# The Secretary of HUD's Regulation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A95-3474 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** February 16, 1995 - **Citation:** 60 FR 9154 ## 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, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-3474. Public record. Not legal advice.