Pilot Mortgage Program Proposed by the Federal Home Loan Bank of Seattle

FEDERAL HOUSING FINANCE BOARD

[97-N-6]

Pilot Mortgage Program Proposed by the Federal Home Loan Bank of

Seattle

AGENCY: Federal Housing Finance Board.

ACTION: Notice.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is

requesting public comment prior to its consideration of a proposal by

the Federal Home Loan Bank of Seattle (FHLBank of Seattle) to initiate

a pilot mortgage purchase program. The Finance Board will review and

consider all comments prior to taking action on the proposal. The

FHLBank of Seattle is proposing to invest up to $25 million total in

Federal Housing Agency (FHA)-insured loans originated by its members

and non-member mortgagees to affordable housing developers and local

government agencies. The loans would finance rent-to-own programs for

low- and moderate-income households wishing to become homeowners. The

FHLBank of Seattle has identified a credit need for the program and

anticipates that the program can provide more favorable pricing than

would otherwise be available while preserving the Bank's and System's

triple-A rating.

DATES: Comments must be received in writing on or before September 8,

1997.

ADDRESSES: Individuals wishing to submit comments should provide

written comments by mail to: Elaine L. Baker, Secretary to the Board,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006. Comments will be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT:

Greg Goggans, Senior Financial Analyst, Office of Policy, (202) 408-

2878, or Roy S. Turner, Jr., Attorney-Advisor, (202) 408-2512, Office

of General Counsel, Federal Housing Finance Board, 1777 F Street, N.W.,

Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

The Federal Home Loan Bank Act (Bank Act) provides that the part of

the assets of each Federal Home Loan Bank (Bank) except reserves and

amounts provided for at 12 U.S.C. 1431(g)) not required for advances to

members, may be utilized for certain types of investments. This

includes, to such extent as the Bank may deem desirable and subject to

such regulations, restrictions, and limitations as may be prescribed by

the Finance Board, such securities in which fiduciary and trust funds

may be invested under the laws of the State in which the Bank is

located. See 12 U.S.C. 1431(h). The Finance Board implements the

investment provisions of the Bank Act through the Financial Management

Policy (FMP).

The FMP establishes a framework within which the Banks are allowed

to implement prudent and responsible financial management strategies

that assist them in accomplishing their mission, and in generating

income sufficient to meet their financial obligations, in a safe,

sound, and profitable manner. Section II of the FMP specifies certain

types of assets as permissible investments to the extent they are

specifically authorized under 12 U.S.C. 1431(g), 1431(h), or 1436(a) of

the Bank Act, or to the extent a Bank has determined that they are

securities in which fiduciary or trust funds may be invested under the

laws of the state in which the Bank is located. Investments that

support housing and community development are permitted, provided that

the Bank:

Ensures the appropriate levels of expertise, establishes

policies, procedures, and controls, and provides for any reserves

required to effectively limit and manage risk exposure and preserve

the triple-A rating of the Bank and the Federal Home Loan Bank

System:

Ensures that its involvement in such investment activity assists

in providing housing and community development financing that is not

generally available, or that is available at lower levels or under

less attractive terms;

Ensures that such investment activity promotes (or at the very

least, does not detract from) the cooperative nature of the System;

Provides a complete description of the contemplated investment

activity (including a comprehensive analysis of how the above three

requirements are fulfilled) to the Finance Board; and

Receives written confirmation from the Finance Board, prior to

entering into such investments, that the above investment

eligibility standards and requirements have been satisfied.

II. Pilot Proposal

The FHLBank of Seattle proposes investing up to a total of $25

million in FHA-insured loans originated by its members and non-member

mortgagees to Housing and Urban Development (HUD)-eligible public and

private non-profit organizations such as affordable housing developers

and local government agencies. The purpose of the loans will be to

finance rent-to-own programs for low- and moderate-income households.

The loans will be 15- to 30- year, fully amortizing, fixed-rate

mortgages that are FHA-insured under Section 203 of the Federal Housing

Act. The terms of the proposal, which have not yet been considered by

the Finance Board and are subject to change as part of the review

process, are set out below.

Borrowers (non-profit organizations and local government agencies)

will enter into ``lease to own'' arrangements with low- and moderate-

income households wishing to become homeowners. A portion of each lease

payment will be set aside until a sufficient amount is accumulated to

make the 3 percent down-payment required for an FHA-insured loan. At

that point, the tenant(s), if qualified under FHA program guidelines,

will assume the mortgage. FHA insurance will be maintained throughout

the life of the loan.

The loans will be originated by the FHLBank of Seattle's members

and non-member mortgagees, that have been certified by HUD as Direct

Endorsement Underwriters. The originators or other designated program

participants will service the loans and must be HUD-FHA-approved or

Government National Mortgage Association (GNMA)-approved servicing

agents.

According to the proposal, all risk associated with these loans are

manageable. All loans will be underwritten to FHA standards and the FHA

will guarantee the principal repayment of each loan. The FHLBank of

Seattle will sign a loan purchase and servicing agreement with each

program participant. The originators will service the loan or contract

with a FHLBank of Seattle-approved loan servicer. The servicer will

handle all assignments or foreclosure activities, and assume

responsibility for any shortfall in interest income. The servicer will

absorb any interest losses. The servicing agreement will require the

servicer to recover any expenses, such as foreclosures, from FHA. The

agreement will include a buy-back clause for any loan determined to be

ineligible for FHA insurance and/or not in compliance with State and

Federal housing regulations. The FHLBank of Seattle will periodically

review financial statements of all servicers and will monitor whether

servicers remain in good standing with HUD.

The FHLBank of Seattle believes that because of these risk

management efforts, losses are not probable and estimable and reserves

are therefore unnecessary under generally accepted accounting

principles. The Finance Board has final authority as to what reserves,

if any, may be required for this program.

Interest-rate risk management will be handled the same as a pass-

through

[[Page 42794]]

security with a mix of consolidated obligations and other asset/

liability management tools. Liquidity risk will be mitigated by the

relatively small size of the pilot.

The FHLBank of Seattle will purchase the loans at a price/yield

equivalent to that quoted for loans securitizing GNMA I securities

instead of the lower price/yields for loans securitizing GNMA II

securities. The FHLBank of Seattle indicates that the FHA-insured loans

that will be purchased under the program are normally securitized into

GNMA II securities instead of GNMA I securities because of the low

volume of such loans, longer time to originate, and wider range of

interest rates.\1\

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\1\ Single-Family pools for GNMA I securities are required to be

$1 million or more while such pools for GNMA II securities have a

minimum of $250,000. Loans placed into GNMA I securities may not

vary by more than 50 basis points in rate whereas loans securitized

into GNMA II securities may vary by 50 to 150 basis points in rate.

The small pool size and the broader range enables more loans to fit

into the GNMA II pools.

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The proposal also notes that the pilot will assist in providing

financing under more attractive terms than are generally available.

Program participants may sell such loans for immediate delivery to

FHLBank of Seattle instead of accumulating a pool of loans required to

securitize a GNMA security. This reduces the cost to the lender since

it no longer has to hold the loans and hedge the interest rate risk

associated with the loans until such time as sufficient quantity is

accumulated for GNMA pooling. The lender may request from the FHLBank

of Seattle a forward commitment of up to six months on a loan rate.

Additionally, the FHLBank of Seattle will pay a servicing fee of 50

basis points to the servicer (lender) instead of the 44 basis points

paid by GNMA (net of a 6 basis points fee for insurance).

The FHLBank of Seattle also believes that the pilot advances the

mission of the Bank System because the pilot will stimulate more

lending for lease-to-own programs. According to the FHLBank of Seattle,

lease-to-own programs are costly for lenders to develop because of the

low mortgage amounts as well as the higher costs associated with

underwriting loans to non-profits and local housing agencies compared

to loans to families/individuals. The FHLBank of Seattle intends to

work to reduce the amount of time and hence the cost of underwriting

the loans by providing technical advice to lenders and borrowers. In

addition, origination of these types of loans for sale to the FHLBank

of Seattle creates an opportunity for member and nonmember mortgagees

to transact Community Reinvestment Act-eligible lending at more

favorable rates.

Finally, the FHLBank of Seattle believes that its proposal would

enhance the cooperative nature of the System because the loans will be

originated by members and approved non-member mortgagees of the FHLBank

of Seattle. In addition, the FHLBank of Seattle will only purchase such

loans directly from these originators and thereby provide a secondary

market outlet for them. Members have informed the FHLBank of Seattle

that the lack of a secondary market outlet has impeded them from making

this type of loan. The proposal indicates that the pilot will therefore

enhance the flow of credit to an under-served segment of the mortgage

market.

Dated: August 1, 1997.

William W. Ginsberg,

Managing Director.

[FR Doc. 97-20815 Filed 8-7-97; 8:45 am]

BILLING CODE 6725-01-M