The Secretary of HUD's Regulation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)
Federal RegisterFeb 16, 1995
Ask Donna
What actually matters in this document.
Text
SUMMARY: This proposed rule would establish new regulations
implementing the Secretary of Housing and Urban Development's
regulatory authorities respecting the Federal National Mortgage
Association (``Fannie Mae'') and the Federal Home Loan Mortgage
Corporation (``Freddie Mac''). Under the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (``the Act''), the Secretary
has general regulatory authority over Fannie Mae and Freddie Mac
(``GSEs'').
Status as a GSE provides substantial advantages to Fannie Mae,
Freddie Mac, and their shareholders. With such public benefits flow
public responsibilities. In the Act, Congress set forth a framework to
ensure that the GSEs fulfill the public purposes set forth in their
Charter Acts and serve the housing needs of the country, without
threatening the GSEs' safety and soundness. Under the Act, the
Secretary is responsible for establishing housing goals to require the
GSEs to extend access to mortgage credit to very low-, low-, and
moderate-income families and families in central cities, rural areas,
and other underserved areas. The Secretary is also responsible for
advancing fair lending by requiring that the GSEs not discriminate in
their mortgage purchases because of race, color, religion, sex,
handicap, familial status, age, or national origin. This regulation
requires that the GSEs facilitate enforcement of the Fair Housing Act
and the Equal Credit Opportunity Act (ECOA) by submitting data on
mortgage lenders to assist investigations of possible Fair Housing Act
and ECOA violations. The proposed regulation also directs the GSEs to
undertake remedial action against sellers found to violate the Fair
Housing Act and ECOA and provides for the Secretary periodically to
review and comment on each GSE's underwriting and appraisal guidelines.
In addition, the regulation sets forth the scope of other Secretarial
responsibilities, including the statutory authority to review and
approve new programs of the GSEs, obtain data and reports from the GSEs
on their housing activities, and disseminate publicly information
related to the GSEs' housing activities while protecting proprietary
information.
DATES: Comment due date: May 2, 1995.
ADDRESSES: Comments should be sent to Rules Docket Clerk, Office of
General Counsel, room 10276, Department of Housing and Urban
Development (HUD), 451 Seventh Street, SW, Washington DC 20410-0500.
Communications should refer to the docket number and title. Facsimile
(FAX) comments are not acceptable. A copy of each communication
submitted will be available for public inspection and copying between
the hours of 7:30 a.m. and 5:30 p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Harold Bunce, Acting Director,
Financial Institutions Regulation, Office of Policy Development and
Research, telephone (202) 708-2770; or, for legal questions, Kenneth A.
Markison, Assistant General Counsel for Government Sponsored
Enterprises/RESPA, Office of the General Counsel, telephone (202) 708-
3137; Department of Housing and Urban Development, 451 Seventh Street,
SW, Washington, D.C. 20410. A telecommunications device for deaf
persons (TDD) is available at (202) 708-9300. (These are not toll-free
telephone numbers.)
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Statement
The information collection requirements contained in this rule have
been submitted to the Office of Management and Budget (OMB) for review
under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). No
person may be subjected to a penalty for failure to comply with these
information collection requirements until they have been approved and
assigned an OMB control number. The OMB control number, when assigned,
will be announced by separate notice in the Federal Register.
Public reporting burden for the collection of information
requirements contained in this rule is estimated to include the time
for reviewing the instructions, searching existing data sources,
gathering and maintaining the data needed, and completing and reviewing
the collection of information. Information on the estimated public
reporting burden is provided under the Preamble heading, Other Matters.
Send comments regarding this burden estimate or any other aspect of
this collection of information, including suggestions for reducing this
burden, to the Department of Housing and Urban Development, Rules
Docket Clerk, 451 Seventh Street, SW, Room 10276, Washington, DC 20410-
0500; and to the Office of Information and Regulatory Affairs, Office
of Management and Budget, Attention: Desk Officer for HUD, Washington,
DC 20503.
I. General
A. Purpose
This proposed rule would establish new regulations implementing the
authorities of the Secretary of Housing and Urban Development (``the
Secretary'') to regulate the GSEs under the GSEs' respective Charter
Acts (the Federal National Mortgage Association Charter Act (Fannie Mae
Charter Act), Title III of the National Housing Act, section 301 et
seq. (12 U.S.C. 1716 et seq.); and the Federal Home Loan Mortgage
Corporation Act (Freddie Mac Act), Title III of the Emergency Home
Finance Act of 1970, section 301 et seq. (12 U.S.C. 1451 et seq.) and
the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 (``FHEFSSA'' or ``the Act''), enacted as Title XIII of the Housing
and Community Development Act of 1992 (Pub. L. 102-550, approved
October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641).
FHEFSSA substantially changed the Secretary's authorities to regulate
the GSEs, requiring the Secretary to promulgate new regulations. The
Secretary proposes these regulations to implement these new
authorities, to replace the Secretary's current regulations governing
Fannie Mae and, for the first time, to establish regulations governing
Freddie Mac.
B. Background
In 1968, Congress chartered Fannie Mae as a stockholder-owned,
privately managed corporation to fulfill various public purposes by
providing a secondary market for home mortgages. In 1970, Congress
chartered Freddie Mac within the Federal Home Loan Bank System.
The GSEs' Charter Acts set forth identical purposes for Fannie Mae
and Freddie Mac1 to: (1) Provide stability in the secondary market
for residential mortgages; (2) respond appropriately to the private
capital market; (3) provide ongoing assistance to the secondary
[[Page 9155]] market for residential mortgages (including activities
relating to mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than the return
earned on other activities) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital
available for residential mortgage financing; and (4) promote access to
mortgage credit throughout the Nation (including central cities, rural
areas, and other underserved areas) by increasing the liquidity of
mortgage investments and improving the distribution of investment
capital available for residential mortgage financing.2
\1\Cf. Fannie Mae Charter Act, section 301, to Freddie Mac Act,
section 301.
\2\Fannie Mae Charter Act, section 301, and Freddie Mac Act,
section 301(b).
---------------------------------------------------------------------------
1. The Current Fannie Mae Regulations
In 1978, the Secretary promulgated regulations governing Fannie
Mae.3 These regulations were issued under the authority of the
Fannie Mae Charter Act and, among other things, implemented the
Secretary's ``general regulatory power'' over Fannie Mae and
established other specific regulatory powers of the Secretary,
including procedures under which the Secretary must approve stock and
debt issuances, changes to a statutory debt-to-capital ratio, and new
conventional mortgage programs.4 The regulations also require
Secretarial approval of Fannie Mae's underwriting guidelines to
implement fair housing requirements and regulate equal opportunity in
employment.5 To ensure that Fannie Mae fulfilled its Charter Act
purpose of providing a secondary market for home mortgages for low- and
moderate-income families, the regulations required that 30 percent of
Fannie Mae's aggregate mortgage purchases be mortgage purchases
financing housing secured by mortgages located in central cities and
that 30 percent of its aggregate mortgage purchases be mortgages
financing housing for low- and moderate-income families.6 Housing
for low- and moderate-income families under the Fannie Mae regulations
included multifamily housing insured under Federal Housing
Administration (FHA) programs, housing receiving housing assistance
payments (HAP), and, for single-family housing, housing purchased at a
price not in excess of 2.5 times the area median family income.7
\3\24 CFR part 81.
\4\24 CFR 81.12, 81.14, 81.15, and 81.16(c).
\5\24 CFR 81.18 and 81.19.
\6\24 CFR 81.16(d) and 81.17.
\7\24 CFR 81.2(l).
---------------------------------------------------------------------------
2. FIRREA and the Secretary's Assumption of Regulatory Responsibility
Over Freddie Mac
Section 731 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (``FIRREA'') (Pub. L. 101-73, approved August
9, 1989) amended the Freddie Mac Act. The Secretary of HUD was granted
general regulatory power and essentially the same specific regulatory
powers with respect to Freddie Mac as the Secretary had respecting
Fannie Mae, so that the Secretary's regulatory authority was
``identical, on all relevant matters, to (the Secretary's) regulatory
power over (Fannie Mae).''8
\8\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
---------------------------------------------------------------------------
3. The Federal Housing Enterprises Financial Safety and Soundness Act
Congress was concerned about the potential for loss to the
taxpayers if the GSEs suffered serious losses.9 In FIRREA,
Congress required the Treasury Department, the Congressional Budget
Office (CBO), and the General Accounting Office to study the regulation
of the GSEs and present recommendations to the Congress.10 These
studies concluded that the current regulatory authorities over the GSEs
were inadequate to protect the taxpayer and ensure that the GSEs served
the public purposes for which they were chartered. All three agencies
recommended that the Government be granted additional authority to
regulate the GSEs. The Treasury study formed the basis for a 1991
Administration proposal to create an independent office within HUD to
regulate the safety and soundness of the GSEs.
\9\See, e.g., H.R. Rep. 101-54, Part 1, 101st Cong., 1st Sess.
389 (1989).
\10\FIRREA, sections 1004 (Comptroller General study) and 1404
(Treasury study), and 2 U.S.C. 621 note (Treasury study and CBO
study).
---------------------------------------------------------------------------
In 1991, the House of Representatives passed H.R. 2900 (102d Cong.,
1st Sess. (1991)), establishing an independent office within HUD to
regulate the financial safety of the GSEs.11 The House bill also
provided for the establishment of special affordable housing goals to
ensure that the GSEs meet the unaddressed needs of very low-income
families and lower-income families in lower income areas.12 The
Senate made substantial revisions to the House bill, including changes
to clarify the Secretary's authority to establish central cities and
low- and moderate-income goals and to modify provisions concerning fair
housing.13
\11\H.R. 2900, section 101.
\12\Id., at sections 121(n) and 122(l).
\13\S. 2733, 102d Cong., 2d Sess., sections 502, 504, and 514
(1992).
---------------------------------------------------------------------------
In 1992--as the Department was preparing regulations governing
Freddie Mac and revising its Fannie Mae regulations--Congress enacted
FHEFSSA, which revamped the regulatory structure concerning the GSEs
and the GSEs' Charter Acts. In FHEFSSA, Congress chose to separate
authority over the GSEs' safety and soundness from authority to assure
that the GSEs accomplished their public purposes. FHEFSSA established a
new Office of Federal Housing Enterprise Oversight (OFHEO) charged with
new regulatory powers over the financial safety of the GSEs.14
FHEFSSA also granted the Secretary more specific powers and authorities
over the housing purposes and fair lending responsibilities of the
GSEs.
\14\Section 1311, and see, e.g., section 1313. Unless otherwise
specified, all section cites herein are cites to the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.
---------------------------------------------------------------------------
The Act granted the Secretary the power to establish, monitor, and
enforce goals for the GSEs' purchases of mortgages financing housing
for low- and moderate-income families, housing located in central
cities, rural areas, and other underserved areas, and special
affordable housing meeting the unaddressed housing needs of targeted
families.15 Although the authority to establish goals previously
existed under the Charter Act and was implemented under the current
Fannie Mae regulations,16 FHEFSSA defined and expanded this
authority. Moreover, the Act provided that the goals would be achieved
based on income of owners and renters. The regulations, promulgated in
1978, had allowed a proxy of house price17 that was easier to
achieve.
\15\See generally, sections 1331-34.
\16\See 24 CFR 81.16(d) and 81.17.
\17\24 CFR 81.2(l)(3).
---------------------------------------------------------------------------
Generally, the Act authorizes the Secretary to establish each of
the goals after consideration of certain prescribed factors relevant to
the particular goal.18 However, for a transition period of
calendar years 1993 and 1994, the Act established target percentage
amounts for purchases by the GSEs of mortgages on housing for low- and
moderate-income families and housing located in central cities--which
were based on the Fannie Mae regulations--and specific dollar amounts
for purchases of mortgages on special affordable
[[Page 9156]] housing.19 For the transition years, the Act set
targets for both GSEs that low- and moderate-income and central cities
mortgage purchases comprise at least 30 percent of the units financed
by the GSEs' total mortgage purchases for these years.20 The Act
also set targets for the special affordable housing goals in the
transition years,21 which, unlike the other goals, were set at no
less than a minimum number of dollars of mortgage purchases rather than
units financed. For the transition, the Act required that the Secretary
establish interim goals to improve the GSEs' performances relative to
the statutory targets, so that the GSEs would meet the targets by the
end of the transition period.22
\18\Sections 1332(b), 1333(a)(2), and 1334(b).
\19\Sections 1332(d), 1333(d), and 1334(d).
\20\Sections 1332(d)(1) and 1334(d)(1).
\21\Section 1333(d) (1) and (2).
\22\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
---------------------------------------------------------------------------
The Act also established new fair lending requirements for the GSEs
under which the Secretary must, by regulation, prohibit the GSEs from
discriminating in their mortgage purchases because of ``race, color,
religion, sex, handicap, familial status, age, or national origin,
including any consideration of age or location of the dwelling or the
age of the neighborhood or census tract where the dwelling is located
in a manner that has a discriminatory effect.''23 Under the Act,
the Secretary also must: require the GSEs to submit data to assist the
Secretary in investigating whether a mortgage lender has failed to
comply with the Fair Housing Act and the Equal Credit Opportunity Act
(ECOA); obtain and make available to the GSEs information from other
regulatory and enforcement agencies on violations by lenders of the
Fair Housing Act and ECOA; direct the GSEs to take remedial action
against lenders found to have engaged in discriminatory lending
practices in violation of the Fair Housing Act or ECOA; and
periodically review and comment on the underwriting and appraisal
guidelines of each GSE to ensure that such guidelines are consistent
with the Fair Housing Act and the Act.24
\23\Section 1325(1).
\24\Section 1325 (2)-(6).
---------------------------------------------------------------------------
The Act details the Secretary's authority to review and approve new
programs of the GSEs and establishes procedures under which the GSEs
may contest determinations on new program requests.25 The Act
affirms the Secretary's authority to require reports from the
GSEs26 and details specific data and reports that the GSEs must
provide.27 The Act assigns the Secretary other responsibilities,
including establishing a public use data base and implementing
requirements for the protection of proprietary information provided by
the GSEs.28 The Act also requires the Secretary to establish
procedures to ensure due process for the GSEs in exercising the
Secretary's regulatory authorities.29
\25\Section 1322.
\26\Section 1327.
\27\See sections 1381 (o and p) and 1382 (r and s).
\28\Sections 1323 and 1326.
\29\Sections 1322, 1336, and 1341-49.
---------------------------------------------------------------------------
In light of the $850 billion in mortgage-backed securities that
were currently outstanding from the GSEs, their $190 billion combined
mortgage portfolios, and the GSEs' importance to the National economy,
Congress determined that the taxpayers needed increased protection from
potential financial losses or risks posed by the GSEs.30 The Act
therefore established a new independent financial regulator for the
GSEs within HUD--the Office of Federal Housing Enterprise Oversight
(OFHEO)31--to design and administer a stress test for capital
adequacy and to carry out all regulatory functions to ensure the
financial safety of the GSEs.32 In establishing a new regulatory
framework for regulation of the GSEs' financial safety and soundness,
the Act deleted several specific authorities of the Secretary,
including authority to approve stock offerings, the rate of dividends,
and changes in the GSEs' debt-to-capital ratio.33 The Act assigns
authority to approve dividends to the Director of OFHEO34 and
replaces the debt-to-capital ratio with a risk-based capital standard
and stress test administered by the Director of OFHEO.35 Under the
Act, the Secretary retains general regulatory power over both GSEs,
``(e)xcept for the authority of the Director of the (OFHEO) described
in section 1313(b) and all other matters relating to the safety and
soundness of the (GSEs) * * *.''36
\30\See, e.g., S. Rep. No. 102-282, 102d Cong., 2d Sess. 10
(1992) (hereinafter cited as ``S. Rep.'').
\31\Section 1311.
\32\See generally, section 1313.
\33\Sections 1381 (d)(2), (e)(1), and (k), and 1382(e).
\34\Sections 1381(d)(2) and 1382(e).
\35\Sections 1361-64.
\36\Section 1321.
---------------------------------------------------------------------------
4. Previous Proposed Rule
On August 16, 1991, the Secretary published a proposed rule to
update the Fannie Mae regulations and establish new regulations
governing Freddie Mac.37 Prior to the promulgation of a final
rule, the President signed FHEFSSA into law on October 28, 1992. Since
the new Act required complete revision of the rule, the Secretary is
withdrawing the former proposed rule and issuing this new proposed
rule.
\37\56 FR 41022 (1991).
---------------------------------------------------------------------------
5. Interim Housing Goals
On October 13, 1993, the Secretary published a Notice in the
Federal Register establishing the interim goals for the GSEs' purchases
of mortgages financing low- and moderate-income housing, housing in
central cities, and special affordable housing--applicable to the
transition years of 1993 and 1994--and requirements for implementation
of the goals.38
\38\58 FR 53048 and 53072 (1993).
---------------------------------------------------------------------------
For the transition period of 1993 and 1994, the Act established
annual targets for the purchases by both GSEs of mortgages financing
housing for low- and moderate-income families and housing located in
central cities.39 The Act set these targets at 30 percent of the
units financed by mortgage purchases of the GSEs;40 the targets
were based on the goals established under HUD's Fannie Mae
regulations.41 For the transition period, the Act provided that,
where a GSE was not meeting a target as of January 1, 1993, the
Secretary must establish the annual goal so that the GSE would improve
its performance relative to the 30 percent target.42 Where a GSE
was meeting a target, the Act required the Secretary to establish the
goal so that the GSE would improve its performance relative to the 30
percent target.43 The Act also established dollar targets for the
GSEs' purchases of mortgages financing special affordable housing,
i.e., housing meeting the needs of and affordable to low-income
families in low-income areas and very low-income families.44 The
Secretary established these goals and implementation requirements in
the Interim Notice published in October 1993.45
\39\Sections 1332(d)(1) and 1334(d)(1).
\40\Sections 1332(d)(1) and 1334(d)(1).
\41\24 CFR 81.16(d) and 81.17.
\42\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
\43\Sections 1332(d)(2)(B) and 1334(d)(2)(B).
\44\Section 1333 (a)(1), (d)(1), and (d)(2).
\45\58 FR 53048 and 53072 (1993).
---------------------------------------------------------------------------
The Notice established the goal that 30 percent of the units
financed by mortgages purchased by Fannie Mae in 1993 and 1994 should
be housing for low- and moderate-income families.46 The Notice
also established the goal that 28 percent of units financed by
mortgages purchased by Fannie Mae in 1993, and 30 percent in 1994,
should be on housing located in central cities.47 For the year
1993, Fannie Mae exceeded [[Page 9157]] the goal for low- and moderate-
income housing with 35.58 percent and is performing at a rate for
199448 that likely will result in Fannie Mae's exceeding the goal
and achieving 40 percent. In 1993, Fannie Mae did not meet the goal for
central cities and has developed a housing plan to increase its efforts
for 1994.
\46\58 FR 53048, 53061 (1993).
\47\Id. at 53063.
\48\Fannie Mae's report on its performance under the goal for
the first three quarters of 1994 provides that 43.29 percent of its
mortgage purchases count toward achievement of the goal for low- and
moderate-income families.
---------------------------------------------------------------------------
The Notice established Freddie Mac's goal for purchases of
mortgages financing housing for low- and moderate-income families at 28
percent for 1993 and 30 percent for 1994.49 The Notice established
Freddie Mac's goal for purchases of mortgages financing housing located
in central cities for 1993 at 26 percent and 30 percent for
1994.50 For the year 1993, Freddie Mac exceeded the goal for low-
and moderate-income housing with 29.18 percent and is performing at a
rate for 199451 that likely will result in Freddie Mac's exceeding
the goal and achieving 35 percent. In 1993, Freddie Mac did not meet
the goal for central cities and has developed a housing plan to
increase its efforts for 1994.
\49\58 FR 53072, 53085 (1993).
\50\Id. at 53088.
\51\Freddie Mac's report on its performance under the goal for
the first three quarters of 1994 indicates that 36.31 percent of its
mortgage purchases count toward achievement of the goal for low- and
moderate-income families.
---------------------------------------------------------------------------
C. Secretary's Approach to Regulating the Enterprises
The Secretary recognizes that the GSEs occupy a unique position in
this country's housing finance system. The GSEs were created by the
Congress, chartered for public purposes and receive significant public
benefits, but the GSEs are privately owned and operated. Because of
their status as government-sponsored enterprises, the GSEs receive
significant benefits not enjoyed by any other shareholder-owned
corporation in the mortgage market. The explicit benefits the GSEs
receive include: (1) conditional access to a $2.25 billion line of
credit from the U.S. Treasury;\52\ (2) exemption from securities
registration requirements of the Securities and Exchange Commission and
the states;\53\ (3) exemption from all State and local taxes except
property taxes;\54\ and (4) higher demand for the GSEs' securities,
since the Government gives those securities the attributes of and the
same preferred investment status as Treasury debt.\55\ These explicit
benefits are far outweighed by an implicit benefit--the market's
assumption that, even though no explicit Federal guarantee exists,\56\
should a GSE fail to meet its obligations, Congress, and ultimately the
American taxpayer, would assist the GSEs. As a result of this implicit
guarantee, the GSEs can borrow at near-Treasury rates, and they can
sell securities at prices that exceed those of wholly private
firms.\57\ Consequently, the GSEs' cost of doing business is less than
that of other competitors in the mortgage market.
\52\Sections 306(c)(2) of the Freddie Mac Act and 304(c) of the
Fannie Mae Charter Act.
\53\Sections 306(g) of the Freddie Mac Act and 304(d) of the
Fannie Mae Charter Act.
\54\Sections 303(e) of the Freddie Mac Act and 309(c)(2) of the
Fannie Mae Charter Act.
\55\See, e.g., 12 CFR 208, App. A, section III.C.2.
\56\The GSEs' obligations are not guaranteed by the United
States. See, e.g., sections 1302(4), 1381(f), and 1382(n) (requiring
each GSE to state in its obligations and securities that such
obligations and securities ``are not guaranteed by the United
States'').
\57\Congressional Budget Office, Controlling the Risks of
Government-Sponsored Enterprises, at 10 (April 1991).
---------------------------------------------------------------------------
This competitive advantage, combined with the GSEs' solid
management, has resulted in enormous growth for both GSEs. In 1989, the
GSEs purchased $171 billion of mortgages; in 1993, $543 billion, a
three-fold increase. In 1993, the GSEs collectively purchased 70
percent of the mortgages originated in the conventional conforming loan
market.\58\ The GSEs' profitability has more than doubled in the same
period, with combined profits of $2.7 billion in 1993, compared to $1.2
billion in 1989. At the end of the first quarter of 1994, the combined
dollar amount of mortgages held in portfolio and mortgage-backed
securities outstanding between the two GSEs is nearly 2.5 times the
thrift industry's holdings and twice as large as the holdings by
commercial banks.\59\
\58\Fannie Mae Economics Department.
\59\Commercial banks held $555 billion, thrifts held $458
billion, and the GSEs held or backed $1,164 billion. Federal Reserve
Bulletin, Vol. 80, No. 8, Table 1.54, at A38 (August 1994).
---------------------------------------------------------------------------
Because they are publicly created entities that enjoy substantial
publicly derived benefits, Congress requires the GSEs to carry out
public purposes not required of other private-sector entities in the
housing finance industry. The GSEs' Charter Acts require them to assist
in the efficient functioning of a secondary market for residential
mortgages, including mortgages for low- and moderate-income families,
and to promote access to mortgage credit throughout the nation,
including central cities, rural areas, and other underserved areas. The
Charter Act requirements create an obligation for the GSEs to ensure
that citizens throughout the country have the opportunity to enjoy
access to the public benefits provided by these federally related
entities.
The GSEs have been successful at achieving an important part of
their mission of providing stability in primary mortgage markets and
bringing liquidity to housing finance markets through standardization
and the development of mortgage-backed securities. Many home buyers
have benefitted from lower interest rates and increased access to
capital as a result of the GSEs' activities. The importance of the
secondary market and its impact on who is able to buy a home and which
communities have access to mortgage credit is substantial. Even lenders
intending to hold loans in portfolio originate loans using the GSEs'
standards, so that the lenders have the option to sell to the GSEs at a
future date.
The Act and the legislative history make clear that the GSEs should
be serving Americans across the income spectrum and throughout the
country. The GSEs do an excellent job of facilitating the availability
of mortgage credit for home buyers with more than moderate incomes and
for residents of suburban communities. The GSEs must also use their
entrepreneurial talents and position in the marketplace to ``ensure
that citizens throughout the country enjoy access to the public
benefits provided by these federally related entities.''\60\ The GSEs
are not expected to provide deep subsidies for the financing of
affordable housing on the scale needed to solve the nation's housing
problems. However, given the purposes for which Congress created these
enterprises and the substantial federal benefits that they receive, it
is essential that the GSEs' activities promote the achievement of
national housing goals.
\60\S. Rep. at 34.
---------------------------------------------------------------------------
D. Leading the Industry
During the consideration of the Act, Congress noted its strong
concern that the GSEs were not doing enough to benefit low- and
moderate-income families or the residents of underserved areas that
lack access to credit.\61\ The Act specifically requires that in
establishing the goals, the Secretary consider the ability of the GSEs
to lead the industry. The intent of the Congress was clearly stated:
the GSEs should ``lead the mortgage finance industry in making mortgage
credit available for [[Page 9158]] low- and moderate-income
families''.\62\ The Act also clarified the GSEs' responsibility to
complement the requirements of the Community Reinvestment Act and fair
lending laws in order to expand access to capital to those
traditionally underserved by the housing finance market.
\61\See, e.g., S. Rep. at 34.
\62\S. Rep. at 34.
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac do not lead the mortgage finance
industry in expanding housing opportunities for low-income home buyers
and for families who must rent because they cannot afford to be
homeowners. The GSEs do not lead the mortgage finance industry in
providing access to mortgage credit for residents of communities that
are underserved. But the GSEs can and should provide this leadership.
As noted in the Act's legislative history, ``the GSEs need to provide
more leadership in all of these areas, and they have indicated a desire
to do so. But direct and potentially forceful federal oversight is the
only way to ensure that it will happen.''\63\
\63\S. Rep. at 11.
---------------------------------------------------------------------------
The Secretary shares the concern of Congress about the GSEs' level
of activity in making mortgage credit available for lower-income
families. Loans originated for families with incomes below 80 percent
of area median income are less likely to be purchased by the GSEs. Five
out of six single-family mortgages purchased by the GSEs are for
borrowers with incomes above 80 percent of area median income. Almost
60 percent of the GSEs' single-family business is for borrowers with
incomes above 120 percent of area median income.
In considering whether the GSEs are leading the industry and in
establishing the appropriate levels for the housing goals, the level of
originations by the primary market must be examined. The primary market
is able to sell to the GSEs more loans for higher-income families than
loans for lower-income families. Based on 1993 mortgage market data,
the GSEs purchased 55 percent of the loans originated by the primary
market for borrowers with incomes above 120 percent of area median
income, but only 41 percent of the mortgages originated for borrowers
with incomes less than 60 percent of area median income. This occurred
notwithstanding that, in response to the Community Reinvestment Act and
their desire to meet the mortgage needs of a broad range of families,
lenders are originating many more mortgages for very low- and low-
income families than the GSEs are purchasing.
E. Establishing the Housing Goals
The Secretary recognizes that both GSEs have improved their
performance in 1993 in the provision of mortgages financing for low-
and moderate-income home buyers and central city residents. Both GSEs
have begun new programs to increase their ability to deliver the
benefits of their activities to traditionally underserved borrowers.
These activities are commendable and the Secretary looks forward to
seeing those initiatives carried forward. Both GSEs have also been
engaged in initiatives to communicate to lenders that the GSEs'
underwriting guidelines are not intended to prevent lenders from
originating loans for previously underserved segments of their
communities.
The Secretary notes these initiatives and the performance of the
GSEs under the 1993 housing goals. Both Fannie Mae and Freddie Mac have
made progress in carrying out their Charter-required activities to
expand access to credit. At the same time, greater accomplishments are
needed to assure that the GSEs fully realize their Charter Act
purposes. To meet the intent of the Act, the GSEs must purchase more
loans originated by the market for borrowers with lower incomes.
The Secretary does not intend that the GSEs do less business for
borrowers with high incomes in order to increase their purchases of
mortgages for lower-income families. Given the capacity of the GSEs, a
tradeoff between high-income and low-income business does not need to
occur. When the mortgage market spiked to a trillion dollars in volume
in 1993, the GSEs demonstrated their capacity to expand their volume
tremendously. The Secretary does not believe that the GSEs will have to
shrink one portion of their business to expand their focus on achieving
their Charter purposes of providing access to credit to all Americans.
This view has also been expressed by James A. Johnson, Chairman and
Chief Executive Officer of Fannie Mae, in Congressional testimony in
April 1994:
It is a governmental frame of reference to assume (Fannie Mae's)
resources are limited (as appropriations would be for a government
department) and then to 'assign' them through numerous subgoals to
categories of need. But the fact that Fannie Mae helps moderate-
income families in no way diverts (Fannie Mae) from supporting low-
income families.\64\
\64\Testimony before the Committee on Banking, Finance, and
Urban Affairs, Subcommittee on General Oversight, Investigations,
and the Resolution of Failed Financial Institutions, U.S. House of
Representatives, at 17 (April 20, 1994).
In setting the levels of the housing goals, the Secretary has
considered carefully the six factors stipulated in the Act: National
housing needs; economic, housing, and demographic conditions; the
previous performance and effort of the enterprises in achieving the
specific goal; the size of the market for that goal; the ability of the
GSEs to lead the industry; and the need to maintain the sound financial
condition of the enterprises.\65\ The Secretary has concluded that
these factors, as well as the requirement that the GSEs lead the
industry in affirmative efforts to meet the needs of lower-income
families and residents of central cities, rural areas, and other
underserved communities, dictate that the levels of the housing goals
should be increased for 1995-1996. The Secretary considered the
following factors which are analyzed in detail in the appendices:
\65\12 U.S.C. 4562.
---------------------------------------------------------------------------
(1) Housing Needs. Homeownership is a key aspiration of most
Americans. Homeownership fosters family responsibility and self-
sufficiency, expands housing choice and economic opportunity and
promotes community stability. A homeowner has the most secure physical
environment in which to raise a family. Children of homeowners are more
likely to graduate from high school, less likely to commit crime, and
less likely to themselves have children as teenagers than children of
renters. Recent surveys indicate that lower-income families and
minority families who do not own their own homes will make considerable
sacrifices to purchase a home.
During the past decade, the goal of homeownership has become more
elusive for very low-, low-, and moderate-income families. The
homeownership rate in this country declined from on all-time high of
65.6 percent in 1980 to 63.9 percent in 1985, where it has remained
essentially unchanged. The families that bore the brunt of this decline
in homeownership are households who earn less than the median,
particularly single-parent households and households with children.
At the same time, housing needs of families who rent have also
increased. Finding affordable housing is by far the most common housing
problem for American families nationwide. Poor households compete for a
diminishing number of affordable apartments as low-cost units are lost
to disrepair or are upgraded to serve higher-income renters. The result
is growing numbers of low-income households who pay high shares of
their income for [[Page 9159]] inadequate housing. Six million low-
income families paid more than 50 percent of their income for rent,
leaving them with less money for other necessities like food, clothing,
health care, and education. The very lowest income renters (families
with incomes below 30 percent of area median income) are particularly
hard-hit by high rents relative to their incomes, with over 50 percent
of these families spending more than half of their income on rent.
The most unfortunate families have no homes. Precise counts of
homeless people are not available. An estimated 600,000 people are
homeless on any given night and as many as seven million Americans have
experienced homelessness during the late 1980s, some for brief periods
and some for years.\66\
\66\Priority: HOME! The Federal Plan to Break the Cycle of
Homeless, 17 (1994).
---------------------------------------------------------------------------
(2) Economic, Housing, and Demographic Conditions. The Department
estimates that in 1995 originations for single-family mortgages will be
$615 billion. The demand for purchase mortgages will increase in 1995
and 1996, because of demographic trends, including high levels of
immigration, changing age and family composition of households, the
growth of the affluent elderly population, and potentially increased
homeownership by native-born minorities. In addition, although volatile
interest rates strongly influence both housing starts and mortgage
market activity, rates that are low by historic standards have improved
affordability for first-time home buyers, many of whom were closed out
of the market during the 1980s. Increasing income inequality and
changes in household composition will continue to create an acute need
for rental housing affordable to very low-income families, placing
additional pressure on the widespread shortages of rental housing
affordable to families with incomes below 30 percent of area median
income.
(3) Previous Performance of the GSEs. The GSEs exceeded the 1993
goals for low- and moderate-income housing. Neither enterprise met the
central cities goal for 1993. For the special affordable housing goal,
a two-year goal, both GSEs are on track to meet the single-family
portion of the goal. Fannie Mae should meet the multifamily portion of
the goal by the end of 1994. It is unclear whether Freddie Mac will
meet the multifamily portion of the goal by the end of 1994. The
Secretary notes that, during the transition period 1993-1994, both GSEs
have engaged in new marketing efforts, and introduced new programs,
products, and relationships in an effort to achieve the goals.
(4) Size of the Conventional Market for Each Goal. The Secretary
recognizes the importance of accurately determining, to the extent
possible given current data, the size of the various markets applicable
to each of the goals. HUD devoted significant analytical resources to
estimating market shares, using information from four major data
sources: The 1993 purchases by the GSEs, 1993 HMDA data, the American
Housing Survey, and the Residential Finance Survey. HUD estimates that
50 to 55 percent of the mortgage market in 1995-1996 will be composed
of mortgages from low- and moderate-income households. As a subset of
that market, at least 17-20 percent of the conventional conforming
market will be composed of mortgages for very low-income households and
low-income households in low-income areas. The market share for the
central cities, rural areas, and other underserved areas goal (as
redefined) is 21-23 percent.
(5) Ability of the Enterprises to Lead the Industry. The Secretary
believes that the GSEs are well-positioned to provide the leadership
that is needed to encourage the mortgage finance industry to better
serve very low-, low-, and moderate-income families and residents of
communities underserved by the mortgage markets. The GSEs' ability to
lead the industry flows from their dominant role in the mortgage
market, their ability--through their underwriting standards and new
programs and products--to influence the types of loans that primary
lenders are willing to make, their development and use of cutting-edge
technology, their competent and well-trained staff, and their financial
resources.
(6) Need to Maintain the Sound Financial Condition of the
Enterprises. The enterprises are very substantial corporations as
measured by their assets and profits. The Secretary has determined that
the GSEs can accomplish the goals established in this regulation in
such a way that limited, if any, risk is posed to their safety and
soundness. The goals would require reasonable increases in the GSEs'
purchases of mortgages that are affordable to very low-, low-, and
moderate-income households or finance units located in areas that meet
the proposed definition of underserved areas. Given the relatively
small size of the proposed increases compared to their current
business, the potential increase in the credit risk borne by the GSEs
will be limited.
F. Setting the Levels of the Housing Goals
In establishing the housing goals for 1995 and 1996, the Secretary
balanced the congressionally mandated factors, i.e., size of the
market, housing needs, safety and soundness considerations, economic
and demographic conditions, previous performance and the GSEs ability
to lead the industry.\67\ The Secretary was guided by the overarching
principle that both enterprises were created by Congress to serve
public purposes for which they receive public benefits, and that their
unique status requires that they lead the industry in expanding access
to mortgage credit for more Americans and communities. The factors and
the public purposes of the GSEs also require that the GSEs lead the
industry in affirmative efforts to meet the needs of lower-income
families and residents of central cities, rural areas, and other
underserved communities.\68\
\67\See Appendices A-C for the Secretary's analysis of these
factors.
\68\12 U.S.C. 4501.
---------------------------------------------------------------------------
Based on a consideration of the factors, set forth fully in
appendices A, B and C to this rule, the Secretary proposes to establish
the goals for 1995 and 1996 for mortgage purchases for low and moderate
income housing at 38 percent for 1995 and 40 percent for 1996, the goal
for mortgage purchases for central cities, rural areas and other
underserved housing at 18 percent for 1995 and 21 percent for 1996, and
the goals for special affordable housing at 11 percent for 1995 and at
12 percent for 1996.
Based on a consideration of the factors, set forth in the same
appendices to the rule, the Secretary proposes to establish all three
goals for 1997 and 1998 so that the goals will move the GSEs steadily
over a reasonable period of years, including these two years, to a
level of mortgage purchases where the GSEs will be leading the industry
in purchasing mortgages meeting the goals. In carrying out this
objective, the Secretary proposes to establish the goals for 1997 and
1998 at levels ranging from the same amounts established for 1996 to
higher levels. The purpose of any higher levels would be to continue to
move the GSEs toward purchasing a greater proportion of mortgages
originated by the market. The goals for 1997 to 1998 are therefore
proposed for comment as a range; in finalizing the goals, the Secretary
will specify definite figures on this range. In order to finalize the
goals, the Secretary seeks responses from the public on what ``leading
the industry'' should mean and what the goals should be over this
period and in [[Page 9160]] the future to achieve this objective. The
Secretary anticipates at this time that future market conditions will
require additional adjustment of the goals by future rulemaking in the
latter part of the 1990s.
(1) Should the goals be established so that the GSEs are required
to lead the industry by buying at least the percentages of mortgages
that the market originates for each goal? If yes, at what levels and
over what period should the GSE goals be established to achieve this
objective and, specifically, at what levels should the 1997 and 1998
goals be established to meet this objective? In responding, please
note:
(A) For the housing goal for low- and moderate-income families--the
Secretary determined that for 1995 and 1996, 50 percent of the market
is comprised of mortgages qualifying under this goal.
(B) For the special affordable housing goal--the Secretary
determined that for 1995 and 1996, 17-20 percent of the market would be
mortgages qualifying under this goal.
(C) For the central cities, rural areas, and other underserved
areas goal--the Secretary determined that for 1995 and 1996, 21-23
percent of the market would be mortgages qualifying under this goal.
(2) Should leading the industry mean and should the goals be
established for future years so that the GSEs are required to purchase
(as a percentage of the GSEs' total purchases) a higher percentage of
mortgages than are originated by the market under each housing goal?
For example, if 16 percent of the mortgages originated and available
are expected to be originated for mortgages for very low-income
families, should the GSEs be expected to purchase, as a percentage of
their overall business, an amount greater than 16 percent of mortgages
on housing for very low-income families at some future date? If yes, at
what levels and over what period should the goals be established to
achieve this objective and, specifically, at what levels should the
1997 and 1998 goals be established to achieve this objective? Also,
what percentage over the market should be required?
(3) Should the goals be established such that the GSEs purchase an
equivalent proportion of loans originated by the market for borrowers
under 80 percent of area median income as they do for borrowers over
120 percent of area median income? If yes, at what levels and over what
period should the goals be established to achieve this objective and,
specifically, at what levels should the 1997 and 1998 goals be
established to achieve this objective?
(4) Should the goals be adjusted as the GSEs reach or fail to
achieve the goals or should the goals be established and the GSEs'
performance evaluated against relatively fixed goals? If the commenter
believes that the goals should be adjusted, how frequently or under
what conditions should the Secretary take action to adjust the goals?
(5) To what extent should the GSEs' share of the overall mortgage
market affect the levels of the goals? The GSEs currently purchase
approximately 70 percent of all conventional, conforming mortgages
originated. Should the goals increase as the GSEs' market share
increases? If yes, how should this work? How and in what manner should
the goals be adjusted?
G. Principles Governing Regulation
In considering these regulations, the Secretary has set forth the
following principles:
(1) To fulfill the intent of the Act, the GSEs should lead the
industry in ensuring that access to credit is made available for very
low-, low- and moderate-income families and residents of underserved
areas. The Secretary recognizes that, to lead the mortgage industry
over time, the GSEs will have to stretch to reach certain goals, which
is consistent with the Congressional statement that it ``fully expects
the enterprises will need to stretch their efforts to achieve'' the
goals.\69\
\69\S. Rep. at 35.
---------------------------------------------------------------------------
(2) The Secretary's role as a regulator is to set direction through
the goals, but not to dictate the products or delivery mechanisms the
GSEs will use to achieve those goals. Regulating two enormous financial
enterprises in a dynamic market requires that the GSEs be allowed to
use their innovative capacities to determine how best to deliver
products to the primary market. Regulation should allow the GSEs to
maintain their flexibility and the ability to respond quickly to market
opportunities in order to meet the goals stipulated by the Secretary.
(3) Discrimination in lending--albeit often subtle and even
unintentional--has denied racial and ethnic minorities the same access
to credit to purchase a home that has been available to similarly
situated non-minorities. The GSEs have a critical role and position in
promoting access to capital by minorities and other historically
underserved groups and demonstrating to other private-sector market
players the profit potential in these traditionally underserved
markets.
(4) In addition to the GSEs' core business of purchasing single-
family-home loans, the GSEs also must assist in the creation of an
active secondary market for multifamily loans. As noted, this country
has a critical need for affordable rental housing to provide adequate
housing for families who cannot afford to become homeowners.
Availability of capital is a key constraint in the expansion of
development activity to build more rental housing.
(5) Parity between the two enterprises in the level of the goals
they are required to meet should be established. Both enterprises
operate in the same markets and have similar opportunities to purchase
mortgages that will satisfy the goals. Freddie Mac has no operational
or organizational constraints that would prevent it from meeting goals
that Fannie Mae could meet.\70\
\70\During the transition period of 1993-1994, the Act
established annual targets for the purchases by both GSEs of
mortgages financing housing for low- and moderate-income families
and housing located in central cities. Sections 1332(d)(1) and
1334(d)(1). For both GSEs, the Act set identical targets at 30
percent of the units financed by mortgage purchases of the GSEs.
Although the targets were identical, the Secretary established
differential goal levels for Freddie Mac and Fannie Mae, in order to
allow Freddie Mac sufficient time to reenter the multifamily market
in a prudent and organized manner. Freddie Mac had announced its
withdrawal from the multifamily market in 1990. In 1993, Freddie Mac
announced its reentry into the multifamily market, after it had
reorganized its multifamily division, greatly increased its
staffing, implemented new information systems, released a new
underwriting guide for multifamily properties, and established a
network of originators and servicers with proven local expertise.
---------------------------------------------------------------------------
II. Section-by-Section Discussion of Proposed Changes to Fannie Mae
Regulations and New Freddie Mac Regulations (Part 81)
Subpart A--General
Section 81.1--Scope of Part
This section provides that these regulations implement the
authority of the Secretary concerning the GSEs under the Charter Acts
and FHEFSSA. The section states that subpart A contains definitions
applicable to this part; subpart B contains the housing goals; subpart
C contains Fair Housing requirements; subpart D sets forth program
review procedures for new programs; subpart E contains requirements for
reports to the Secretary; subpart F contains regulations dealing with
access to information; subpart G contains procedures available to the
GSEs; subpart H contains book-entry procedures; and subpart I contains
regulations dealing with regulatory examinations and other provisions.
The section provides that, except where the [[Page 9161]] Secretary and
the Director of the Office of Federal Housing Enterprise Oversight
share authority, this part does not implement any authority of the
Director of OFHEO.
Section 81.2--Definitions
This section defines terms which are relevant to the Secretary's
regulatory authorities. These terms relate to the housing goals, fair
housing/fair lending, new program approval, and collection,
dissemination and protection of GSE information furnished to the
Secretary. Some of the terms are defined in FHEFSSA, some are defined
under the Freddie Mac Act and the remainder were defined for these
regulations.
The Freddie Mac Act defines terms that are relevant to both GSEs
although the same terms are not defined under the Fannie Mae Charter
Act. The legislative history of FIRREA indicates that Congress intended
that competitive parity exist between the GSEs and that the regulatory
power granted to the Secretary be identical for both GSEs.71 The
proposed regulation, therefore, defines terms the same for both GSEs
even where the definitions were originally provided in the Freddie Mac
Act.
\71\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
---------------------------------------------------------------------------
Defined terms that are relevant to all of the housing goals include
``Balloon mortgage'', ``Conventional Mortgage'', ``Dwelling unit'',
``Mortgage'', ``Mortgage purchase'', ``Multifamily Housing'',
``Refinancing'', ``Rental housing'', ``Residence'', ``Seasoned
mortgage'', ``Single family housing''. ``Conventional mortgage'' is
defined as a mortgage other than a mortgage as to which a GSE has the
benefit of any guaranty, insurance or other obligation by the United
States. ``Mortgage purchase'' is defined as a transaction where a GSE
buys or otherwise acquires with cash or other thing of value a mortgage
for its portfolio or for securitization. ``Multifamily housing'' means
a residence having more than four dwelling units. ``Single family
housing'' is a residence consisting of one to four dwelling units.''
Terms relating to the low- and moderate-income housing goals
include ``Low-income'', ``Median income'', ``Moderate income'',
``Rent,'' ``Utilities,'' and ``Utility allowance''. The term ``Low-
income'' is defined as income not in excess of 80 percent of area
median income, adjusted for family size for rental units but unadjusted
for owner-occupied units. ``Median income'' means, with respect to an
area, the unadjusted median family income of the area, as most recently
established by the Secretary; an area is the metropolitan statistical
area (MSA) if the property is located in an MSA--otherwise, an area is
the county in which the property is located. ``Moderate-income'' means
income not exceeding area median income and, in the case of rental
units, income not in excess of median income with adjustments for
family size. ``Rent'' is defined as contract rent if the cost of all
utilities are included in contract rent; if all utilities are not
included, ``Rent'' is contract rent plus the cost of those utilities or
contract rent plus a utility allowance. ``Utilities'' means charges for
electricity, gas, water, sewage disposal, fuel, and garbage collection.
Defined terms concerning the central cities, rural areas, and other
underserved areas goal include the terms ``Central cities'', ``Rural''
and ``Underserved areas''. As discussed fully below, in this preamble's
discussion of the housing goals, the term ``central cities'' is defined
as the underserved areas of any political subdivision designated as a
central city by the Office of Management and Budget. ``Rural area'' is
defined as the underserved areas located outside of any metropolitan
statistical area (MSA) designated by the Office of Management and
Budget. ``Underserved area'' is defined as a census tract: With a
median income at or below 120 percent of the area median income and a
minority population of 30 percent or greater; or with a median income
at or below 80 percent of area median income.
The special affordable housing goals have specific rules requiring
the definition of certain terms. These terms include ``Low-income
areas'', ``Portfolio of loans'' and ``Very low-income''. ``Low-income
area'' means a census tract in which the median income does not exceed
80 percent of area median income. ``Portfolio of loans'' means ten or
more loans. ``Very low-income'' is defined as income not exceeding 60
percent of the area median income--under the Act's definition, this
percentage is adjusted for family size for rental units but is not
adjusted for family size for owner-occupied units.
Terms concerning the fair housing provisions of these regulations
include ``Familial status'', ``Handicap'' and ``Minority''. The terms
``familial status'' and ``handicap'' are defined under these
regulations by reference to the definitions contained in the Fair
Housing Act regulations at 24 CFR 100.20 and 100.201. ``Minority''
includes American Indians, Alaskan Natives, Asian and Pacific
Islanders, African Americans, and Hispanics.
The defined term pertaining to the Secretary's new program approval
authority is ``New program.'' ``New program'' is defined in the Act and
under these regulations as a program for the purchasing, servicing,
lending on the security of, or otherwise dealing in conventional
mortgages that is significantly different from a program that: Was
approved or engaged in by the GSE at the time of the enactment of
FHEFSSA; or represents an expansion above limits expressly contained in
any prior approval.
Terms that are relevant to both the reports and information
provisions of the regulations include ``Mortgage data'', ``Proprietary
information'' and ``Public data''. ``Mortgage data'' is defined as data
obtained by the Secretary from the GSEs under the Fannie Mae Charter
Act and the Freddie Mac Act relating to the GSEs' mortgage purchases.
``Proprietary information'' is defined as all categories of information
and data submitted to the Secretary by the GSE which contain trade
secrets and commercial or financial information of the GSE which is
privileged or confidential and which, if released, would cause
substantial competitive harm. Although this definition parallels the
definition under Exemption 4 of the Freedom of Information Act (FOIA),
5 U.S.C. 552(b)(4), in determining which GSE information is
proprietary, the Department will not be bound by FOIA, its legislative
history, or Exemption 4 case law. ``Public data'' means all mortgage
data obtained by the Secretary from the GSEs which the Secretary
determines is not proprietary and should be made publicly available;
Appendix D to the regulations lists and describes this data.
Finally, the proposed regulation defines the terms: ``Act,''
``Day,'' ``Director,'' and ``Secretary.'' ``Act'' is defined to mean
the Federal Housing Enterprises Financial Safety and Soundness Act or
FHEFSSA. ``Day'' is defined as a calendar day rather than a working
day. ``Director'' means the Director of the Office of Federal Housing
Enterprise Oversight of the Department of Housing and Urban
Development. ``Secretary'' means the Secretary of Housing and Urban
Development.
Subpart B--Housing Goals
Background
The Secretary is required to establish, by regulation, annual
housing goals for each GSE. The goals include a low- and moderate-
income housing goal,72 a [[Page 9162]] special affordable housing
goal,73 and a central cities, rural areas and other underserved
areas housing goal.74 The Act provides that the goals are to be
established in a manner consistent with sections 301(3) of the Fannie
Mae Charter Act and 301(b)(3) of the Freddie Mac Act, which require the
GSEs ``to provide ongoing assistance to the secondary market for
residential mortgages (including * * * mortgages on housing for low-
and moderate-income families involving a reasonable economic return
that may be less than the return earned on other activities) * * *.''
Under the Act, the Secretary may, by regulation, adjust any housing
goal from year to year.75 The statute provides that, in
establishing these goals, the Secretary shall apply certain prescribed
factors, as described in Appendices A, B, and C.76 In this
regulation, the Secretary proposes to establish the three housing goals
for 1995 and 1996. The Secretary is also planning to establish the
level of the goals for 1997 and beyond in the final regulation.
\72\Section 1332.
\73\Section 1333.
\74\Section 1334.
\75\Section 1331(c).
\76\Sections 1332(b), 1333(a)(2), and 1334(b).
---------------------------------------------------------------------------
In this regulation, each housing goal requires that a certain
percentage of the dwelling units financed by each GSE's total mortgage
purchases for the year be the type of dwelling units targeted by the
housing goal. For example, for 1995, the housing goal for low- and
moderate-income families is established at 38 percent--in other words,
38 percent of the dwelling units financed by each GSE's mortgage
purchases would have to be affordable to low- or moderate-income
families; thus, if a GSE's mortgage purchases financed 2 million
dwelling units, the proposed regulation would require that 38 percent
of those 2 million dwelling units, or 760,000 dwelling units, be
affordable to low- or moderate-income families.
A single mortgage can count for all three goals. For example, a
mortgage that finances a house for a low-income family in a central
city would count under the special affordable housing goal (low-income
family in a low-income area), the low- and moderate-income housing goal
(low-income borrower), and the central cities, rural areas, and other
underserved areas goal (central city). Under the housing goals for
1993, the majority of the mortgages that qualified for one goal also
qualified for a second goal.
Housing Goal for Low- and Moderate-Income Families
The Secretary is establishing an annual housing goal for each GSE's
purchase of mortgages on housing for low- and moderate-income families
(``the low- and moderate-income goal''). The Secretary's detailed
findings under the factors for establishing the goal are attached as
Appendix A. The annual goal for 1995 for each GSE's purchases of
conventional mortgages financing housing for low- and moderate-income
families is established at 38 percent of the total number of dwelling
units financed by each GSE's mortgage purchases in 1995. The annual
goal for 1996 is 40 percent. The final regulation shall establish the
annual goals for 1997 and 1998 and the Secretary intends that the 1998
goal apply thereafter, unless revised through subsequent rulemaking;
the Secretary seeks comment on the level of the goals for 1997, 1998,
and thereafter--see the questions listed above (in the leading the
industry discussion) and repeated at the end of this preamble.
Housing Goal for Central Cities, Rural Areas, and Other Underserved
Areas
The Secretary is establishing an annual goal for 1995 and 1996 for
the GSEs' purchase of mortgages on housing located in central cities,
rural areas, and other underserved areas. In accordance with the Act,
under this proposed rule, the Secretary is expanding and redefining
this goal from the central cities goal, which applied during the
transition years of 1993 and 1994, to a goal that is directed to
mortgage purchases in central cities, rural areas and other areas, with
a focus on underserved areas within those geographic locations.
``Underserved areas'' are those areas that experience problems with the
availability of mortgage credit.
For the transition period of 1993 and 1994, the goal was directed
solely to the GSEs' purchases of mortgages financing housing located
anywhere in ``central cities.'' The Act defined ``central cities'' for
the transition period as those cities designated as central cities by
the Office of Management and Budget (OMB). These provisions were
modelled on HUD's existing Fannie Mae regulations. The legislative
history of the Act states that for the transition period the goal only
applied to purchases in OMB-defined ``central cities'' to allow time to
gather data and establish an appropriate methodology to ``redefine and
expand'' the goal.77 The legislative history also provides that
``following the transition period, geographic areas relating to the
goal will be as determined by (the regulator).''78
\77\See S. Rep. at 38 and 65.
\78\S. Rep. at 65.
---------------------------------------------------------------------------
Following the transition period, the Act requires the Secretary to
establish an annual goal for the purchase of mortgages located in
``rural areas and other underserved areas'' as well as ``central
cities.'' In establishing the central cities, rural areas, and other
underserved areas goal, Congress was concerned with the ``acute''
``housing problems'' in the nation's cities and with the ``neglected
and decaying'' parts of the cities.79 Congress directed HUD to
target ``areas with relatively poor access to mortgage credit,'' areas
with ``(i)nadequate access to mortgage credit,'' and areas suffering
from ``the vestiges of redlining.''80
\79\S. Rep. at 28.
\80\S. Rep. at 38; see also, id. at 34 (the GSEs must address
``the disinvestment in central cities and rural communities'').
``(R)edlining ha(s) effectively disadvantaged certain geographic
areas, particularly inner city and rural areas.'' Id. at 41. See
also, 138 Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of
Sen. Riegle) (the bill would provide ``a greater flow of credit to
people who otherwise have a very difficult time financing home
mortgages'').
---------------------------------------------------------------------------
The legislative history provides that ``(t)he purpose of these
goals is * * * to service the mortgage finance needs of low- and
moderate-income persons, racial minorities and inner-city
residents.''81 Congress noted that ``* * * mortgage discrimination
and redlining have effectively disadvantaged certain geographic areas,
particularly inner city and rural areas.''82 In explaining the
conference bill on the floor of the Congress, Chairman Gonzalez stated:
``In establishing the definition of a central city and in determining
compliance with such a goal, the Secretary should, to the extent
possible, exclude purchases made in non-low income census tracts that
happen to otherwise be within the central cities area.''83
\81\S. Rep. at 34 (emphasis added); see also, id. at 32, and 138
Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of Sen.
Riegle) (``inner-city lending * * * is a very important part of this
legislation'').
\82\S. Rep. at 41 (emphasis added).
\83\ 138 Cong. Rec. H11453, H11457 (daily ed. Oct. 5, 1992).
Rep. Gonzalez made the identical statement at 138 Cong. Rec. H11077,
H11099 (daily ed. Oct. 3, 1992).
---------------------------------------------------------------------------
The title of this goal also leads to the conclusion that Congress
intended this geographically targeted goal to focus on underserved
areas. ``Central cities, rural areas, and other underserved areas''
indicate that central cities and rural areas are intended to be proxies
for underserved areas. [[Page 9163]]
Expanding and Redefining the Goal
In accordance with the requirements of the Act, the Secretary is
expanding this goal for 1995 and 1996 to include rural and other
underserved areas as well as central cities. At the same time, the
Secretary has redefined the term ``central cities'' to encompass the
underserved areas of central cities and defined ``rural areas'' as the
underserved areas of non-metropolitan areas. The goal is, therefore,
intended to focus on communities within central cities, rural areas and
other areas which are ``underserved'' in terms of availability of
mortgage credit. This determination is based on the legislative intent,
the factors for establishing the goal, HUD's research on underserved
areas during the transition period, the results of two public forums
held with researchers, public-interest groups, other federal agencies,
and the GSEs, and data received from the GSEs during the transition.
Underserved Areas
The Act did not define the term ``underserved area'' but the
legislative history indicates that it should be defined as those areas
that lack access to mortgage credit. As detailed in Appendix B, the
Secretary considers ``underserved'' to mean those areas that have an
unmet demand for mortgage credit. Using 1993 HMDA data and 1990 Census
data, the Department analyzed mortgage application denial and
origination rates throughout the country, as well as reports and other
research on the availability of mortgage credit and mortgage flows. The
research indicated that pervasive and widespread disparities exist in
lending across the nation. The Department found, as have other
researchers, that the availability of mortgage credit to an area is
related to its minority concentration and income characteristics of its
residents. Two patterns are clear in the Department's research and that
of other researchers:
Census tracts with higher percentages of minority
residents have higher mortgage denial and lower loan origination rates
than all-white or predominately white census tracts; and
Census tracts with lower incomes have higher denial rates
and lower origination rates than higher income tracts.
As Appendix B details, HUD's research and that of others has found
that the location of a census tract--whether it is located within a
central city or a suburb--has minimal impact on whether the tract is
underserved.84 Mortgage flows in a census tract have far less to
do with the physical location of a tract, i.e., central city versus
suburb, than the minority concentration and median income of that
tract. The most thorough studies available demonstrate that areas with
lower incomes and higher shares of minority residents consistently have
poorer access to mortgage credit, with higher denial rates and lower
origination rates for mortgages. With income, minority composition, and
other relevant census tract variables controlled for, differences in
credit availability between central cities and suburbs are minimal.
\84\See, e.g., Robert B. Avery, Patricia E. Beeson, and Mark S.
Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA
Data,'' (presented at the Western Economic Association Annual
Meetings, Vancouver BC), July 1994, and William Shear, James
Berkovec, Ann Dougherty, and Frank Nothaft, ``Unmet Housing Needs:
The Role of Mortgage Markets,'' unpublished paper, June 1, 1994.
---------------------------------------------------------------------------
Based on this research, the Secretary has determined that this goal
should target those areas in central cities, rural areas, and other
areas where: 30 percent or more of the residents in a census tract are
minority and the median income of families in the census tract is at or
below 120 percent of the area median income; or where the median income
of families in the census tract is less than 80 percent of the area
median income. The goal therefore is directed to census tracts in
central cities, rural areas, and all other parts of the country meeting
these criteria. (For purposes of defining ``rural areas,'' the
Secretary is seeking comments on whether counties or Block Numbering
Areas, which are equivalent to census tracts in rural areas, are the
appropriate geographic unit.)
The Department has conducted an intensive research effort on
identifying geographic areas underserved by the mortgage markets. This
research effort is ongoing and will continue during the period of
proposed rulemaking. Research underway includes the analysis of the
implications of alternative definitions of underserved areas in urban,
suburban, and rural communities. The Department will also engage in a
multi-year research effort to identify and analyze indicators of unmet
demand for mortgage credit. This long-term research effort will be used
by the Department in future years to review the level of the housing
goals established for the GSEs. In conducting this research effort on
identifying indicators of unmet demand, the Department fully intends to
consult with other Federal agencies including Treasury and with the
GSEs.
Central Cities
For purposes of this housing goal, the Secretary is defining
``central cities'' as the underserved areas of any political
subdivisions designated as central cities by the Office of Management
and Budget (OMB). Directing the goal to all areas of central cities
identified by the Office of Management and Budget (OMB) would not
appropriately target the GSEs' activities to areas that have a relative
lack of access to mortgage credit. OMB defines the central city or
central cities of a metropolitan statistical area based on population
and other factors that measure job location and commuting patterns. OMB
does not take into account mortgage credit availability or measures of
economic distress. As a result, the list of 545 central cities includes
very affluent and well served cities and excludes other obviously
distressed cities. For example, Palo Alto, California--with a per
capita income of $32,500 and a poverty rate of 2 percent--is a central
city but Compton, California--with a per capita income of $7,800 and a
poverty rate of 24 percent--is not a central city.
In addition, there are substantial regional variations in the
portion of state urban population that are included in central cities.
In the southern and western parts of the country, cities have often
expanded by annexing adjacent territory. This option was generally not
available to cities in the Northeast, which have retained their
historical boundaries. As a result, a substantially greater portion of
the population lives in central cities in the South and West than in
the more urbanized Northeastern states. This has led to perverse
results for the central cities goal in place for 1993: Central cities
accounted for more than 50 percent of both GSEs' mortgage purchases in
Arizona, New Mexico, and North Dakota. In New Jersey, on the other
hand, purchases in central cities accounted for only 4 percent of GSE
purchases.
James A. Johnson, Fannie Mae's Chairman and Chief Executive
Officer, in April 1994 testimony before a Congressional sub-committee
summarized some of the problems with using the OMB designation of
central cities:
Central cities are also of limited value as proxies for
distressed, needy, minority or low- and moderate-income census
tracts. Especially in older cities that are hemmed in by separately
incorporated suburbs and other communities, political jurisdictions
enforce artificial barriers to describing areas of need. Conversely,
where cities can annex neighboring communities as growth occurs, the
result is a central city that encompasses so much territory of such
diverse nature that [[Page 9164]] it loses much of its distinctive
urban character.85
\85\Testimony before the Committee on Banking, Finance, and
Urban Affairs, Subcommittee on General Oversight, Investigations,
and the Resolution of Failed Financial Institutions, U.S. House of
Representatives, at 17 (April 20, 1994).
---------------------------------------------------------------------------
Rural Areas
Determining how to define ``rural areas'' within the context of
this goal is even more difficult than the complex analyses of HMDA and
Census data for cities and suburbs summarized in Appendix B. This
occurs for three interrelated reasons: (1) The general lack of accurate
data on mortgage flows and credit activity outside metropolitan
statistical areas (MSAs), (2) the scarcity of careful current studies
on access to mortgage credit in rural locations, and (3) the existence
of a variety of statutory and statistical definitions for ``rural.''
To address the many issues pertinent to developing an appropriate
and workable definition of ``rural areas'' for purposes of this rule,
the Department has consulted with rural demographers and economists at
the Department of Agriculture's Economic Research Service, the Census
Bureau, the Farmers Home Administration, and the Housing Assistance
Council. All of these issues were also discussed at a forum attended by
researchers from academia, the Department of Agriculture, the Census
Bureau, the Housing Assistance Council, the Congressional Budget
Office, public-interest groups, and the GSEs. The Secretary's decisions
about defining ``rural areas'' are based on these consultations as well
as ongoing analyses of data from the 1990 Census, the American Housing
Survey, and the Residential Finance Survey.
Framework for Defining Rural Areas
In considering the issue of how to define rural areas for the
central cities, rural areas, and other underserved areas goal, the
Department analyzed available data and research on mortgage flows and
credit access in rural locations, consulted with rural demographers and
economists at government agencies and elsewhere, and considered the
multiple existing definitions of ``rural'' currently in use. Based on
the evidence that income and housing needs vary as greatly between
nonmetropolitan counties and block numbering areas86 as they do
within MSAs, the Secretary has determined that the basic definition of
``underserved areas'' developed above--as areas with high minority
shares or low median family income--should also apply in rural areas,
that is, outside of MSAs. The Secretary has determined that for
purposes of this housing goal that ``rural areas'' are the underserved
areas in nonmetropolitan counties, i.e., outside of Metropolitan
Statistical Areas.
\86\For data collection in the 1990 Census, block numbering
areas (BNAs) are the non-metropolitan equivalent of census tracts--
subareas of counties that contain approximately 4,000 people.
---------------------------------------------------------------------------
The Secretary seeks comments on whether the appropriate unit of
geographic focus for defining underserved areas in non-MSAs is the
county or the Block Numbering Area (the rural equivalent of census
tracts). In addition, the Secretary seeks comment on whether this
definition of rural should be expanded by including indicators of
access to metropolitan areas and/or indicators of jurisdictional size
(i.e., include small communities of less than 2,500 people). The
following section summarizes the factors the Secretary considered in
determining this proposed definition of rural and closes with questions
on which the Secretary solicits comments about the proposed definition.
(1) Unavailability of accurate data on mortgage flows and credit
activity in rural locations. HMDA data, the source used for most of the
studies of credit needs summarized in Appendix B, does not provide
information on mortgage activity outside of metropolitan statistical
areas (MSAs), and within MSAs census tracts may contain both rural and
urban segments.87 Other sources of mortgage flow information, like
the Federal Reserve Call Reports, do not detail locations of loans.
\87\Only lending institutions with offices in metropolitan
statistical areas (MSAs) report mortgage origination data under
HMDA. 12 U.S.C. 2803(a)(1).
---------------------------------------------------------------------------
(2) Studies of access to mortgage credit. Researchers participating
in the Department's forum agreed that available studies do not show
that rural areas endemically have problems with access to credit,
although this (lack of) conclusion may stem from data unavailability. A
1990 study by the Urban Institute, for example, found little evidence
of a national rural home credit shortage, and attributed low mortgage
activity in some local markets to lack of demand in weak local
economies.88 Yet abundant anecdotal evidence exists that
underserved areas in rural communities require a special focus by the
GSEs, to redress years of historic neglect by the mortgage market.
According to the Housing Assistance Council, access to mortgage credit
appears worse as distance from metropolitan centers increases,89
while Department of Agriculture representatives judge that communities
with population below 2,500 or 5,000 are more likely than other rural
communities to lack access to credit. More generally, the forum
participants agreed that, as found for central cities, rural
communities with low income and minority concentrations were those more
likely to be underserved by the mortgage markets.
\88\The Urban Institute, The Availability and Use of Mortgage
Credit in Rural Areas (1990), examined data on ownership, mortgage
terms and conditions, and Federal program coverage, particularly for
moderate-income home buyers.
\89\Statement of Moises Loza, Executive Director of the Housing
Assistance Council (HAC), July 21, 1994, to the Subcommittee on
Environment, Credit, and Community Development of the House
Committee on Agriculture.
---------------------------------------------------------------------------
A report by the Economic Research Service of the Department of
Agriculture shows that urban proximity is important: economic
conditions and housing problems tend to be worse in counties most
remote from metropolitan areas or smaller cities.90 In particular,
counties with ``persistent low-income,'' which are disproportionately
more rural and remote, have had little recent economic activity,
stagnation in real family income during the 1980s, and continue to have
the highest incidence of housing lacking complete plumbing. These high
poverty counties are concentrated in Appalachia and in areas with high
proportions of minority residents.
\90\Rural Conditions and Trends, Vol. 4, No. 3 (Fall 1993), a
special 1990 census issue, documents differences between counties in
population, education, employment, income, poverty, and housing.
---------------------------------------------------------------------------
(3) Current Definitions of Rural. In considering a workable
definition of ``rural areas,'' the Secretary focused on three major
definitions in use: (i) The Census Bureau's official designation; (ii)
the Farmer's Home Administration's designation for several of its
programs; and (iii) the designation of ``non-metropolitan.'' In this
proposed rule, rural areas are defined as ``underserved areas''
``located outside of any Metropolitan Statistical Area designated by
the Office of Management and Budget.'' The reasons for choosing to
focus on non-metropolitan areas are described below:
(a) Census Bureau definition. The Census Bureau bases its
definition of rural on population size and density.91 Locations
that meet the rural definition are designated once per decade, based on
decennial Census results. There are two major disadvantages of using
the Census Bureau definition as part of a definition of rural areas for
this goal. First, few relevant intercensal data [[Page 9165]] sources
are based on the Census Bureau definition, complicating the work
required to establish market segments and set the level of the housing
goals. Second, geocoding addresses to rural locations based on this
definition would be difficult and burdensome for the GSEs, given the
current state of geographic information systems software. The Census
Bureau's 1992 Tiger/Line file's ability to provide accurate addresses
is weakest in rural areas, particularly for rural route
addresses.92
\91\See U.S. Bureau of the Census, 1990 Census of Population and
Housing: Guide, Part B. Glossary, 16-17 (1993) (hereinafter cited as
``Census Glossary'').
\92\The Tiger/Line files are the extract of the Census Bureau's
geographic data base and are produced for geocoding by data users.
They categorize all polygons and blocks as either rural or urban and
have address ranges for most of the country.
---------------------------------------------------------------------------
(b) Farmers Home Administration's definition of rural. The Farmers
Home Administration (FmHA) defines rural areas eligible for several
programs, including the 515 loan program,93 and the definitions
vary among the programs. Generally, more locations qualify as ``rural''
under these definitions than under the Census Bureau's definition
because the FmHA definitions include places with populations above
2,500 and the Bureau would categorize such places as ``urban.''94
The most critical disadvantage in using a FmHA definition as the rural
identifier is that there is no central or machine-readable source of
information on areas defined by FmHA as rural; instead, local maps are
marked to show the appropriate boundaries and then stored in field
offices.
\93\42 U.S.C. 1490.
\94\Cf. 42 U.S.C. 1490 to Census Glossary at 16-17.
---------------------------------------------------------------------------
(c) Non-Metropolitan Statistical Areas. The Secretary chose to
incorporate this designation into the definition of ``rural areas.''
First, geocoding and reporting would be straightforward, since MSAs are
composed of counties in most parts of the country. This definition
appears to correspond better to the parts of the country where
availability of mortgage credit has been an issue. The availability of
mortgage credit in the rural fringes of metropolitan areas appears to
be less of a problem than in rural communities distant from
metropolitan areas. Finally, most intercensal data, including
population and household estimates, employment, income estimates, etc.,
are produced at least annually at the county level.
Questions Related to the Definition of Rural Areas
The Secretary invites comment on the following questions:
(1) Should rural areas be based on the characteristics of Block
Numbering Areas or counties? Which of these two options makes better
sense for lenders and for GSE reporting? Which option better directs
goal performance at areas with poor access to mortgage credit?
(2) In establishing the definition for rural areas, should the
income and minority criteria (used for defining central cities and
other underserved areas) be supplemented with other indicator(s) of the
needs for better access to mortgage credit? Should population size
(e.g., communities below 2500 or non-metropolitan counties below
50,000) be considered as such an indicator?
(3) What are the relative merits of indicators of access to
metropolitan areas or nonmetropolitan cities such as the ``Beale'' or
``Ghelfi-Parker'' codes?95
\95\These indicators of urban influence were developed by the
Department of Agriculture's Economic Research Service. Linda M.
Ghelfi, ``County Classifications,'' Rural Conditions and Trends,
4(3): 6-11 (1993).
---------------------------------------------------------------------------
(4) In New England, where MSAs are not composed of counties, should
the definition of rural areas include areas ``outside (P)MSAs'' or
``outside NECMAs''?
Other Underserved Areas
For purposes of this housing goal, the Secretary has determined
that ``other underserved areas'' are census tracts located in
metropolitan areas located outside of central cities and having the
minority and income characteristics described above. This definition
will cover suburban communities that lack access to credit.
Alternative Approaches to Defining the Central Cities, Rural Areas, and
Other Underserved Areas Goal
The Secretary considered alternative approaches to establishing
this goal. One alternative would be to simply expand the goal by
retaining all areas in all 545 OMB-designated central cities, all rural
areas, and all other underserved areas. If underserved areas are
defined as described above, this alternative approach would result in a
goal that targets nearly 70 percent of the country's population. The
Secretary decided this approach was inconsistent with the intent of the
Act.
Congress established the goals to ensure that Fannie Mae and
Freddie Mac take special consideration of specific housing needs in
carrying out their work. The goals are intended to be priority areas
for the GSEs as they carry out their Charter Act purposes. A goal that
encompasses so much of the nation's population and geography would be
unlikely to provide the GSEs with appropriate direction. Further, this
approach would lead to a dispersion of the GSEs' goal-oriented business
to a large number of communities that do not meet the Congressional
directive that they be areas with a relative lack of mortgage credit.
Finally, an overly-broad approach would result in less support for the
critical efforts of cities and rural communities to improve and
stabilize neighborhoods that, because of past practices and historic
patterns, have an unsatisfactory availability of mortgage credit.
The Size of the Goal
Because this goal has been redefined, the market of mortgages
originated and available for GSE purchase is different from and indeed
smaller than the market of mortgage originations for the 1993-1994
goal. The Secretary estimates that mortgages originated in underserved
areas of central cities, rural areas, and other areas comprise 21 to 23
percent of the conventional conforming mortgage market. Thus, the goal
is established at a percentage that is lower than the central cities
goal in the transition period (1993-94).
Based on a consideration of the factors for establishing the goal
detailed in Appendix B, the Secretary establishes the annual goal for
1995 for each GSE's purchases of mortgages financing housing located in
underserved areas at 18 percent of the total number of dwelling units
financed by each GSE's mortgage purchases. The goal for 1996 is 21
percent. The final regulation shall establish the annual goals for 1997
and 1998 and the Secretary intends that the 1998 goal apply thereafter,
unless revised through subsequent rulemaking; the Secretary seeks
comment on the level of the goals for 1997, 1998, and thereafter--see
the questions listed above (in the leading the industry discussion) and
repeated at the end of this preamble. In 1993, 15.9 percent of the
dwelling units financed by Fannie Mae's mortgage purchases were in
areas defined under the proposed definition of central cities, rural
areas, and other underserved areas, while Freddie Mac's performance was
14.4 percent.
Units will count toward this goal if the units are located in a
central city as redefined, a rural area as defined, or any other
underserved area. Through the use of geocoding or any similarly
accurate and reliable method, the GSEs are required to determine
whether units [[Page 9166]] financed under mortgages purchased by the
GSEs are located in central cities, rural areas, and other underserved
areas as defined by regulation.
Special Affordable Housing Goal--Background
This goal had no antecedent in the current Fannie Mae regulations.
The Act requires that the Secretary ``establish a special annual goal
designed to adjust the purchase by each (GSE) of mortgages on rental
and owner-occupied housing to meet the then-existing, unaddressed needs
of, and affordable to, low-income families in low-income areas and very
low-income families.''96
\96\Section 1333(a)(1).
---------------------------------------------------------------------------
During the transition period (1993-1994), the Act required that
each GSE's mortgage purchases under the special affordable housing goal
be equally divided between mortgages on single family housing and
mortgages on multifamily housing.\97\ The multifamily goal was further
divided, with 45 percent of the goal devoted to mortgages on
multifamily housing where dwelling units were affordable to low-income
families.\98\ The remaining 55 percent of the dollar volume of
multifamily mortgages purchased had to comprise mortgages on
multifamily housing in which either: (1) ``at least 20 percent of the
units are affordable to families whose incomes do not exceed 50
percent'' of area median income;\99\ or (2) ``at least 40 percent of
the units are affordable to very low-income families.''\100\ Only the
portions of qualifying mortgages on multifamily properties that are
attributable to units affordable to low-income families contributed to
the achievement of this goal.\101\ Under the transition standard, where
at least 20 percent of the units were affordable to especially low-
income families (families whose incomes do not exceed 50 percent of
area median income) or at least 40 percent of the units were affordable
to very low-income families, all units from such multifamily projects
that were affordable to low-income families counted toward the goal.
\97\Section 1333(d)(1)-(2).
\98\Section 1333(d)(3)(A)(i).
\99\Section 1333(d)(3)(A)(ii)(I). The Department defined
``especially low-income families'' as those with incomes not in
excess of 50 percent of area median income.
\100\Section 1333(d)(3)(A)(ii)(II).
\101\Section 1333(d)(3)(C).
---------------------------------------------------------------------------
The Act required that, for each GSE's mortgage purchases financing
single family housing to be counted toward achievement of the special
affordable housing goal, 45 percent of the dollar volume of single
family mortgages had to comprise mortgages of low-income families
living ``in census tracts in which the median income does not exceed 80
percent of the area median income.''\102\ The remaining 55 percent of
the dollar volume of single family mortgage purchases had to comprise
mortgages of very low-income families.\103\
\102\Section 1333(d)(3)(B)(i).
\103\Section 1333(d)(3)(B)(ii).
---------------------------------------------------------------------------
The Special Affordable Housing Goal
Following the transition period, the Act does not specify the types
of mortgage purchases that shall count toward achievement of the
special affordable housing goal.\104\ Based on experience during the
transition, the Secretary concluded that determining GSE performance
under these provisions was cumbersome and did not clearly reflect the
number of especially low- and very low-income families actually served
under the multifamily portion of the special affordable housing goal.
Accordingly, as described below, the proposed regulation simplifies the
counting under this portion of the goal.
\104\See section 1333.
---------------------------------------------------------------------------
The proposed regulation would substantially simplify the special
affordable housing goal to apply to ``rental housing and owner-occupied
housing.''\105\ Under the proposed regulation, rental housing would
include all units in multifamily housing and all units in single family
rental housing. The proposed regulation makes this change in part
because of the high percentage of renters in single family dwelling
units--41 percent of rental units in properties secured by
conventional, conforming mortgages are located in single family
properties.\106\
\105\See section 1333(a).
\106\Special tabulation derived from Bureau of the Census,
Housing and Household Economic Statistics Division, 1991 Residential
Finance Survey.
---------------------------------------------------------------------------
The rental portion of the special affordable housing goal would be
targeted to very low-income families because of the substantial housing
needs of these renters. Five-eighths of renters with incomes below 50
percent of area median income pay more than 30 percent of their income
for housing, live in inadequate housing, or are overcrowded.\107\ Even
worse, almost half of the 7.4 million renters with incomes below 30
percent of area median income pay more than half of their income for
housing or live in severely inadequate housing.\108\ The high incidence
of severe housing problems among these extremely-low-income renters
reflects the severe shortages of units affordable to them.
\107\U.S. Department of Housing and Urban Development, Office of
Policy Development and Research, Worst Case Needs for Housing
Assistance in the United States in 1990 and 1991--A Report to
Congress, 4 (June 1994).
\108\U.S. Department of Housing and Urban Development, Office of
Policy Development and Research.
---------------------------------------------------------------------------
Under the proposed regulation, only those rental units that are
affordable to very low-income families would count toward the goal
rather than all low-income units in buildings that had a certain
percentage of very low- or especially low-income units. Under the
owner-occupied housing portion of the goal, the dwelling units that
count toward the goal are units: (1) Located in low-income areas and
owned by low-income families; and (2) owned by very low-income
families.
The Act provides that, for each GSE, the special affordable housing
goal ``shall not be less than 1 percent of the dollar amount of the
mortgage purchases by the (GSE) for the previous year.''\109\ Although
the goal has been established to exceed one percent of each GSE's total
mortgage purchases in the preceding year, to maintain consistency, the
special affordable housing goal, like the other two goals, is expressed
as a percentage of dwelling units rather than dollars. The Secretary
determined that expressing this goal as a percentage of the previous
year's business was not preferable for several reasons: (1) Due to the
cyclicality of the mortgage market and the GSEs' business volume, use
of a fixed percentage of the previous year's purchases could make such
a goal less realistic in a year such as 1995, when total purchases are
projected to fall sharply from prior-year levels due to the decline in
refinancing activity; (2) conversely, in years of sharply increasing
activity, the goal represented by a set percentage of total mortgage
purchases in the previous year could represent an insufficient
commitment by the GSEs to special affordable housing; and (3) where a
GSE purchases (for a given sum) mortgages financing two dwelling units
that are affordable to families at 30 percent of area median income,
the GSE would be making a greater contribution to affordable housing
than if the GSE purchased (for the same sum) one mortgage that was
affordable to one family at 60 percent of area median income. A units-
based goal takes this consideration into account, but a strict dollar-
based goal would not.
\109\Section 1333(a).
---------------------------------------------------------------------------
The proposed regulation provides that for 1995 the special
affordable housing goal will be 11 percent of the total
[[Page 9167]] number of dwelling units financed by each GSE's mortgage
purchases for 1995. The goal will be 12 percent for 1996. The goal is
equally divided between rental housing and owner-occupied housing,
i.e., for 1995 the goal for rental housing is 5.5 percent and the goal
for owner-occupied housing is 5.5 percent. For 1996, the goal is 6
percent for rental housing and 6 percent for owner-occupied housing.
The final regulation shall establish annual goals for 1997 and 1998 and
the Secretary intends that the 1998 goal apply thereafter, unless
revised through subsequent rulemaking; the Secretary seeks comment on
the level of the goals for 1997, 1998, and thereafter--see the
questions listed above (in the leading the industry discussion) and
repeated at the end of this preamble.
Performance Under the Special Affordable Housing Goal
In evaluating each GSE's performance in achieving this goal, the
Act requires that the Secretary give full credit toward achievement of
the special affordable housing goal for: (1) The purchase or
securitization of federally related mortgages that cannot be readily
securitized through the Government National Mortgage Association
(GNMA)\110\ or another Federal agency, where the GSE's participation
substantially enhances the affordability of the housing subject to such
mortgages,\111\ and the mortgages are on housing that otherwise
qualifies under this goal; (2) the purchase or refinancing of seasoned
loan portfolios where the seller has a specific program to use the
proceeds of such sales to originate new loans that meet the special
affordable housing goal and such purchases or refinancings support
additional lending for housing that otherwise qualifies under this
goal; and (3) the purchase of direct loans made by the Resolution Trust
Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC)
where the loans are not guaranteed by the RTC or the FDIC or other
Federal agencies, the loans include recourse provisions similar to
those offered through private mortgage insurance or other conventional
sellers, and such loans are for the purchase of housing that otherwise
qualifies under this goal.\112\
\110\A mortgage originated more than 2 years before a GSE
purchases it is an example of a mortgage that cannot be readily
securitized by GNMA.
\111\Mortgages that cannot be readily securitized through GNMA
or another Federal agency, and mortgages where a GSE's participation
substantially enhances the affordability of the housing subject to
the mortgages, include mortgages under the Home Equity Conversion
Mortgage (HECM) Insurance Demonstration Program (sec. 255 of the
National Housing Act), 12 U.S.C. 1715z-20, and under the Guaranteed
Rural Housing Loan program, 7 U.S.C. 1933.
\112\Section 1333(b)(1).
---------------------------------------------------------------------------
This proposed regulation provides that entities qualify as sellers,
under (2) above, where the sellers currently operate on their own or
actively participate in an ongoing program that results in the
origination of loans meeting the special affordable housing goal; thus,
a GSE's purchase of such loans supports additional lending for housing
that will qualify under this goal. By encompassing active
participation, the proposed regulation allows purchases of portfolios
from sellers, who actively participate with qualified housing groups
that operate programs resulting in the origination of loans meeting
this goal, to count toward achievement of the goal. However, if a GSE
wants to count portfolio purchases toward achievement of this goal, it
must verify and monitor that the sellers currently operate or actively
participate in such ongoing programs that result in the origination of
additional loans meeting the requirements of this goal. Where a
seller's primary business is originating mortgages on housing that
qualifies under the special affordable housing goal, the proposed
regulation provides that such a seller is presumed to meet the
requirement for actively participating in program(s) supporting lending
meeting the special affordable housing goal.
Under the Interim Notices, no credit was given toward achieving the
special affordable housing goal for any purchases or securitization of
mortgages associated with the refinancing of existing GSE portfolios.
The intent of this prohibition was to preclude the GSEs from swapping
portfolios toward the end of the year in an effort to achieve the
special affordable housing goal. After reviewing the experience of the
transition period, the Secretary has determined that wholesale
exchanges of mortgages between the GSEs shall not count toward
achievement of the housing goal; however, refinancings of individual
mortgages should count toward the special affordable housing goal so
long as the refinancing is an individual ``arms-length'' refinancing by
a borrower. This is appropriate for several reasons: (1) The GSEs have
very little influence on whether a particular single family mortgagor
decides to refinance the mortgage--such refinancings are market driven
and normally due to decreases in interest rates, and the Secretary
concluded that such market driven refinancings should count toward the
goal; and (2) determining whether the GSE had purchased the previous
mortgage was time consuming and burdensome for the GSEs and for the
Department and yielded little incremental value in producing more
affordable housing finance.
General Requirements
Performance under the goals is determined by assessing the portion
or percentage of each GSE's business that satisfies each goal. In
determining this percentage, a fraction is used with the denominator of
the fraction measuring all mortgages purchased that could under
appropriate circumstances count towards such a goal and the numerator
including only those purchases that count toward the goal. The
denominator does not include GSE transactions or activities that are
not included in the terms ``mortgage'' or ``mortgage purchase.'' For
example, where a GSE purchases a non-conventional mortgage, such as a
mortgage insured or guaranteed by the Federal Housing Administration
(FHA), such a mortgage purchase shall not be included in the
denominator for purposes of determining that GSE's performance under
the housing goal for low- and moderate-income housing because
``mortgage purchase'' does not include the purchase of non-conventional
mortgages.
In establishing the goals for housing for low- and moderate-income
families, housing located in central cities, rural areas, and other
underserved areas, and special affordable housing, the Secretary may
consider the number of housing units financed by any multifamily
housing mortgage purchase.\113\ The Secretary has decided to count all
dwelling units, whether in multifamily or single family housing, under
these goals if the units otherwise meet the requirements of the Act and
this proposed regulation.
\113\See section 1331(b).
---------------------------------------------------------------------------
Special Counting Rules Under the Goals
During the transition period, the Department analyzed the impact of
requirements under the Interim Notices concerning the extent various
types of transactions should count toward achievement of the goals.
Based on that analysis, the Secretary is proposing changes to or is
clarifying the treatment of certain transactions, including credit
enhancements, cooperative loans, refinancings, second loans, and risk-
sharing arrangements between the Department and the GSEs. In
determining the level of credit for [[Page 9168]] various transactions,
the Secretary developed certain principles to guide the determination,
and these principles will be used in the future when the Secretary
determines whether new types of transactions count toward the goals.
The principles are: (1) Where a transaction is substantially equivalent
to a mortgage purchase, the transaction generally should receive full
credit; (2) where a transaction is less risky than the risk associated
with the GSE's mortgage purchases, the amount of credit should be less
than full credit; and (3) where a transaction creates a new market or
increases liquidity in an existing market, the amount of credit should
generally be full credit.
(1) Credit Enhancements. Under this proposal, mortgages supported
by the following credit enhancements would count toward achievement of
the housing goals. Under these credit enhancement transactions, the GSE
guarantees housing finance bonds issued by any entity, including a
state or local housing finance agency; the GSE provides collateral in
the form of specific mortgages owned by the GSE; and the GSE's
guarantee has a credit risk substantially equivalent to the credit risk
the GSE would have assumed if it had securitized the mortgages financed
by the housing bonds. The Secretary will consider whether other types
of credit enhancements should count toward the housing goals and, if
other types are counted, whether those types of credit enhancements
should receive full or partial credit. The Secretary is seeking
comments on whether other types of credit enhancements should count.
(2) REMICs. The final regulation will provide whether real estate
mortgage investment conduits (REMICs) will count toward achievement of
any of the housing goals. The Secretary seeks public comment on REMICs
and requests views from the public on the following questions:
(i) Where a REMIC contains a GSE's mortgages or mortgage-backed
securities (MBS), should that type of REMIC count toward any of the
housing goals? How should double counting be avoided?
(ii) Where a REMIC does not contain a GSE's mortgages or MBS,
should that type of REMIC count toward any of the housing goals?
(iii) Should other types of REMICs be counted toward any of the
housing goals?
(iv) In determining whether any REMICs count toward achievement of
the housing goals, what should the Secretary consider?
(v) If any of these REMICs should count toward the housing goals,
should the REMICs receive full credit or some level of partial credit?
If partial credit, how should the level of credit be determined?
(vi) How should the final regulation deal with types of REMICs that
have not yet been created or used in the market? Should such REMICs
only count if that type of REMIC is reviewed by the Secretary and the
Secretary determines that the type of REMIC should count toward the
housing goals?
(3) Risk-sharing. Risk-sharing transactions would receive partial
credit toward achievement of the housing goals where: (1) The GSE's
risk-sharing arrangement is with the Department or another Federal
agency; and (2) the GSE and the agency acquire mortgages and share the
risks associated with those acquisitions. The credit to be awarded for
these risk-sharing activities is to be equal to the amount of the GSE's
risk under the risk-sharing arrangement.
For example, under section 542 of the Housing and Community
Development Act of 1992, codified as a note to 12 U.S.C. 1707, the
Department has entered into separate multifamily risk-sharing
agreements with Fannie Mae and Freddie Mac. Under those agreements,
each GSE shares risk of mortgage default through re-insurance with HUD
on a 50 percent expected loss basis. If, under these agreements, a GSE
shares the risk for 1,000 multifamily dwelling units and the GSE
certifies that its share of the risk is equal to 50 percent, that GSE's
performance under the low- and moderate-income housing goal would
include the following calculation: The numerator would include 50
percent of the dwelling units affordable to low- and moderate-income
families; and 500 dwelling units would be added to the denominator.
Where a GSE enters a risk-sharing arrangement, to receive credit
toward the goals, it must certify what the real percentage of risk is
and how that percentage was calculated--that percentage will then be
used in calculating the GSE's performance under the relevant goal. The
Department notes that in some risk-sharing arrangements, a GSE may
assume top loss or catastrophic loss. In those instances, the actual
risk assumed by the GSE clearly will not equal the percentage of the
risk stipulated, e.g., if a GSE assumes the first 20 percent of the
risk, its actual risk is higher than 20 percent.
(4) Participations. Where a GSE purchases only a portion of a
mortgage, that participation receives partial credit equivalent to the
percentage of the mortgage purchased. For example, if a GSE has a 20
percent participation in a mortgage, the denominator shall include 20
percent of the units financed by the mortgage and the numerator will
include that portion of the 20 percent of the units that meet the
requirements for the particular housing goal.
(5) Cooperative housing loans. The purchase of a mortgage on stock
in a cooperative housing unit (``a share loan'') is counted the same
way as the purchase of single family owner-occupied units and, thus,
affordability is based on the income of the owners. Where a GSE
purchases a mortgage on a cooperative building (``the blanket loan'')
and share loans for units in the same building, both purchases receive
full credit, i.e., the blanket loan counts under the housing goals in
the same manner as a multifamily mortgage purchase.
(6) Seasoned loans. Purchases of seasoned loans are treated the
same as purchases of recently originated mortgages and receive full
credit under the goals. However, such purchases shall not count if the
GSE already counted the mortgages under these housing goals or the
goals in the Interim Notice of Housing Goals. To ensure that the
housing covered by seasoned loans is affordable and counts, where a
mortgage is more than three (3) years old, affordability must be
determined based on income and/or rent level information at the time of
purchase by the GSE.
(7) Second loans. A second mortgage on a residential property will
be counted under the goals, if the property otherwise counts. The
Secretary is seeking comment on whether these loans should receive
partial or full credit toward the goals and, if partial credit, how the
amount of credit should be determined. These loans, many of which are
originated to pay for the costs of rehabilitating a single-family home,
are an important part of lending in underserved communities. Many low-
income homeowners cannot purchase new homes but seek to borrow funds to
make repairs to their existing homes to increase their habitability and
comfort. In many cases, however, these loans will have smaller unpaid
principal balances than loans originated for purchase.
(8) Tax Credit and Mortgage Revenue Bond Purchases. The Secretary
commends the GSEs' involvement in a wide variety of undertakings,
including equity investments in projects eligible for Low-Income
Housing Tax Credits (tax credits)\114\ and purchases of State and local
government housing bonds, [[Page 9169]] such as mortgage revenue
bonds,\115\ which serve significant purposes related to low- and
moderate-income housing. The Secretary has concluded, however, that--
although important in providing financing for low-income housing
development--these activities are not equivalent to ``mortgage
purchases'' and credit will not be granted toward the goals for these
activities. This approach is consistent with the language in the Senate
report concerning such activities: ``The (GSEs) are expected to
continue such investments, but to carry them out in addition to
initiatives necessary to meet the goals contained in this
legislation.''\116\
\114\26 U.S.C. 42.
\115\26 U.S.C. 143.
\116\Id. at 38. See also, id. at 31, and H.R. Rep. No. 102-206,
102d Cong., 1st Sess. 60 (1991) (hereinafter cited as ``H. Rep.'').
---------------------------------------------------------------------------
(9) Second homes. Mortgages financing secondary residences would
not count toward achievement of any of the goals because the Secretary
has determined that the goals should be directed to increasing the
supply of primary residences, not secondary residences.
(10) Refinancings. The purchase of refinanced mortgages shall fully
count toward achievement of the housing goals except as provided in the
specific restrictions under the special affordable housing goal which,
generally, permits arms-length borrower-driven refinancings to count
toward achievement of the goal but excludes wholesale exchanges of
mortgages between the GSEs.
Affordability Determination Under the Goals
In analyzing a GSE's performance in achieving these goals, the
Secretary will, for mortgage purchases on owner-occupied dwelling
units, consider the mortgagors' income as required by the Act.\117\
\117\Sections 1332(c)(1) and 1333(c)(1)(A).
---------------------------------------------------------------------------
For mortgage purchases on rental dwelling units, the Secretary will
consider, based on data at the time of mortgage purchase, the income of
prospective or actual tenants if available. Where such income
information is not available, rent on the dwelling units is used as a
proxy and compared to the rent levels affordable to very low-, low-,
and moderate-income families.\118\ To be considered affordable, the
rent cannot exceed 30 percent of the maximum income level of the
family's classification, i.e., very low-, low-, or moderate-income,
with adjustments for unit size.\119\
\118\Sections 1332(c) and 1333(c).
\119\Sections 1332(c)(2) and 1333(c)(2).
---------------------------------------------------------------------------
Consistent with the Act,\120\ the Secretary is requiring that
tenants' income information be collected by each GSE where such income
information is available. Based on the legislative history, income
information is available ``when it is known by the lender because, for
example, such information is required as a condition of an existing
federal housing program.''\121\ Thus, where, as a condition of an
existing federal, state, or local housing program, income information
of tenants is required to be collected, such income information is
considered as known to a lender and, therefore, available to the GSEs.
\120\Sections 1332(c)(1)(B) and 1333(c)(1)(B).
\121\S. Rep. at 35.
---------------------------------------------------------------------------
Where tenant income is not known to the lender, the 30 percent rent
proxy is to be used to monitor and evaluate each GSE's performance in
achieving the goals.\122\ (The Secretary notes that the 30-percent rent
standard prescribed by the Act for determining affordability under the
low- and moderate-income housing goal is too inclusive. In applying
this standard, it can be anticipated that more than 80 percent of
rental housing will be regarded as affordable to low- and moderate-
income families.)
\122\See sections 1332(c) and 1333(c).
---------------------------------------------------------------------------
The term ``rent'' is not defined in the Act. Where the term
``rent'' is used in eligibility and affordability requirements for
government housing programs, the term means ``gross rent,'' which
includes all utilities, based on either actual data or allowances.
Likewise, this proposed regulation defines ``rent'' as gross rent,
i.e., contract rent including utilities or contract rent plus utilities
where some or all of the utilities are not included in the contract
rent.
Where all utilities are not included in rent, use of contract rent
is unsatisfactory and excludes a significant component of housing costs
from the rent calculation. Utility costs comprise a significantly
larger share of total housing costs for lower income families in
comparison with higher income families. Moreover, applying the rent
test, with rent exclusive of utility costs, would result in an even
more unrealistically inclusive test of affordability for rental
dwelling units than is the case using gross rent. If contract rent were
used, the Department projects that more than 95 percent of all rental
units would be classified as affordable to low- and moderate-income
families.\123\
\123\Using rent as defined in this Notice, consistent with
current law, 93 percent of existing rental dwelling units and 78
percent of recently constructed rental dwelling units qualify as
affordable to low- and moderate-income families.
---------------------------------------------------------------------------
To resolve the problem of assuring consideration of gross rents
including utility costs, while at the same time providing workable
means for including those costs, this proposed regulation allows the
GSEs to use: Actual data on utilities; utility allowances based on data
from the American Housing Survey (AHS) and issued annually by the
Secretary; utility allowances established for the HUD Section 8 Program
(section 8 of the United States Housing Act of 1937, 42 U.S.C. 1437f);
and/or an alternative adjustment formula subject to approval by the
Secretary. The proposed regulation provides that, unless such an
alternative approach is approved by the Secretary, the GSEs shall use
actual data, the AHS-derived allowances, or the Section 8 allowances.
Where tenant income is not available, the Act requires that the
test for affordability of rental dwelling units be applied to units
``with appropriate adjustments for unit size as measured by the number
of bedrooms.''\124\ Thus, to determine whether a unit counts toward
achievement of a goal, rent on the unit is considered in terms of the
number of bedrooms in the unit. The Low-Income Housing Tax Credit
(LIHTC) provides an accepted formula for adjustments to determine
housing capacity, see 26 U.S.C. 42(g)(2)(C), and this proposed
regulation requires the use of those adjustments for these goals. These
adjustments assume that an efficiency houses one person, a one bedroom
unit houses 1.5 persons and each additional bedroom houses an
additional 1.5 persons.
\124\Sections 1332(c)(2) and 1333(c)(2).
---------------------------------------------------------------------------
Income adjustments for family size, required under the Act to
determine whether a renter family's income qualifies as very low, low,
or moderate, are established for the HUD Section 8 program and use of
these adjustments is also required under this proposed regulation. To
determine which rental dwelling units qualify as affordable, this
proposed regulation combines the LIHTC unit size adjustment factors
with the Section 8 family size adjustment factors to develop the
necessary unit size adjustment factors to be applied to rent. For
example, under the LIHTC an efficiency is assumed to house one person;
under Section 8, for moderate-income, one person's rent may not exceed
70 percent of 30 percent of area median income; thus, an efficiency is
affordable for a moderate-income person if the rent does not exceed 21
percent [[Page 9170]] of area median income.\125\ Similarly, a two-
bedroom unit is assumed to house three persons; three persons' rent may
not exceed 90 percent of 30 percent of area median income; thus, a two-
bedroom unit is affordable for a moderate-income family if the rent
does not exceed 27 percent of area median income. These percentages are
included below under ``General Requirements.''
\125\Similarly, for purposes of determining affordability to
low-income families: An efficiency is assumed to house one person;
one person's rent may not exceed 70 percent of 30 percent of 80
percent of area median income (using family size to adjust income);
thus, an efficiency is affordable to a low-income family if the rent
does not exceed 16.8 percent of the area median income.
---------------------------------------------------------------------------
In some instances, the LIHTC unit size adjustments and the Section
8 family size adjustments do not directly correspond to each other. For
example, under the LIHTC a one-bedroom apartment is assumed to house
1.5 persons but Section 8 does not provide a family size adjustment for
1.5 persons. Therefore, the HUD Section 8 adjustment factors for one
person (70 percent) and two persons (80 percent) have been averaged to
obtain a rent not in excess of 75 percent of 30 percent of area median
income, yielding a net one-bedroom unit size adjustment factor of 22.5
percent of area median income.\126\ Similar interpolations also are
made for three-bedroom and five-bedroom units.
\126\Similarly, for purposes of low-income affordability, the
same 75 percent figure is used to obtain a rent not in excess of 75
percent of 30 percent of 80 percent of area median income, yielding
a net unit size adjustment factor of 18 percent.
---------------------------------------------------------------------------
In certain rare instances (normally in New England), it may be
unclear which area median income should be applied to determine the
affordability of certain dwelling units. Under the proposed regulation,
where a GSE knows that a property is located in a census tract that is
split between two different areas and it is not clear which area median
income should be used, the GSE must calculate a median income for the
split census tracts. The median income for such split areas equals: (A)
The percentage of the population of the census tract that is located in
the first area times the median income of that area; plus (B) the
percentage of the population of the geographic segment that is located
in the second area times the median income of that area.
For example, a GSE purchases a mortgage on a property located in a
census tract that is partially in a metropolitan statistical area (MSA)
and partially outside the MSA; seventy-five percent of the census
tract's population is in the MSA and the remaining 25 percent is
outside the MSA; the median income for the MSA is $40,000; the median
income for the county outside the MSA is $30,000. The median income for
the split census tract would be 75 percent of $40,000 plus 25 percent
of $30,000, or $37,500.
HUD seeks guidance on the appropriate reference for income in non-
metropolitan areas for determining affordability under the housing
goals for low- and moderate-income families and special affordable
housing and for defining low-income areas in the goal for central
cities, rural areas and other underserved areas. Should borrower and
area income in non-metropolitan areas be defined: (1) Relative to the
county median income; or (2) relative to the maximum of the county
median income or the median income of the non-metropolitan balance of
the State?
Housing Plans
The proposed rule provides procedures if a GSE fails to meet any
housing goal. If the Secretary determines that either GSE has failed to
meet any housing goal or there is a substantial probability that a GSE
will fail to meet a housing goal, the Secretary shall, by written
notice, preliminarily require that the GSE submit a housing
plan.127 The GSE would then have 30 days (which may be extended by
the Secretary) to respond in writing to the Secretary's notice.\128\
The GSE's response may include any information that the GSE considers
appropriate for the Secretary to consider in determining whether the
GSE failed to meet a housing goal, whether there is a substantial
probability that the GSE will fail to meet a housing goal, and whether
achievement of the housing goal was or is feasible.
\127\Section 1336(b)(1).
\128\Section 1336(b)(2).
---------------------------------------------------------------------------
After reviewing the GSE's response, the Secretary shall issue a
final determination as to whether the GSE has failed or there is a
substantial probability that the GSE will fail to meet the housing
goal.\129\ Additionally, the Secretary shall determine whether
achievement of the housing goal was or is feasible based on market and
economic conditions and the GSE's financial condition.\130\ Where the
Secretary determines that the GSE has failed or there is a substantial
probability that the GSE will fail to meet the housing goal and that
achievement of the housing goal was or is feasible, the Secretary shall
require the GSE to submit a housing plan.\131\
\129\Section 1336(b)(3)(A).
\130\Id.
\131\Section 1336(c)(1).
---------------------------------------------------------------------------
Each housing plan must be feasible and sufficiently specific to
enable the Secretary to monitor the GSE's performance under and
compliance with the plan.\132\ A housing plan must describe the
specific actions that the GSE will take to achieve the goal in the next
calendar year or, where the Secretary has determined that a substantial
probability exists that the GSE will fail to meet a goal in the current
year, the plan must describe the reasonable improvements the GSE will
make in the remainder of the year.\133\
\132\Section 1336(c)(2).
\133\Id.
---------------------------------------------------------------------------
Subpart C--Fair Housing Requirements
The Act requires the Secretary, by regulation, to prohibit the GSEs
from discriminating in their mortgage purchase activities and to
require that the GSEs submit specified data to the Secretary on
mortgage lenders to assist the Secretary's investigative activities
under the Fair Housing Act and to assist investigative activities under
the Equal Credit Opportunity Act (ECOA).\134\ The Act also requires the
Secretary to: Obtain and provide to the GSEs information on violators
of the Fair Housing Act and ECOA; direct the GSEs to take action
against mortgage lenders found to discriminate; and periodically review
and comment on the GSEs' underwriting guidelines.\135\
\134\Sections 1325(1)-(3).
\135\Section 1325(4)-(6).
---------------------------------------------------------------------------
In enacting FHEFSSA, Congress recognized the unique position and
responsibilities of the GSEs in the mortgage market and their
unparalleled capabilities to effectuate fair housing and fair lending
in that market. The GSEs are Federally sponsored and purchase a large
majority of all of the conventional mortgages originated by primary
lenders. The House Report on the Act stated:
While the Committee does not intend that the (GSEs) be
responsible for investigating and punishing acts of discrimination,
the Committee does expect the (GSEs) to use their considerable
influence over the mortgage market to ensure that lenders with which
they deal are acting in a nondiscriminatory manner.\136\
\136\H. Rep. at 57.
Discrimination on a prohibited basis is intolerable and socially
and economically destructive. The GSEs on many occasions have expressed
their commitment to combatting discrimination and advancing fair
lending. The Secretary, through this regulation, seeks to make concrete
the [[Page 9171]] GSEs' significant fair housing and fair lending
responsibilities under the Act.
These provisions are intended ultimately to further fair lending by
primary lenders. Accordingly, in developing these sections, the
Secretary consulted with Federal agencies that regulate lending
institutions including the Office of Comptroller of the Currency, the
Office of Thrift Supervision, the Treasury Department, and the Federal
Reserve. Those consultations proved extremely beneficial.
Responsibility for enforcement of the Act's fair housing provisions is
solely vested in the Department of Housing and Urban Development under
the Act, including the HUD Office of Federal Housing Enterprise
Oversight (OFHEO), and no provisions in this regulation may impede
those authorities. However, the Secretary has concluded that in the
implementation of these regulations further consultations in the
operational arrangements of these regulations would be valuable.
Consultation will assure needed coordination of regulatory actions
within the government and the provision of beneficial information and
views from the regulators to the Secretary. The regulations, therefore,
specifically require that memoranda of understanding will be
established with regulators to specify procedures for submission and
dissemination of information from the regulators to the Secretary and
to the GSEs. Also, prior to directing any remedial action by a GSE
against a lender, the Secretary would be required to solicit and fully
consider the views of the lender's regulator. Finally, at all points in
the process where warranted, including, without limitation, the
Secretary's review of the GSEs' underwriting guidelines and business
practices affecting lenders, the Secretary will fully consider the
views of the appropriate regulators in the standards used by such
regulators in similar circumstances.
Prohibitions Against Discrimination
The regulations generally prohibit the GSEs from discriminating in
any manner in their mortgage purchases because of race, color,
religion, sex, handicap, familial status, age or national origin,
including any consideration of the age or location of the dwelling or
the age of the neighborhood or census tract where the dwelling is
located in a manner that has a discriminatory effect. The proposed
regulation provides that the GSEs are liable for any discrimination by
them, or their officers, or employees, or agents in making mortgage
purchases. Just as the term ``mortgage purchase'' includes transactions
which are substantively similar to mortgage purchases for purposes of
the housing goal provisions, the term is similarly inclusive for
purposes of the restrictions against discrimination.
The regulation makes clear that prohibited conduct is subject to
certain exemptions. For example, while the regulations generally forbid
the GSEs from considering factors concerning the age and location of a
dwelling, or the area in which the dwelling is located in a manner that
has a discriminatory effect, these factors may be considered in certain
cases. The age of a dwelling may be used by an appraiser as a basis for
conducting more extensive inspections of structural aspects of the
dwelling. Location factors that may have a negative effect on a
dwelling's value may be properly considered in an appraisal and in
other aspects of the underwriting process.
The GSEs may also consider factors justified by business necessity,
including requirements of Federal law, relating to a transaction's
financial security or to protection against default or reduction of the
value of the security. For example, age or location may be considered
in circumstances other than appraisals, including requiring a different
loan-to-value ratio for an older, more expensive to maintain,
multifamily building. However, where a GSE's consideration of a factor
or factors has a disparate result based upon race, color, religion,
sex, handicap, familial status, age or national origin, including any
consideration of the age or location of the dwelling or the age of the
neighborhood or census tract where the dwelling is located, in order
for the factor or factors to continue to be considered, the factor must
be justified by business necessity. The business necessity must be
manifest and neither hypothetical nor speculative. Even if
consideration of the factor can be justified based on business
necessity, its use still may be impermissible if an alternative policy
or practice could serve the same purpose with less discriminatory
effect.
Business Practices Analysis and Underwriting and Appraisal Guidelines
The regulations provide that following their effective date and
periodically thereafter as requested by the Secretary, each GSE shall
conduct and submit to the Secretary a Business Practices Analysis to
further implement the prohibitions against discrimination under the Act
and facilitate the reporting requirements under sections 309(n)(2)(G)
of the Fannie Mae Act and 307(f)(2)(G) of the Freddie Mac Act137
and the underwriting and appraisal guideline review requirements under
the Act.138 The GSEs will develop a methodology for conducting the
Business Practices Analyses and the Secretary will review and comment
on the methodology.
\137\These Charter Act sections require the GSEs to ``assess
underwriting standards, business practices, repurchase requirements,
pricing fees, and procedures, that affect the purchase of mortgages
for low- and moderate-income families, or that may yield disparate
results based on the race of the borrower, including revisions
thereto to promote affordable housing or fair lending.''
\138\Section 1325(6).
---------------------------------------------------------------------------
The Business Practices Analysis must assess the GSE's underwriting
standards and appraisal practices, repurchase requirements, pricing,
fees, procedures, and other business practices that affect the purchase
of mortgages for low- and moderate-income families or that may yield
disparate results based on the race, color, religion, sex, handicap,
familial status, age or national origin of the borrower. The analysis
shall specify revisions that will be made to promote affordable housing
and fair lending. If disparate results occur because of any business
practices, the GSE must demonstrate that a business necessity exists
for the practice or demonstrate how the GSE plans to remedy the
situation. The GSEs' Charter Acts as amended by FHEFSSA require an
analysis of business practices as part of a required report.139
The analysis will serve as a baseline for future reporting and as a
necessary action by the GSEs toward remedying any systemic practices
that are discriminatory and assuring that the GSEs are not in violation
of the prohibitions under this subpart.
\139\Fannie Mae Charter Act, section 309(n)(2)(G), and Freddie
Mac Act, section 307(f)(2)(G).
---------------------------------------------------------------------------
The Secretary recognizes that, at least initially, this highly
important analysis will require a considerable amount of time to
complete. Accordingly, the Secretary specifically seeks comments
concerning the deadline for completing the initial analysis and the
time for review by the Secretary which should be included in the final
regulations.
Under the Act, the Secretary is required to review the GSEs'
underwriting and appraisal guidelines to ensure compliance with the
Fair Housing Act, the regulations promulgated thereunder, section 1325
of the Act, and these regulations.140 In implementing this
responsibility--in a manner intended to maximize industry self-
regulation--this proposal places initial responsibility on the GSEs
themselves, rather than the Department, [[Page 9172]] to review all
current guidelines and future revisions of the guidelines. Review of
the GSEs' current guidelines therefore will involve analyses by the
GSEs followed by Secretarial review and comment. The GSEs' analyses of
the current guidelines will occur for the first time, under this
regulation, as part of the Business Practices Analysis. The regulations
require that before instituting a revision, the GSE must certify that
after reasonable evaluation and analysis, the GSE has determined in
good faith that to the best of its knowledge the change will not be
discriminatory.
\140\Section 1325(6).
---------------------------------------------------------------------------
The Secretary will provide comments and recommendations for changes
to guidelines and revisions to ensure consistency with the Fair Housing
Act. If a GSE does not make such changes or otherwise resolve comments
to the satisfaction of the Secretary, the Secretary may take action
under the Fair Housing Act.
In addition to requiring an analysis of the GSEs' business
practices as a means of effectuating fair lending, the Secretary seeks
comment concerning whether the GSEs should be required to develop a
fair lending plan to identify and address impediments to fair housing
and fair lending in the primary market. Lending discrimination remains
a pervasive and persistent problem in the mortgage industry. The
Secretary seeks comment on the following questions:
(1) Should the GSEs be required to prepare a fair lending plan?
(2) Could a fair lending plan offer new ways to lead the primary
lending market in eradicating discrimination? If so, how?
(3) What are the appropriate components of such a plan? and
(4) How would the plan effectuate fair housing/fair lending
objectives?
Submission of Information to Assist the Secretary
The GSEs are required to submit information and data to the
Secretary to assist in investigating whether any mortgage lender with
which the GSE does business has failed to comply with the Fair Housing
Act or ECOA.141 The regulation requires that the GSEs: (a) Respond
to a specific Secretarial request for information on a particular
lender or lenders; (b) provide information when the GSE becomes aware
of a questionable activity by a lender; and (c) develop and provide
data that could be generated by GSE data systems, e.g., relating data
on census tracts to lender mortgage sales. When investigating the
practices of a particular lender, GSE data could provide the Secretary
useful information on lending patterns of that lender and other lenders
in the same area.
\141\Sections 1325 (2)-(3).
---------------------------------------------------------------------------
The Secretary invites the GSEs and the public to provide comments
on additional information that the GSEs could usefully gather on
lenders for the Secretary's review in connection with the enforcement
of the Fair Housing Act.
Submission of Information by the Secretary to the GSEs
The Secretary will obtain information from Federal, State, and
local enforcement agencies with information regarding violations of
ECOA, the Fair Housing Act, or State and local anti-discrimination
laws. The Secretary will provide this information to the GSEs. Such
information may indicate violations of the GSEs' underwriting
guidelines and/or representations or certifications from lenders. The
specific nature of the violation information to be obtained by the
Secretary and the procedures for referral applicable to Federal
financial regulators will be governed by memoranda of understanding
entered into between the Secretary and such regulators. The Secretary
shall also consult with such regulators on the nature of the
information to be provided to the GSEs. The Secretary is particularly
sensitive to ensuring that only relevant and legally appropriate
information--considering financial privacy and other pertinent
matters--is obtained and provided to the GSEs under this provision.
Although other provisions of the Act and regulations described below
allow the Secretary to direct sanctions against lenders found to
discriminate,142 these information dissemination provisions
neither directly nor indirectly require actions by the GSEs based upon
violation information provided by the Secretary. The regulations merely
provide that the GSEs may take appropriate action under their
procedures based on information provided by HUD concerning lender
violations of the Fair Housing Act or ECOA, i.e., the GSEs, in their
discretion, may choose to take action against lenders based on
violations of binding contractual arrangements with the GSEs forbidding
discrimination.
\142\Section 1325(5).
---------------------------------------------------------------------------
Remedial Actions
The Secretary is required to direct the GSEs to take remedial
actions--including suspension, probation, reprimand, or settlement--
against lenders which have been found to have engaged in discriminatory
lending practices in violation of the Fair Housing Act and ECOA
following appropriate proceedings.143
\143\ Section 1325(5).
---------------------------------------------------------------------------
For purposes of remedial action, a lender will have been found to
have violated ECOA only after a final determination on the matter has
been made by an appropriate United States District Court or any other
court of competent jurisdiction. A lender will have been found to have
violated the Fair Housing Act only after a final determination on the
matter has been made by a District Court, a HUD Administrative Law
Judge, or the Secretary. Based on such violations, the Secretary shall
direct the GSE to take remedial action(s) under this section. Prior to
the date the action is to be imposed, the lender may request and, if
the request is timely filed, will be entitled to a hearing before a HUD
Administrative Law Judge; such hearing shall be limited to review of
the appropriateness of the proposed remedial action only. The
determination on the underlying violation will not be subject to review
at the hearing.
To ensure regulatory coordination and avoid any unnecessary
regulatory burden, the Secretary will be required under the proposed
regulation, prior to directing any remedial actions under this section,
to solicit and fully consider the views of the particular lender's
Federal financial regulator concerning the action or actions
contemplated. Views will be solicited and considered in accordance with
the foregoing memoranda of understanding between the Secretary and such
regulators. The regulations address the lenders' due process rights and
factors that the Secretary may consider in determining an appropriate
action. The Act empowers the Director of OFHEO to enforce violations of
section 1325 by the GSEs. Potential violations are to be referred to
the Director by the Secretary.
The Fair Housing Act
The Secretary's regulatory authority under section 1325 of the Act
is in addition to the Secretary's responsibilities under the Fair
Housing Act144 and Executive Order 12,892.145 The Fair
Housing Act requires that the Secretary administer all HUD programs and
activities relating to housing and urban development (which would
include GSE oversight responsibilities) so as ``to affirmatively
further'' the [[Page 9173]] purposes of the Fair Housing Act.146
The Secretary is in the process of developing regulations under the
Fair Housing Act that will update HUD's current regulations concerning
fair housing and fair lending. Those forthcoming regulations will
supplement these GSE regulations. Nothing in these regulations is
intended to diminish in any manner the GSEs' responsibilities under the
Fair Housing Act.
\144\42 U.S.C. 3601-19.
\145\59 FR 2939 (1994).
\146\42 U.S.C. 3608(e)(5).
---------------------------------------------------------------------------
Subpart D--Review of New Programs
Background
Under both Charter Acts, prior to amendment by FHEFSSA, the
Secretary had statutory authority to approve the GSEs' purchasing,
servicing, selling, lending on the security of or otherwise dealing in
conventional mortgages. Under provisions of FHEFSSA, the Secretary must
approve new programs unless the Secretary determines that the program
was not authorized under specific provisions of the GSEs' Charter Acts
or that the program was not in the public interest.147 Until one
year after the Director's regulations under section 1361(a) of FHEFSSA
are issued, the Director also must review new programs and, if the
Director determines that the new program would risk significant
deterioration of the GSE's financial condition, the new program must be
disapproved by the Secretary.148 The purpose of the Secretary's
approval is ``to ensure that (programs) are authorized by the relevant
(C)harter Act, not detrimental to housing availability and
affordability, and, for an undercapitalized (GSE),to ensure that such
programs (will) not worsen the financial condition of the
(GSE).''149
\147\Section 1322(b)(2).
\148\Section 1322(b)(2).
\149\S. Rep. at 15.
---------------------------------------------------------------------------
Scope of Authority
The Secretary intends to make certain that the GSEs continue to
have sufficient latitude to develop innovative programs to serve
America's housing needs. In the area of housing finance, dramatic
innovations have occurred during the last 25 years, with the
introduction of the mortgage-backed security, the REMIC, and other
financing vehicles that have brought new sources of investment capital
into housing. The GSEs have either developed or refined these vehicles.
The Secretary wants to ensure that future innovations are also allowed
to develop without unnecessary impediment.
As noted in the House Report on the Act, ``(t)he Secretary's role
with regard to approval authority over new programs is not designed to
entangle Fannie Mae and Freddie Mac in unnecessary delays, bureaucratic
red tape, or extraneous consideration by HUD.''150 In reviewing
new programs, the Secretary will follow judiciously the standards for
review in the Act and will only disapprove a request for new program
approval where the program is not within the scope of the GSE's
statutory authority, the program is not in the public interest, or,
during the transition period, where the Director determines that the
new program would risk significant deterioration in a GSE's financial
condition.151
\150\H. Rep. at 55.
\151\Section 1322(b)(1).
---------------------------------------------------------------------------
Each GSE is required to obtain the approval of the Secretary for
any ``new program'' before the GSE implements the program.152
Section 1303(13) of the Act defines ``new program'' as ``any program
for the purchasing, servicing, selling, lending on the security of, or
otherwise dealing in, conventional mortgages that--(A) is significantly
different from programs that have been approved under this Act or that
were approved or engaged in by (a GSE) before (October 28, 1992); or
(B) represents an expansion, in terms of the dollar volume or number of
mortgages or securities involved, of programs above limits expressly
contained in any prior approval.'' (Programs that were specifically
approved are referred to as ``approved programs.'')
\152\Sections 1322(a) of FHEFSSA, 305(c) of the Freddie Mac Act,
and 302(b)(6) of the Fannie Mae Charter Act.
---------------------------------------------------------------------------
Under the Act, all GSE programs engaged in prior to October 28,
1992, which are referred to in the regulations as ``authorized
programs,'' are deemed to be approved even where the GSE did not
actually obtain approval from the Secretary and such programs need not
be submitted to the Secretary for further review. However, where
programs are significantly different from authorized programs, unless
such programs are otherwise approved they are ``new programs'' subject
to the Secretary's approval.
Under these regulations, the ``new program'' approval procedure
applies to ongoing ``programs,'' pilots, and demonstration programs
that ``significantly differ'' from authorized or approved programs.
``New program'' also would include a program that is expanded, in
dollar volume or number of mortgages or securities involved, above any
limits expressly contained in any prior approval by the Secretary.
Where a question exists as to whether an activity is a program, if
submission is otherwise required, the GSE must submit the activity for
Secretarial review. As noted in the legislative history, where a
planned program ``could reasonably raise significant questions'' as to
whether the program is within a GSE's statutory purposes or in the
public interest, that program ``should be viewed as significantly
different from existing programs and, therefore, must be submitted for
approval.''153 Accordingly, the GSEs shall submit programs for
review if the Secretary could reasonably consider the program to be
new, even where the GSE believes the program is not new. Where the GSE
does not believe that the program is new, the GSE may, in its
submission, fully explain its basis for that position.
\153\S. Rep. at 15.
---------------------------------------------------------------------------
Fannie Mae undertakes certain housing related activities under
section 309(a) of its Charter Act, which authorizes Fannie Mae ``to do
all things as are necessary or incidental to the proper management of
its affairs and the proper conduct of its business.'' Freddie Mac has
similar authority under which Freddie Mac's ``(f)unds * * * may be
invested in such investments as (its) Board of Directors may
prescribe,'' and Freddie Mac has the power ``to determine its necessary
expenditures and the manner in which the same shall be incurred,
allowed, and paid.''154 Where any of these activities could be
regarded as new programs subject to the Secretary's review, the
proposed regulation would require the GSEs to submit requests for
program approval for those activities (under sections 309(a) of the
Fannie Mae Charter Act or 303(c)(9) or (d) of the Freddie Mac Act). The
purpose of this requirement is to ensure that the Secretary
appropriately reviews all new programs and ensures that the GSEs do
not, through use of their corporate powers, violate any provisions of
their Charter Acts such as the prohibition against the GSEs originating
mortgage loans.155
\154\Freddie Mac Act, sections 303(d) and 303(c)(9).
\155\See sections 304(a)(2)(B) of the Fannie Mae Charter Act and
305(a)(5)(B) of the Freddie Mac Act.
---------------------------------------------------------------------------
Although new programs will be subject to Secretarial review, the
Secretary does not intend to interfere with the GSEs' other activities
under sections 309(a) of the Fannie Mae Charter Act or 303(c)(9) or (d)
of the Freddie Mac Act. The Secretary encourages the GSEs to continue
their activities under these provisions. [[Page 9174]]
Products
A program differs from a product. As noted in the legislative
history, ``(o)nce a program is approved, Fannie Mae and Freddie Mac are
expected and encouraged to develop a range of specific products under
the umbrella of the new program. The Secretary's prior approval
authority does not extend to the introduction of new products under an
approved program.''156
\156\ H. Rep. at 55.
---------------------------------------------------------------------------
Significantly Different
To determine whether a planned GSE program is ``significantly
different'' from a GSE program that has been approved or authorized,
and, therefore, requires the Secretary's approval, the proposed
regulation provides that a program is significantly different if it
materially differs from the GSE's other approved or authorized programs
by entailing substantially greater risk or substantially expanding the
GSE's role in the housing markets by involving new categor(ies) of
borrowers, properties or other securities, borrowing purposes, or
credit enhancements. New programs do not include new activities that
are designed to refine approved or authorized programs by repackaging
features of those programs, making technical improvements, or creating
other nonmaterial variations.
Requested Comments on New Program Approval
In connection with new program approval, the Secretary seeks
comments on the following questions:
(1) The Act defines ``new program,'' generally, as a program that
is significantly different from GSE programs previously approved or
authorized. The Act does not define ``program,'' ``product,'' or
``significantly different.'' Should these term(s) be defined in the
final rule and, if so, how should the term(s) be defined?
(2) The Act requires the Secretary to approve a new program unless
the program is not authorized by the GSE's Charter Act or the Secretary
determines that the new program is not in the public interest. Should
the final rule include factors that the Secretary will consider in
determining whether a program is not in the public interest and, if so,
what factors should be included?
Procedures
Requests from a GSE for new program approval must be submitted in
writing and fully explain the program and whether the program is
implemented under the authority of sections 305(a) (1), (4), or (5) of
the Freddie Mac Act or 302(b) (2)-(5) of the Fannie Mae Charter Act.
Each program request shall include: An opinion from counsel setting
forth the statutory authority for the new program; a good faith
estimate of the anticipated dollar volume of the program over the
short- and long-term; a full description of the purpose and operation
of the proposed program, the market targeted by the program, the
delivery system for the program, the effect of the program on the
mortgage market, and material relevant to the public interest.
The Secretary and the Director (where the Director has new program
approval authority) may, within 45 days of receiving a request for new
program approval, determine that additional information from the GSE is
needed to make a decision on the request.157 When additional
information is needed by the Secretary or the Director, the Secretary
shall request such information from the GSE. The GSE must provide such
information within 10 days of the Secretary's request and, if the GSE
fails to do so, the Secretary may deny the request based on the GSE's
failure.
\157\ Section 1322(c)(2).
---------------------------------------------------------------------------
The Secretary shall approve or disapprove new program requests
within 45 days, or 60 days if additional information is requested from
the GSE.158 When the Secretary approves a new program, the
Secretary shall provide written notice of the approval to the GSE. When
a new program is not approved, the Secretary shall submit an
explanatory report to the Committee on Banking, Finance and Urban
Affairs of the House of Representatives and the Committee on Banking,
Housing, and Urban Affairs of the Senate.159 If the Secretary
fails to approve or disapprove a new program within 45 days (or 60 days
where additional information is requested), the request shall be deemed
approved.160
\158\ Section 1322(c)(2).
\159\ Section 1322(c)(2).
\160\ Section 1322(c)(3).
---------------------------------------------------------------------------
Where the Secretary disapproves a new program request from a GSE
under sections 305(a) (1), (4), or (5) of the Freddie Mac Act or 302(b)
(2)-(5) of the Fannie Mae Charter Act and these regulations, the GSE
may request within 30 days of the disapproval an opportunity to
supplement the administrative record at a meeting with the Secretary or
the Secretary's designee or in writing.161 A meeting will be
scheduled within 10 days of a request. Within 10 days after written
submission or a meeting, the Secretary will notify the GSE whether the
decision is withdrawn, modified or affirmed.
\161\See Section 1322(c)(4)(A).
---------------------------------------------------------------------------
Where the Secretary disapproves a new program because it is not in
the public inter
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.