Enterprise Duty To Serve Underserved Markets

Federal RegisterDec 18, 2015

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1282

RIN 2590-AA27

Enterprise Duty To Serve Underserved Markets

AGENCY:

Federal Housing Finance Agency.

ACTION:

Notice of proposed rulemaking; request for comments.

SUMMARY:

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 establish a duty for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to serve three specified underserved markets—manufactured housing, affordable housing preservation, and rural markets—to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for very low-, low-, and moderate-income families in those markets. The Federal Housing Finance Agency (FHFA) is issuing and seeking comments on a proposed rule that would provide Duty to Serve credit for eligible Enterprise activities that facilitate a secondary market for mortgages related to: Manufactured homes titled as real property; blanket loans for certain categories of manufactured housing communities; preserving the affordability of housing for renters and homebuyers; and housing in rural markets. The proposed rule would establish a method for evaluating and rating the Enterprises' compliance with the Duty to Serve each underserved market.

DATES:

Written comments must be received on or before March 17, 2016.

ADDRESSES:

You may submit your comments, identified by regulatory information number (RIN) 2590-AA27, by any of the following methods:

•

Agency Web site: www.fhfa.gov/open-for-comment-or-input.

•

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 email to FHFA at

RegComments@fhfa.gov

to ensure timely receipt by FHFA. Please include “Comments/RIN 2590-AA27” in the subject line of the submission.

•

Hand Delivered/Courier:

The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA27, Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, DC 20219. The package should be delivered at the 7th Street entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.

•

U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service:

The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA27, Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW., Washington, DC 20219. Please note that all mail sent to FHFA via U.S. Mail is routed through a national irradiation facility, a process that may delay delivery by approximately two weeks.

FOR FURTHER INFORMATION CONTACT:

Jim Gray, Manager, Office of Housing and Regulatory Policy, (202) 649-3124, or Mike Price, Senior Policy Analyst, Office of Housing and Regulatory Policy, (202) 649-3134. These are not toll-free numbers. The mailing address for each contact is: Federal Housing Finance Agency, 400 7th Street SW., Washington, DC 20219. 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 this proposed rule, in addition to specific questions provided throughout, and will take all comments into consideration before issuing the final rule. Commenters do not need to answer each question. While FHFA has considered the views commenters submitted on the Duty to Serve proposed rule issued in 2010 in preparing this proposed rule, in view of the significant differences between this proposed rule and the 2010 Duty to Serve proposed rule, commenters on the previous proposed rule must submit a new comment letter on this new proposed rule for their comments to be further considered. Copies of all comments received will be posted without change, including any personal information you provide, such as your name, address, email address and telephone number, on FHFA's 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, Eighth Floor, 400 7th Street, SW., Washington, DC 20219. To make an appointment to inspect comments, please call the Office of General Counsel at (202) 649-3804.

II. Background

A. Statutory Background

The Safety and Soundness Act provides that the Enterprises “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families.”

Section 1129 of HERA amended section 1335 of the Safety and Soundness Act to establish a duty for the Enterprises to serve three specified underserved markets, to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for certain categories of borrowers in those markets.

Specifically, the Enterprises are required to provide leadership in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages on housing for very low-, low-, and moderate-income families for manufactured housing, affordable housing preservation, and rural markets.

In addition, section 1335(d)(1) requires FHFA to establish, by regulation, a method for evaluating and rating the Enterprises' compliance with the Duty to Serve underserved markets.

FHFA is required to separately evaluate each Enterprise's compliance with respect to each underserved market, taking into consideration the following:

12 U.S.C. 4501(7).

12 U.S.C. 4565.

12 U.S.C. 4565(a). The terms “very low-income,” “low-income,” and “moderate-income” are defined in 12 U.S.C. 4502.

12 U.S.C. 4565(d)(1).

(i) The Enterprise's development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing to each of the underserved markets (hereafter, the “loan product assessment factor”);

(ii) The extent of the Enterprise's outreach to qualified loan sellers and other market participants in each of the underserved markets (hereafter, the “outreach assessment factor”);

(iii) The volume of loans purchased by the Enterprise in each underserved market relative to the market opportunities available to the Enterprise, except that the Director shall not establish specific quantitative targets or evaluate the Enterprise based solely on the volume of loans purchased (hereafter, the “loan purchase assessment factor”); and

(iv) The amount of investments and grants by the Enterprise in projects

which assist in meeting the needs of the underserved markets (hereafter, the “investments and grants assessment factor”).

12 U.S.C. 4565(d)(2).

The Duty to Serve provisions and issues for consideration are discussed further below.

B. Conservatorship

On September 6, 2008, the Director of FHFA appointed FHFA as conservator of the Enterprises in accordance with the Safety and Soundness Act to maintain the Enterprises in a safe and sound financial condition and to help assure performance of their public mission. Since the establishment of FHFA as conservator, the Enterprises have returned to profitability. Through December 31, 2014, the Enterprises have paid a total of $225 billion in dividends payments to the U.S. Department of the Treasury on the senior preferred stock.

See

White House, “Fiscal Year 2016 of the U.S. Government Analytical Perspectives,” at 307 (2015),

available at https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/ap_20_credit.pdf.

While the Enterprises are in conservatorships, the law requires and FHFA expects them to continue to fulfill their core statutory purposes, which include their support for affordable housing. The Enterprise affordable housing goals have continued throughout the conservatorships, with modifications to the levels of the goals. FHFA now proposes a rule to implement the Enterprises' Duty to Serve underserved markets. Consistent with the conservatorships, Enterprise support for affordable housing must be accomplished within the confines of safety and soundness and the goals of conservatorship. The Enterprises' 2015 Conservatorship Scorecard requires the Enterprises to make progress in preparing to implement the Duty to Serve, prior to this rulemaking.

C. Regulatory History

1. Advance Notice of Proposed Rulemaking

The rulemaking for the Duty to Serve commenced in August 2009 with FHFA's publication in the

Federal Register

of an Advance Notice of Proposed Rulemaking (ANPR) on the Enterprise Duty to Serve underserved markets.

FHFA received 100 comment letters in response to the ANPR.

See

74 FR 38572 (Aug. 4, 2009).

2. 2010 Duty To Serve Proposed Rule

After reviewing the comment letters on the ANPR, FHFA published in the

Federal Register

on June 7, 2010, a proposed rule on the Duty to Serve.

The 45-day comment period for the proposed rule closed on July 22, 2010.

See

75 FR 32099 (June 7, 2010).

FHFA received 4,019 comments on the proposed rule. Commenters included: Individuals, including owners of manufactured homes; trade associations, including manufactured housing trade groups and lender trade groups; policy and housing advocacy groups, including rural housing advocacy groups, organizations representing manufactured home residents, and national and state consumer law organizations; nonprofit organizations; corporations, including manufactured housing construction companies; federal, state, and local government entities, including state and local housing finance agencies; property services groups, including property management companies; manufactured home community homeowners' associations; affordable housing developers and preservation lenders; a legal services group; Members of Congress; and both Enterprises.

FHFA has taken a new look at the issues for this new proposed rule, with the benefit of the comments received on the 2010 Duty to Serve proposed rule and subsequent input from diverse stakeholder groups. The comments and input received and the agency's intervening years of experience with the Enterprises and their operations in the underserved markets have suggested a different approach, sufficiently so that further notice and comment is necessary through this new proposed rule.

As before, the new proposed rule would not itself authorize or prohibit the Enterprises from engaging in any activity. Instead, it would authorize Duty to Serve credit for certain Enterprise activities in furtherance of their Duty to Serve obligations and would propose a framework for evaluating the Enterprises' performance.

III. Duty To Serve Underserved Markets

A. Implementing the Duty To Serve

The Enterprises' public purposes include a broad obligation to serve lower- and moderate-income borrowers. The Safety and Soundness Act establishes a duty for the Enterprises to serve very low-, low-, and moderate-income families in three specific underserved markets. All activities an Enterprise undertakes in furtherance of its Duty to Serve must be consistent with its Charter Act. Nothing in this rulemaking would permit or require an Enterprise to engage in any activity that would be otherwise inconsistent with its Charter Act or the Safety and Soundness Act.

Although the Enterprises are in conservatorships, FHFA expects them to show tangible results in each underserved market and to be a catalyst for mortgage lending to very low-, low-, and moderate-income families in each underserved market consistent with their obligations for safety and soundness. The Enterprises should expect mortgage purchases and activities pursuant to the Duty to Serve to earn a reasonable economic return, which may be less than the return earned on activities that do not serve these underserved markets.

See

12 U.S.C. 4513(a)(1)(B)(ii).

B. Underserved Markets Plans

1. Requirement for Underserved Markets Plans—Proposed § 1282.32

Section 1282.32 of the proposed rule would require each Enterprise to prepare an Underserved Markets Plan identifying the activities and related objectives in each underserved market that it will pursue to serve that market.

Each Plan would be mandatory and have a three-year term. The extent to which the Enterprises comply with their Plan obligations would form the basis for FHFA's evaluation of each Enterprise's Duty to Serve performance.

The 2010 Duty to Serve proposed rule also would have required that the Enterprises identify their Duty to Serve activities in Underserved Markets Plans.

2. Eligible Activities for Underserved Markets—Proposed §§ 1282.33(b), 1282.34(b), 1282.35(b), 1282.37

Sections 1282.33(b), 1282.34(b), 1282.35(b), and 1282.37 of the proposed rule would specifically define the scope of the activities that could be included in an Underserved Markets Plan for an underserved market and, thus, be eligible for Duty to Serve credit as follows:

Manufactured housing market

—Activities that facilitate a secondary market for mortgages on residential properties for very low-, low-, and moderate-income families consisting of: (1) Manufactured homes titled as real estate; and (2) manufactured housing communities;

Affordable housing preservation market

—Activities that facilitate a secondary market for mortgages on residential properties for very low-, low-, and moderate-income families consisting of affordable rental housing preservation and affordable homeownership preservation; and

Rural market

—Activities that facilitate a secondary market for mortgages on residential properties for very low-, low-, and moderate-income families in a “rural area,” which would be defined to mean: (1) A census tract outside of a metropolitan statistical area (MSA), as designated by the Office of Management and Budget (OMB); or (2) a census tract that is in an MSA but outside of the MSA's Urbanized Areas and Urban Clusters, as designated by the U.S. Department of Agriculture's (USDA's) Rural Urban Commuting Area (RUCA) codes.

Activities eligible for Duty to Serve credit that also promote residential economic diversity would be eligible for extra credit under § 1282.37 of the proposed rule.

Each of these activities must be in full compliance with applicable federal and state law. The underserved markets and related definitions are further discussed below.

3. Underserved Markets Plan Activities—Proposed § 1282.32(c)(1)

Under § 1282.32(c)(1) of the proposed rule, each Underserved Markets Plan would include activities delineated under one of the following categories:

• Statutory Activities—Activities that assist affordable housing projects under the eight affordable housing programs specifically enumerated in the Safety and Soundness Act, and any comparable state and local affordable housing programs (a category that is also specified in the Safety and Soundness Act);

• Regulatory Activities—Activities in the underserved markets that are designated as Regulatory Activities in the proposed rule; and

• Additional Activities—Other activities identified by the Enterprises in their Plans that are determined by FHFA, in reviewing the proposed Plans, to be eligible for that underserved market.

Proposed Additional Activities may include activities that support other federal, state and local programs not specifically enumerated in the proposed rule that would benefit from such support. Any such program must be eligible under one of the three specified underserved markets. If an Enterprise proposes activities to support other federal, state or local programs in its Underserved Markets Plan, the Enterprise must provide FHFA with clear information that defines the program and its eligibility under one of the three underserved markets consistent with the purpose and scope of this proposed rule. Such programs include, for example, state housing finance agency projects and local government initiatives that seek to provide affordable housing and for which Duty to Serve credit could be available.

• While overall the Enterprises must serve very low-, low-, and moderate-income families in each underserved market, any one activity may, but need not, serve more than one of the qualifying income categories. The Underserved Markets Plans must include a mix of activities serving all three income categories.

Statutory Activities and Regulatory Activities are collectively referred to as “Core Activities” in this

SUPPLEMENTARY INFORMATION

The proposed rule would not require an Enterprise to include every Core Activity in its Underserved Markets Plan, but the Plan must describe how the Enterprise considered each Core Activity. If an Enterprise elects not to include a Core Activity in its Plan, it must provide a detailed explanation for its decision in the Plan. There would be no restriction on the number of Additional Activities that an Enterprise may include in its Plan.

FHFA believes that specifying Core Activities for the Enterprises to consider in developing their Underserved Markets Plans, as well as providing the Enterprises the option to designate Additional Activities, will provide the most efficient ways to increase the Enterprises' presence in the three underserved markets and encourage healthy competition between the Enterprises. When one Enterprise is able to marshal its resources to better serve an underserved market, this may encourage the other Enterprise and other institutions to also consider how they could assist that market, and would demonstrate that certain products and services can be reasonably provided in the market.

Additionally, as described in this

SUPPLEMENTARY INFORMATION

and in proposed § 1282.37, the proposed rule would include an opportunity for the Enterprises to earn extra Duty to Serve credit when a qualifying activity in an underserved market also serves to reduce the economic isolation of very low-, low-, and moderate-income households by promoting residential economic diversity.

These activities would not be mandatory, but in order to qualify for the extra credit, the Enterprises would need to describe in their Plans the activities in the underserved markets they intend to undertake to promote residential economic diversity.

In a separate context, the Federal Home Loan Banks' Affordable Housing Program has long recognized the role of reducing economic isolation in housing affordability and provides incentives for the development of projects that promote economic diversity in the housing market. Under the applicable regulation, a Federal Home Loan Bank may award scoring points for projects that promote “economic diversity,” defined as “[t]he financing of housing that is part of a strategy to end isolation of very low-income households by providing economic diversity though mixed-income housing in low- or moderate-income neighborhoods, or providing very low- or low- or moderate-income households with housing opportunities in neighborhoods or cities where the median income equals or exceeds the median income for the larger surrounding area, such as the city, county, or Primary Metropolitan Statistical Area, in which the neighborhood or city is located.”

See

12 CFR 1291.5(d)(5)(vi)(H).

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

1. How much discretion should the Enterprises have in selecting activities—Core Activities and Additional Activities—to serve the underserved markets?

2. Should FHFA establish specific Regulatory Activities for the underserved markets, or should the Enterprises have broad discretion to decide how to serve these markets?

3. Are the proposed Regulatory Activities, as identified in the proposed rule for each of the underserved markets and described further below, appropriate for accomplishing the Duty to Serve objectives?

4. Objectives for Each Activity—Proposed § 1282.32(c)(2)

Under § 1282.32(c)(2) of the proposed rule, for each activity set forth in the Underserved Markets Plan, the Plan would be required to describe one or more “Objectives”—specific, measureable tasks to be accomplished by the Enterprise. Objectives would be central to FHFA's Duty to Serve evaluation and rating process.

Examples of Objectives might include an Enterprise's plans and timetable for achieving certain goals for one of its existing activities in an underserved market, or an Enterprise's specific outreach plans for working with lenders to develop innovative programs under a particular activity. Objectives would largely take narrative form but, where appropriate, could include quantitative benchmarks. If quantitative benchmarks form part of an Objective, FHFA's evaluation criteria may include comparing the Objective's quantitative benchmark at the beginning of the evaluation period with a new quantitative benchmark for the

Objective calculated at the end of the evaluation period. This comparison would not create specific quantitative targets or evaluate an Enterprise based solely on the volume of loans purchased, which are prohibited by the Safety and Soundness Act.

Rather, quantitative benchmarks would be a measurement component of the evaluation process, authorized by the Safety and Soundness Act's establishment of the loan purchase assessment factor. Objectives may cover a single year or multiple years and must meet all of the following requirements:

12 U.S.C. 4565(d)(2)(C).

•

Strategic.

Directly or indirectly maintain or increase liquidity to an underserved market;

•

Measurable.

Provide measureable benchmarks, which may include numerical targets, that enable FHFA to determine whether the Enterprise has achieved the Objective;

•

Realistic.

Calibrated so that the Enterprise has a reasonable chance of meeting the Objective with appropriate effort;

•

Time-bound.

Subject to a specific timeframe for completion by being tied to Plan calendar year evaluation periods; and

•

Tied to analysis of market opportunities.

Based on assessments and analyses of market opportunities in each underserved market, taking into account safety and soundness considerations.

5. Assessment Factors Incorporated Into Objectives—Proposed § 1282.32(c)(3)

Under § 1282.32(c)(3) of the proposed rule, each Underserved Markets Plan Objective would be required to incorporate one or more of the following four statutory assessment factors:

•

Outreach Assessment Factor.

The outreach assessment factor requires evaluation of “the extent of outreach [by the Enterprises] to qualified loan sellers and other market participants” in each of the three underserved markets.

A Plan Objective could describe how an Enterprise would engage market participants, such as through conducting meetings and conferences with current and prospective seller/servicers and providing technical support to seller/servicers, in order to accomplish a Plan activity. Market participants could include traditional participants in Enterprise programs, as well as non-traditional participants such as consortia sponsored by banks, and local and state governments.

Id.

at (d)(2)(B).

•

Loan Product Assessment Factor.

The loan product assessment factor requires evaluation of an Enterprise's “development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing to each” underserved market.

A Plan Objective could describe, for example, how the Enterprise would reevaluate its underwriting guidelines, which could include empirical testing of different parameters and modification of loan products in an effort to increase the availability of loans to families targeted by the Duty to Serve, consistent with prudent lending practices. FHFA expects the Enterprise to identify underwriting obstacles that could prevent service to very low-, low-, and moderate-income families.

Id.

at (d)(2)(A).

•

Loan Purchase Assessment Factor.

The loan purchase assessment factor requires FHFA to consider “the volume of loans purchased in each of such underserved markets relative to the market opportunities available to the [E]nterprise.”

The Safety and Soundness Act further states that FHFA “shall not establish specific quantitative targets nor evaluate the [E]nterprises based solely on the volume of loans purchased.”

A Plan Objective could include the Enterprise's plans for purchasing loans in particular underserved markets, including its assessments and analyses of the market opportunities available for each underserved market and its expected volume of loan purchases for a given year.

Id.

at (d)(2)(C).

Id.

Although the proposed rule would not establish quantitative targets, FHFA would consider the Enterprise's past performance on the volume of loans purchased in a particular underserved market relative to the volume of loans the Enterprise actually purchases in that underserved market in a given year pursuant to its Plan. In reviewing the Plan and the loan purchase assessment factor, FHFA would take into account difficulties in forecasting future performance and the need for flexibility in dealing with unexpected market changes.

•

Investments and Grants Assessment Factor.

The investments and grants assessment factor requires evaluation of “the amount of investments and grants in projects which assist in meeting the needs of such underserved markets.”

A Plan Objective could include investments. As with all activities, the investments must comply with the Enterprise's Charter Act.

FHFA has directed the Enterprises to refrain from making grants because they are in conservatorship. Accordingly, during the period of conservatorship, FHFA does not intend to provide credit to the Enterprises for making grants.

Id.

at (d)(2)(D).

12 U.S.C. 1451

et seq.

and 12 U.S.C. 1716

et seq.

In addition to the four statutory assessment factors, the proposed rule includes a non-mandatory criterion for evaluating the Enterprises' performance on qualifying activities (described in this

SUPPLEMENTARY INFORMATION

and in § 1282.37 of the proposed rule), for which the Enterprises could earn additional Duty to Serve credit when they include qualifying activities that promote residential economic diversity in their Underserved Markets Plans. Under this criterion, FHFA would evaluate the Enterprises on the extent to which their qualifying activities promote residential economic diversity in an underserved market in connection with mortgages on: (1) Affordable housing in high opportunity areas; or (2) mixed-income housing in areas of concentrated poverty. This would be a criterion for which extra credit may be given for planned activities, but the activities associated with the criterion would not be mandatory activities for the Plans. FHFA specifically requests comments on all aspects of the proposed criterion, including how the residential economic diversity activities for extra credit should be defined and assessed.

Activities in each of the underserved markets would be eligible for extra credit for residential economic diversity (“qualifying activities”) except for manufactured housing communities activities, energy efficiency improvement activities, and any Additional Activities determined by FHFA as ineligible. FHFA proposes excluding manufactured housing community activities because of the lack of information on tenants' total monthly housing costs, which would be necessary for FHFA to assess the affordability of the units. Nor is the proposed proxy for determining manufactured housing community affordability, which relies on the income level of the census tract instead of on monthly housing costs, useful for estimating whether a manufactured housing community contributes to residential economic diversity. FHFA also proposes to exclude activities related to energy efficiency improvements as they typically do not relate to the siting of housing and, thus, do not appear to further residential economic diversity.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

4. Are the requirements for Objectives discussed above appropriate, and should there be any additional requirements?

5. Should Duty to Serve credit be given under the loan products assessment factor for an Enterprise's research and development activities that may not show results in their initial phase, but which may be necessary for long-term product planning and development for underserved markets?

6. Has FHFA adequately defined the scope of extra credit for the proposed residential economic diversity activities? Has FHFA chosen the correct activities that should be excluded from qualifying for extra credit for residential economic diversity activities? Also, see description of proposed § 1282.37 and Requests for Comments.

6. Underserved Markets Plan Submission and FHFA Review—Proposed § 1282.32(d)(1)

Section 1282.32(d)(1) of the proposed rule would require the Enterprises to submit their proposed Underserved Markets Plans to FHFA at least 180 days before the termination date of the Enterprise's existing Plan, except that the Enterprise's first proposed Plan after the effective date of this regulation must be submitted to FHFA pursuant to FHFA-established timeframes and procedures.

a. Posting of Proposed Underserved Markets Plans, Public Input and Enterprise Review—Proposed § 1282.32(d)(2), 1282.32(d)(3)

Section 1282.32(d)(2) of the proposed rule would provide a process for public input on the Enterprises' proposed Underserved Markets Plans. A number of commenters on the 2010 Duty to Serve proposed rule suggested that the Enterprises' proposed Plans be published for comment because doing so could improve the Enterprises' and FHFA's assessment of the adequacy of the Plans. Commenters stated that public comment could add to the innovation and impact of the Duty to Serve obligations on the underserved markets. Both Enterprises opposed publishing the proposed Plans for public comment on the basis that the Plans would contain proprietary and confidential data and other information. After taking into account the commenters' opposing views, FHFA has concluded that a public input process can be implemented that would promote transparency and increase the opportunity for productive stakeholder input in the Underserved Markets Plan process, while preserving the proprietary and confidential nature of Enterprise data and information. Soliciting public input could help the Enterprises to develop information about underserved market needs and how they might be met so that the Enterprises can make better judgments in formulating their Underserved Markets Plan Activities and Objectives.

Accordingly, the proposed rule would provide that as soon as practical after an Enterprise submits its proposed Plan to FHFA for review, FHFA will post on FHFA's Web site a public version of the proposed Plan that omits proprietary and confidential data and information. The public would have 45 days to provide input on the public version of the proposed Plan. Seeking public input on the proposed Plans would encourage participation by stakeholders, including lenders, industry participants, local government, community groups, and the broader public. In its discretion, each Enterprise would make revisions to its proposed Plan based on the public input.

b. FHFA Plan Review Process—Proposed §§ 1282.32(d)(4), 1282.32(d)(5), 1282.32(e), 1282.32(f)

The proposed rule would provide that within 60 days after the end of the public input period, FHFA will inform each Enterprise of any FHFA comments on its proposed Plan. The Enterprise would be required to address those comments, as appropriate, through revisions to its proposed Plan pursuant to timeframes and procedures established by FHFA.

After FHFA is satisfied that all of its comments have been addressed, FHFA would issue a “non-objection” to the Plan. The effective date of the Plan would be January 1st of the first evaluation year for which the Plan is applicable, except for the Enterprise's first Plan after the effective date of the final rule, whose term and effective date would be determined by FHFA.

After receiving FHFA's non-objection to its Plan, an Enterprise would post the final Plan on the Enterprise's Web site with confidential and proprietary information omitted. FHFA would also post the final Plan with confidential and proprietary information omitted on FHFA's Web site.

7. Modifying Final Underserved Markets Plans—Proposed § 1282.32(g)

Section 1282.32(g) of the proposed rule would permit modifications of final Underserved Markets Plans during the period of the Plans. The 2010 Duty to Serve proposed rule would not have permitted modifications. In their comments on the 2010 proposed rule, both Enterprises stated that they should be able to modify their Plans, citing the uncertainty and volatility in the mortgage markets, and the Enterprises' need to determine whether their market estimates are accurate, assess performance against goals, and update business forecasting. FHFA finds these comments persuasive.

Accordingly, the proposed rule would permit an Enterprise to modify its final Plan during its three-year term, subject to FHFA non-objection. It would also permit FHFA, in its sole discretion, to require an Enterprise to modify a final Plan. Instances in which FHFA might permit or require an Enterprise to modify its Plan include changes in market conditions (including obstacles and opportunities) or significant safety and soundness concerns that arise after an Enterprise implements its Plan. FHFA and the Enterprises may seek public input on any proposed modifications to a final Plan if FHFA determines that public input would assist its consideration of the proposed modifications. Should a final Plan be modified, the modified Plan with confidential and proprietary information omitted would be posted on the Enterprise's and FHFA's Web sites.

8. Enterprise New Products and New Activities

Enterprise new products and new activities are subject to the prior approval and prior notice requirements, respectively, that FHFA established by regulation pursuant to the Safety and Soundness Act.

FHFA expects the Enterprises to meet the loan product assessment factor through activities that do not rise to the level of new products. For example, an Enterprise could modify its underwriting guidelines for existing loan products and develop innovative approaches to financing that do not constitute new products, consistent with safety and soundness and the requirements of conservatorship. However, if an Enterprise determines that a new product or activity would facilitate its duty to serve obligations and would be consistent with safety and soundness, it may propose such product or activity for FHFA consideration.

See

12 U.S.C. 4541; 12 CFR part 1253.

Requests for Comments

FHFA specifically requests comments on the following questions (please

identify the question answered by the numbers assigned below):

7. Is there an alternative mechanism to an Underserved Markets Plan that would better enable FHFA to evaluate the Enterprises' Duty to Serve obligations?

8. Should the Enterprises be required to prepare Underserved Markets Plans for terms with a period other than three years?

9. Should public input be sought on the Enterprises' proposed Underserved Markets Plans and, if so, is there a more effective approach than the proposed approach?

C. Underserved Markets

1. Manufactured Housing Market—Proposed § 1282.33

a. Background

Very low-, low-, and moderate-income households have significant housing needs in the current environment. Manufactured housing is widely recognized as a significant source of housing for such households. In the United States, as of 2013, 6.7 million households resided in manufactured housing, or 5.8 percent of all households, according to the 2013 American Community Survey.

In many cases, manufactured housing may offer the only affordable homeownership opportunity for lower-income households.

In 2013, the average sales price of a manufactured home was $64,000, while the average sales price of a site-built home, less the cost of the land, was $249,429.

Adjusted for size, manufactured homes still have significantly lower average costs per square foot than site-built homes: $43.54 as compared with $93.70.

Freddie Mac, “2015 Multifamily Outlook—Executive Summary, Multifamily Research Perspectives,” at 16 (Feb. 2015),

available at http://www.freddiemac.com/multifamily/pdf/2015_outlook.pdf.

Both Delaware and North Carolina have statutes that cite the importance of manufactured housing as the only affordable option for many low- and moderate-income households and the impetus for requiring various protections for owners of manufactured housing units.

See

25 Del. C. § 7040; N.C. Gen. Stat. 160A-383.1 (2001).

See also

R.I. Gen. Laws section 31-44.1-1; 25 Del. C. section 7040.

See

HUD Community Planning and Development, “Mixed-Income Housing and the HOME Program” (2003),

available at http://portal.hud.gov/hudportal/documents/huddoc?id=19790_200315.pdf.

See generally

Diane K. Levy, Zach McDade & Kassie Dumlao, “Effects from Living in Mixed-Income Communities for Low-Income Families—A Review of the Literature” (Nov. 2010) (Urban Institute),

available at http://www.urban.org/research/publication/effects-living-mixed-income-communities-low-income-families/view/full_report;

Robert Chaskin & Mark Joseph, The University of Chicago School of Social Service Administration, “Mixed-Income Development Study” (Spring 2009),

available at https://ssascholars.uchicago.edu/mixed-income-development-study/content/overview-0.

But see

Robert C. Ellickson, “The False Promise of the Mixed-Income Housing Project,” 57 UCLA L. Rev. 983 (2010) (concluding that many recent social-scientific studies weaken the case for government support of mixed-income projects).

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

16. Are there other segments of the manufactured housing market besides those discussed above that warrant Enterprise support under the Duty to Serve, such as communities located in lower-income or economically distressed areas?

17. Is the proposed limit of 150 pads for an eligible small manufactured housing community appropriate? Is there a different threshold that could better achieve the purposes of the Duty to Serve?

18. Are the proposed pad lease protections appropriate? Should any additional pad lease protections be required for an Enterprise to receive Duty to Serve credit?

19. Should the proposed pad lease protections be required for any manufactured housing community, regardless of its ownership or size, to be eligible for Duty to Serve credit?

20. Would the proposed methodology for determining affordability effectively approximate the incomes of the community's tenants? Are there other approaches that could effectively approximate the incomes of manufactured housing community tenants to comply with the Duty to Serve family income requirements,

e.g.,

the size of the blanket loan on the community or the size of the community?

21. Could governing or financing documents for the community provide a proxy for resident incomes? For communities owned by governmental units or instrumentalities, would regulations, handbooks or financing documents specifying income criteria for the residents be an appropriate indicator of tenant incomes? For nonprofit-owned and resident-owned communities, would the founding documents for the community, which describe its mission as serving lower-income families, or financing agreements or other documents from funding sources specifying the required income levels of intended beneficiaries, be appropriate indicators of tenant incomes? Is there any comparable documentation that could be applicable to communities with for-profit owners,

e.g.,

where they have accepted income restrictions in order to accept Section 8 vouchers?

22. Where the loan seller knows the incomes of the tenants of a manufactured housing community at the time an Enterprise purchases the

blanket loan on the community, should the incomes be used to determine affordability, and what operational concerns might be associated with transferring the income data to the Enterprises?

23. Are there other loan programs, terms or lending criteria that, if adopted, could increase Enterprise purchases of blanket loans on manufactured housing communities?

24. Should FHFA address geographic diversity of the Enterprises' assistance for manufactured housing as part of the Duty to Serve manufactured housing community financing needs, and if so, how?

25. Since manufactured housing community acquisition loans may support large sales prices on existing communities which, in turn, may drive increases in pad rents and render the communities unaffordable to lower-income households, should acquisition loans be ineligible for Duty to Serve credit? Are there particular instances where acquisition loans benefit very low-, low-, and moderate-income households?

26. Would Enterprise refinance loans be particularly helpful to residents because they are long-term, fixed rate and relatively low-cost, which reduces the pressure on community owners to increase pad rents?

2. Affordable Housing Preservation Market—Proposed § 1282.34

a. Background

The Safety and Soundness Act provides that the Enterprises “shall develop loan products and flexible underwriting guidelines to facilitate a secondary market to preserve housing affordable to very low-, low-, and moderate-income families,” including housing projects subsidized under certain specified federal grant, subsidy and mortgage insurance programs enumerated in the Act.

Section 1282.34(c) of the proposed rule would provide Duty to Serve credit for Enterprise activities related to facilitating a secondary market for mortgages on housing under any of these statutorily-enumerated programs.

12 U.S.C. 4565(a)(1)(B).

In addition, § 1282.34(d) of the proposed rule would provide Duty to Serve credit for Enterprise activities related to facilitating a secondary market for mortgages for: Existing small multifamily properties; energy efficiency improvements on existing multifamily rental properties; energy efficiency improvements on existing owner-occupied single-family properties; affordable homeownership preservation through shared equity homeownership programs; HUD's Choice Neighborhoods Initiative; and HUD's Rental Assistance Demonstration program. Under the proposed rule, each of these activities would constitute a Regulatory Activity that the Enterprises must address in their Underserved Markets Plans by describing how they will undertake the activity or explaining the reasons why they will not undertake the activity. The Plans may also include Additional Activities that support housing for very low-, low-, or moderate-income families consisting of affordable rental housing preservation and affordable homeownership preservation, subject to FHFA determination of whether such activities are eligible for Duty to Serve credit.

b. Interpreting “Preservation”

The Safety and Soundness Act does not define the term “preservation” for the affordable housing preservation market. Preservation strategies for affordable rental housing and homeownership differ.

i. Affordable Rental Housing

For affordable rental housing, preservation is generally understood among affordable housing practitioners to mean preserving the affordability of the rents to tenants in existing properties, including preventing conversion of the properties to market rents at the end of the required long-term affordability retention periods, typically 15 years, which is also the time at which major rehabilitation of the properties is usually needed.

This is consistent with the plain meaning of the term “preservation,” which is maintaining something in its existing state.

The concept of “preservation” in the rental housing context is not generally understood to include new construction of rental properties.

This is the focus of HUD's Office of Affordable Housing Preservation (recently renamed the Office of Recapitalization).

See

Cambridge Dictionaries Online, definition of “preserve.”

However, the population has been expanding while the stock of affordable rental housing has been shrinking.

The rate of new construction of affordable rental housing has not kept pace with the demand.

Further, more desirable markets face particular upward rent pressure.

One way to preserve affordability is to give credit for newly constructed rental units where long-term affordability is required by regulatory agreements, such as for at least 15 years, the standard affordability retention period for rental housing. In addition, some of the specifically enumerated programs under the affordable housing preservation market in the Safety and Soundness Act involve new construction, arguably indicating congressional intent that support for new construction be included under this market, although Congress may have intended only that support for existing properties under these programs at the point of their expiring regulatory agreements be included in this market.

See

Evidence Matters, Policy Development and Research, Department of Housing and Urban Development, “Preserving Affordable Rental Housing: A Snapshot of Growing Need, Current Threats, and Innovative Solutions,” Summer 2013,

available at

http://www.huduser.gov/portal/periodicals/em/em_newsletter_summer_2013_fnl.pdf.

Id.

FHFA specifically requests comments on whether the term “preservation” should be interpreted to allow Duty to Serve credit for Enterprise support for both the purchase of permanent construction take-out loans

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on rental properties with long-term affordability regulatory agreements and the purchase of refinanced mortgages on existing rental properties with long-term affordability regulatory agreements.

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The Enterprises purchase permanent construction take-out loans but not acquisition/development/construction loans.

ii. Energy Efficiency Improvements on Existing Multifamily Rental Properties

Lowering energy and water use in multifamily buildings will reduce the total amount that tenants spend for the energy and water that they do use, thus reducing their utility consumption. This can be considered “preservation” under the affordable housing preservation market because housing costs are typically defined as rent plus utility costs. Thus, savings in utility consumption that reduce utility expenses may help maintain the overall affordability of rental housing for tenants. Accordingly, under the proposed rule, Enterprise support for energy and water efficiency improvements on existing multifamily properties affordable to very low-, low-, and moderate-income families would be a Regulatory Activity, provided there are verifiable, reliable projections or expectations that the improvements financed by the loan will reduce energy and water consumption by the tenant by at least 15 percent. The reduced utility costs derived from the reduced consumption must not be offset by higher rents or other charges imposed by the property owner, and the reduced

utility costs must offset the upfront costs of the improvements within a reasonable time period.

iii. Energy Efficiency Improvements on Single-Family, First-Lien Properties

As with multifamily rental properties, preservation of affordable single-family properties (homeownership or rental) may also encompass lowering home energy costs. Lowering energy costs can help a homeowner to continue to afford mortgage payments and other housing costs and remain in the home or help a tenant afford rent. Under the proposed rule, Enterprise support for energy efficiency improvements on existing single-family, first-lien properties would be a Regulatory Activity provided there are verifiable, reliable projections or expectations that the improvements financed by the loan will reduce utility consumption by the homeowner or tenant by at least 15 percent. The reduced utility costs derived from the reduced consumption must offset the upfront costs of the improvements within a reasonable time period, and in the case of a single-family rental property, the reduced utility costs must not be offset by higher rents or other charges imposed by the property owner.

iv. Shared Equity Programs

For affordable homeownership, there are no regulatory agreements similar to those with affordable rental properties that expire at the 15-year point, when preservation of the units as affordable units to lower-income tenants is in jeopardy and rehabilitation of the property is often needed. Rather, preservation for affordable homeownership entails ensuring that the price of the home is affordable over a long-term period to initial and subsequent purchasers, whether purchasing a newly constructed home or an existing home. Shared equity programs offer this type of sustainable affordable homeownership. Under the proposed rule, Enterprise support of financing under shared equity programs that involve the creation of long-term affordable homeownership would be a Regulatory Activity, as further discussed below.

v. Choice Neighborhoods Initiative

The proposed rule would establish as a Regulatory Activity Enterprise support for HUD's Choice Neighborhoods Initiative (CNI).

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Created after the enactment of HERA, CNI seeks to preserve and transform distressed, HUD-supported affordable housing. CNI focuses on creating mixed-income housing and investing in neighborhood improvements and upgrades. The proposed rule would provide Duty to Serve credit for Enterprise activities supporting permanent financing under CNI.

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42 U.S.C. 1437v;

see also http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/programs/ph/cn.

vi. Rental Assistance Demonstration Program

The proposed rule would establish as a Regulatory Activity Enterprise support for HUD's Rental Assistance Demonstration (RAD) program.

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Also created after the enactment of HERA, the RAD program seeks to improve and preserve distressed, HUD-supported affordable housing. The program enables public housing authorities to tap outside sources of capital to renovate and preserve housing affordable to very low-income households. The proposed rule would provide Duty to Serve credit for Enterprise activities supporting permanent financing under the RAD program.

102

Consolidated and Further Continuing Appropriations Act of 2012 (PL 112-55), as amended, 42 U.S.C. 1437f note;

see also http://portal.hud.gov/hudportal/HUD?src=/RAD.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

27. Are there other options on how to interpret preservation of multifamily or single-family affordable housing that FHFA should consider?

28. Should FHFA require that preservation activities extend the property's regulatory agreement that restricts household incomes and rents for some minimum number of years, such as 10 years, beyond the date of the Enterprises' loan purchase? If so, what would be an appropriate minimum period of long-term affordability for the extended use regulatory agreement?

29. Should Enterprise purchases of permanent construction takeout loans on new affordable multifamily rental properties with extended-use regulatory agreements that will keep rents affordable for a specified long-term period, such as 15 years or more, receive credit under the affordable housing preservation market? What would be an appropriate period of long-term affordability for the extended-use regulatory agreements?

c. Statutory Activities—Proposed § 1282.34(c)

The Safety and Soundness Act provides that the Enterprises “shall develop loan products and flexible underwriting guidelines to facilitate a secondary market to preserve housing affordable to very low-, low-, and moderate-income families, including housing subsidized under” the following government programs:

• The project-based and tenant-based rental assistance programs under Section 8 of the United States Housing Act of 1937 (42 U.S.C. 1437f);

• The program under Section 236 of the National Housing Act (rental and cooperative housing for lower-income families) (12 U.S.C. 1715z-1);

• The program under Section 221(d)(4) of the National Housing Act (housing for moderate-income and displaced families) (12 U.S.C. 1715l);

• The supportive housing for the elderly program under Section 202 of the Housing Act of 1959 (12 U.S.C. 1701q);

• The supportive housing program for persons with disabilities under Section 811 of the Cranston-Gonzalez National Affordable Housing Act (42 U.S.C. 8013);

• The programs under title IV of the McKinney-Vento Homeless Assistance Act (42 U.S.C. 11361

et seq.

), but only permanent supportive housing projects subsidized under such programs;

• The rural rental housing program under Section 515 of the Housing Act of 1949 (42 U.S.C. 1485);

• The low-income housing tax credit (LIHTC) under Section 42 of the Internal Revenue Code of 1986 (26 U.S.C. 42); and

• Comparable state and local affordable housing programs.

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12 U.S.C. 4565(a)(1)(B).

Under § 1282.34(c) of the proposed rule, Duty to Serve credit would be provided for Enterprise activities related to facilitating a secondary market for mortgages on housing under these statutorily-enumerated programs. The Enterprises would be required to address all of the statutory programs in their Underserved Markets Plans by either indicating how they choose to undertake activities under these programs or the reasons why they will not undertake activities under the programs.

Almost all the subsidized rental units covered by the statutorily-enumerated programs are targeted to very low- or low-income families. Across the country, thousands of multifamily properties with federal, state or local subsidies that serve very low- and low-income families are at risk of conversion to market rate rents.

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Properties

become at risk when rent affordability restrictions in the regulatory agreements or subsidies expire upon loan maturity or contract expiration, or upon early sale or refinancing of the property, or when properties have deteriorated and become unsafe or uninhabitable.

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The Enterprises play an important role in helping to preserve subsidized rental housing by purchasing first lien mortgages that combine refinancing of existing debt with additional financing for rehabilitation, which enables the subsidies and the regulatory agreements to be extended. FHFA will pay particular attention to the number of rental properties nationwide that are at risk of losing their subsidies and the extent of the Enterprises' support for helping to preserve this housing resource.

104

See

Joint Center for Housing Studies of Harvard University, “The State of the Nation's

Housing 2015,” at 33-34 (2015),

available at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-full.pdf.

105

Stewards of Affordable Housing for the Future, “Housing `at risk,'”

available at http://www.poah.org/about/at-risk.htm.

The Enterprises currently offer specialized loan purchase programs that are designed to provide permanent financing for several of the statutorily-enumerated programs and, in particular, the Section 8 rental assistance and LIHTC programs, and they actively participate in the preservation of this housing stock. However, some of the other statutorily-enumerated programs are either grant programs or FHA full insurance programs for which there is no known role for the Enterprises' loan purchase programs and no history of their participation. The status of each program and the role that the Enterprises could play in assisting each is discussed below.

i. HUD Section 8 Rental Assistance Program

Under HUD's Section 8 rental assistance program, property owners receive rent payment subsidies from HUD covering the difference between the market rent for a unit and the tenant's rent contribution. This program has a rent affordability requirement, which is that 30 percent of the tenant's adjusted gross income contribute to rent and utilities. HUD provides rental assistance in the form of vouchers or certificates that move with the individual household, or through contractual obligations with the property owner, known as Housing Assistance Payment (HAP) contracts.

Both Enterprises purchase loans on properties with Section 8 HAP contracts or with units supported by Section 8 vouchers or certificates. Properties supported by Section 8 rental assistance represent a significant portion of the Enterprises' existing affordable housing loan purchases.

Several commenters on the 2010 Duty to Serve proposed rule stated that the Enterprises' underwriting guidelines were unnecessarily strict and limit their ability to provide adequate support for financing of Section 8-assisted properties. That is because the Enterprises do not recognize all of the Section 8 rental income in their loan underwriting and also require high reserves to protect against annual appropriations risk on HAP contracts.

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In the commenters' view, the Enterprises' requirements make refinancing more difficult or infeasible, or result in smaller loan amounts with fewer funds available for property rehabilitation. Under the Request for Comments section below, FHFA specifically requests comments on whether there are ways the Enterprises can extend their support for Section 8-assisted properties, including potential changes to their underwriting and reserve requirements that are consistent with safety and soundness.

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“Appropriations risk” is the possibility that Congress will appropriate no or less funds for a program than requested by the executive branch.

ii. HUD Section 236 Interest Rate Subsidy Program

Under the Section 236 program, HUD subsidizes the interest rate down to one percent on mortgages on multifamily properties, known as Interest Reduction Payments (IRP), in exchange for restrictions on the rents to affordable levels for the term of the mortgage, but no fewer than 20 years. HUD data indicate that approximately 110 properties have subsidized interest rate loans that will mature in 2015, 2016 and 2017.

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HUD permits the optional continuation of IRP assistance when projects assisted under Section 236 are refinanced. Both Enterprises currently have specialized programs to purchase refinanced mortgages on Section 236 subsidized loans that maintain the interest rate subsidy in accordance with HUD requirements. Under the Request for Comments section below, FHFA specifically requests comments on whether there are ways the Enterprises can extend their support for the Section 236 program.

107

HUD Insured Multifamily Mortgages Database,

available at http://www.hud.gov/offices/hsg/comp/rpts/mfh/mf_f47.cfm.

iii. HUD Section 221(d)(4) FHA Insurance Programs

HUD's Section 221(d)(4) FHA insurance program provides financing for the new construction or substantial rehabilitation of multifamily properties, and for permanent financing when construction is completed. The program does not require affordability restrictions on the rents and there are no income limits for tenants, thus properties financed under this program may, and often do, provide market-rate housing.

There is no obvious role for the Enterprises to support projects funded under the Section 221(d)(4) program other than to refinance the original loans and remove the properties from the FHA insurance program. In their comments on the 2010 Duty to Serve proposed rule, both Enterprises stated that activities related to refinancing Section 221(d)(4) loans on affordable housing properties should count towards the Duty to Serve as preservation activities if the properties are affordable and if the use agreement is extended.

Under the Requests for Comments section below, FHFA specifically requests comments on whether there are other ways the Enterprises can support properties currently funded under the Section 221(d)(4) program.

iv. HUD Section 202 Housing Program for Elderly Households

HUD's Section 202 program for low-income elderly households is a capital advance program under which HUD provides construction or rehabilitation funds and rental subsidies. Properties financed under this program have long-term use agreements for the term of the loan, which can expire upon early sale or refinancing or at loan maturity and put the properties at risk of conversion to market-rate rents. Refinancing Section 202 properties allows the owners to obtain additional funds for rehabilitation and to extend the rental subsidies and use agreements.

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See

Vincent F. O'Donnell, “Prepayment and Refinancing of Section 202 Direct Loans—A Summary of HUD Notices H 2002-16 and H 2004-21” (Feb. 25, 2005).

Most Section 202 properties are refinanced through FHA insurance programs, which offer favorable financing terms, including lower debt service coverage ratios, more favorable underwriting treatment of the rental subsidy income, higher loan-to-value ratios, and longer loan terms than are offered by conventional mortgage lenders. Thus, refinancing under the FHA insurance programs usually results in a larger loan amount and more funds available to the owner for rehabilitation and reserves.

By actively pursuing Section 202 refinancing opportunities, the

Enterprises would provide owners with more refinancing options and give owners access to adjustable-rate mortgages with lower interest rates and shorter maturities. In 2011, legislative changes to further facilitate refinancing of Section 202 properties were enacted into law. These changes could further increase Enterprise opportunities to support the recapitalization and preservation of Section 202 housing. Under the Requests for Comments section below, FHFA specifically requests comments on whether there are other ways the Enterprises can support properties currently funded under the Section 202 program.

v. HUD Section 811 Housing Program for Disabled Households

HUD's Section 811 program is a capital advance and rental assistance program for low-income disabled persons. Section 811 properties carry no debt, and HUD rental subsidies cover the difference between operating expenses and rental income;

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excess cash flow produced by the properties is minimal. There is no obvious role for the Enterprises to support projects funded under this program and the Enterprises have never supported mortgage financing under this program. However, under the Request for Comments section below, FHFA specifically requests comments on whether there are ways the Enterprises could support the Section 811 program.

109

See

HUD, “Section 811 Supportive Housing for Persons with Disabilities” (HUD Web site),

available at http://www.hud.gov/offices/hsg/mfh/progdesc/disab811.cfm.

vi. McKinney-Vento Homeless Assistance Act Programs

Programs under title IV of the McKinney-Vento Homeless Assistance Act provide supportive housing grants to help homeless persons, especially homeless families with children, transition to independent living. Not-for-profit organizations that develop this supportive housing use a combination of grant and financing sources, and the projects typically do not involve debt financing. There is no obvious role for the Enterprises to support projects funded under this program and the Enterprises have never supported mortgage financing under this program. However, under the Request for Comments section below, FHFA specifically requests comments on whether there are ways the Enterprises can support this program.

vii. USDA Sections 515 Rural Housing Programs

Under USDA's Section 515 program, USDA provides direct loans and rental assistance to develop rental housing for low-income households in rural locations. Both Enterprises currently purchase loans originated under the Section 515 program. Under the Request for Comments section below, FHFA specifically requests comments on whether there are ways the Enterprises can extend their support for the Section 515 program.

viii. Federal Low-Income Housing Tax Credits (LIHTC)

Under the LIHTC program, investors purchase tax credits to provide equity to off-set the development costs of rental housing properties with long-term regulatory agreements that require the housing to remain affordable for very low- or low-income households. The Enterprises offer specialized loan purchase programs to refinance and rehabilitate existing LIHTC properties in conjunction with extension of their regulatory use agreements, and are an important source of financing for preservation of older LIHTC projects.

The Enterprises were significant LIHTC equity investors from the inception of the LIHTC program until the mid-2000s, but ceased investing before entering conservatorship in 2008. To date, FHFA has not approved Enterprise resumption of this activity. The LIHTC equity investment market has also changed and is now highly liquid and dominated by bank and insurance company investors. The Safety and Soundness Act provides for an investment and grants assessment factor when evaluating compliance with the Duty to Serve, and permitting the Enterprises to resume equity investments in LIHTCs would be one way to meet that assessment factor. Under the Requests for Comments section below, FHFA specifically requests comments on whether the Enterprises should resume equity investments in LIHTC projects.

ix. Comparable State and Local Affordable Housing Programs

In addition to the specifically enumerated programs in the Safety and Soundness Act, the Act provides that the Enterprises shall facilitate a secondary market for “comparable state and local affordable housing programs.”

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Under the proposed rule, an Enterprise may include such programs in its Underserved Markets Plan subject to FHFA determination of whether such programs are eligible for Duty to Serve credit. Examples of such comparable programs for multifamily housing that could receive Duty to Serve credit include support for properties that restrict all or a portion of their units for very low-, low-, or moderate-income families due to participation in density bonuses or property tax abatements, state or local affordable housing programs, state LIHTC programs, programs for redevelopment of government-owned land or buildings as affordable housing, and inclusionary zoning requirements.

111

110

See

12 U.S.C. 4565(a)(1)(B)(ix).

111

Inclusionary zoning refers to local government planning ordinances that require a specified portion of the units in newly constructed housing to be reserved for and affordable to very low- to moderate-income households.

Examples of comparable state and local programs for single-family affordable housing that could receive Duty to Serve credit include local neighborhood stabilization programs (NSP) that enable communities to address problems related to mortgage foreclosure and abandonment through the purchase and redevelopment of foreclosed or abandoned homes for very low-, low-, or moderate-income households. After the financial crisis, state and local government NSPs were partially funded by HUD. Most commenters on the 2010 Duty to Serve proposed rule that addressed the issue supported giving credit for Enterprise assistance to the HUD-funded NSP, as well as for other state and local foreclosure and abandonment prevention programs. FHFA believes that any NSP or other state or local foreclosure and abandonment prevention programs that benefit very low-, low-, or moderate-income families could receive Duty to Serve credit.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

30. Are there other ways the Enterprises can support the statutorily-enumerated programs in addition to those discussed above?

31. In what ways, including potential responsible changes to their underwriting and reserve requirements, could the Enterprises prudently extend their support for Section 8-assisted properties?

32. Are there ways in which the Enterprises could extend their support for the HUD Section 236 Interest Rate Subsidy Program?

33. Are there additional ways in which the Enterprises could support properties currently funded under HUD

Section 221(d)(4) FHA Insurance Program?

34. Are there other ways in which the Enterprises could support properties currently funded the HUD Section 202 Housing Program for Elderly Households?

35. Are there ways in which the Enterprises could support the HUD Section 811 Housing Program for Disabled Households?

36. Are there ways in which the Enterprises could support McKinney-Vento Homeless Assistance Act programs?

37. Are there other ways in which the Enterprises could extend their support for the USDA Section 515 Rural Housing Program?

38. Are there other federal affordable housing programs that the Enterprises could support that should receive Duty to Serve credit but that are not enumerated in § 1282.34(c) of the proposed rule?

39. What safety and soundness concerns should be considered in determining Enterprise participation in any of the programs discussed above?

40. Are there other state or local affordable housing programs for multifamily or single-family housing that the Enterprises could support that should be eligible to receive Duty to Serve credit in addition to those discussed above?

41. Should FHFA allow the Enterprises to resume LIHTC equity investments? Would the resumption of LIHTC equity investments by the Enterprises benefit the financial feasibility of certain LIHTC projects or would it substitute Enterprise equity funding for private investment capital without materially benefiting the projects?

42. If FHFA allows the Enterprises to resume LIHTC investments, should FHFA limit investments to support for difficult to develop projects in segments of the market with less investor demand, such as projects in markets outside of the assessment areas of large banks or in rural markets or for preservation of projects with expiring subsidies? Are there other issues that FHFA should consider if limiting the types of LIHTC projects appropriate for equity investment by the Enterprises?

43. If FHFA permits the resumption of LIHTC equity investments, should Duty to Serve credit be provided only for LIHTC equity investments in projects with expiring subsidies or projects in need of refinancing, or should Duty to Serve credit also be given for LIHTC equity investments in new construction projects with regulatory agreements that assure long-term rental affordability?

44. If FHFA allows the Enterprises to resume LIHTC investments, should FHFA limit such investments to those that promote residential economic diversity, for example, by investing in LIHTC properties located in high opportunity areas, as proposed to be defined in § 1282.1, to address concerns raised about the disproportionate siting of LIHTC housing (non-senior) in low-income areas and the effect on residential segregation?

45. Should FHFA consider permitting the Enterprises to act as the guarantor of equity investments in projects by third-party investors provided any such guarantee is safe and sound and consistent with the Enterprise's Charter Act? If so, what types of guarantees should the Enterprises offer?

d. Regulatory and Additional Activities

Section 1282.34(d) of the proposed rule identifies four additional affordable housing preservation activities that would receive Duty to Serve credit. Under the proposed rule, these activities would constitute Regulatory Activities which the Enterprises must address in their Underserved Markets Plans by indicating how they plan to undertake the activity or stating the reasons why they will not. Each proposed Regulatory Activity addresses market segments for which the Enterprises already provide some level of support. Proposed § 1282.34(e) would provide that the Enterprises may also propose Additional Activities that support the financing of mortgages on residential properties for very low-, low-, or moderate-income families consisting of affordable rental housing preservation or affordable homeownership, subject to FHFA determination of whether such activities are eligible for Duty to Serve credit.

i. Small Multifamily Rental Properties—Proposed § 1282.34(d)(1)

Section 1282.34(d)(1) of the proposed rule would provide Duty to Serve credit for Enterprise purchase and securitization of loan pools from smaller banks and community-based lenders, specifically, non-depository community development financial institutions, community financial institutions, and federally insured credit unions meeting an asset cap applicable to community financial institutions, where the loan pools are backed by existing small multifamily rental properties consisting of five to not more than fifty units. This activity would constitute a Regulatory Activity that the Enterprises would have to address in their Underserved Markets Plans by indicating how they choose to undertake the activity or the reasons why they will not undertake the activity.

Both Enterprises support financing for small multifamily properties through specialized retail loan programs offered through their lenders. The housing goals regulation publicly released in August 2015 established, for the first time, a subgoal for Enterprise purchases of loans on small multifamily properties that are affordable to low-income households. FHFA expects the subgoal to be met through the Enterprises' retail loan purchase activities. However, several commenters on the 2010 Duty to Serve proposed rule stated that the Enterprises should do more to support the financing needs of small multifamily properties.

Small multifamily properties are often older than larger properties, have fewer, if any, amenities, and tend to have more affordable rents. These factors make small multifamily properties an important source of affordable rental housing and they can also make financing more difficult to obtain. As discussed in the Notice accompanying the final housing goals rule, much of the financing needs of small multifamily property owners are met through loans provided by smaller local and regional banks, and by community-based lenders. Most of these loans are originated for the lenders' own portfolios and the lenders may cease making small multifamily property loans when their portfolio capacity has been reached.

To encourage the Enterprises to expand their support for this market segment, the proposed rule would provide Duty to Serve credit for Enterprise purchases and securitization of loan pools from non-depository community development financial institutions, community financial institutions, and federally insured credit unions meeting an asset cap applicable to community financial institutions, where the loan pools are backed by existing small multifamily rental properties consisting of five to not more than fifty units.

Section 1282.1 of the proposed rule would define “community development financial institution” and “community financial institution” in accordance with the definitions in FHFA's regulation on Federal Home Loan Bank membership. The membership regulation defines a “community development financial institution” as an institution that is certified as a community development financial institution by the Community Development Financial Institutions Fund under the Community Development Banking and Financial

Institutions Act of 1994, other than a bank or savings association insured under the Federal Deposit Insurance Act, a holding company for such a bank or savings association, or a credit union insured under the Federal Credit Union Act.

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The membership regulation defines a “community financial institution” generally as an institution whose deposits are insured under the Federal Deposit Insurance Act,

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and whose total assets are less than $1 billion, as adjusted annually by FHFA for inflation, beginning in 2009, with total assets being calculated as an average over the previous three years.

114

Based on FHFA's most recent inflation adjustment, the asset cap is now $1,123,000,000.

115

112

See

12 CFR 1263.1.

113

Id.;

12 U.S.C. 1811

et seq.

114

See

12 CFR 1263.1.

115

See

80 FR 6712 (Feb 6, 2015).

Section 1282.1 of the proposed rule would define a “federally insured credit union” in accordance with the definition of “insured credit union” in the Federal Credit Union Act.

116

The Federal Credit Union Act defines an “insured credit union” as a credit union the member accounts of which are insured under the Federal Credit Union Act.

117

116

12 U.S.C. 1752(7).

117

Id.

Over time, a reliable secondary market for loans on small multifamily properties could develop to provide these originating lenders with additional liquidity. Thus, the Duty to Serve regulation could complement the housing goals regulation by encouraging greater and more comprehensive Enterprise support for the liquidity needs of small multifamily properties.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

46. Are there other affordable housing preservation activities for small multifamily properties beyond those discussed above that should receive Duty to Serve credit?

47. Should an Enterprise's purchase and securitization of loan pools from non-depository community development financial institutions, community financial institutions, and federally insured credit unions subject to the asset cap, where the loan pools are backed by existing small multifamily properties, be a Regulatory Activity?

48. How could the Enterprises provide further support for the financing or liquidity needs of small multifamily properties? Should another type of support for small multifamily properties be a specific Regulatory Activity?

49. How could the Enterprises provide support for the liquidity needs of smaller banks and community-based lenders that finance small multifamily properties, for example by buying and securitizing loan pools these lenders have originated? What kind of Enterprise support would encourage these types of lenders to increase their financing of these properties?

50. Do the proposed definitions of “community development financial institution,” “community financial institution,” and “federally insured credit union” subject to the asset cap sufficiently capture smaller banks and community-based lenders for Duty to Serve purposes?

ii. Energy Efficiency Improvements on Multifamily Properties—Proposed § 1282.34(d)(2)

Section 1282.34(d)(2) of the proposed rule would provide Duty to Serve credit for Enterprise support for energy and water efficiency improvements on existing multifamily properties affordable to very low-, low-, and moderate-income families, provided there are verifiable, reliable projections or expectations that the improvements financed by the loan will reduce energy and water consumption by the tenant by at least 15 percent, the reduced utility costs derived from reduced consumption must not be offset by higher rents or other charges imposed by the property owner, and the reduced utility costs will offset the upfront costs of the improvements within a reasonable time period. This activity would constitute a Regulatory Activity that the Enterprises would have to address in their Underserved Markets Plans by indicating how they choose to undertake the activity or the reasons why they will not undertake the activity.

Improved energy efficiency and reduced energy consumption in multifamily housing is a broadly acknowledged public policy goal. Energy expenses, principally in the form of heating, cooling, water consumption and electricity use (collectively, utilities) consume a growing part of the incomes of very low-, low-, and moderate-income households. When these high utility costs are added to the cost of rent, multifamily housing becomes increasingly unaffordable. In recent years, energy cost increases in multifamily housing have outpaced rent increases (which have significantly exceeded the rate of inflation). A 2011 HUD study found that while average rents increased by 7.6 percent from 2001 to 2009, energy costs to renters increased by almost 23 percent during this same period.

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See

Evidence Matters, Policy Development and Research, Department of Housing and Urban Development, “Quantifying Energy Efficiency in Multifamily Rental Housing,” Summer 2011,

available at

http://www.huduser.gov/portal/periodicals/em/EM_Newsletter_Summer_2011_FNL.pdf.

Lowering energy and water use in multifamily buildings will reduce the total amount that tenants spend for the energy and water that they do use, thus reducing their utility consumption. This can be considered “preservation” under the affordable housing preservation market because housing costs are typically defined as rent plus utility costs. Thus, savings in utility consumption that reduce utility expenses may help maintain the overall affordability of rental housing for tenants. Owners of multifamily properties also benefit from energy efficiency improvements through reduced common area utility expenses, which could relieve pressure on owners to raise rents to cover increased utility costs. Owners also derive indirect benefits from unit-based energy efficiency improvements, including rendering a property more marketable to potential tenants.

Enterprise support for energy efficiency improvements could include specialized loan programs or efforts to educate lenders about the benefits of energy improvements and conservation. Given the Enterprises' market reach, they could have a significant impact on promoting energy efficiency improvements and conservation in a broad range of multifamily properties if lenders were properly educated and incented.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

51. Should Enterprise support for multifamily properties that include energy improvements resulting in a reduction in the tenant's energy and water consumption and utility costs be a Regulatory Activity?

52. How can the Enterprises provide more outreach to lenders regarding the Enterprises' energy improvement products?

53. Should the Enterprises require the lender to verify before the closing of an energy improvement loan that there are reliable and verifiable projections or expectations that the proposed energy

improvements will likely reduce the tenant's energy and water consumption and utility costs and, if so, what standards of reliability, verifiability and likelihood of reduced consumption and costs should be required?

54. Should the Enterprises be required to verify, after the closing of an energy improvement loan, that the energy improvements financed actually reduced the tenant's energy and water consumption and utility costs and, if so, how can they verify this?

55. What if any ongoing monitoring should be required to measure the effectiveness of financed energy improvements in reducing tenants' energy and water consumption and utility costs?

56. For the proposed requirement that the reduced utility costs will offset the upfront costs of the improvements within a reasonable time period, should a reasonable time period be defined and, if so, how?

iii. Energy Efficiency Improvements on Single-Family, First-Lien Properties—Proposed § 1282.34(d)(3)

Section 1282.34(d)(3) of the proposed rule would provide Duty to Serve credit for Enterprise support of energy efficiency improvement loans on single-family (homeownership or rental), first-lien properties affordable to very low-, low-, or moderate-income households, provided that there are verifiable, reliable projections or expectations that the improvements financed by the loans will reduce energy and water consumption by the homeowner or tenant by at least 15 percent, the reduced utility costs derived from the reduced consumption will offset the upfront costs of the improvements within a reasonable time period, and in the case of a single-family rental property, the reduced utility costs must not be offset by higher rents or other charges imposed by the property owner. This activity would constitute a Regulatory Activity that the Enterprises would have to address in their Underserved Markets Plans by indicating how they choose to undertake the activity or the reasons why they will not undertake the activity.

Studies have found that consumers earning below $20,000 a year spend 10 percent of their income on utilities compared to 6 percent spent by consumers with incomes above $70,000.

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The experience of homeowners at these income levels likely parallels those of the broader consumer category.

119

See

U.S. Bureau of Labor Statistics, “Consumer Expenditure Survey,” (July 2013-June 2014),

available at http://www.bls.gov/cex/#tables_long.

These percentages are for all consumers. Homeowners overall spend 7.5 percent of their income for utilities, fuels, and public services.

See

U.S. Bureau of Labor Statistics, “Table 1202: Income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, Consumer Expenditure Survey, 2014” (Sept. 2015),

available at http://www.bls.gov/cex/2014/combined/income.pdf.

Enterprise support for single-family energy efficiency loans with resulting savings accruing to the homeowners or tenants may help lower their total housing costs and thereby help preserve affordable housing. In addition, savings from energy efficiency upgrades may be correlated with better borrower loan performance. A 2013 study found that, controlling for other loan determinants, default risks are on average 32 percent lower in energy efficient homes; some of these lower default risks may benefit very low-, low-, and moderate-income borrowers. The study also found that borrowers in energy efficient homes are 25 percent less likely to prepay their mortgages,

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a loan characteristic that investors generally find appealing.

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120

See

Institute for Market Transformation, “Research Report: Home Energy Efficiency and Mortgage Risks,” University of North Carolina Center for Community Capital (March 2013),

available at http://www.imt.org/uploads/resources/files/IMT_UNC_HomeEEMortgageRisksfinal.pdf.

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For a discussion of the risks that prepayment poses to investors,

see generally

The Bond Market Association, “An Investor's guide to Pass-Through and Collateralized Mortgage Securities,” at 4-6,13-14,

available at http://www.freddiemac.com/mbs/docs/about_MBS.pdf.

However, as comprehensive home energy improvements cost between $5,000 and $15,000, the upfront costs of energy efficiency improvements constitute a significant barrier to very low-, low-, and moderate-income homeowners, who generally lack significant financial resources to pay for such improvements.

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Financing for single-family energy efficiency loans can be further hampered by lender reluctance to consider energy savings in their loan underwriting procedures.

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Finally, because identifying energy efficiency as the loan purpose can complicate automated underwriting, borrowers may choose not to specify that the home improvements are intended for energy efficiency purposes.

122

See

Mark Zimring, Ian Hoffman, Annika Todd, & Megan Billingsley, “Delivering Energy Efficiency to Middle Income Single Family Households,” Lawrence Berkeley National Laboratory (December 11, 2011),

available at http://emp.lbl.gov/publications/delivering-energy-efficiency-middle-income-single-family-households.

123

See

Institute for Market Transformation, “Research Report: Home Energy Efficiency and Mortgage Risks,” University of North Carolina Center for Community Capital (March 2013),

available at http://www.imt.org/uploads/resources/files/IMT_UNC_HomeEEMortgageRisksfinal.pdf.

Lenders may not want to put the additional time needed in in order to adjust underwriting for energy savings.

See generally

“Green Housing for the 21st Century: Retrofitting the Past and Building an Energy-Efficient Future,” Hearings Before the Subcomm. On Housing Transportation, and Community Development of the Committee on Banking Housing and Urban Affairs, 111th Cong., 2d Sess., at 23 (2010) (S. HRG. 111-6,93),

available at http://www.gpo.gov/fdsys/pkg/CHRG-111shrg61989/pdf/CHRG-111shrg61989.pdf.

Fannie Mae currently supports the financing of single-family energy efficiency improvements through its “Energy Improvement Feature” (EI Feature) and HomeStyle Renovation mortgage.

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EI Feature loans cover both purchase money loans and refinances of preexisting loans. Borrowers can use purchase or refinance proceeds, of up to 10% of the “as completed” appraised value, to finance both the property and energy improvements, as long as certain conditions are met. In all cases, the EI Feature loan must be in first lien position. The EI Feature has seen limited borrower participation, which could be due to one or more of the factors described above or because financing for energy efficiency improvements is already occurring in Fannie Mae's standard business.

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Fannie Mae also participated in the FHA PowerSaver pilot program, which ended in 2013.

The HomeStyle Renovation mortgage enables a borrower to obtain a purchase transaction or cash-out refinance mortgage to cover the costs of energy improvements to the property. Borrowers can use purchase or refinance proceeds, of up to 50% of the “as completed” appraised value, to finance both the property and the energy improvements, as long as certain conditions are met. In all cases, the HomeStyle Renovation mortgage must be in first lien position.

Freddie Mac does not currently offer loan products specifically for single-family energy efficiency loans, but like Fannie Mae, likely purchases loans with energy efficiency components as part of its standard business.

Given the difficulty of developing functional single-family energy efficiency mortgage products, possible Objectives that could be included in an Underserved Markets Plan might focus initially on developmental actions such as: (i) Working with lenders to develop education programs to encourage energy efficiency improvement loans, including conservation programs, for very low-, low-, or moderate-income households in single-family properties; (ii) working with a wider range of locally-based lenders to encourage energy efficiency components in purchase money loans or limited cash-out refinances; and (iii) developing products that result in the

introduction of energy efficiency components into loans that meet the proposed rule's requirements.

Requests for Comments

FHFA specifically requests comments on the following questions (please identify the question answered by the number assigned below):

57. How can the Enterprises work with potential lenders to facilitate financing for energy efficiency improvement loans on single-family properties?

58. What is a reasonable time period for the reduced utility costs from energy efficiency improvements to offset the upfront costs of the improvements?

59. Should Enterprise support for single-family properties that include energy improvements resulting in a reduction in the homeowner's or tenant's energy and water consumption and utility costs be a Regulatory Activity?

60. How can the Enterprises provide more outreach to lenders regarding the Enterprises' energy improvement loan products?

61. Should the Enterprises require the lender to verify before the closing of a single-family energy improvement loan that there are reliable and verifiable projections or expectations that the proposed energy improvements will likely reduce energy and water consumption and utility costs and, if so, what standards of reliability, verifiability and likelihood of reduced consumption and costs should be required?

62. Should the Enterprises be required to verify, after the closing of a single-family energy improvement loan, that the energy improvements financed actually reduced energy and water consumption and utility costs and, if so, how can they verify this?

63. For the proposed requirement that the reduced utility costs will offset the upfront costs of the improvements within a reasonable time period, should a reasonable time period be defined and, if so, how?

iv. Preservation of Long-Term Affordable Homeownership Through Shared Equity Programs—Proposed § 1282.34(d)(4)

Section 1282.34(d)(4) of the proposed rule would provide Duty to Serve credit for Enterprise activities related to affordable homeownership preservation through shared equity homeownership programs. Shared equity programs include programs administered by community land trusts, other nonprofit organizations, or State or local governments that:

(1) Ensure affordability for at least 30 years or as long as permitted under state law through a ground lease, deed restriction, subordinate loan or similar legal mechanism that makes residential real property affordable to very low-, low-, or moderate-income families. The legal instrument ensuring affordability must also stipulate a preemptive option to purchase the homeownership unit from the homeowner at resale to preserve the affordability of the unit for successive very low-, low-, or moderate-income families;

(2) Monitor the homeownership unit to ensure affordability is preserved over resales; and

(3) Support the homeowners to promote successful homeownership for very low-, low-, or moderate-income families.

Under the proposed rule, this activity would constitute a Regulatory Activity that the Enterprises would have to address in their Underserved Markets Plans by indicating how they choose to undertake the activity or the reasons why they will not undertake the activity.

Affordability of homeownership through shared equity programs is preserved either by:

(1) Resale restrictions through deed restrictions or ground leases administered by governmental units or instrumentalities, or nonprofit entities and designed to keep the home affordable over resales; or

(2) Subordinate loan programs, often called “shared appreciation loan programs,” that are administered by governmental units or instrumentalities, or nonprofit entities where second mortgage loans are due upon sale and typically structured with zero percent interest. Upon sale at market value, the homeowner repays the loan amount and a portion of the appreciation. The government or nonprofit entity uses its share of the appreciation to make the same home affordable to a subsequent income-eligible homebuyer. Shared equity programs utilize various legal mechanisms to preserve affordability, but all shared equity programs make home purchase affordable for a very low-, low-, or moderate-income buyer and limit the homeowner's proceeds upon resale to make the same home affordable to a subsequent income-eligible buyer.

While much of the affordable housing preservation emphasis is on rental housing, homeownership preservation is also important. Ho

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