Enterprise Duty To Serve Underserved Markets

Federal RegisterDec 29, 2016

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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:

Final rule.

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—in order 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 this final rule which specifies the scope of Enterprise activities that are eligible to receive Duty to Serve credit. These activities generally are those that facilitate a secondary market for mortgages related to: Manufactured homes titled as real property or personal 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 final rule provides a framework for FHFA's method for evaluating and rating the Enterprises' compliance with the Duty to Serve each underserved market.

DATES:

The final rule is effective January 30, 2017.

FOR FURTHER INFORMATION CONTACT:

Jim Gray, Manager, Office of Housing and Community Investment, (202) 649-3124; Matt Douglas, Senior Policy Analyst, Office of Housing and Community Investment, (202) 649-3328; Miriam Smolen, Associate General Counsel, Office of General Counsel, (202) 649-3182; or Sharon Like, Managing Associate General Counsel, Office of General Counsel, (202) 649-3057. 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. Background

A. Statutory Background

The Safety and Soundness Act provides generally 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 evaluation area”);

(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 evaluation area”);

(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 evaluation area”); 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 evaluation area”).

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

The Duty to Serve provisions and issues considered 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. The U.S. Department of the Treasury (Treasury Department) has provided essential financial commitments of taxpayer funding under Senior Preferred Stock Purchase Agreements (PSPAs). Fannie Mae and Freddie Mac have drawn a combined total of $187.5 billion in taxpayer support under the PSPAs to date. Through September 30, 2016, the Enterprises have paid the Treasury Department a total of $250.5 billion in dividends on senior preferred stock. Under the provisions of the PSPAs, the Enterprises' dividend payments do not offset the amounts drawn from the Treasury Department.

While the Enterprises are in conservatorships, all of their activities are subject to FHFA review and approval. FHFA has delegated day-to-day management of the Enterprises to their senior management and boards of directors. In managing the conservatorships, FHFA sets the strategic direction of the Enterprises, approves Enterprise actions as deemed appropriate by FHFA, and oversees and monitors Enterprise activities.

The law also requires and FHFA expects the Enterprises to continue to fulfill their core statutory purposes while they are in conservatorship, which include their support for affordable housing and underserved markets. Consistent with the conservatorships, Enterprise support for affordable housing and underserved markets must be accomplished within the confines of safety and soundness and the goals of conservatorship.

C. Regulatory History

Prior to issuing this final rule, FHFA engaged in a number of rulemaking activities to establish its regulatory expectations for the Enterprises' Duty to

Serve obligations and FHFA's evaluation process for those activities. These prior regulatory actions are described below.

1. Advance Notice of Proposed Rulemaking

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 public comment period for the proposed rule closed on July 22, 2010. FHFA received 4,019 comments on the proposed rule. Commenters included individuals, trade associations, policy and housing advocacy groups, nonprofit organizations, corporations, government entities, management companies, homeowners' associations, developers, lenders, a legal services group, Members of Congress, and both Enterprises. No final Duty to Serve rule was issued after the close of the comment period in 2010.

See

75 FR 32099 (June 7, 2010).

3. 2015 Duty To Serve Proposed Rule

FHFA began work to develop a new Duty to Serve proposed rule in 2014, taking into consideration the comments received on the 2010 Duty to Serve proposed rule and subsequent input from diverse stakeholder groups. The comments and input received and FHFA's intervening years of experience with the Enterprises and their operations in the underserved markets suggested a different approach, sufficiently so that further notice and comment was necessary through issuance of a new proposed rule. Accordingly, FHFA published in the

Federal Register

on December 18, 2015 a second proposed rule on the Enterprises' Duty to Serve requirements.

The 90-day public comment period for the proposed rule closed on March 17, 2016.

See

80 FR 79181 (Dec. 18, 2015).

FHFA received 1,567 comments on the 2015 proposed rule, including from the following stakeholder groups:

• Individuals, including owners of manufactured homes;

• Trade associations, including manufactured housing trade organizations, and lender, builder and energy efficiency trade organizations;

• Nonprofit lenders and developers, including loan funds, land trusts, community development financial institutions, intermediaries, and organizations focused on preservation and energy conservation;

• Policy and housing advocacy organizations, including civil rights organizations, fair housing organizations, and national and state consumer law organizations;

• Commercial enterprises including Low-Income Housing Tax Credit investors, manufactured housing construction companies and developers, and energy efficiency companies;

• Government entities, including federal, state, and local government entities and state and local housing finance agencies;

• Members of Congress;

• Academicians, including university professors; and

• Fannie Mae and Freddie Mac.

A number of commenters addressed one or more of the 79 specific requests for comment posed in the

SUPPLEMENTARY INFORMATION

to the proposed rule. Responses to the questions came from a diversity of stakeholders reflecting a wide range of opinions. FHFA appreciates the efforts made by commenters to respond to the questions, and FHFA considered these comments in developing the final rule. Some questions were answered by a large number of commenters, while other questions were not addressed by commenters at all. Some commenters offered a single answer to multiple questions. As a result, FHFA has incorporated applicable responses to the questions into the discussion below of comments on particular issues.

FHFA also held five roundtable discussions with commenters representing a diversity of interests on issues pertaining to the rulemaking.

The purpose of the roundtable discussions was to provide the commenters with an opportunity to elaborate on their comment letters, express their views on the comment letters submitted by others, and provide responses to FHFA questions seeking clarifications on their comment letters. Each roundtable discussion focused on specific groups of stakeholders:

Summaries of each of these meetings are available on FHFA's Web site at:

https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=543

• On April 19, 2016, FHFA met with rural housing stakeholders to discuss how the term “rural area” should be defined, high-needs rural areas, and other related issues.

• On April 20, 2016, FHFA met with advocates for consumers, civil rights, energy efficiency, and affordable housing to discuss manufactured housing, energy efficiency, Low-Income Housing Tax Credits, and other strategies to preserve affordable housing.

• On April 25, 2016, FHFA met with organizations representing the mortgage finance and insurance industries to discuss gaps in underserved market segments that are within acceptable credit risk tolerances for lenders, insurance companies, and investors, and other related issues.

• On April 26, 2016, FHFA met with organizations representing manufactured housing industry participants to discuss tenant protections in manufactured housing communities, manufactured housing units titled as real estate or personal property, and other related issues.

• On May 2, 2016, FHFA held a conference call with rural housing stakeholders who were unable to participate in the April 19 meeting described above.

II. Duty To Serve Underserved Markets

A. Implementing the Duty To Serve

The final rule implements the Enterprises' statutory Duty to Serve very low-, low-, and moderate-income families in the underserved markets of manufactured housing, affordable housing preservation, and rural housing. In doing so, the final rule creates two complementary processes for the Enterprises to plan for their Duty to Serve activities and for FHFA to annually evaluate each Enterprise's compliance with its Duty to Serve obligations. Under the final rule, each Enterprise must prepare an Underserved Markets Plan (Plan) describing the specific activities and objectives it will undertake to fulfill its Duty to Serve obligations in each underserved market over a three-year period. The Plan process as outlined in the final rule does not make any specific activity mandatory. Instead, the final rule establishes a set of procedures for the Enterprises to consider a range of activities for inclusion in their Plans and incentives for the Enterprises to include impactful activities in their Plans. In addition to the provisions described in the final rule, and in order to address implementation and operational questions that may arise, FHFA intends to release guidance from time to time as the Enterprises develop and execute their Plans.

The final rule also establishes an evaluation and ratings process for FHFA

to assess the Enterprises' performance in fulfilling their Plans in each underserved market. As part of this process, FHFA will prepare Evaluation Guidance which, together with the Enterprises' Plans, will be the basis for FHFA's evaluations and ratings. The public will have an opportunity to provide input on each Enterprise's draft Plan as well as FHFA's draft Evaluation Guidance. FHFA will annually assign each Enterprise a rating for each of the three underserved markets in its Plan, and FHFA will publicly report on its basis for assigning each rating. As part of these annual evaluations, FHFA will also monitor the Enterprises' Duty to Serve activities on an ongoing basis.

All activities that an Enterprise undertakes in furtherance of its Duty to Serve must be consistent with its charter act,

as well as with all other applicable federal and state laws. Nothing in the final rule authorizes or requires an Enterprise to engage in any activity that would be otherwise inconsistent with its charter or the Safety and Soundness Act, or prohibits an Enterprise from engaging in any activity. Rather, the final rule specifies the scope of Enterprise activities that are eligible to receive Duty to Serve credit, and provides a framework for evaluating the Enterprises' performance.

See

Federal National Mortgage Association Charter Act sec. 301, 12 U.S.C. 1716,

et seq.,

and Federal Home Loan Mortgage Corporation Act sec. 301, 12 U.S.C. 1451 note,

et seq.

The Enterprises' public purposes include a broad obligation to serve lower- and moderate-income borrowers.

Consistent with safety and soundness and consistent with the conservatorships, FHFA expects the Enterprises to show tangible results in each underserved market and to effectively facilitate mortgage lending to very low-, low-, and moderate-income families in each underserved market. Consistent with their charters, 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

The below section sets out the final rule's requirements for each Enterprise to submit a Plan that will describe the activities and objectives the Enterprise will undertake for Duty to Serve credit. Each Enterprise must not only describe in its Plan the activities it intends to engage in, but also why it decided not to include certain other activities in its Plan.

In the final rule, FHFA has established parameters for Enterprise Plans and the following aspects are described below: (1) Requirement that the Plans have a three-year term; (2) definitions of those activities eligible to include in Enterprise Plans; (3) requirement that the Enterprises designate Plan activities for each underserved market; (4) requirement that the Enterprises designate Plan objectives for each activity and also specify the evaluation area for each Plan objective; (5) submission and review of Enterprise Plans; (6) modification of Enterprise Plans; and (7) the process for approving new products.

1. Requirement for Underserved Markets Plans With Three-Year Terms—§ 1282.32(a), (b)

Consistent with the proposed rule, § 1282.32(a) and (b) of the final rule provides that each Enterprise must prepare a Plan describing the specific activities and objectives it will undertake to fulfill its Duty to Serve obligations in each underserved market over a three-year period. As discussed further below, objectives are the specific action items that the Enterprises will identify for each activity. The Plan, along with Evaluation Guidance to be provided by FHFA, will be the basis for FHFA's evaluation of each Enterprise's Duty to Serve performance. The Evaluation Guidance is discussed further below under § 1282.36.

Numerous commenters, including both Enterprises, supported the use of Plans, which commenters stated is a reasonable way for the Enterprises to describe their planned activities and objectives and for FHFA to evaluate Enterprise performance. Fannie Mae recommended that the Plans be simplified to align more closely with the requirements of other federal regulators for Community Reinvestment Act (CRA) Strategic Plans. Fannie Mae stated that such simplified Plans would require fewer Enterprise resources to develop, thereby enabling the Enterprises to devote more of their resources to engaging in activities in the underserved markets. Freddie Mac also commented on the level of detail required in the Plans and recommended that FHFA permit the Enterprises to update their Plans annually in order to address changes.

FHFA has considered the feedback from commenters and has determined that such Plans should be required in the final rule. Accordingly, § 1282.32(a) of the final rule requires the Enterprises to develop Plans describing the specific activities and objectives they will undertake to meet their Duty to Serve each underserved market.

Many commenters discussed the appropriateness of the proposed three-year term for the Plans, with the large majority supporting three years. A trade association commented that compliance with a requirement to submit Plans every three years would be burdensome for the Enterprises. Freddie Mac stated that reliably projecting activities and benchmarks beyond the first year of the Plan would be challenging due to changes in market conditions, lessons learned, and market opportunities, and recommended that FHFA permit annual updates to the Plans. FHFA has determined that three-year cycles are an appropriate period of time for the Enterprises to be able to accomplish multiyear objectives and that it is feasible for the Enterprises to forecast activities and market conditions for Plan purposes. In addition, as discussed below, the Enterprises will be permitted to annually modify their Plans during the three-year cycle,, subject to FHFA Non-Objection.

2. Eligible Activities for Underserved Markets—§§ 1282.33(b), 1282.34(b), 1282.35(b), 1282.36(c)(3)

The final rule defines the scope of eligible activities that an Enterprise may include in a Plan as those that facilitate a secondary mortgage market on residential properties for very low-,low-, and moderate-income families, consisting of: (1) Manufactured homes titled as real property or personal property and manufactured housing communities; (2) affordable rental housing preservation and affordable homeownership preservation; and (3) rental housing and homeownership housing in rural areas.

See

§§ 1282.33(b), 1282.34(b), 1282.35(b), and 1282.36(c)(3). In a change from the proposed rule, the scope of eligible activities in the final rule includes manufactured homes titled as personal property, which is discussed in greater detail below in Section C(1): Manufactured Housing.

Section 1282.36(c)(3) of the final rule also provides for extra credit-eligible activities, including those that promote residential economic diversity.

3. Underserved Markets Plan Activities—§§ 1282.32(d); 1282.33(c), (d); 1282.34(c), (d); 1282.35(c), (d); 1282.36(c)(3)

a. Statutory, Regulatory, and Additional Activities

Consistent with the proposed rule, § 1282.32 of the final rule retains the requirement that each Enterprise's Plan

describe all activities that the Enterprise will undertake for Duty to Serve credit, with the activities grouped under the following categories, as applicable:

• 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 final rule; and

• Additional Activities—Other activities identified by an Enterprise in its Plan that are determined by FHFA to be eligible for that underserved market.

FHFA invites the Enterprises to include Additional Activities in their Plans for FHFA's review and consideration. Additional Activities may include, for example, activities that support other federal, state, and local programs not specifically enumerated in the final rule that would benefit from Enterprise support. Any Additional Activities must be eligible under one of the three specified underserved markets as defined in this final rule. If an Enterprise chooses to include an Additional Activity in its Plan, the Enterprise must provide sufficient explanation in its Plan of how the Additional Activity will target an underserved segment of the market. In addition, an Enterprise must describe how the Additional Activity ensures that there are adequate levels of consumer protections or benefits to the tenants or homeowners that are consistent with the requirements of other Statutory and Regulatory Activities in the rule. As an example, for an Additional Activity that pertains to energy efficiency to be eligible to include in a Plan, an Enterprise would have to provide evidence that the activity would provide a benefit comparable to how affordable housing is preserved in the Regulatory Activities relating to energy efficiency.

FHFA will also take into consideration how different the proposed Additional Activity is from the other Duty to Serve Statutory and Regulatory Activities. Additional Activities that are very similar to a Statutory and Regulatory Activity will be subject to higher levels of scrutiny, recognizing that the protections embedded in those activities have been either statutorily enumerated by Congress, or have been subject to the public comment process in the proposed Duty to Serve rule, respectively and considered by FHFA.

The table below shows the Statutory and Regulatory Activities for each of the three underserved markets.

Activities

Underserved markets

Manufactured housing

Affordable housing preservation

Rural areas

Statutorily-Enumerated Activities

None

1. Section 8 programs

2. Section 236 (rental and cooperative housing program)

3. Section 221(d)(4) (moderate-income and displaced families)

4. Section 202 (elderly)

5. Section 811 (persons with disabilities)

6. Permanent supportive housing projects (homeless assistance)

7. Section 515 (rural rental)

8. Low-Income Housing Tax Credits (LIHTCs)

9. Comparable state and local affordable housing programs

None.

Regulatory Activities

1. Support manufactured homes titled as real property

2. Support manufactured homes titled as personal property

3. Support manufactured housing communities owned by government instrumentalities, nonprofits, or residents

4. Manufactured housing communities with specified minimum tenant pad lease protections

1. Support small multifamily rental property financing activity

2. Support financing of multifamily energy efficiency improvements

3. Support financing of single-family energy efficiency improvements

4. Support affordable homeownership preservation (shared equity) financing

5. Support HUD's Choice Neighborhoods Initiative (CNI)

6. Support HUD's Rental Assistance Demonstration (RAD) Program

7. Support financing of purchase or rehabilitation of distressed properties

1. Support housing in high-needs rural regions:

• Middle Appalachia.

• The Lower Mississippi Delta.

• Colonias.

• Rural tracts in persistent poverty counties.

2. Support housing for high-needs rural populations:

• Native Americans in Indian areas.

• Agricultural workers.

3. Support financing by small financial institutions of rural housing.

4. Support rural small multifamily rental property activity.

Because the goal of the Duty to Serve statute is to increase the amount of investment capital available for mortgage financing for very low-, low-, and moderate-income households, §§ 1282.32(a), 1282.33(a), 1282.34(a), 1282.35(a) of the final rule require the Plans to include activities in each underserved market that serve all three income categories in each year in which the Enterprise is evaluated and rated. Any one activity may, but need not, serve more than one of the three income categories.

b. Extra Credit-Eligible Activities

Section 1282.36(c)(3) of the final rule provides that certain activities designated in the Evaluation Guidance, including those activities that reduce the economic isolation of very low-, low-, and moderate-income households by promoting residential economic diversity, will be eligible for Duty to Serve extra credit.

FHFA received comments from a wide range of commenters who

recommended providing extra credit for a diverse set of activities. Extra credit-eligible activities, including residential economic diversity activities, are not mandatory. However, in order to be eligible to for extra credit, the Enterprises must include and describe the designated activities and objectives in their Plans. Extra credit-eligible activities, including residential economic diversity activities, are discussed further below under § 1282.36(c)(3).

c. Consideration of Minimum Number of Activities

This final rule does not require the Enterprises to engage in any particular activity for Duty to Serve credit. However, the final rule does require that the Enterprises consider a certain number of activities and explain why they are either included in their Plans or why they have chosen not to include them in their Plans. Section 1282.32(d)(1) of the final rule provides that FHFA will designate in the Evaluation Guidance a minimum number of Statutory Activities or Regulatory Activities that the Enterprises must consider for each underserved market. For example, if FHFA decides that the Enterprises must consider at least three Statutory or Regulatory Activities for a given market, each Enterprise would be required to select any three Statutory or Regulatory Activities and explain in its proposed Plan whether it will engage in these activities, and if not, why not. This is a change from the proposed rule, which would have required the Enterprises to consider, and include explanations in their Plans for, every Statutory and Regulatory Activity specified in the rule.

The proposed rule referred to the Statutory and Regulatory Activities as “Core” Activities.

Several policy advocacy organizations supported the proposed approach that the Enterprises be required to consider and address every Statutory and Regulatory Activity in their Plans. Some commenters reasoned that the proposed approach would maintain accountability for the programs enumerated in the statute, while at the same time provide the Enterprises the flexibility to decide which activities to undertake. A few commenters who advocated for the consideration of every Statutory or Regulatory Activity in a Plan also supported providing the Enterprises with broad discretion in deciding how to serve the underserved markets.

Freddie Mac commented that by FHFA designating certain activities as Statutory or Regulatory Activities, the proposed rule appeared to be intended to guide the Enterprises towards certain Activities. Freddie Mac also raised the concern that it might not be possible to create or sustain a secondary mortgage market in certain submarkets. Fannie Mae stated that the proposed approach could be simplified and made more cost effective. Both Enterprises commented on the importance of having discretion and flexibility to propose suitable activities for the underserved markets.

After considering the comments, FHFA has determined in § 1282.32(d)(1) of the final rule that it will state in the Evaluation Guidance a minimum number of Statutory or Regulatory Activities that the Enterprises must consider and address in their Plans, leaving to the Enterprises the decision on which specific Statutory or Regulatory Activities to consider and address under this requirement. This approach balances the comments recommending that FHFA guide the scope of activities and maintain accountability for the statutorily-enumerated programs with the feasibility concerns of the Enterprises. In addition, because the Enterprises' capacity to address the Statutory and Regulatory Activities may change over time, providing flexibility for FHFA to specify in the Evaluation Guidance the minimum number of such activities to be considered and addressed in the Plans will enable FHFA to change the minimum number each Plan cycle as appropriate. The statutory programs in § 1282.34(c)(5) and (c)(6) are excluded for this purpose because they do not, at this time, lend themselves to Enterprise support, so FHFA does not expect the Enterprises to address these two programs in their Plans.

d. Activities and Objectives To Be Undertaken

Section 1282.32(d)(1) and (2) of the final rule provides that for all Statutory, Regulatory, and Additional Activities that an Enterprise chooses to undertake in its Plan, the Enterprise must address in its Plan how it will undertake the activities and related objectives, which are discussed further below. Section 1282.32(d)(3) provides that if an Enterprise chooses to undertake an activity, such as a residential economic diversity activity, for extra credit under § 1282.36(c)(3), the Enterprise must describe the activity and related objectives in its Plan.

The Enterprises may include as many Statutory, Regulatory, and Additional Activities and related objectives in their Plans as they consider feasible. FHFA will review the number of activities and objectives included in an Enterprise's Plan, as well as the nature of those activities, to determine whether the number is reasonable and achievable, and the degree of potential impact on the underserved markets.

4. Underserved Markets Plan Objectives for Each Activity—§ 1282.32(e), 1282.32(f)

Consistent with the proposed rule, § 1282.32(e) of the final rule provides that for each activity set forth in a Plan, the Plan must include one or more objectives, which are the specific action items that the Enterprises will identify for each activity. Objectives are central to FHFA's Duty to Serve evaluation process and ratings determinations. Objectives may cover a single year or multiple years. Each objective must meet all of the following requirements:

•

Strategic.

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

•

Measurable.

Provide measurable 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.

A number of policy advocacy organizations and nonprofit lenders supported FHFA's proposed approach for the objectives. A policy advocacy organization and a nonprofit organization suggested regulatory language changes that it stated would enhance the specificity of the Enterprise's objectives, strengthen the ability of the public and FHFA to assess compliance with the Enterprise's stated objectives, and measure their impact. FHFA believes that such changes are not necessary as the Evaluation Guidance will contain sufficient information regarding the process for developing the Plans.

Statutory Evaluation Areas

As proposed, § 1282.32(f) of the final rule provides that each Plan objective must incorporate one or more of the following four statutory evaluation areas (referred to as “assessment factors” in

the proposed rule), which are set forth in § 1282.36(b) of the final rule:

•

Outreach.

The outreach evaluation area 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, nonprofit organizations, real estate developers, and state and local governments.

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

•

Loan Product.

The loan product evaluation area 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 will 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 safe and sound lending practices. FHFA expects the Enterprise to identify and assess current underwriting guidelines that may impede service to very low-, low-, and moderate-income families in the underserved markets.

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

•

Loan Purchase.

The loan purchase evaluation area 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.

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

Id.

Although the final rule does not establish quantitative targets, FHFA will 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 evaluation area, FHFA will take into account difficulties in forecasting future performance and the need for flexibility in dealing with unexpected market changes.

•

Investments and Grants.

The investments and grants evaluation area 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 Enterprises' Charter Acts.

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 Duty to Serve credit to the Enterprises for making grants.

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

12 U.S.C. 1451

et seq.

and 12 U.S.C. 1716

et seq.

FHFA received a number of comments on the four evaluation areas. The two evaluation areas that received the most comments were loan products, and grants and investments. For the loan products evaluation area, commenters offered suggestions for specific pilots and for enhancing the criteria to use when assessing loan product activities. Commenters generally expressed support for the development of new loan products. The commenters were nearly unanimous in expressing their support for the Enterprises to be allowed to receive Duty to Serve credit for investments and grants, with many suggesting specific uses for those funds.

The proposed rule specifically requested comment on whether Duty to Serve credit should be given under the loan product evaluation area for research and development activities that may not show initial results. Several trade associations, nonprofit lenders, and policy advocacy organizations, as well as the Enterprises supported providing Duty to Serve credit for this activity even without initial results. A few commenters offered qualified support for research and development only for targeted markets and focused activities provided the research and development activities are robust, the data collected and findings are shared with industry stakeholders, and the research and development activities mesh with already well-developed concepts that have the potential to reach the market within a short period of time.

After considering the comments, FHFA has determined that it is reasonable to make Enterprise research and development activities eligible for Duty to Serve credit under the loan product or outreach evaluation areas because of their importance in encouraging innovation and creative solutions to the challenges that exist in the underserved markets.

Requirement of a Single Evaluation Area for Each Objective

Section 1282.32(f) of the final rule provides that an Enterprise must designate in its Plan the evaluation area under which each Plan Objective will be evaluated.

Under the proposed rule, an objective would have been eligible to receive Duty to Serve credit under only one evaluation area in each underserved market for each year. Both Enterprises objected to this proposed requirement, stating that Duty to Serve credit should be available under multiple evaluation areas within an underserved market. Fannie Mae argued that Plan activities, regardless of which evaluation area they are in, are intertwined with achieving the end result of better serving an underserved market. Freddie Mac argued that the proposed requirement would undercount Enterprise support for activities that meet multiple evaluation areas within a particular market and could result in imprecise or arbitrary classification of the Enterprises' activities or objectives.

After considering the comments, FHFA has determined in the final rule that each objective should only be eligible to receive Duty to Serve credit under one evaluation area per year in an underserved market. This requirement is not intended to preclude or discourage the Enterprises from undertaking multi-faceted activities and objectives that take place over several years. Rather, the Enterprises will simply be required to identify one evaluation area for each objective during each year of a Plan cycle that reflects the Enterprise's primary focus for the objective. In many instances, this may involve an Enterprise specifying separate objectives to cover actions relating to different evaluation areas. For example, a multi-faceted objective, such as one involving research and development, could foreseeably be assessed under outreach in year one of

a Plan, and under loan products in year two of the Plan. Identifying the primary evaluation area for each objective, for each year, will focus Enterprise efforts and make it easier for FHFA and other stakeholders to evaluate their performance.

5. Plan Procedures—§ 1282.32(g)

a. Submission of Proposed Plans—§ 1282.32(g)(1)

Section 1282.32(g)(1) of the final rule establishes a process and timeline for the Enterprises to submit their proposed Plans to FHFA for review, with some changes to the process and timeline in the proposed rule. The final rule also establishes distinct timelines for the first Plan development cycle and subsequent Plan cycles.

For the first Plan development cycle following the publication of the final rule, the Enterprises will be required to submit their proposed Plans to FHFA within 90 days after the posting of the proposed Evaluation Guidance on FHFA's Web site. This is a change from the proposed rule, which would have required submitting the first proposed Plan to FHFA pursuant to a timeframe and procedures to be established by FHFA, and would have required FHFA to provide to each Enterprise an individualized Evaluation Guide containing a scoring matrix for its Plan after Non-Objection to the Plan.

For subsequent proposed Plans after the first Plans, FHFA will provide timelines 300 days before the termination date of the Plan in effect, or a later date if additional time is necessary for proposed Plan submission, public input periods, and Non-Objection to an undeserved market in a Plan. FHFA envisions that these timelines will be part of the Evaluation Guidance. Unless otherwise directed by FHFA, each Enterprise must submit a proposed Plan to FHFA at least 210 days before the termination date of the Enterprise's Plan in effect.

Several policy advocacy organizations, a trade organization, and both Enterprises expressed the need for greater certainty earlier in the Plan development process as to how the Enterprises will be evaluated by FHFA. FHFA agrees that providing more details on the Plan submission and review process will assist the Enterprises in developing their proposed Plans and assist the public in understanding how the Enterprises will be evaluated. Accordingly, under the final rule, FHFA will provide the proposed Evaluation Guidance to the Enterprises prior to the date the Enterprises must submit their proposed Plans to FHFA, as opposed to providing an Evaluation Guide to each Enterprise after submission of its Plan, as proposed. Specifically, FHFA will provide the proposed Evaluation Guidance to the Enterprises at least 90 days before their proposed Plans are due to FHFA and will post the proposed Evaluation Guidance on FHFA's Web site for public input. For the first Plan development cycle, FHFA expects to provide the proposed Evaluation Guidance to the Enterprises within 30 days of the date of the posting of this final rule on FHFA's Web site.

b. Posting of Proposed Plans and Public Input—§ 1282.32(g)(2), (3)

Section 1282.32(g)(2) of the final rule establishes a process and timeline for public input on the Enterprises' proposed Plans, with some changes to the process and timeline set forth in the proposed rule. Consistent with the proposed approach, the final rule provides that as soon as practical after an Enterprise submits its proposed Plan, FHFA will post a public version of the proposed Plan, with any proprietary and confidential data and information omitted, on FHFA's Web site for public input. Section 1282.32(g)(3) of the final rule provides that the public input period for the first cycle of proposed Plans will be 60 days, a change from the proposed rule's 45 days.

There was broad support from a wide range of commenters, including policy advocacy organizations, nonprofit intermediaries, trade associations and state housing finance agencies for posting the Enterprises' proposed Plans for public input. Commenters stated that public input would improve the quality of the Plans, add accountability to the Plan review process, and improve FHFA's evaluation of the adequacy of the proposed Plans.

Both Enterprises expressed concerns about posting the proposed Plans for public input, stating that the Plans would contain proprietary and confidential information and that the process of preparing a public version of the proposed Plan could be time intensive. The Enterprises and some commenters also expressed significant concerns about the proposed rule's timeline for specific actions related to proposing and reviewing the Plans. The primary criticisms from various commenters were that the proposed deadlines would not provide sufficient time for the Enterprises to develop their proposed Plans, for stakeholders to provide input on the proposed Plans, for FHFA to adequately consider the public input, and for the Enterprises to incorporate changes in response to the public input. For example, a policy advocacy organization stated that because of the complexity of the Plans, along with the number of activities they are likely to cover, the public would likely need 60-90 days to provide sufficient input on the proposed Plans.

After considering the comments, FHFA has determined that a public input process for the Enterprises' proposed Plans can be implemented that provides transparency and an opportunity for productive public input, while preserving the proprietary and confidential nature of Enterprise data and information. Public input can provide significant value in assisting the Enterprises to identify the needs of the underserved markets, as well as the specific activities that could help meet those needs. FHFA has also determined that the proposed 45-day public input period should be increased to 60 days. Accordingly, under § 1282.32(g)(3) of the final rule, for the Enterprises' first proposed Plans, the public will have 60 days from the date the proposed Plans are posted on FHFA's Web site to provide input. The Enterprises' subsequent proposed Plans will be available for public input pursuant to the timeframe and procedures established by FHFA. FHFA envisions that the timeframe and procedures for public input on subsequent proposed Plans will be specified in future Evaluation Guidance.

c. Enterprise Review—§ 1282.32(g)(4)

Consistent with the proposed rule, § 1282.32(g)(4) of the final rule provides that each Enterprise may, in its discretion, make revisions to its proposed Plan based on public input.

d. FHFA Review—§ 1282.32(g)(5)

Section 1282.32(g)(5) of the final rule provides that for the first Plan development cycle following publication of the final rule, FHFA will review each Enterprise's proposed Plan, and within 60 days or such additional time as may be necessary from the end of the public input period, provide each Enterprise with FHFA's comments on its proposed Plan. FHFA has determined that a 60-day review period generally should provide sufficient time for review of the Enterprises' proposed Plans.

For subsequent Plan development cycles, as opposed to the 45-day review period in the proposed rule, the final rule provides that FHFA will establish a timeframe and procedures for FHFA review, comments, and any required Enterprise revisions for the subsequent proposed Plans. FHFA envisions that the timeframe and procedures for FHFA's review of the subsequent

proposed Plans will be specified in future Evaluation Guidance. This will allow the review process for subsequent proposed Plans to remain flexible and aligned with the future timelines for submitting the Enterprises' proposed subsequent Plans and publishing the Evaluation Guidance.

The Enterprises will be required to address FHFA's comments on their proposed Plans, as appropriate, through revisions to their proposed Plans pursuant to the timeframe and procedures established by FHFA.

e. Designation of Statutory or Regulatory Activity for FHFA Consideration in Issuing a Non-Objection—§ 1282.32(g)(5)(iii)

Section 1282.32(g)(5)(iii) of the final rule provides that FHFA may, in its discretion, designate in the Evaluation Guidance one Statutory Activity or Regulatory Activity in each underserved market that FHFA will significantly consider in determining whether to provide a Non-Objection to that underserved market in an Enterprise's proposed Plan. This provision was not included in the proposed rule.

This provision evolved from comments that FHFA received suggesting that some Statutory and Regulatory Activities are so important that FHFA should

require

the Enterprises to engage in them. Several commenters recommended a number of specific Statutory or Regulatory Activities that should be mandatory, with residential economic diversity and a chattel manufactured housing pilot being the most frequently cited, on the basis that these activities are the most likely to have an impact on the underserved markets.

After considering the comments, FHFA has determined to maintain the approach in the proposed rule and not make any Statutory or Regulatory Activities mandatory in the final rule. FHFA has concerns that mandating a specific activity, without first considering how the Enterprise would propose conducting an activity to ensure that it would be undertaken in a safe and sound manner, would be inadvisable.

Instead, § 1282.32(g)(5)(iii) of the final rule provides that FHFA may, in its discretion, designate in the Evaluation Guidance one Statutory or Regulatory Activity in each underserved market that FHFA will significantly consider in determining whether to provide a Non-Objection to that underserved market in a proposed Plan. This provision of the final rule provides FHFA with the authority to transparently communicate a priority activity to the Enterprises and puts the Enterprises on notice that FHFA will evaluate their decisions to either include or not include this activity in their Plans. For example, FHFA might encourage the Enterprises to consider serving challenging regions or populations such as Middle Appalachia, or challenging activities such as shared equity homeownership or agricultural workers' housing, which could require more time and effort to make an impact on the underserved market than other activities. In determining whether to issue a Non-Objection where an Enterprise has chosen not to include the designated Statutory or Regulatory Activity in its Plan, FHFA will consider whether the Enterprise has made a convincing case in its Plan for not including it.

f. FHFA Non-Objections to Underserved Markets in a Plan—§ 1282.32(g)(5)(iv)

This final rule provides that FHFA will issue three Non-Objections for a Plan—one for each underserved market—and not for the Plan as a whole. Section 1282.32(g)(5)(iv) of the final rule provides that after FHFA is satisfied that all of its comments on an individual underserved market section in an Enterprise's proposed Plan have been addressed, FHFA will issue a Non-Objection for that underserved market in the Plan. This is a change from the proposed rule, which would have required FHFA to issue a single Non-Objection for the entire proposed Plan.

Several policy advocacy organizations commented that the proposed rule did not make clear the procedures and consequences FHFA would invoke in the event its issuance of a Non-Objection delayed the start of a Plan. This could occur under the proposed approach where FHFA is not satisfied that its comments on an Enterprise's plans for a particular underserved market have been addressed and FHFA is unable to issue a Non-Objection to the entire Plan, thereby preventing the Enterprise from commencing implementation of its Plan in all of the three underserved markets. Under the final rule, FHFA will issue a separate Non-Objection for each of the three underserved markets, which will enable the Enterprises to proceed with implementing their plans for a particular underserved market that has received a Non-Objection without having to wait for FHFA's Non-Objection to the other underserved markets. The next section describes the final rule's approach in the event that there is a delay in FHFA's ability to provide a Non-Objection for one or more underserved markets in a Plan.

g. Effective Dates of Underserved Markets in Plans—§ 1282.32(g)(6)

Section 1282.32(g)(6) of the final rule provides that the effective date of an underserved market in a Plan that has received a Non-Objection from FHFA by December 1 of the prior year will be January 1 of the first evaluation year for which the Plan is applicable. Where an underserved market in a Plan does not receive a Non-Objection by December 1 of the prior year, the effective date for that underserved market will be determined by FHFA. This provision is changed from the proposed rule to take into account that the timing of receiving Non-Objections for each of the underserved markets in a proposed Plan may impact the effective dates for those sections of the Plan. Based on the extent of the delay, FHFA will also describe the impact of any delay in a Plan's effective date on the evaluation and rating processes for the affected underserved market.

h. Posting of Underserved Market Sections of Plans—§ 1282.32(g)(7)

Section 1282.32(g)(7) of the final rule provides that as soon as practical after FHFA issues a Non-Objection to an underserved market in an Enterprise's Plan, that section of the Plan will be posted on the Enterprise's and FHFA's respective Web sites, with any confidential and proprietary data and information omitted. This provision is revised from the proposed rule to take into account that particular underserved markets in a proposed Plan may receive Non-Objections at different times.

6. Modifying Underserved Markets Plans—§ 1282.32(h)

As proposed, § 1282.32(h) of the final rule provides that at any time after implementation of a Plan, an Enterprise may request to modify its Plan during the three-year term, subject to FHFA Non-Objection of the proposed modifications, and FHFA may require an Enterprise to modify its Plan during the three-year term. FHFA and the Enterprises may seek public input on proposed modifications to a Plan if FHFA determines that public input would assist its consideration of the proposed modifications. If a Plan is modified, the modified Plan, with any confidential and proprietary information and data omitted, will be posted on the Enterprise's and FHFA's respective Web sites.

Several commenters, including both Enterprises, supported allowing the final Plans to be modified during the three-year term. A number of commenters also recommended that

FHFA require the Enterprises to solicit public input on their proposed Plan modifications, with some suggesting between 30 and 90 days for such input. Policy advocacy organizations also recommended that FHFA provide public notice when significant modifications to a final Plan receive a Non-Objection, with the modifications and rationale for FHFA's Non-Objection detailed. Freddie Mac strongly supported allowing Plan modifications, and recommended that FHFA establish a simple notice and review process without public input when modifications merely reflect changes in the market.

After considering the comments, FHFA has determined that Plan modifications generally should be permitted, as set forth in the proposed rule. Because of the detailed level of information that the Enterprises need to include in their Plans, FHFA envisions allowing the Enterprises to annually adjust their Plans to reflect their progress, to incorporate lessons learned from executing their Plans, and to make other appropriate adjustments. Additionally, FHFA envisions utilizing the same annual adjustment to ensure that Plan objectives continue to represent meaningful progress over time. However, to maintain the integrity of the final Plans, ad hoc modifications, occurring outside of the annual adjustment, should occur only in special circumstances and should not be a routine part of the process. Instances in which FHFA might require an Enterprise to modify its Plan include significant changes in market conditions, including obstacles and opportunities, or significant safety and soundness concerns arising during the three-year term of the Plan.

FHFA is more likely to seek public input on a proposed Plan modification where an Enterprise requests to eliminate an activity or objective from its Plan, or make numerous changes to the Plan, as opposed to, for example, a request to modify the measurable quantity of an objective by a modest amount.

7. Enterprise New Products and New Activities

Enterprise new products and new activities are subject to the prior approval and prior notice requirements pursuant to the Safety and Soundness Act.

If an Enterprise determines that a new product or new activity would facilitate its Duty to Serve obligations and would be consistent with safety and soundness, it may propose that new product or new activity for FHFA consideration.

See

12 U.S.C. 4541.

C. Underserved Markets

1. Manufactured Housing Market—§ 1282.33

The below section describes the final rule provisions for the manufactured housing market and explains FHFA's rationale for adopting four Regulatory Activities for this market. The Regulatory Activities are for: (1) Manufactured homes titled as real property, (2) manufactured homes titled as personal property, (3) manufactured housing communities owned by government units or instrumentalities, nonprofits, or residents; and (4) manufactured housing communities with specified minimum tenant pad lease protections.

FHFA's final rule does not adopt the small manufactured housing community Regulatory Activity that was included in the proposed rule. The below section also discusses the affordability methodology adopted in the final rule.

a. Eligible Activities—§ 1282.33(b)

Section 1282.33(b) of the final rule provides that Enterprise activities eligible to be included in a Plan for the manufactured housing market are activities that facilitate a secondary market for mortgages on residential properties for very low-, low-, or moderate-income families in the manufactured housing market. The manufactured housing market consists of manufactured homes and manufactured housing communities. As defined in the final rule, manufactured homes include: (i) Manufactured homes titled as personal property (also referred to as “chattel”), and (ii) manufactured homes titled as real property. The proposed rule would have included manufactured housing communities and manufactured homes titled as real property, but not manufactured homes titled as chattel. As further discussed below, after extensive research and consideration of the comments received on chattel lending, FHFA has also included Enterprise support for chattel loans as a Regulatory Activity in the final rule.

Definition of “Manufactured Home”

Consistent with the proposed rule, § 1282.1 of the final rule defines “manufactured home” to mean a home as defined in section 603(6) of the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended (42 U.S.C. 5401

et seq.

) (referred to here as the “HUD Code”). As in the proposed rule and because of concerns about the structural integrity of pre-HUD Code homes, activities related to manufactured homes that are not compliant with the HUD Code are excluded from the definition and activities supporting them are not eligible for Duty to Serve credit in the final rule.

Some commenters favored Duty to Serve credit for Enterprise support for financing of pre-HUD Code manufactured homes (

i.e.,

those built prior to June 15, 1976). A nonprofit organization focused on rural housing estimated that one-fifth of rural manufactured homes are pre-HUD Code mobile homes.

In joint comment letters, two manufactured housing trade associations noted that in “55 and over” manufactured housing communities, some residents are low-, fixed-income seniors with no source of financing for their pre-HUD Code mobile homes. They further noted that in “all age communities,” pre-HUD Code home occupants are often low-income and work “blue collar” jobs or depend on government assistance.

See

Housing Assistance Council, “Moving Home—Manufactured Housing in Rural America” (Dec. 2005),

available at

http://www.ruralhome.org/storage/documents/movinghome.pdf

Pre-HUD Code homes, even those with modifications, do not meet HUD standards and cannot be accepted as compliant with the HUD Code.

FHFA acknowledges the financing needs for owners of pre-HUD Code homes and may reconsider the matter in a future rulemaking if appropriate methodologies can be found for assuring the structural integrity of the homes.

See generally

U.S. Department of Housing and Urban Development, “Frequently Asked Questions” (HUD homepage),

available at

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/mhs/faqs

b. Regulatory Activities—§ 1282.33(c)

Section 1282.33(c) of the final rule establishes four specific Regulatory Activities under the manufactured housing market. Two of these Regulatory Activities pertain to Enterprise support for financing of single-family manufactured homes titled as real property or chattel, and two pertain to Enterprise support for financing of blanket loans for manufactured housing communities.

(i) Chattel: Loans on Manufactured Homes Titled as Personal Property—§ 1282.33(c)(2)

Section 1282.33(c)(2) of the final rule establishes a Regulatory Activity for Enterprise activities related to facilitating a secondary market for loans on manufactured homes titled as

personal property, also referred to as chattel. The proposed rule did not include chattel lending as an eligible activity under the manufactured housing market. The proposed rule discussed issues related to chattel loans and specifically requested comment on whether the Enterprises should receive Duty to Serve credit for purchasing chattel loans, either on a pilot or an ongoing basis.

FHFA received almost 1,400 comment letters on whether Enterprise purchases of chattel loans should be an eligible activity that receives Duty to Serve credit. The vast majority of the letters were form letters signed by individuals and small businesses in the manufactured housing industry recommending Duty to Serve credit for Enterprise support of chattel loans. FHFA also received many individual comment letters from trade associations, consumer advocacy organizations, and manufactured housing community owners and operators supporting Duty to Serve credit for chattel loans. Three Members of Congress also supported Duty to Serve credit for chattel loans.

Several trade associations for the manufactured housing industry favored Duty to Serve credit for chattel loans but acknowledged that modifications such as credit enhancements and greater borrower protections could facilitate secondary market support for these loans. One trade association for the manufactured housing industry had a different view, strongly supporting Duty to Serve credit for chattel loans but opposing any additional credit enhancements or borrower protections for chattel loans. All of these manufactured housing industry commenters advised that manufactured housing is a significant source of unsubsidized affordable housing and manufactured home borrowers have significant needs for financing that are not being met. The commenters further stated that the absence of a secondary market and the lack of available financing for chattel loans have severely impacted the manufactured housing industry, resulting in closures of many factories nationwide. Several trade associations for the manufactured housing industry and a financial marketing corporation commented that much of the pricing disparity between chattel loans and real estate loans results from the absence of a significant secondary market for chattel loans.

In a change from their comments on the 2010 proposed rule, a number of consumer advocacy organizations and nonprofit organizations favored Duty to Serve credit for chattel loans as long as there are adequate consumer protections. A state housing finance agency similarly supported Duty to Serve credit for a chattel pilot provided there are strong underwriting and tenant protections.

A federal financial regulatory agency did not take a position on Duty to Serve credit for chattel loans but urged FHFA to protect chattel loan borrowers, whom the agency stated are particularly vulnerable to unfair lending practices.

A trade association for community bankers was among the few commenters opposing Duty to Serve credit for chattel loans. The trade association expressed general concern about the Enterprises' safety and soundness, as well as the risks that attend chattel lending, stating that more could be done to support real estate lending for manufactured housing, which the trade association stated is a safer loan product. A joint comment letter signed by several policy advocacy organizations and nonprofit organizations opposed any Duty to Serve credit for chattel loans, noting the abuses and high default rates detailed in the

SUPPLEMENTARY INFORMATION

to the proposed rule.

Freddie Mac opposed Duty to Serve credit for chattel loans, as it did in its comment letter on the 2010 proposed rule, without providing a rationale. Fannie Mae did not address chattel loans, a change from its comment letter on the 2010 proposed rule in which it opposed Duty to Serve credit for chattel loans.

After considering the comments, FHFA has decided to establish a new Regulatory Activity in § 1282.33(c)(2) of the final rule for Enterprise support for chattel loans. While FHFA expects the Enterprises to also serve manufactured homes titled as real estate, which include borrower protections and is discussed in greater detail in the next section, FHFA has also determined that the pursuing pilot initiatives, in safe and sound manner, that serve very low-, low-, and moderate-income households who live in manufactured homes titled as chattel, should be eligible for Duty to Serve credit.

FHFA makes this change in the final rule having considered the feedback from many commenters in support of providing the Enterprises with Duty to Serve credit for chattel-titled lending. FHFA also makes this change having considered the potential for the Enterprises' to improve liquidity and access to credit in the manufactured housing market generally and for very low-, low-, and moderate-income households.

For example the percentage of new manufactured homes titled as chattel has increased from 67 percent in 2009 to 80 percent in 2015.

Additionally, efforts to expand the real estate titled share of the market have faced some difficulties.

FHFA also makes this change having considered the potential for the Enterprises to improve the chattel lending market through standardization that includes borrower protections.

One indicator of how little liquidity exists is that over 70 percent of manufactured home loans reported under HMDA are held in portfolio by the lenders, compared with 16 percent for site-built homes.

See

Consumer Financial Protection Bureau, “Manufactured-housing consumer finance in the United States,” p. 37 (Sept. 2014),

available at

http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf

See

U.S. Commerce Department, Census Bureau, “Cost & Size Comparisons For New Manufactured Homes and New Single-Family Site-Built Homes” (2007-2015),

available at

https://www.census.gov/data/tables/2015/econ/mhs/2015-annual-data.html

One factor inhibiting the potential for market change is that manufactured home dealers and lenders are not legally obligated to explain the titling of homes to buyers or its implications.

See generally

Ann M. Burkhart, Bringing Manufactured Housing into the Real Estate Finance System, 37 Pepp. L. Rev. 427, 443 (Mar. 2010),

available at

http://cfed.org/assets/pdfs/manufactured_housing/advocacy_center/mht/Burkhart_MH_Finance.pdf

. Another factor is that state laws for converting the titles of manufactured homes from chattel to real property present challenges. For example, some states prohibit converting titles for manufactured homes on leased land.

See

National Consumer Law Center, “Titling Homes as Real Property” (Oct. 2015),

available at

https://www.nclc.org/images/pdf/manufactured_housing/titling-homes2.pdf

See also

Ann M. Burkhart, Bringing Manufactured Housing into the Real Estate Finance System, 37 Pepp. L. Rev. 427, 443-444 (Mar. 2010),

available at

http://cfed.org/assets/pdfs/manufactured_housing/advocacy_center/mht/Burkhart_MH_Finance.pdf

In making this change in the final rule, FHFA is also aware of the challenges and risks, which FHFA discussed in detail in the proposed rule, that the Enterprises would face in exploring the chattel lending market. As is discussed in the following sections, FHFA would require the Enterprises to methodically assess ways to mitigate these challenges and risks before beginning any chattel loan purchases. Additionally, FHFA would also conduct a thorough review and assessment of any chattel loan pilot initiative, both when proposed by the Enterprise and, if approved, throughout its execution by the Enterprise. This review is a core part of FHFA's regulatory responsibilities in overseeing all of the Enterprises' Duty to Serve activities, but FHFA believes it is appropriate to emphasize this point for chattel lending since it would be a new purchase activity for the Enterprises.

Review of Enterprise Chattel Loan Pilot Initiatives.

Initially, only approved chattel loan pilot initiatives included in an Enterprise's Plan would be eligible for Duty to Serve credit. Under an

Enterprise Plan to pursue such a chattel loan pilot initiative, FHFA review of the pilot initiative would also be required under the new product and activities statute prior to any purchases by the Enterprise of chattel loans.

To facilitate a timely new product review, an Enterprise's Plan should indicate when the Enterprise expects to commence purchasing chattel loans as part of a pilot initiative prior to any purchases by the Enterprise of chattel loans.

See

12 U.S.C 4541.

As described in greater detail below, FHFA will carefully assess a number of factors in reviewing any chattel loan pilot or ongoing initiative included in an Enterprise Plan. While the final rule does not contain pre-determined limitations on pilot chattel loan initiatives, FHFA could include such parameters in the Evaluation Guidance. For example, the final rule does not restrict the location of the manufactured homes (within or outside of a manufactured housing community), the volume of Enterprise chattel loan purchases, the duration of any initiative, or the Enterprises' counterparties. Nor does the final rule restrict the specific terms and features of an acceptable chattel loan product beyond those restrictions applicable to all single-family loan purchases. However, FHFA could address some of these parameters in the Evaluation Guidance, and FHFA will also consider them in determining whether to provide a Non-Objection to an Enterprises Plan for the manufactured housing market and for purposes of the new product review.

FHFA will review the results of a chattel loan pilot initiative conducted by an Enterprise, including an assessment of safety and soundness. If at any time FHFA believes that such a pilot poses a risk to the safety and soundness of the Enterprises, as with any activity under a Duty to Serve Plan, FHFA would require the Enterprise to modify or stop its activities accordingly. If, however, FHFA determines that a pilot initiative has been successful, and the Enterprise wishes to pursue an ongoing initiative for chattel loans, that ongoing initiative would require FHFA approval.

The below sections discuss a number of factors that FHFA will consider in reviewing any Enterprise Plan to pursue pilot chattel loan initiatives, including the financial performance of chattel loans, possible risk mitigants, and borrower and tenant protections.

Financial Performance of Chattel Loans.

An important factor in determining the potential success of any chattel pilot would be access to reliable data about chattel loan performance. According to manufactured housing industry representatives, since the manufactured housing subprime crisis in 1999 to 2000, manufactured home loan underwriting standards and practices have sharply improved.

However, little default and foreclosure data for conventional chattel loans are publicly available to determine how well chattel loans have performed.

See

Cavco Industries, Inc., “Annual Report on Form 10-K for the Fiscal Year Ended March 28, 2015,” pp. 8-9 (Mar. 28, 2015),

available at

http://investor.cavco.com/public/phhweb/gallery/userupload/ir-doc-386/cvco_2015.3.28_10k.pdf;

George Allen, “Manufactured Housing Primer,” pp. 2-3 (Franklin Printing, Apr. 2010).

See generally

Ronald Wirtz, “Home, sweet (manufactured?) home,” Fedgazette (Federal Reserve Bank of Minneapolis, July 1, 2005),

available at

https://www.minneapolisfed.org/publications/fedgazette/home-sweet-manufactured-home

Regarding the paucity of data on manufactured housing overall,

see generally

Matthew Furman, “Eradicating Substandard Manufactured Homes: Replacement Programs as a Strategy,” p. 4 (Nov. 2014) (A paper submitted to Harvard's Joint Center for Housing Studies and NeighborWorks America),

available at

http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w15-3_furman.pdf

This limited data about chattel lending has not only been a challenge for FHFA in developing this rule, but FHFA also understands that it will be an ongoing challenge for the Enterprises in developing any chattel loan pilot initiative. Therefore, as part of any Plan that includes chattel loan activities, FHFA expects that the Enterprises would work to develop better financial performance data both in preparation for a chattel loan pilot purchase initiative and through the implementation of the pilot itself.

One source of chattel loan data that, while limited, would be relevant in considering a chattel loan pilot initiative is the Federal Housing Administration's (FHA) Title I manufactured home chattel loans insurance program. Data for the 2010 originations of Title I chattel loans show that as of year-end 2015, claims had been filed with FHA on 218 out of 1,789 loans endorsed (12 percent).

Data for Title I chattel loans showing the percentage of delinquencies, however, are not available. Also, credit score data on Title I loans are incomplete due to the lack of credit scores for some borrowers who do not have traditional credit accounts on which scores are generated by the national credit agencies. The Office of Management and Budget projects that Title I chattel loans for fiscal year 2017 will have a 19 percent recovery rate.

FHA data further show that interest rates on Title I chattel loans ranged around 7 to 8 percent in recent years. These rates may appear high in comparison to interest rates for site-built homes with fixed rate, 30-year mortgages. However, the Title I rates are relatively low compared to those for conventional chattel loans, which were reported to be in the 7 to 13 percent range in early 2015.

This was one of the higher claim rates in recent years.

See

Office of Management and Budget, Federal Credit Supplement—Budget of the U.S. Government, Fiscal Year 2017, p. 14 (Table 4) (2016) [hereinafter cited “OMB Forecast”],

available at

https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/cr_supp.pdf

See

Paola Iuspa, “Refinancing mobile home loan at lower rate,”

Bankrate.com

(Jan. 23, 2015),

available at

http://www.bankrate.com/finance/refinance/refinancing-mobile-home-loan.aspx

. One researcher found that at the middle of 2012, chattel financing rates were typically at 15 percent.

See

Darla Hailey, “Mobile Home Decommissioning and Replacement Research in the Pacific Northwest,” p. 7 (Sept. 2016),

available at

https://rtf.nwcouncil.org/subcommittee/small-and-rural-utility-rtf-technical-support-subcommittee

FHFA expects that the Enterprises, in pursuing a chattel loan pilot initiative, would significantly build on the data available through FHA's Title I program by partnering with manufactured housing lenders to access performance data on chattel loans, including, where possible, for chattel loans currently held in portfolio by lenders that serve this market.

As the Enterprises develop information about chattel loan performance, FHFA expects that this would impact Enterprise decisions on how to appropriately price these loans. On this point, a trade association for the manufactured housing industry suggested charging appropriate loan level price adjustments and guarantee fees as possible conditions for chattel initiatives by the Enterprises. The pricing on the FHA Title I program has resulted in a projected 4 percent surplus over its expected costs.

Also, loan modifications for some borrowers have been one way to allow them to stay in their homes and, at the same time, mitigate losses to lenders. Part of the assessment of the performance of chattel loans would include analysis of available loan modification efforts.

See

OMB Forecast, p. 6 (Table 2) (2016),

available at

https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/cr_supp.pdf

Risk Mitigants.

In designing a chattel loan pilot initiative, FHFA would also expect the Enterprises to incorporate appropriate risk mitigants into the pilot design. In addition to limiting the volume or duration of the chattel loan pilot initiative, one type of risk mitigant could be to tighten underwriting requirements for credit scores, down

payments, loan-to-value ratios (LTV), debt-to-income ratios, and borrower reserves. Another risk mitigant could be having chattel loans purchased by the Enterprises secured not only by a lien on the title to the home, but also by a lien on the underlying land, as one manufactured housing trade association suggested. Additionally, loan modifications for some borrowers have been one way to allow them to stay in their homes and, at the same time, mitigate losses to lenders.

Credit enhancements that share credit risk with private investors are an additional risk mitigant, although the Enterprises would need to develop counterparty relationships and approaches tailored for these loans. None of the Enterprises' approved mortgage insurer counterparties currently offers mortgage insurance for chattel loans, and bond insurance is also unavailable.

The Enterprises could require loan sellers to repurchase the loan or retain a participation of at least ten percent in the loan to meet the requirements of the Enterprises' charter acts.

See generally

12 U.S.C. 1717(b)(1) (Fannie Mae Charter Act); 12 U.S.C. 1454(a)(1) (Freddie Mac Charter Act).

In pursuing such an approach, the Enterprises would need to consider the financial strength of the counterparty, which would be an important factor in assessing the total credit risk of a transaction. Additionally, as the Enterprises work to develop loan performance data, the Enterprises could explore developing credit risk transfer approaches specific to chattel loans, separate from the credit enhancement requirements of the charter acts.

FHFA would assess these and any other risk mitigants included by an Enterprise in a proposed chattel loan pilot before the Enterprise could begin any loan purchases.

Borrower and Tenant Protections.

Before approving any chattel loan purchases by the Enterprises, FHFA would also expect the Enterprises to require meaningful borrower and tenant protections beyond those required under current law. As one regulatory agency commented, chattel loan borrowers are subject to increased risks due to the lack of borrower and tenant protections for chattel loans. The relative lack of consumer protections, compared to those households with a manufactured home titled as real estate, was also discussed at length in the proposed rule. The main protections for real estate mortgage borrowers, which chattel loan borrowers lack, are those afforded by the Real Estate Settlement Procedures Act (RESPA), which prohibits inappropriate kickbacks, requires disclosures of settlement costs, and requires proper loan servicing.

The proposed rule described potential difficulties in replicating RESPA-like protections for chattel loan borrowers.

A number of manufactured housing trade associations commented in favor of adding these protections for chattel loan borrowers. Several nonprofit organizations suggested that housing counseling be required for chattel loan borrowers, although another nonprofit organization pointed out that there is a shortage of counselors with training in manufactured housing. FHFA is also concerned about a lack of tenant protections in the pad leases for chattel borrowers whose homes are located on leased land.

See generally

12 U.S.C. Ch. 27; Consumer Financial Protection Bureau, “CFPB Consumer Laws and Regulations—RESPA” (Apr. 2015),

available at

http://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf

See

80 FR at 79190 (Dec. 18, 2015).

FHFA expects that the Enterprises would seek feedback from stakeholder groups about how best to design the borrower and tenant protections for any chattel loan pilot initiative. This approach will provide important input on how the Enterprises should balance providing appropriate borrower and tenant protections with designing the pilot in a way that is operationally feasible for the Enterprises and their counterparties.

Preparations for Loan Purchases.

FHFA understands that the Enterprises would need to expend substantial effort and would incur non-trivial costs prior to implementing a chattel loan pilot initiative.

As discussed above concerning access to better financial performance data, Enterprise research and development efforts would need to precede any purchases of chattel loans, including developing expertise, designing pilot parameters, reviewing potential counterparties, researching investors and securities structures, and developing appropriate borrower and tenant protections to be integrated as counterparty requirements. Enterprise counterparties would also need to be prepared to accurately report their chattel loan data and to adopt strong compliance and internal auditing standards.

Regarding the difficulties involved in establishing an Enterprise pilot for chattel loans,

see generally

Titus Dare, “A Deeper Look at why the GSEs say no to Securitizing Chattel Loans,” MHProNews (May 24, 2016),

available at

http://www.mhmarketingsalesmanagement.com/blogs/industryvoices/tag/titus-dare/

The final rule, therefore, allows for a wide range of Enterprise activities supporting chattel loans to be eligible for Duty to Serve credit. For example, Enterprise outreach to potential counterparties could count under the outreach evaluation area, and Enterprise research and development could count under the outreach evaluation area or the loan product evaluation area even where it does not result in actual purchases of chattel loans by the Enterprise. The Enterprises' publication of their research and findings could benefit the entire manufactured housing market, which could also work to further liquidity in this market.

Request for Information (RFI).

In light of the many considerations that the Enterprises would need to make in designing and proposing a chattel pilot initiative, FHFA has determined to issue an RFI to the public on what an Enterprise should include in a chattel pilot initiative, if an Enterprise decides to pursue a pilot initiative. FHFA has determined that the RFI will conclude in time for the Enterprises to consider the input from the RFI in any chattel pilot initiative that may be included in an Enterprise's draft Plan.

(ii) Manufactured Homes Titled as Real Property—§ 1282.33(c)(1)

Consistent with the proposed rule, § 1282.33(c)(1) of the final rule establishes a Regulatory Activity for Enterprise support of financing for manufactured homes titled as real property.

A wide range of commenters asserted that there is a need for Enterprise support for this market. Manufactured housing industry commenters stated that while real estate-titled homes are a smaller part of the manufactured housing market than chattel-titled homes, there are changes the Enterprises could make to assist this market. A manufactured housing trade association suggested that Enterprise guarantee fees for loans on real estate-titled homes be comparable to those for loans on site-built homes. The commenter also recommended that a number of terms and conditions of the Enterprises' mortgage products for real estate-titled homes be modified, such as financing of property damage insurance, liberalizing the LTV requirements, and financing pre-HUD Code homes in some instances.

Except for the general requirements applicable to all single-family loan purchases, the final rule does not incorporate commenters' specific suggestions regarding the terms and conditions for mortgages on real estate-titled homes purchased by the

Enterprises. These suggestions are more appropriate to be raised by the commenters directly with the Enterprises during the development and implementation of the Enterprises' Plans.

Commenters in a number of circumstances addressed individual underwriting recommendations. As noted throughout, FHFA encourages the Enterprises to consider this feedback, although FHFA also notes that this should not be construed as an endorsement by FHFA of those comments and FHFA will review any underwriting guidelines as part of its review of Enterprise Plans for Non-Objection.

The proposed rule specifically requested comment on whether Duty to Serve credit for real estate-titled manufactured homes should be limited to certain situations, such as when refinancing borrowers with excessive interest rates.

A wide variety of commenters opposed any limitations on Duty to Serve credit for real estate-titled homes because of the shortage of funding for manufactured housing overall and the acute housing needs of lower-income borrowers. FHFA is persuaded by these comments and has not included any such limitations in the final rule.

See

80 FR at 79190 (Dec. 18, 2015).

FHFA notes that mortgages on real estate-titled manufactured homes generally perform well. The borrowers for these homes are subject to the same consumer protections as borrowers for site-built homes, and the housing is affordable relative to site-built housing. In addition, the Enterprises already have an infrastructure in place for purchasing and servicing mortgages on real estate-titled manufactured homes.

(iii) Manufactured Housing Communities—§ 1282.33(c)(3)

Section 1282.33(c)(3) of the final rule establishes the following Regulatory Activities for Enterprise support for manufactured housing communities, with some modifications from the proposed rule: (1) Support for blanket loans on government-, nonprofit-, or resident-owned manufactured housing communities, and (2) support for blanket mortgages on manufactured housing communities with minimum tenant protections in the pad leases. The definition of “manufactured housing community” in § 1282.1 of the final rule remains unchanged from the proposed rule—a tract of land under unified ownership and developed for the purpose of providing individual rental spaces for the placement of manufactured homes for residential purposes within its boundaries.

The final rule does not allow additional Duty to Serve credit where a manufactured housing community qualifies under both Regulatory Activities because government-, nonprofit-, or resident-owned owned communities are likely to already have meaningful tenant pad lease protections.

Freddie Mac supported Duty to Serve credit for activities that generally support affordable manufactured housing communities, without limiting eligibility to the specific Regulatory Activities in the proposed rule, stating that this would be consistent with Congressional intent.

A manufactured housing trade association opposed any Duty to Serve credit for Enterprise support for manufactured housing communities, maintaining that manufactured home communities are not an underserved market and do not address the critical challenge for homeowners, which is affordable financing for chattel-titled manufactured homes facilitated by a strong Enterprise secondary market. Two state trade associations for the manufactured housing industry similarly opposed Duty to Serve credit for manufactured housing community loans and preferred that the Enterprises focus on manufactured home loans.

As further discussed below, the final rule retains two of the proposed Regulatory Activities, with some modifications, but does not include the third proposed Regulatory Activity for Enterprise support for financing small manufactured housing communities.

(a) Small Manufactured Housing Communities

In a change from the proposed rule, the final rule does not include Enterprise support for the financing of blanket loans on small manufactured housing communities (communities with 150 or fewer pads) as a Regulatory Activity. As discussed in the

SUPPLEMENTARY INFORMATION

to the proposed rule, this Regulatory Activity was proposed because the Enterprises' purchases to date had tended to be for loans on larger manufactured housing communities, and existing funding for smaller communities was likely to have variable interest rates and balloon payments at the end of the mortgage term.

Few commenters specifically addressed this proposed Regulatory Activity. A trade association supported the proposed Regulatory Activity because the need for financing in this market is for the older or rural communities that tend to be smaller in size. The commenter further suggested that the Enterprises develop prudent underwriting standards that would expand Enterprise loan purchases beyond higher-end communities. In addition, the commenter suggested that the Enterprises collect, analyze, and publish data on manufactured housing communities, in order to develop investor interest. The commenter advised that this would improve liquidity and lower the costs to borrowers. A state housing finance agency supported the proposed Regulatory Activity, stating that small communities need the most financing assistance. A manufactured housing community investor and consultant also supported the proposed Regulatory Activity without providing a rationale.

A larger number of commenters opposed the proposed Regulatory Activity. For example, a policy advocacy organization opposed basing a Regulatory Activity on the size of a community, stating that while it is reasonable to assume that smaller manufactured housing communities face greater challenges in attracting capital than larger communities, the Enterprises already support financing of smaller communities. The commenter instead favored Enterprise support for manufactured communities located in geographies with greater needs, such as high-cost areas where manufactured housing community preservation would secure affordable housing for many years. The commenter asserted that of the three proposed Regulatory Activities for manufactured housing communities, the Enterprises would favor serving smaller communities because it would be the easiest Regulatory Activity to pursue.

Most other commenters who addressed the proposed Regulatory Activities for manufactured housing communities also saw no particular need for targeted Enterprise support for the small manufactured community submarket. The commenters said that there is no correlation between the size of a community and the affordability it provides to residents with limited financial means. A trade association for owners of manufactured homes opposed the proposed Regulatory Activity, commenting that the number of pads in a community is less relevant than the need to provide tenant protections. In addition, a trade association for the manufactured housing industry and a state housing finance agency expressed doubts about conditioning access to Duty to Serve credit on the size of the manufactured housing community. Neither Enterprise supported the proposed Regulatory Activity, although Freddie Mac favored service to this market as an “Additional Activity.” Freddie Mac stated that very small manufactured housing communities have a higher chance of being below

investment grade and that there are economy of scale difficulties with small communities. Freddie Mac also stated that 25 percent of its blanket loan portfolio is loans on communities with fewer than 150 pads. An academician stated that the proposed Regulatory Activity would encourage service to the least efficient sector of the market. In the

SUPPLEMENTARY INFORMATION

to the proposed rule, FHFA noted that blanket loans for smaller manufactured housing communities are frequently originated by local banks or credit unions and held in portfolio. FHFA did not receive comment letters from community banks or credit unions indicating support for or opposition to this proposed Regulatory Activity.

After considering the comments, it appears that this proposed Regulatory Activity would provide relatively less assistance to the very low-, low-, and moderate-income families targeted for assistance by the Duty to Serve, as compared with the two Regulatory Activities for manufactured housing communities retained in the final rule. Nevertheless, if an Enterprise proposed support for smaller manufactured housing communities as a qualifying Additional Activity and provided detailed information on a targeted market need, FHFA would consider it in reviewing the Enterprise's Plan.

(b) Manufactured Housing Communities Owned by Government Units or Instrumentalities, Nonprofits, or Residents—§ 1282.33(c)(3)

Consistent with the proposed rule, § 1282.33(c)(3) of the final rule establishes a Regulatory Activity for Enterprise support for mortgages on manufactured housing communities owned by government units or instrumentalities, nonprofits, or residents. The final rule defines “resident-owned manufactured housing community” as a manufactured housing community for which the terms and conditions of residency, policies, operations, and management are controlled by at least 51 percent of the residents, either directly or through an entity formed under the laws of the state. FHFA has changed the percentage of residents in this definition from 50 percent in the proposed rule to 51 percent in the final rule so that control by a majority of the residents would be required for the community to be eligible for credit, as Fannie Mae suggested in its comment letter.

A number of policy advocacy organizations and nonprofit organizations supported this proposed Regulatory Activity because these types of communities play a key role in preserving sustainable manufactured housing communities and also tend to be safer investments. A nonprofit organization stated that lot rents in resident-owned communities remain affordable following the residents' purchase of the communities.

Several manufactured housing trade associations opposed the proposed Regulatory Activity, as well as any other Regulatory Activity for manufactured housing communities, based on the view that support for manufactured housing communities would not carry out the Duty to Serve mandate. For instance, one commenter objected to the type of ownership of a manufactured housing community affecting access to capital, and stated that government-owned manufactured housing communities should not have easier access to Enterprise support than other types of manufactured housing communities.

FHFA has determined that making Enterprise support for manufactured housing communities owned by government units or instrumentalities, nonprofits, or residents eligible for Duty to Serve credit is consistent with the Enterprises' Duty to Serve responsibilities because these types of communities typically serve lower-income residents, remain residential communities, promote fair treatment of tenants, and help preserve permanent affordability for their residents.

One study found that residents of resident-owned communities “have consistent economic advantages over their counterparts in investor-owned communities, as evidenced by lower lot fees, higher average home sales prices, faster home sales, and access to fixed rate home financing.”

Although government-, nonprofit-, and resident-owned communities currently make up a very small portion of the overall manufactured housing community market, more active support by the Enterprises for communities with these types of ownership structures could encourage more communities to convert to these forms of ownership. Accordingly, consistent with the proposed rule, the final rule establishes a Regulatory Activity for Enterprise support for financing manufactured housing communities owned by government units or instrumentalities, nonprofits, or residents.

See generally

Millennium Housing—Mission Statement,

available at

http://www.millenniumhousing.net/#Mission_Statement.

Sally K. Ward, Charlie French & Kelly Giraud, “Resident Ownership in New Hampshire's `Mobile Home Parks:' A Report on Economic Outcomes” (rev. 2010),

available at

http://scholars.unh.edu/cgi/viewcontent.cgi?article=1009&context=carsey

Section 1282.33(c)(4) of the final rule establishes a Regulatory Activity for Enterprise support for blanket loans on manufactured housing communities that have certain specified minimum pad lease protections for tenants. These protections address renewable lease terms, rent increases and payments, unit sale and sublease rights, and advance notice of a planned sale or closure of the community. The final rule incorporates several modifications to the tenant protections in the proposed rule. By establishing this Regulatory Activity, FHFA seeks to encourage manufactured housing communities to adopt pad lease protections for tenants, or enhance existing pad lease protections. The minimum pad lease protections in the final rule are:

• One-year renewable lease term unless there is good cause for nonrenewal;

• 30-day written notice of rent increases;

• 5-day grace period for rent payments, and the right to cure defaults on rent payments; and

• Right of tenants to:

(A) Sell the manufactured home without having to first relocate it out of the community;

(B) Sublease the home or assign the pad lease for the unexpired term to the new buyer of the tenant's manufactured home without any unreasonable restraint;

(D) Sell the manufactured home in place within a reasonable time period after eviction by the manufactured housing community owner; and

(E) Receive at least 60 days advance notice of a planned sale or closure of the manufactured housing community.

The final rule changes the proposed rule by: (1) Clarifying that Enterprise support of financing of manufactured housing communities located in jurisdictions with laws providing tenants with equal or greater protections than those specified in the rule is eligible for Duty to Serve credit; (2) making the pad lease protections available to tenants at all times and not only in cases of default on rent payments; (3) reducing the advance notice period for planned sale or closure of the community from 120 days to 60 days; and (4) not including the proposed provisions on bona fide offers of sale of the community. The changes are discussed further in the sections below.

As discussed in the

SUPPLEMENTARY INFORMATION

to the proposed rule, the final rule does not impose requirements on sellers and servicers to oversee manufactured housing community owners' compliance with the pad lease protections. Also, consistent with the approach in the proposed rule, the final rule does not require that covenants in the blanket loan documents for the manufactured housing community provide that noncompliance by community owners with the pad lease protections constitutes an event of default. Instead, tenants would need to file private lawsuits to remediate any landlord noncompliance with the lease provisions.

Both Enterprises commented that manufactured housing communities that do not have the proposed pad lease protections are able to obtain financing without Enterprise support. This is due to the current strong market for manufactured housing community financing.

A policy advocacy organization that supported having strong tenant protections as a concept also expressed concern that requiring tenant protections could deter community owners from selling their loans to the Enterprises. FHFA notes that this Regulatory Activity would not require the owner of a manufactured housing community to agree to these lease provisions as a condition of selling its loan to an Enterprise. However, if an Enterprise decided to include this Regulatory Activity in its Plan, the Enterprise could receive Duty to Serve credit for those transactions with community owners who did adopt the specified lease provisions. FHFA would take into consideration market competition and the relative difficulty of encouraging community owners to adopt these lease provisions in assessing Duty to Serve credit.

See generally

Tony Petosa, Nick Bertino & Erik Edwards, “Wells Fargo Multifamily Capital, Manufactured Home Community Financing Handbook,” pp. 5-8 (10th ed., 2d Qtr. 2016).

See

Peter Grant, “Singapore's Sovereign-Wealth Fund Is in Talks to Buy Manufactured-Home Owner,” Wall Street Journal (June 28, 2016) (“Well-capitalized private equity and publicly traded REITs are eager to acquire these properties.”),

available at

http://www.wsj.com/articles/singapores-sovereign-wealth-fund-is-in-talks-to-buy-manufactured-home-owner-1467106203

. For a discussion of the high desirability of manufactured housing communities as an investment,

see generally

Nancy Olmsted, Marcus & Millichap, “Investors Competing for Limited Supply of Manufactured Home Communities,” First Half 2015, Manufactured Housing Research Report (2015).

A number of commenters addressed the specific tenant pad lease protections in the proposed rule. Commenters clustered into two groups, with most manufactured housing industry commenters and the Enterprises opposing the proposed pad lease protections, and most consumer advocacy groups favoring even stronger pad lease protections. The manufactured housing industry commenters opposed the pad lease protections because the industry prefers a funding option unconstrained by pad lease protection requirements. The Enterprises also opposed pad lease protections on the grounds that tenant protections are better handled by the state legislatures.

Policy advocacy organizations and nonprofit organizations supported having tenant pad lease protections, either as a stand-alone Regulatory Activity, or as an eligibility requirement for all manufactured housing community loans purchased by the Enterprises. One policy advocacy organization supported the Enterprises' developing a standardized lease containing pad lease protections, and urged that it include free speech rights and rights of association.

A manufactured housing tenants' organization recommended that FHFA adopt the pad lease protections contained in the American Association of Retired Persons (AARP) Model Act.

The commenter further advised that 14 states lack any pad lease protection laws for manufactured housing community tenants. The commenter expressed concern that states might adopt FHFA's proposed pad lease protections as a ceiling on tenant protections rather than as the minimum baseline that FHFA intended. A policy advocacy organization stated that the Enterprises should use their market influence to support the proposed pad lease protections or those in state or local laws, whichever are more protective.

See generally

Carolyn L. Carter, Odette Williamson, Elizabeth DeArmond & Jonathan Sheldon, “Manufactured Housing Community Tenants: Shifting the Balance of Power—A Model State Statute,” AARP Public Policy Institute (Rev. Ed. 2004), [hereinafter cited “AARP Model Act”],

available at

http://assets.aarp.org/rgcenter/consume/d18138_housing.pdf

A state housing finance agency recommended including safeguards in the final rule against large rent increases in manufactured housing communities. In developing this Regulatory Activity, FHFA sought to address the most concerning reported practices in designing the tenant pad lease protections for the proposed and final rule

and has determined that wholesale adoption of the AARP Model Act into tenant lease protections in the final rule would not be practical. However, after considering the comments, FHFA has determined that certain modifications and clarifications to the proposed tenant lease protections should be made in the final rule, which are discussed below.

See generally

Darren Cunningham, “Another Mobile Home Tenant Facing $25k Lawsuit After Selling Her Own Home,” Fox17online (Apr. 7, 2014) (Web site),

available at

http://fox17online.com/2014/04/07/another-mobile-home-tenant-sued-for-25k-after-selling-her-own-home/

Equivalent Pad Lease Protection Laws.

The

SUPPLEMENTARY INFORMATION

to the proposed rule stated that where a jurisdiction has laws requiring certain pad lease protections for manufactured housing communities that are equal to or greater than the minimum pad lease protections in the proposed rule, communities in those jurisdictions would be eligible for Duty to Serve credit under the proposed Regulatory Activity. The text of the proposed rule referred to the protections as “minimum” protections. Some commenters apparently misunderstood this reference and stated that there could be conflicts between the proposed pad lease protections and state and local pad lease protection laws. Some manufactured housing community owners expressed concern about the impact of the proposed pad lease protections because they perceived conflicts between these requirements and state and local laws, and stated that it would be inappropriate to condition financing on these requirements.

FHFA did not intend that the minimum pad lease protections in the proposed rule be a suggested ceiling for pad lease protections to be adopted by states or localities. Instead, FHFA intends that the pad lease protections finalized here act as a floor for tenant protections in manufactured housing communities. The final rule clarifies this by stating explicitly that manufactured housing communities in jurisdictions with laws providing tenants with equal or greater pad lease protections than those specified in the Regulatory Activity are eligible for Duty to Serve credit.

Right to Sell Manufactured Homes and Sublease or Assign Pad Leases.

The proposed rule would have provided that upon a default by tenants on their rent payments, the tenants would have the right to: (1) Sell their home without having to first relocate it out of the community; (2) post “For Sale” signs; (3) sublease or assign their pad lease for the unexpired term without unreasonable restraint; and (4) sell their home within a reasonable period of time after eviction. The final rule makes these protections available to tenants at all times regardless of whether they have defaulted on their rent payments.

A manufactured housing industry consultant supported the proposed right for tenants to be able to sell their homes in place and advertise the sale. The commenter stated, however, that after eviction of a tenant, the trial court judge usually determines a reasonable period of time for the tenant to sell the home. The commenter further noted that most leases in the Midwest are verbal, month-to-month leases, with most tenants declining a written lease.

Advance Notice Period for Planned Sale or Closure of Community.

Under the proposed rule, tenants would have had the right to receive at least 120 days advance notice of a planned sale or closure of the community, within which time the tenants, or an organization acting on behalf of a group of tenants, may match any bona fide offer of sale, and the community owner must consider the tenants' offer and negotiate with them in good faith.

Some manufactured housing trade organizations opposed a right for advance notice to tenants of a planned sale of the community except when the sale involves a change in land use. In their view, the sale of the property does not harm tenants because their leases simply transfer to the new owner.

With one exception, commenters did not specifically address the length of the proposed advance notice period. The exception was a policy advocacy organization that conducted a review of the manufactured housing community laws in all 50 states. The commenter reported that only Vermont and Connecticut have a 120-day advance notice period, that Florida, Massachusetts, and Rhode Island have a 45-day “purchase opportunity” period, and that Oregon has a 25-day advance notice period. The commenter concluded that the proposed 120-day advance notice to tenants is too long and that the other state advance notice periods are effective.

FHFA also considered the AARP Model Act, which provides for a 90-day advance notice period for the sale of a community.

The 90-day period is extended by an additional 180 days where a tenant association provides timely notice to the community owner of its intent to purchase the community.

The AARP Model Act provides a two-year advance notice period for a change in use (

i.e.,

closing) of a community.

See

AARP Model Act, Sec. 113(b).

See id.

at Sec. 113(c).

See id.

at Sec. 112(b).

Based on the commenter's states survey and the AARP Model Act, FHFA is persuaded to change the proposed 120-day advance notice period in the final rule. In view of the wide range of advance notice periods among the states and to balance the needs of tenants with the needs of community owners, the final rule adopts a minimum advance notice period of 60 days. In application, the final rule makes it possible for the 60-day advance notice period and the expiration of the last pad lease term then in effect to expire on the same day.

Tenants' Right of First Refusal.

A “right of first refusal” is a right in a contract where the seller must give the other party an opportunity to match the price offer that a third party has made to buy a certain asset.

Several manufactured housing trade associations mistakenly believed that the proposed Regulatory Activity included a right of first refusal for the tenants to purchase their manufactured housing communities where the communities are being sold or closed. The proposed rule did not include a right of first refusal for tenants. Rather, the proposed rule stated that the “community owner shall

consider

the tenants' offer and negotiate with them in good faith.”

(emphasis added)

See

The Law Dictionary (Black's Law Dictionary Free Online Legal Dictionary, 2d Ed.) (Web site),

available at

http://thelawdictionary.org/right-of-first-refusal/

80 FR at 79217 (2015).

Many policy advocacy organizations favored including a tenants' right of first refusal in the Regulatory Activity, stating that the absence of such a right is a fundamental risk to tenants.

In contrast, several manufactured housing trade associations stated that a tenants' right of first refusal would limit community owners' ability to finance and sell their communities and would expose the Enterprises as investors.

After considering the comments, FHFA has determined that incorporating a tenants' right of first refusal in this Regulatory Activity would add an overly expansive role for the Enterprises and potentially involve significant implementation issues.

Accordingly, consistent with the proposed rule, the final rule does not include a tenants' right of first refusal in the Regulatory Activity.

See generally

Matthew Silver, “Lawsuit Attempts to Block Sale of Manufactured Home Community,” MHProNews (July 5, 2016),

available at

http://www.mhmarketingsalesmanagement.com/blogs/daily-business-news/lawsuit-attempts-to-block-sale-of-manufactured-home-community/

; David I. Walker, “Rethinking Rights of First Refusal,” p. 5 Stan. J.L. Bus. & Fin. 1 (1999); Joshua Stein, “Why Rights of First Offer and Rights of First Refusal Don't Work” (Nov. 26, 2013),

available at

https://commercialobserver.com/2013/11/why-rights-of-first-offer-and-rights-of-first-refusal-dont-work/

Negotiation of Community Sale.

Under the proposed rule, as part of the pad leases protections, the tenants, or an organization acting on behalf of a group of tenants, would have the right to match any bona fide offer for sale, and the community owner would be required to consider the tenants' offer and negotiate with them in good faith. FHFA has determined that it is not necessary for the rule to specify a right for the tenants to make an offer to purchase their community, as this right exists irrespective of the Duty to Serve. FHFA also determined that, while state laws and the AARP Model Act

may specify tenant purchase rights, it is not feasible to include them in pad leases.

See

AARP Model Act, sec. 113(b), (e).

(d) Determining Affordability of Manufactured Housing Communities—§ 1282.38(f)

The Safety and Soundness Act provides that Duty to Serve activities must be for very low-, low-, and moderate-income families. Manufactured housing community owners and loan sellers are unlikely to know the incomes of all of the community residents at the time a blanket loan on the community is sold to an Enterprise. Thus, in order for an Enterprise's purchase of the loan to be eligible to receive Duty to Serve credit, an alternative to requiring the Enterprises to obtain the incomes of the community residents is needed. FHFA has previously established a methodology in 12 CFR 1282.19 for determining affordability under the Enterprises multifamily affordable housing goals that uses the tenants' total monthly housing costs (rent payments plus utility costs, adjusted for number of bedrooms) instead of their incomes.

That methodology will also be used generally for determining the affordability of multifamily properties for Duty to Serve purposes. However, the methodology cannot be used where the total monthly housing costs of the residents are not known to the property owners or the loan sellers. For manufactured housing communities, the total monthly housing costs of the residents (note payments on manufactured home plus pad rent payments plus utility costs, adjusted for bedroom size) are generally not known to the owners of the community or the loan sellers.

See

12 CFR 1282.15(d)(1), 1282.19.

Accordingly, to determine the affordability of manufactured housing communities under the Duty to Serve, § 1282.38(f) of the final rule provides that, unless otherwise determined by

FHFA, the affordability of homes in the community shall be determined using one of the two methodologies discussed below, as applicable, as a proxy for the number of homes in the community that are affordable, except that for purposes of determining extra Duty to Serve credit for residential economic diversity activities or objectives, the methodology in paragraph (f)(2) may not be used:

(1)

Methodology for government-, nonprofit- or resident-owned manufactured housing communities.

Section 1282.38(f)(1) of the final rule provides that, for a manufactured housing community owned by a government unit or instrumentality, a nonprofit organization, or the residents, if laws or regulations governing the affordability of the community, or the community's or ownership entity's founding, chartering, governing, or financing documents, require that a certain number or percentage of the community's homes be affordable consistent with paragraph (d)(1) of § 1282.38, then any homes subject to such affordability restriction are treated as affordable for Duty to Serve purposes.

The proposed rule text did not include this methodology but specifically requested comment on whether governing or financing documents for the community could provide a proxy for resident incomes. For those communities that are owned by government units or instrumentalities, the proposed rule asked whether regulations, handbooks, or financing documents specifying income criteria for the residents would be an appropriate indicator of tenant incomes. For those communities that are nonprofit-owned and resident-owned communities, the proposed rule asked whether 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, would be appropriate indicators of tenant incomes. The proposed rule also asked whether there is 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).

These questions received few comments. A nonprofit organization stated that governing or financing documents would provide a good proxy for the incomes of residents in limited equity cooperatives (

i.e.,

resident-owned communities) because the land is preserved over the long term for manufactured housing, and home sales prioritize low-income buyers for purchases. An organization that assists in financing resident-owned communities also favored this methodology, although it stated that all resident-owned communities should be deemed income-qualifying under the Duty to Serve regardless of any income documentation. Neither Enterprise commented on the questions.

FHFA has considered the comments and is persuaded that manufactured housing communities owned by government units or instrumentalities, nonprofits, or residents generally are driven by public missions to provide affordable homes to very low-, low-, and moderate-income households, consistent with the purposes of the Duty to Serve. Accordingly, FHFA has determined that it is reasonable to rely on these entities' or communities' founding, chartering, governing, or financing documents as proxies for affordability of homes in the community where the documents contain restrictions that require affordability of homes to the income groups targeted by the Duty to Serve. A manufactured housing community will also be considered affordable to the income groups targeted by the Duty to Serve if laws or regulations governing the community require that it be affordable to such income groups.

To facilitate Enterprise support for financing for the types of communities discussed above, the final rule provides the Enterprises with the option of using either this methodology or the census tract methodology discussed below.

(2)

Census tract methodology for any type of manufactured housing community.

Section 1282.38(f)(2) of the final rule provides that for any type of manufactured housing community, except for purposes of determining extra credit for residential economic diversity activities or objectives,

the affordability of the homes in the community is determined as follows:

Estimating affordability under § 1282.38(f)(2) assumes that a community's affordability mirrors the income characteristics of the tract in which it is located, which is not useful for determining whether the community contributes to residential economic diversity.

(A) If the median income of the census tract in which the manufactured housing community is located is less than or equal to the area median income, then all homes in the community are treated as affordable;

(B) If the median income of the census tract in which the manufactured housing community is located exceeds the area median income, then the number of homes that are treated as affordable is determined by dividing the area median income by the median income of the census tract in which the community is located and multiplying the resulting ratio by the total number of homes in the community.

Consistent with the proposed rule, § 1282.38(f)(2) of the final rule includes a methodology that uses the median income of the census tract in which the community is located, as determined by FHFA, to proxy for the incomes of the community's residents. This methodology is available regardless of the type of ownership structure of the community.

As an example of the second scenario, if the area median income is $100,000, the census tract's median income is $125,000, and the number of homes in the community is 100, the number of homes treated as affordable is:

Step 1: $100,000 ÷ $125,000 = 80%

Step 2: 80% × 100 = 80 (number of homes treated as affordable)

The final rule adopts the proposed census tract methodology's first step for determining the appropriate ratio of the area median income to the census tract median income. The second step in the final rule multiplies that ratio by the total number of homes in the community. This is a change from the proposed rule where step 2 would have multiplied the step 1 ratio by the unpaid principal balance of the blanket loan.

Duty to Serve credit under the loan purchase evaluation area is generally measured based on the number of dwelling units affordable to very low-, low-, and moderate-income families. Measuring credit for purchases of blanket loans on manufactured housing communities based on the number of homes in the community rather than on the unpaid principal balance is not a substantive change because it will not affect the proportion of each community that is treated as affordable. Measuring based on the number of homes is more consistent with the evaluation methods for other types of mortgage purchases, and it will permit easier comparisons of volumes across different mortgage purchases under the Duty to Serve.

Several commenters addressed the proposed census tract methodology. A policy advocacy organization favored the methodology, describing it as simple and reasonable. A trade association also supported the methodology, but preferred that a matrix with parameters tailored to accommodate family stresses like major medical expenses be added.

A manufactured housing tenants' organization opposed the methodology on the basis that it would not work well if the manufactured housing community is located in more affluent areas or in

commercial areas. A state housing finance agency stated that the methodology is flawed because census tract, American Community Survey, and HUD area median income data may not be a good proxy for affordability. The commenter recommended that the chosen methodology be based on use of actual data. Neither commenter offered a recommended substitute for the proposed methodology and these standard measures of affordability.

Fannie Mae suggested instead using the affordability estimation methodology for the Enterprises' housing goals in § 1282.15(e), which is available when rental data is missing,

but did not elaborate on its reasons for recommending that methodology. Fannie Mae stated that it would need to incur additional expenditures to operationalize the proposed census tract methodology.

See

12 CFR 1282.15(e).

Freddie Mac did not address the reasonableness of the proposed methodology directly, but stated that its support for affordable manufactured housing communities is confirmed by various measures, including the proposed methodology.

An organization that specializes in supporting resident-owned manufactured housing communities commented that in its many years of training and financing resident-owned communities in numerous states, it has not seen any manufactured housing communities in which fewer than 50 percent of homeowners earn less than 80 percent of area median income. The commenter stated that 86 percent of homeowners in its current manufactured housing community portfolio earn less than 80 percent of area median income. The commenter recommended, therefore, that the final rule treat all manufactured housing communities as serving low- and moderate-income households.

FHFA understands the view that manufactured housing communities overwhelmingly serve lower-income households. However, not all manufactured housing communities can be deemed to meet the Duty to Serve income requirements, as some communities are not affordable to households at the Duty to Serve income levels.

See, e.g.,

Tom Delavan, “America's Most Glamorous Trailer Park,” The New York Times Style Magazine (Nov. 11, 2015),

available at http://www.nytimes.com/2015/11/11/t-magazine/paradise-cove-malibu-million-dollar-trailer-parks.html?_r=1

; Deborah Jellett, “Ten of the Best Luxury Trailer Parks in the World,” The Richest (Web site) (Apr. 28, 2014),

available at http://www.therichest.com/luxury/celebrity-home/ten-of-the-best-luxury-trailer-parks-in-the-world/

FHFA also appreciates the suggestion that the proxy methodology be tailored more to the individual financial circumstances of the community's residents. However, community owners and loan sellers would not be expected to know or share the personal financial circumstances of each resident, making tailored matrices challenging to develop.

In response to the suggestion that the § 1282.15(e) estimation methodology for the housing goals

be used for manufactured housing communities under the Duty to Serve, FHFA notes that the housing goals methodology was developed for other types of multifamily rental housing. Accordingly, FHFA has determined that the methodology established in the rule is more appropriate to that task.

See generally

12 CFR 1282.15(e).

FHFA also recognizes that under the census tract methodology, the Enterprises could receive Duty to Serve credit for purchases of blanket loans on manufactured housing communities that may include some residents with incomes exceeding the area median income. The methodology takes this into account through its partial credit calculation for manufactured housing communities in higher income census tracts. FHFA has determined that the census tract methodology is a reasonable approach that will result in Duty to Serve credit being provided for manufactured housing communities that largely serve income-eligible households. In addition, mixed-income communities may contribute significant benefits to the lower-income households in the community and to the success and sustainability of the community.

The final rule also provides that FHFA may approve the use of another methodology for determining the affordability of homes in a manufactured housing community is appropriate. If an Enterprise believes that an alternative methodology would be feasible and preferable to the methodologies in the final rule for a particular type of manufactured housing community transaction, the Enterprise should raise the matter with FHFA for consideration.

2. Affordable Housing Preservation Market—§ 1282.34

The below section describes the final rule provisions for the affordable housing preservation market. The section discusses the scope of eligible preservation activities for Duty to Serve credit as including both affordable rental housing preservation and affordable homeownership preservation. It also identifies the circumstances under which eligible Duty to Serve activities may involve permanent construction take-out loans. The section further identifies the Statutory Activities enumerated for housing projects under the Safety and Soundness Act.

It also discusses the seven Regulatory Activities identified by FHFA, which are: (1) Financing of small multifamily rental properties; (2) energy or water efficiency improvements on multifamily rental properties; (3) energy or water efficiency improvements on single-family, first lien properties; (4) shared equity programs for affordable homeownership preservation; (5) HUD Choice Neighborhoods Initiative; (6) HUD Rental Assistance Demonstration program; and (7) purchase and rehabilitation of certain distressed properties. Finally, the section sets out requirements for Additional Activities that the Enterprises may propose in the affordable housing preservation market for Duty to Serve credit.

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

a. Eligible “Preservation” Activities—§§ 1282.34(b); 1282.37(b)(6), (c)

Consistent with the proposed rule, § 1282.34(b) of the final rule provides that Enterprise activities eligible to be included in a Plan under the affordable housing preservation market are activities that facilitate a secondary market for mortgages on residential properties for very low-, low-, or moderate-income families consisting of affordable rental housing preservation and affordable homeownership preservation.

Under the final rule, only certain permanent construction take-out loans are eligible for Duty to Serve credit under the affordable housing preservation market.

Section 1282.37(c)(1) of the final rule establishes two categories of these loans that are eligible for Duty to Serve credit. The first category is Enterprise activities related to permanent construction take-out loans for replacement properties that preserve existing subsidies on affordable housing for a regulatory period of required affordability. This period must be at least as restrictive as the longest affordability restriction applicable to the subsidy or subsidies being preserved. The second category is Enterprise activities related to permanent construction take-out loans

for housing that was developed under state or local inclusionary zoning, real estate tax abatement, or loan programs, where the property owner has agreed to restrict a portion of the units for occupancy by very low-, low-, or moderate-income families, and to restrict the rents that can be charged for those units at affordable rents to those populations, or where the property is developed for a shared equity program that meets the requirements to be eligible for Duty to Serve credit as discussed below and in § 1282.34(d)(4). For these loans to be eligible for Duty to Serve credit, there must be a regulatory agreement, recorded use restriction, or deed restriction in place that maintains affordability for the term defined by the state or local program. These limitations on eligible activities related to permanent construction take-out loans apply to Statutory, Regulatory, and Additional Activities in this market, which are described in detail below.

A permanent construction take-out loan is a long-term mortgage that replaces a short-term construction loan for a new property. The Enterprises currently purchase permanent construction take-out loans but not acquisition/development/construction loans.

Permanent construction take-out loans that do not meet the requirements of either of these two categories are not included in the final rule's interpretation of “preservation” under the affordable housing preservation market. However, such permanent construction take-out loans are eligible for Duty to Serve credit under the manufactured housing and rural markets subject to meeting the eligibility requirements for those markets as provided in the final rule. Additional guidance on preservation activities and affordability periods may be provided in FHFA's Evaluation Guidance as necessary.

A further discussion of the final rule's provisions on permanent construction take-out loans is below.

b. Permanent Construction Take-Out Loans

As discussed in the

SUPPLEMENTARY INFORMATION

to the proposed rule, the Safety and Soundness Act enumerates nine statutory programs for Duty to Serve credit under the affordable housing preservation market, which are discussed below, but does not otherwise define the term “preservation” for this market.

Preservation strategies for affordable rental housing and homeownership differ. For affordable rental housing, preservation in the affordable housing industry is generally understood to mean preserving the affordability of rents to tenants in existing properties.

This includes preventing the conversion of affordable properties to market rate rents at the end of long-term affordability periods, which are typically 15 years, 20 years, or 30 years, at which time major rehabilitation of the properties may be 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.

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

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, in the post-financial crisis years, the number of renters 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 for such housing. Further, more desirable markets face particular upward rent pressure. One way to preserve affordability is to give Duty to Serve credit for permanent construction take-out loans for rental properties where long-term affordability periods are required by regulatory agreements, which for several federal programs are set at 15 years, 20 years, or 30 years. Some of the specifically enumerated programs under the affordable housing preservation market in the Safety and Soundness Act involve new construction, which could indicate congressional intent to include support for new construction under this market. However, Congress may have instead intended only that support for existing properties under these programs at the point of their expiring regulatory agreements be included in the affordable housing preservation market.

The proposed rule specifically requested comment on whether the term “preservation” should be interpreted to allow Duty to Serve credit to be provided to Enterprise purchases of permanent construction take-out loans on new rental properties with long-term affordability regulatory agreements that restrict incomes and rents, and whether 15 years or some other term would be an appropriate minimum period of long-term affordability. The proposed rule also specifically requested comment on whether the term “preservation” should be interpreted to include Enterprise purchases of refinance mortgages on existing rental properties with long-term affordability, and whether the preservation activities should be required to extend the property's regulatory agreement restricting household incomes and rents for some minimum number of years, such as 10 years, beyond the date of the Enterprises' loan purchases and, if so, what an appropriate minimum period of long-term affordability would be for the extended use regulatory agreement.

FHFA received numerous comments regarding the interpretation of “preservation.” Commenters generally agreed that Enterprise support for extending long-term affordability for existing rental properties should be included as “preservation.” However, commenters differed on whether and to what extent FHFA should include Enterprise support for permanent construction take-out loans as “preservation.” Both Enterprises recommended that FHFA include new construction as “preservation” in order to address the lack of supply of affordable rental housing, which they stated cannot be met by preservation of existing properties alone. Fannie Mae did not specify whether FHFA should limit the types of new construction that should be eligible as “preservation” for Duty to Serve credit. Freddie Mac recommended that new construction for properties with regulatory agreements requiring long-term affordability be considered.

Support for Including New Construction for Replacement Properties That Preserve Existing Subsidies

The majority of commenters who responded to FHFA's questions on the interpretation of “preservation” and on whether FHFA should provide credit for Enterprise support for certain permanent construction take-out loans stated that they only supported new construction that preserves existing subsidy under “preservation” for Duty to Serve purposes. These commenters included an individual, several nonprofit organizations, policy advocacy organizations, and governmental entities. A nonprofit organization cited the complicated and labor intensive nature of preserving existing properties as a reason for limiting the definition of “preservation” and argued that the Safety and Soundness Act's meaning of “preservation” was well understood as preserving the deep affordability of federally-supported affordable rental housing. The nonprofit organization, along with two policy advocacy organizations, cited transfers of Section 8 subsidy contracts, Rental Assistance Demonstration transactions, and projects that use project-basing of tenant protection vouchers and project-based vouchers as examples that would fit within this category of permanent construction take-out loans. One of these policy advocacy organizations

commented that given the difficulty of preserving existing affordable housing stock, the Enterprises would likely choose not to engage in such activities if less difficult options were included as eligible activities under the Duty to Serve. The commenter, along with a nonprofit organization, stated that Enterprise support of new construction with long-term affordability restrictions in high opportunity areas is an important need, but should fall under the Enterprises' housing goals.

A local government entity commented that Duty to Serve credit the Enterprises receive for activities related to Choice Neighborhood Initiative grants should include new construction for replacement housing units, which could help the government entity with the final stages of its project through the program. A nonprofit organization and a coalition of practitioners working with the Rental Assistance Demonstration program stated that much of the existing affordable housing stock, especially public housing, is very old and beyond the point of upgrades to modernize properties. The commenters noted that new construction would allow these subsidized properties to be replaced with properties that may be less dense, more energy efficient, and more mixed-income. Several policy advocacy organizations and an individual commented that new construction should only be considered “preservation” if Enterprise proposals on new construction encourage residential economic diversity or provide financing for replacement housing that preserves the subsidies on existing affordable units specifically in areas of opportunity. These commenters noted that the new multifamily construction market currently does not appear to need additional liquidity.

Support for Including New Construction With Regulatory Periods of Affordability

Some commenters supported treating new construction with regulatory agreements to maintain affordability as “preservation,” though they differed on how long the regulatory periods should be. Freddie Mac and a nonprofit organization recommended that FHFA include as “preservation” new construction with regulatory agreements requiring long-term affordability. A nonprofit organization, a policy advocacy organization, and a trade association supported including permanent construction take-out loans on rental properties with long-term affordability regulatory agreements as “preservation.” The policy advocacy organization recommended a minimum affordability period of 15 years, and added that permanent construction take-out loans with longer regulatory periods should be scored higher in FHFA's evaluation process for the Enterprises' Duty to Serve performance. A state housing finance agency suggested a 30-year regulatory affordability period for new construction, noting that the standard for regulatory agreements is considerably higher than 15 years. Another state government entity recommended new construction developments with perpetual affordability restrictions as the only kind of new construction that should be treated as “preservation,” stating that the preservation of existing housing stock should be the focus of the Duty to Serve rule. A trade association recommended that FHFA require 50-year or “life of the building” regulatory affordability periods. The commenter stated that it is inefficient to reinvest public and private funds after a 15-year regulatory term expires in order to recapitalize a property and retain its affordability.

Support for New Construction Under Other Parameters

Several commenters supported some types of new construction under “preservation” for the Duty to Serve subject to certain parameters other than regulatory agreements requiring long-term affordability periods or replacement housing that preserves existing subsidies.

A nonprofit organization, along with one of its nonprofit affiliates, recommended that new construction, if included, be treated as “preservation” only if it is limited to places of targeted need, such as high-needs rural regions. The commenters expressed concern that if new construction without such limitations is included as “preservation,” it could distract from the challenging task of preserving existing affordable properties and stray from the statutory intent of the Duty to Serve.

A trade association commented that new construction should be counted under the Duty to Serve with the preservation of affordability assumed through the underwriting of the property, factors in the market, and amenities in the property and its units, rather than through a requirement for long-term regulatory agreements, which the commenter stated could add barriers and compliance burdens.

A policy advocacy organization recommended that Enterprise support of permanent financing for new construction that adds affordable housing in neighborhoods that need more affordable housing should be eligible for Duty to Serve credit. The commenter further suggested that FHFA provide the bulk of the Duty to Serve credit to traditional preservation of existing properties, stating that there is a core mission to preserve existing and largely irreplaceable subsidized housing.

Support for Treating “Preservation” Only as Preserving Existing Properties

A number of commenters recommended that “preservation” be interpreted specifically as preserving existing rental properties. Two individuals, two policy advocacy organizations, and a nonprofit organization commented that “preservation” should include purchasing or refinancing loans on existing rental properties where units are being converted from market rate to affordable. A nonprofit organization noted as reasons for limiting the interpretation of “preservation” that new construction of affordable housing falls under the Enterprises' housing goals and that existing federally supported rental housing properties are often the most affordable properties available in communities. Two state government entities commented that the Enterprises already purchase permanent, multifamily construction take-out loans and, therefore, do not need Duty to Serve credit to encourage such activities. A number of policy advocacy organizations expressed concern that unless new construction that replaces existing affordable housing being demolished is built in gentrifying or high opportunity areas, it could exacerbate segregation. These policy advocacy organizations cited this concern as a reason for opposing new construction being part of FHFA's interpretation of “preservation.”

After considering the comments, as discussed above, FHFA has determined in § 1282.37(b)(6) of the final rule that Enterprise activities related to permanent construction take-out loans should be treated as eligible “preservation” activities under the affordable housing preservation market only if such loans meet the requirements of either of two categories. The first category is permanent construction take-out loans for replacement properties that preserve existing subsidies on affordable housing. The permanent construction take-out loan must preserve existing subsidy with a regulatory period of required affordability that is at least as restrictive as the longest affordability restriction applicable to the subsidy or subsidies being preserved.

The second category is permanent construction take-out loans for housing that was developed under state or local inclusionary zoning, real estate tax abatement, or loan programs, where the property owner has agreed to restrict a portion of the units for occupancy by very low-, low-, or moderate-income families, and to restrict the rents that can be charged for those units at affordable rents to those populations, or where the property is developed for a shared equity program that meets the requirements to be eligible for Duty to Serve credit as discussed below and in § 1282.34(d)(4). There must be a regulatory agreement, recorded use restriction, or deed restriction in place that maintains affordability for the term defined by the state or local program.

Including these limited types of permanent construction take-out loans as eligible for Duty to Serve credit could encourage the Enterprises to make a needed impact in the affordable housing preservation market, which would benefit lower-income households. These requirements will tie permanent construction take-out loans under the affordable housing preservation market more closely to preserving the subsidy on existing housing, which is difficult and complex to preserve, and to preserving long-term affordability of affordable housing developed through state or local inclusionary zoning, real estate tax abatement, or loan programs.

The final rule does not make the above requirements for permanent construction take-out loans under the affordable housing preservation market applicable to permanent construction take-out loans under the manufactured housing and rural markets. This is because the Safety and Soundness Act does not require “preservation” as a component of the activities serving those markets. In addition, the manufactured housing and rural markets may have unique needs for new construction of affordable housing without being tied to replacement of existing housing that preserves subsidy, or to housing developed under state or local inclusionary zoning, real estate tax abatement, or loan programs, where a regulatory agreement, recorded use restriction, or deed restriction maintains affordability of a portion of the property's units for the term defined by the state or local program. For example, rural areas have a specific need for small multifamily properties, given the lower population densities in rural communities. Developers considering financing affordable multifamily housing in rural areas may face challenges with transaction and operational costs, which can be spread more cost-effectively across larger multifamily properties, and they may be reluctant to finance affordable rural multifamily housing if they believe revenues will not cover costs.

c. Statutory Activities—§ 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.”

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

Under § 1282.34(c) of the final rule, Enterprise activities related to facilitating a secondary market for mortgages on housing under these statutorily enumerated programs are eligible for Duty to Serve credit. Enterprise activities under these statutory programs are referred to as “Statutory Activities” in the final rule. Under § 1282.32(d) of the final rule, FHFA will designate a minimum number of Statutory Activities and Regulatory Activities in the Evaluation Guidance that the Enterprises must consider whether to undertake. The HUD Section 811 program and McKinney-Vento Homeless Assistance programs, do not, at this time, lend themselves to Enterprise support, so FHFA does not expect the Enterprises to address these two programs in their Plans for the reasons discussed below. For each Statutory Activity that is addressed in their Plans under this requirement in § 1282.32(d), the Enterprises must describe how they choose to undertake the activity and related objectives, or the reasons why they will not undertake the activity.

The status of each statutory program, the relevant comments received, and the role that the Enterprises could play in assisting each statutory program, are discussed below. There were relatively few comments on Enterprise support for the statutory programs.

(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. The proposed rule specifically requested comment on ways, including potential changes to their underwriting and reserve requirements, the Enterprises could extend their support for Section 8-assisted properties consistent with safety and soundness.

Two nonprofit intermediaries and a trade association requested that the Enterprises evaluate their underwriting practices on loans for properties supported by Section 8 subsidies and, in particular, reconsider how they underwrite their reserve requirements. The commenters stated that the Enterprises' reserve requirements, by taking into account the risk that Congress will not appropriate funds for the Section 8 program, make refinancing more difficult or infeasible, or result in smaller loan amounts with less money available for property rehabilitation. One of the nonprofit intermediaries emphasized that Congress has repeatedly renewed funding for Section 8 rental assistance and, thus, the risk of Congress not appropriating Section 8 funding is quite low. Several commenters also recommended that the Enterprises reconsider their underwriting requirements for minimum vacancies in light of the very low historical vacancy rates for the Section 8 program.

The final rule does not dictate specific underwriting requirements for Enterprise engagement with the Section 8 rental assistance program. FHFA encourages the Enterprises to consider,

in contemplating whether to make any loan product changes to support the Section 8 rental assistance program, whether the commenters' suggestions on underwriting should be included.

(ii) HUD Section 236 Interest Rate Subsidy Program

Under HUD's Section 236 interest rate subsidy program, HUD subsidizes the interest rate down to one percent on mortgages on multifamily properties, in exchange for restrictions that keep rents at affordable levels for the term of the mortgage, but no fewer than 20 years. The proposed rule specifically requested comment on ways the Enterprises could extend their support for the Section 236 program.

A nonprofit intermediary requested that the Enterprises evaluate their underwriting standards to recognize the importance of rent restrictions and tenant protection requirements. Additionally, the commenter requested that the Enterprises establish loan purchase guidelines that recognize the importance of rent increase phase-in periods as a way to both protect tenants and maximize the loan proceeds available to recapitalize and preserve the property.

The final rule does not dictate specific underwriting requirements for Enterprise engagement with the Section 236 program. FHFA encourages the Enterprises to consider, in contemplating whether to make any loan product changes to support the Section 236 program, whether the commenters' suggestions on underwriting should be included.

Where an Enterprise is considering whether to include the Section 236 program in its Plan, FHFA encourages the Enterprise to consider loan product changes allowing tenant protection vouchers to preserve the affordability of the Section 236 properties. Tenants in Section 236 properties may be statutorily eligible for Enhanced Vouchers, a type of Tenant Protection Voucher which can be project-based and helps preserve long-term affordability.

In addition, FHFA encourages the Enterprises to consider whether a Section 236 property has a Rent Supplement or Rental Assistance Program contract and is, therefore, eligible for conversion under the Rental Assistance Demonstration program (see § 1282.34(d)(6) of the final rule). Finally, the Enterprises are encouraged to consider refinancing Section 236 properties that are still receiving interest rate reduction payments and are still subject to the original Section 236 Use Restrictions.

https://www.hudexchange.info/course-content/hud-multifamily-affordable-housing-preservation-clinics/Preservation-Clinic-Tenant-Protection-Vouchers.pdf

(iii) HUD Section 221(d)(4) FHA Insurance Program

HUD's Federal Housing Administration (FHA) insurance program under Section 221(d)(4) provides financing for the new construction or substantial rehabilitation of multifamily properties, and for permanent financing when construction is completed. The proposed rule specifically requested comment on ways the Enterprises could support properties currently funded under the Section 221(d)(4) program. A nonprofit intermediary requested that the Enterprises provide underwriting clarity and flexibility in the treatment of subordinate debt, which the commenter noted is often a feature in refinancing Section 221(d)(4) loans.

The final rule does not dictate specific underwriting requirements for Enterprise purchases of Section 221(d)(4) loans. FHFA encourages the Enterprises to consider, in contemplating whether to make any loan product changes to support the Section 221(d)(4) program, whether the commenter's suggestion should be included.

(iv) HUD Section 202 Housing Program for Elderly Households

HUD's Section 202 program for low-income elderly households is a direct loan and capital advance program under which HUD provides construction or rehabilitation funds and rental subsidies. The proposed rule specifically requested comment on ways the Enterprises could support properties currently funded under the Section 202 program.

A nonprofit intermediary requested that the Enterprises provide underwriting guidance that is consistent with FHA's treatment of Section 202 loans. Specifically, the commenter requested that the Enterprises develop standards that, like FHA's standards, permit Section 202 refinance loans to be underwritten to the above-market rents that reflect the presence of a long-term Section 8 contract. Additionally, the commenter requested that the Enterprises adopt underwriting standards that, like FHA's standards, adequately account for property tax abatements and exemptions when purchasing a Section 202 loan.

The final rule does not dictate specific underwriting requirements for Enterprise engagement with the Section 202 program. FHFA encourages the Enterprises to consider, in contemplating whether to make any loan product changes to support the Section 202 program, whether the commenter's suggestions should be included.

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