed by multifamily loans acquired by Fannie Mae in 2010 and 2011. While in conservatorship, FHFA expects Freddie Mac's board of directors and new senior management team to assess Freddie Mac's business model with respect to multifamily housing. Proposed § 1282.13 would establish the multifamily special affordable housing goals and subgoals as follows. Unlike with the single-family goals described above, FHFA has not defined these goals as prospective targets, with compliance to be assessed by reference to actual market data. Rather, because the availability of the necessary market data is less certain for the multifamily market, FHFA has set goals in the traditional prospective manner, but these goals remain subject to the statutory provisions enabling them to be adjusted, or providing relief from enforcement, if market conditions so require. Multifamily low-income housing goals. The annual goal for Fannie Mae's purchases of mortgages on multifamily residential housing affordable to low-income families would be at least 237,000 dwelling units for each of 2010 and 2011. The annual goal for Freddie Mac's purchases of mortgages on multifamily residential housing affordable to low-income families would be at least 215,000 such dwelling units for each of 2010 and 2011. Multifamily very low-income housing subgoals. The annual subgoal for Fannie Mae's purchases of mortgages on multifamily residential housing affordable to very low-income families would be at least 57,000 dwelling units for each of 2010 and 2011. The annual subgoal for Freddie Mac's purchases of mortgages on multifamily residential housing affordable to very low-income families would be at least 28,000 such dwelling units for each of 2010 and 2011. These proposed multifamily goals reflect the financial and operational condition of the Enterprises in conservatorship. VII. Section-by-Section Analysis A. Definitions—Proposed § 1282.1 Proposed § 1282.1 would set forth definitions applicable to the housing goals provisions. The proposed rule includes a number of technical amendments to conform the definitions to the statutory definitions in the Safety and Soundness Act, as amended by HERA. The proposed rule would remove a number of definitions that were used in regulatory provisions that have been revised or eliminated based on HERA's amendments of the Safety and Soundness Act. Proposed § 1282.1 would no longer include definitions for “central city,” “ECOA,” “government-sponsored enterprise, or GSE,” “home purchase mortgage,” “New England,” “ongoing program,” “other underserved area,” “owner-occupied unit,” “portfolio of loans,” “real estate mortgage investment conduit (REMIC),” “rural area,” “underserved area,” and “wholesale exchange.” Proposed § 1282.1 would add new definitions of “extremely low-income,” “low-income,” and “moderate-income,” and it would revise the income levels in the definition of “very low-income.” The proposed rule would also replace the definition of “low-income area” with a new definition for “families in low-income areas.” Each of these definitions is revised to be substantially the same as the corresponding definition in section 1303 of the Safety and Soundness Act, as amended by HERA. 80 80 12 U.S.C. 4502. Proposed § 1282.1 would add new definitions for “borrower income,” “FEMA,” “HMDA,” “minority census tract,” “mortgage revenue bond,” “non-metropolitan area,” “owner-occupied housing,” “private label security,” and “purchase money mortgage.” The new definitions are intended to reflect common usage and provide certainty in interpreting the terms as used in new and existing regulatory provisions. Proposed § 1282.1 would also make minor conforming revisions to several definitions. The definition of “contract rent” would be revised to make clear that the market rent for similar units in the neighborhood, as used by the lender or appraiser in underwriting a property, may be used as the anticipated rent for unoccupied units. The proposed rule would add language to the definition of “utilities” clarifying that charges for cable or telephone service shall not be included. Proposed § 1282.1 would clarify that Metropolitan Divisions are included in the definition of “metropolitan area” to facilitate comparisons with census and HMDA information. Unnecessary references to the form of payment would be eliminated from the definition of “mortgage purchase.” Proposed § 1282.1 would remove the definition of “refinancing” and incorporate those provisions in a new definition of “refinancing mortgage.” In order to avoid confusion about whether a transaction should be treated as a loan modification or a refinancing, proposed § 1282.1 would exclude workout agreements from the definition. The definition of “mortgage” in proposed § 1282.1 would not include references to personal property manufactured housing loans pending further review of the appropriate treatment of such loans under the Enterprise and Bank housing goals. The definitions for “mortgages contrary to good lending practices” and “mortgages with unacceptable terms or conditions or resulting from unacceptable practices” would be deleted, with their substantive provisions revised and consolidated into a single new definition of “mortgage with unacceptable terms or conditions.” The definition of “HOEPA mortgage” would be revised to conform FHFA's definition to the coverage in HOEPA itself. The definition of “mortgage with unacceptable terms or conditions” in proposed § 1282.1 would include a new provision regarding mortgages with annual percentage rates (APRs) above a certain level. The new provision is intended to cover mortgages that were formerly included in the definition of “HOEPA mortgage.” The provision in the definition of “mortgage with unacceptable terms or conditions” relating to a borrower's ability to pay would be replaced with a provision incorporating interagency guidance on nontraditional and subprime mortgages. This change is intended to cover similar types of mortgages while providing greater consistency between the provisions of the housing goals and other regulatory provisions. Designated disaster areas. The new definition of “families in low-income areas” includes families with incomes at or below 100 percent of AMI who reside in “designated disaster areas.” The proposed rule would define “designated disaster areas” as areas at the census tract level and include only census tracts in counties approved for individual assistance within the declared major disaster area where the average real property damage severity, as reported by the Federal Emergency Management Agency (FEMA), exceeds $1,000 per household for that census tract. Disaster areas are declared when an area is adversely affected by some unforeseen event. However, not all disasters impact housing to the same degree, and the severity of the impact varies within the declared area. Presidential Major Disaster Declarations are defined by FEMA at the county level in the area affected by the major disaster and can be declared to be eligible for public assistance, individual assistance or both. Public assistance is available to local governments for the repair, replacement or clean-up of public infrastructure. Individual assistance is broken down further into two categories, housing needs and “other than housing needs.” 81 Housing needs include repair, replacement and construction of homeowner residences. The proposed rule would limit the definition of “designated disaster areas” to those counties eligible for individual assistance, and it would establish a minimum average real property damage severity. 81 Federally declared disaster areas are managed by FEMA and can be tracked at FEMA's Web site. See http://www.fema.gov/news/disasters.fema. For purposes of complying with the Community Reinvestment Act (CRA), regulators have made the determination that “[e]xaminers will consider institution activities related to disaster recovery that revitalize or stabilize a designated disaster area for 36 months following the date of designation. Where there is a demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended.” 82 To accommodate the Enterprises' business planning requirements, for purposes of the low-income areas housing goal, the proposed rule would treat a designated disaster area as effective beginning no later than January 1 of the year following the FEMA designation and continuing through December 31 of the third full calendar year following the FEMA designation. If data is available in a particular case to support treatment as a designated disaster area from an earlier date, FHFA may provide for such treatment. 82 The Department of the Treasury, the Federal Reserve Board and the Federal Deposit Insurance Corporation, Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice, 74 FR 509 (Jan. 6, 2009). FHFA welcomes comments on the proposed changes to the definitions under § 1282.1. B. Housing Goals—Proposed §§ 1282.11 Through 1282.13 As required by sections 1331(a) and 1333(a)(2) of the Safety and Soundness Act, as amended by HERA, this subpart establishes four single-family housing goals and one multifamily special affordable housing goal for 2010 and 2011. The subpart would also establish one multifamily special affordable housing subgoal for 2010 and 2011. The single-family housing goals would be based both on the proposed benchmark levels and on an evaluation of the Enterprise's performance relative to the market for each housing goal in each year. Proposed § 1282.11(b) would require the Director to establish housing goals for a particular year by December 1 of the previous year. 83 Although the initial final rule establishing the new housing goals under the Safety and Soundness Act, as amended by HERA, will not be published for effect until early 2010, FHFA will evaluate performance under the housing goals established for 2010 on a calendar year basis. 83 See 12 U.S.C. 4561(b). Proposed § 1282.12(b) would establish criteria for determining the size of the market based on HMDA data. The criteria for establishing the size of the market reflect the types of mortgages that would be counted for purposes of the housing goals and that would typically be eligible for purchase by an Enterprise. Additional details regarding the housing goals are discussed above, along with the factors considered by FHFA in establishing the proposed housing goals. C. Discretionary Adjustment of Housing Goals—Proposed § 1282.14 Consistent with the requirements of section 1334 of the Safety and Soundness Act, as amended by HERA, proposed § 1282.14 would provide for an Enterprise to petition the Director to reduce the level of any goal or subgoal. 84 Proposed § 1282.14 would set forth the standards and procedures for consideration by the Director in determining whether to reduce a goal or subgoal level. 84 12 U.S.C. 4564. D. General Counting Requirements—Proposed § 1282.15 Proposed § 1282.15 would set forth general requirements for the counting of Enterprise mortgage purchases toward the achievement of the housing goals. Performance under the single-family housing goals would be evaluated based on the percentage of all single-family, owner-occupied mortgages purchased by an Enterprise that meet a particular goal. Performance under the multifamily housing goals would be evaluated based on the total number of units that meet a particular goal and are financed by mortgages purchased by an Enterprise. The data estimation methodologies in this section would be revised to reflect changes in the affordable housing goals for 2010. The methodology for estimating affordability for single-family rental properties would be eliminated as unnecessary because the single-family housing goals are measured in terms of mortgages rather than units. The option to exclude single-family owner-occupied units with missing data up to one percent of the total number of single-family owner-occupied units backing mortgages purchased by an Enterprise would also be removed because it is no longer in use by either Enterprise. The option to request approval of alternative methodologies would also be removed. In light of the shorter time period for which the affordable housing goals are being established, it should not be necessary to make changes to the rules for missing data prior to FHFA's proposal of new housing goals for later years. E. Special Counting Requirements—Proposed § 1282.16 Proposed § 1282.16 would set forth special counting requirements for the receipt of full, partial or no credit for a transaction toward achievement of the housing goals. A number of clarifying and conforming changes would be made to this section to ensure consistent application of the counting rules among the Enterprises. Proposed § 1282.16(b) would make clear that where a mortgage falls within one of the categories excluded from consideration under the housing goals, the mortgage should be excluded even if it otherwise would fall within one of the special counting rules in proposed § 1282.16(c). For example, a non-conventional mortgage that would be excluded from consideration pursuant to proposed § 1282.16(b)(3) could not be counted even if it otherwise would be counted as a seasoned mortgage under proposed § 1282.16(c)(6). Proposed § 1282.16(c) would also make clear that where a transaction falls under more than one of the special counting rules in § 1282.16(c), all of the applicable requirements must be satisfied in order for the loan to be counted for purposes of the affordable housing goals. Proposed § 1282.16(b) would eliminate the current exclusion of jumbo conforming loans from consideration for purposes of the affordable housing goals. 85 These loans had been excluded from consideration in the past because the goals had been established based on market estimates that preceded the increases in the conforming loan limits. Because the higher loan limits have been considered in the evaluation of the market for this proposed rule, it is no longer necessary to exclude such loans from consideration for purposes of the affordable housing goals. 85 See 12 CFR 1282.16(b)(10). Proposed § 1282.16(b)(1) would be revised to refer more specifically to equity investments in low-income housing tax credits, which are consistent with the Charter Acts of the Enterprises. Proposed § 1282.16(b)(11) would make explicit the existing prohibition on counting mortgages toward performance under the affordable housing goals if the mortgage has previously been counted for purposes of the performance of either Enterprise under the housing goals. In order to limit excessively burdensome recordkeeping that could result, the rule would make clear that this limitation only extends back for five years. Proposed § 1282.16(b)(12) would exclude purchases of mortgages secured by properties that have not been certified as ready for occupancy from consideration for purposes of the affordable housing goals. Proposed § 1282.16(b)(14) would reflect the statutory limitation on housing goals credit for mortgages receiving assistance under the Housing Trust Fund and the Capital Magnet Fund established by HERA. 86 86 See 12 U.S.C. 4568, 4569. Proposed § 1282.16(c) would no longer include real estate mortgage investment conduits (REMICs) as mortgage purchases for purposes of the housing goals, consistent with the general exclusion of PLS under proposed § 1282.16(b)(13). Proposed § 1282.16(c) would also eliminate consideration of expiring assistance contracts, reflecting the changes under HERA to the former special affordable housing goal. Proposed § 1282.16(c)(5) would amend the provisions regarding cooperative housing and condominiums to reflect HERA's treatment of single-family housing and multifamily housing under separate goals. Proposed § 1282.16(c)(8) would remove current limitations on counting mortgage revenue bonds related to the source of funds for repayment and the presence of additional credit enhancements. The proposed rule would require that an Enterprise have sufficient information available to determine the eligibility of any underlying mortgages before counting such mortgages or units for purposes of the housing goals. Proposed § 1282.16(c)(10) would reflect the accepted terminology for the Administration's Making Home Affordable program. Proposed § 1282.16(d) would relocate existing provisions regarding HOEPA mortgages and mortgages with unacceptable terms or conditions from current § 1282.16(c). Placing these provisions in a separate paragraph reflects the fact that unlike other types of mortgage purchases, HOEPA mortgages and mortgages with unacceptable terms and conditions must be counted in the denominator as mortgage purchases but can never be counted in the numerator, regardless of whether the mortgages would otherwise qualify based on the affordability and other counting criteria. The proposed treatment is consistent with past practice and with section 1332(i) of the Safety and Soundness Act, as amended by HERA, which provides that no credit may be given for mortgages that FHFA determines are “unacceptable or contrary to good lending practices.” 87 87 12 U.S.C. 4562(i). Proposed § 1282.16(e) would clarify that FHFA may provide guidance on the treatment of any transactions under the affordable housing goals. Such guidance may be provided in response to a request from one or both Enterprises, or it may be provided at the initiation of FHFA. Private Label Securities. Proposed § 1282.16(b)(13) would exclude PLS from counting for purposes of the affordable housing goals. Historically, the Enterprises—particularly Freddie Mac—relied on PLS purchases to help them achieve certain affordable housing goals. Freddie Mac met the 2005 and 2006 affordable housing goals and subgoals in part through its purchases of AAA-rated tranches of PLS backed by subprime mortgages that were targeted to satisfy goals and subgoals. As house price appreciation and rising interest rates reduced housing affordability, PLS proliferated as the subprime share of the market grew to more than 20 percent. Fannie Mae and Freddie Mac began to follow suit in response to declining market share and in pursuit of higher profits. The Enterprises not only modified their own underwriting standards, but they also bought hundreds of billions of dollars' worth of AAA-rated tranches of subprime and Alt-A PLS for the yield and, in certain instances, to satisfy specific housing goals and subgoals. The results of providing large-scale funding for such loans were adverse for borrowers who entered into mortgages that did not sustain homeownership and for the Enterprises themselves. Although Fannie Mae and Freddie Mac have a combined 57 percent share of mortgages outstanding in their guaranteed portfolio, the mortgages in that portfolio account for only 25 percent of serious delinquencies. However, while PLS account for 12 percent of all mortgages outstanding, PLS account for 34 percent of serious delinquencies. As delinquencies in PLS portfolios triggered downgrades, 90 percent of the PLS holdings of the Enterprises experienced a downgrade. In light of that record, FHFA proposes to exclude PLS from consideration under the housing goals. In addition to the recent dismal performance of PLS, it is reasonable to separate any future growth of the PLS market from the Enterprises' housing goals. The housing goals reflect Congress' concern that the Enterprises' charter mission to support the stability, liquidity and affordability of the secondary market not be managed to the detriment or neglect of goal-eligible mortgages. In this way the goals may be seen as a mechanism to ensure that each Enterprise serves all segments of the mortgage market available to it. Even to the extent that a non-GSE secondary mortgage market returns, loans backing new or seasoned PLS would not count in either the numerator or the denominator for purposes of assessing housing goals. FHFA invites comment on the proposed exclusion of PLS and on alternatives to not counting PLS mortgages in meeting the housing goals. For example, mortgages backing such securities could be counted if an appropriate senior Enterprise officer certified that the mortgages are compliant with all existing regulations regarding good mortgage practices, and with the interagency guidance on subprime lending and non-traditional loans. Such certification, for example, could be required to include a description of the methods used to determine that loans included in such PLS met those conditions. The certification could also require regular and ongoing review of PLS purchases to ensure that they meet existing requirements regarding good mortgage practices and recent interagency regulatory guidance on non-traditional and subprime loans. Commercial Mortgage Backed Securities (CMBS) would also be excluded from counting toward the affordable housing goals under the proposed rule. FHFA invites comment on whether CMBS should be treated differently than other PLS for purposes of the affordable housing goals. Home Equity Conversion Mortgages and Subordinate Liens. Proposed § 1282.16(b)(3) would exclude the purchases of all non-conventional single-family mortgages, including HECMs, from counting towards the Enterprises' housing goals. Certain non-conventional mortgages, including HECMs, have been counted toward the goals in the past. HERA, however, amended section 1332(a) of the Safety and Soundness Act to restrict the single-family housing goals to include only conventional mortgages. 88 This restriction does not preclude the Enterprises' purchase of Charter-compliant non-conventional single-family mortgages, including HECMs, but such purchases would not count toward the housing goals—that is, such purchases would be excluded from both the numerator and denominator in calculating goal performance. 88 12 U.S.C. 4562(a). Proposed § 1282.16(b)(10) would also exclude the purchases of subordinate lien mortgages (second mortgages) from counting towards the Enterprises' housing goals. This exclusion would reflect the fact that, under section 1331 of the Safety and Soundness Act, as amended, the single-family housing goals are limited to purchase money or refinancing mortgages. This would exclude “piggy-back” liens that may be acquired by an Enterprise along with the corresponding first lien mortgage and subordinate lien mortgages, such as home equity loans, acquired separately by an Enterprise where the Enterprise does not also acquire the corresponding first lien mortgage. This provision would not preclude the Enterprises' purchase of Charter-compliant subordinate lien mortgages, but as with HECMs, such purchases would not count toward the housing goals. FHFA seeks comments on this provision. F. Affordability Definitions—Proposed §§ 1282.17 Through 1282.19 Proposed § 1282.17 would set forth definitions and establish cutoff points or boundaries for the statutory and traditionally defined levels of affordability based on area median income for owners and tenants of rental units where the family size and income are known to the Enterprise. In addition to the levels of affordability that currently appear at § 1282.17, this section would include an additional paragraph (e) for extremely low-income borrowers and tenants with income at or below 30 percent of AMI with adjustments for family size. Although the Enterprise housing goals do not specifically target extremely low-income borrowers or tenants, the proposed rule would establish cutoffs for determining such affordability to facilitate any reporting or analysis of such data that is required. Proposed § 1282.18 would set forth definitions and establish cutoff points or boundaries for the statutory and traditionally defined levels of affordability based on AMI for tenants of rental units where the family size is not known to the Enterprise. In addition to the levels of affordability that currently appear at § 1282.18, this section would include an additional paragraph (e) for extremely low-income tenants with income at or below 30 percent of AMI with adjustments for unit si [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-3310. Public record. Not legal advice.