Secondary Market for Non-Conforming Mortgage Loans to Low-Wealth Borrowers; Advance Notice of Demonstration Program

SUMMARY: HUD's fiscal year 1998 Appropriations Act set aside $10

million for grants to certain nonprofit organizations to demonstrate

methods of expanding homeownership opportunities for low-income

borrowers by expanding the secondary market for non-conforming home

mortgage loans to low-wealth borrowers. This advance notice solicits

public input so that HUD can develop meaningful guidelines for

selecting the organizations and operating the demonstration program.

DATES: Comment Due Date: September 3, 1998.

ADDRESSES: Interested persons are invited to submit comments and

responses to the Rules Docket Clerk, Office of the General Counsel,

Room 10276, Department of Housing and Urban Development, 451 Seventh

Street SW, Washington, DC 20410-0500. Communications should refer to

the above docket number and title. Facsimile (FAX) responses are not

acceptable. A copy of each response will be available for public

inspection and copying during regular business hours (7:30 a.m. to 5:30

p.m. eastern time) at the above address.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Home

Mortgage Insurance Division, Office of Insured Single Family Housing,

Department of Housing and Urban Development, Room 9266, 451 Seventh

Street SW, Washington, DC 20410; telephone (202) 708-2700. (This is not

a toll-free number). Hearing or speech-impaired individuals may access

these numbers via TTY by calling the Federal Information Relay Service

at (800) 877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The Departments of Veterans Affairs and Housing and Urban

Development, and Independent Agencies Appropriations Act (Pub. L. 105-

65; approved October 27, 1997) (FY 1998 Appropriations Act) set aside

$10 million from the HOME investment partnerships program for grants to

up to three organizations that are exempt from Federal taxation under

section 501(c)(3) of the Internal Revenue Code. The organizations are

to be selected on a competitive basis to demonstrate methods of

expanding homeownership opportunities for low-income borrowers through

expanding the secondary market for non-conforming home mortgage loans

to low-wealth borrowers. The Conference Report to the FY 1998

Appropriations Act (H.R. Rep. No. 297, 105th Cong., 1st Sess. 103

(1997)), which provides guidance from Congress on its legislative

intent, states that the conferees ``underscore their intention that the

demonstration program focus solely on strategies to expand the

secondary market for affordable home mortgage credit from private

lenders.''

Criteria for the Selection of Grantees

Statutory selection criteria. In selecting the grantees for this

demonstration program, the FY 1998 Appropriations Act provides the

following criteria for selecting such grantees:

--Experience working with lenders who make non-conforming loans to low-

income borrowers;

--Experience in expanding the secondary market for such loans (to low-

income borrowers);

--Demonstrated success in carrying out such activities, including

raising non-Federal grants and capital on concessionary terms for the

purpose of expanding the secondary market for loans in the previous 2

years in amounts equal or exceeding the amount awarded; and

--Demonstrated ability to provide data on the performance of such loans

sufficient to allow for future analysis of the investment risk of such

loans.

Report Language Criteria. The Conference Report states that the

grantees should be selected based on the criteria in the statute and

contained in the House Report (H.R. Rep. No. 175, 105th Cong., 1st

Sess. 37 (1997)). The House Report identifies the following selection

criterion:

--The ability to adequately collect data on the underwriting and

performance of the loans purchased; further, the portfolios should

consist of loans that are non-conforming due to high loan-to-value

ratio, missed payments, credit blemishes, or a lack of credit.

The conferees further establish that priority in the selection

criteria shall be accorded to those organizations that have the

following characteristics:

--Statewide or multi-state service areas;

--Sophisticated existing (emphasis added) data collection capabilities,

including adequate loan portfolio monitoring and analysis systems;

--A demonstrated strong track record of leveraging public sector funds;

and willingness to match funds awarded under the demonstration program

with non-Federal funds; and

--A mix between rural and urban loans.

Questions for Commenters

In order for HUD to develop meaningful guidelines for selecting the

organizations and operating the demonstration program, HUD is seeking

public input on several particular issues. HUD also encourages

commenters to provide any additional input that would be useful in

designing this demonstration program.

A. The FY 1998 Appropriations Act defines the purpose of the

demonstration as follows: ``to demonstrate methods of expanding

homeownership opportunities for low-income borrowers through expanding

the secondary market for non-conforming home mortgage loans to low-

wealth borrowers.''

1. What should be the desired and expected outcomes of the

demonstration program?

2. How should HUD define a ``low-wealth'' borrower for this

demonstration program?

B. The Conference Report indicates that Congress intends to place a

responsibility on the applicant to go beyond addressing the immediate

credit needs of lower-income borrowers to one of developing a strategy

to expand the secondary market for affordable home mortgage credit by

private lenders: ``[T]he conferees underscore strategies to expand the

secondary market for affordable home mortgage credit from private

lenders.''

1. What would be the characteristics of an effective strategy?

2. What are the best measures to assess a strategy's potential

impact on the future availability of private credit to low-wealth

borrowers?

C. The FY 1998 Appropriations Act identifies several criteria for

the selection of an applicant, one of which is ``experience in working

with lenders who make non-conforming loans to low-income borrowers.''

1. What factors might HUD consider in defining ``experience working

with lenders'' for this demonstration program? What factors might be

more (or less) relevant in an applicant's experience working with

lenders?

2. a ``non-conforming loan'' IS generally defined as a loan that

does not

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meet Fannie Mae and Freddie Mac underwriting criteria. Should other

definitions, such as an unseasoned loan, a loan that may require a

second loan committee review, one that has a low mortgage or credit

score, or a loan that does not meet conventional appraisal standards be

considered? Should the definition include FHA loans?)

D. Another selection criterion identified by the FY 1998

Appropriations Act is ``experience in expanding the secondary market

for such loans [i.e., non-conforming loans to low-income borrowers].''

1. How should HUD assess the applicant's experience in expanding

the secondary market for such loans for this demonstration program?

(Examples: By the applicant's volume of such loans sold on the

secondary market? By the applicant's experience with the origination of

non-conforming loans?)

2. The House Report indicates that the demonstration portfolios

should consist of loans that are non-conforming due to high loan-to-

value ratio, missed payments, credit blemishes, or a lack of credit.

Are these factors adequate, or are there other factors that HUD should

evaluate?

3. Are there any compensating characteristics among such borrowers

that are not criteria recognized in conventional or standard

underwriting guidelines? If so, what are they and how might HUD

consider them as part of the demonstration program?

E. Another selection criterion identified by the FY 1998

Appropriations Act is ``demonstrated success in carrying out such

activities including raising non-Federal grants and capital on

concessionary terms for the purpose of expanding the secondary market

for loans in the previous two years in amounts equal or exceeding the

amount awarded.''

1. How should HUD determine ``demonstrated success'' for this

program? (Examples: By the amount of capital raised? By the types of

activities undertaken? Working with lenders who make non-conforming

loans to low-income borrowers and expanding the secondary market for

such loans?)

2. For purposes of the demonstration program, is there a preferred

use of the funds? (Examples: as capital reserves, for loan

originations, for the purchase of loans, for loan guarantees). Should

the efficiency of leverage in the use of the funds be a requirement?

F. The FY 1998 Appropriations Act also requires that the selected

applicant must ``have demonstrated the ability to provide data on the

performance of such loans sufficient to allow for future analysis of

the investment risk of such loans.''

1. What information does HUD need to collect? (Examples:

information regarding delinquencies and defaults, restructured loans,

claims, reasons for poor loan performance, availability of pre-/post-

purchase counseling, an analysis by the applicant of the reasons behind

good/poor loan performance?) Should the information collected be

predefined and made uniform for all applicants (e.g., defining the time

period for a ``default'')?

2. How frequently and for how long a duration of time should this

information be reported?

3. In order to maximize the credibility and impact of the

demonstration, the conferees expect HUD to give priority to applicants

that have ``sophisticated existing data collection capabilities,

including adequate loan portfolio monitoring and analysis.'' How might

HUD assess data collection capability?

4. The conferees expect the Secretary to give priority to

organizations that have statewide or multi-state service areas, and

have a mix of urban and rural loans. How important is a diversified

portfolio in assessing investment risk for purposes of the criterion

described above?

5. Should automated mortgage finance tools, such as credit or

mortgage scoring, be evaluated in this demonstration? Are there other

tools that should be examined?

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this advance

notice of a demonstration program under Executive Order 12866,

Regulatory Planning and Review, issued by the President on September

30, 1993. Any changes made in this document subsequent to its

submission to OMB are identified in the docket file, which is available

for public inspection during regular business hours in the Office of

the Rules Docket Clerk, Office of the General Counsel, Department of

Housing and Urban Development, Room 10276, 451 Seventh Street SW,

Washington, DC 20410.

Dated: July 29, 1998.

Ira Peppercorn,

General Deputy Assistant Secretary for Housing-Federal Housing

Commissioner.

[FR Doc. 98-20800 Filed 8-3-98; 8:45 am]

BILLING CODE 4210-27-P