The multifamily Loss Severity calculation adds the discounted present value of various costs and offsetting revenues associated with the foreclosure of multifamily properties, expressed as a fraction of Defaulted UPB. The loss elements are:

The inputs in Table 3-44 are used to compute Gross Loss Severity for multifamily Loans:

Multifamily Gross Loss Severity Outputs in Table 3-45 are used in the Credit Enhancements Calculations section 3.6.3.6.4, of this appendix.

[b] For each DCC covering loans in the Loan Group, the inputs in Table 3-47 are required:

[c] In the RBC Report, Aggregate Limit CE Subtypes are grouped as illustrated in Table 3-48.

[a] For each month m of the Stress Test, for each Loan Group (LG), carry out the following six steps [a] 1-6 for each DCC.

[a] Mortgage Credit Enhancement Outputs are set forth in Table 3-49.

Combine inputs and outputs from Gross Loss Severity and Credit Enhancements (Table 3-42 through Table 3-49) in the following formulas for each Loan Group in month m:

[b] For Government single family Loan Groups, complete the following three steps:

This section combines the mortgage Amortization Schedules with Default, Prepayment and Net Loss Severity Rates to produce performance-adjusted cash flows for Enterprise Whole Loans in the Stress Test.

The inputs required to compute Stress Test Whole Loan Cash Flows for each Loan Group are listed in Table 3-51.

8. Calculate Total Principal Received (TPR) and Total Interest Received (TIR) in month m:
$ER13SE01.088$
9. For Sold Loans, calculate the following cash flow components:
a. Guarantee Fee (GF) received in month m:
$ER13SE01.089$
b. Float Income (FI) received in month m
$ER15MR02.012$
where: Prepayment Interest Shortfall (PIS) in month m is:
$ER15MR02.013$
3.6.3.7.4 Stress Test Whole Loan Cash Flow Outputs
The Whole Loan Cash Flows in Table 3-52 are used to prepare pro forma balance sheets and income statements for each month of the Stress Period (see section 3.10 Operations, Taxes and Accounting, of this appendix). For Retained Loan groups, cash flows consist of Scheduled Principal, Prepaid Principal, Defaulted Principal, Credit Losses, and Interest. For Sold Loan groups, cash flow consists of Credit Losses, Guarantee Fees and Float Income. For Repurchased MBSs, cash flows are allocated according to the Fraction Repurchased. Table 3-52 covers all cases; for Retained Loans FREP = 1.0.

Table 3-52—Outputs for Whole Loan Cash Flows
Variable
Description
SPRm
Scheduled Principal Received in month m = 1...RM

PPRm
Prepaid Principal Received in month m = 1...RM

DPm
Defaulted Principal in month m = 1...RM

CLm
Credit Losses in month m = 1...RM

PUPBm
Performing Loan Group UPB in month m = 0...RM

TPRm
Total Principal Received in month m = 1...RM

TIRm
Total Interest Received in month m = 1...RM

GFm
Guarantee Fees received in month m = 1...RM

FIm
Float Income received in month m = 1...RM

Table 3-53—Additional Outputs for Repurchased MBSs
Variable
Quantity
Description
STPRm
FREP × (SPRm + PPRm + DPm)
Enterprise's portion of Total Principal Received in months m = 1...RM, reflecting its fractional ownership of the MBS

STIRm
FREP × (TIRm−GFm)
Enterprise's portion of Total Interest Received (at the Pass-Through Rate) in months m = 1...RM, reflecting its fractional ownership of the MBS

SPUPBm
FREP × PUPBm
Enterprise's portion of the Performing UPB of the repurchased MBS in months m = 0...RM, reflecting its fractional ownership of the MBS

3.6.3.8 Whole Loan Accounting Flows
3.6.3.8.1 Whole Loan Accounting Flows Overview
[a] For accounting purposes, cash flows are adjusted to reflect (1) the value over time of discounts, premiums and fees paid or received (Deferred Balances) when an asset was acquired; and (2) the fact that mortgage interest is paid in arrears, i.e. it is received in the month after it is earned. In the Stress Test calculations, payments are indexed by the month in which they are received. Therefore, interest received in month m was earned in month m−1. However, principal is accounted for in the month received.

[b] Deferred Balances are amortized over the remaining life of the asset. Therefore, these calculations go beyond the end of the Stress Test if the Remaining Maturity (RM) is greater than the 120 months of the Stress Test. The projection of cash flows beyond the end of the Stress Test is discussed in the individual sections where the cash flows are first calculated. In general, for interest rate indexes, monthly Prepayment rates and monthly Default rates, the value for m = 120 is used for all months 120 <m ≤RM, but LS = 0 for m >120.

3.6.3.8.2 Whole Loan Accounting Flows Inputs
The inputs in Table 3-54 are required to compute Accounting Flows:

Table 3-54—Inputs for Whole Loan Accounting Flows
Variable
Description
Source
RM
Remaining Term to Maturity in months
RBC Report

UPD0
Sum of all unamortized discounts, premiums, fees, commissions, etc. for the loan group, such that the unamortized balance equals the book value minus the face value for the loan group at the start of the Stress Test, adjusted by the Unamortized Balance Scale Factor
RBC Report

NYR0
Net Yield Rate at time zero
section 3.6.3.3.4, Mortgage Amortization Schedule Outputs

PUPBm
Performing Loan Group UPB in months m = 0 ... RM
section 3.6.3.7.4, Stress Test Whole Loan Cash Flow Outputs

PTR0
Pass-Through Rate at time zero
section 3.6.3.3.4, Mortgage Amortization Schedule Outputs

SPUPBm
Security Performing UPB in months m = 0 ... RM
section 3.6.3.7.4, Stress Test Whole Loan Cash Flow Outputs

SUPD0
The sum of all unamortized discounts, premiums, fees, commissions, etc. associated with the securities modeled using the Wtd Ave Percent Repurchased, such that the unamortized balance equals the book value minus the face value for the relevant securities at the start of the Stress Test, adjusted by the percent repurchased and the Security Unamortized Balance Scale Factor
RBC Report

3.6.3.8.3 Whole Loan Accounting Flows Procedures
3.6.3.8.3.1 Accounting for Retained and Sold Whole Loans
[a] Complete the following three steps to account for Retained and Sold loans:

1. Compute Allocated Interest in month m (AIm) as follows:
$ER13SE01.093$
Note:
Allocated Interest is used only to determine the allocation of Amortization Expense over time, not to generate actual cash flows)

2. Calculate the monthly Internal Rate of Return (IRR) that equates the adjusted cash flows (actual principal plus Allocated Interest) to the Initial Book Value (BV0) of the Loan Group. A single IRR is used for all months m. Solve for IRR such that:
$ER13SE01.094$
Where:
$ER13SE01.095$
3. Calculate the monthly Amortization Expense for each month m:
a. If BV0 <0, or if 12 × IRR >1.0 (100%), or if
$ER13SE01.096$
then the full amount of UPD0 is realized in the first month (AE1 = −UPD0)
b. Otherwise:
$ER13SE01.097$
3.6.3.8.3.2 Additional Accounting for Repurchased MBSs
[a] Complete the following three steps to account for Repurchased MBSs:

1. Compute Security Allocated Interest in month m (SAIm) as follows:
$ER13SE01.098$
Note: Security Allocated Interest is used only to determine the allocation of Security Amortization Expense over time, not to generate actual cash flows.
2. Calculate the monthly Internal Rate of Return (IRR) that equates the adjusted cash flows (actual principal plus Allocated Interest) to the Initial Book Value (SBV0) of the Loan Group. A single IRR is used for all months m. Solve for IRR such that:
$ER13SE01.099$
Where:
SBV0 = SPUPB0 + SUPD0
SACFm = SAIm − SPUPBm + SPUPBm−1
3. Calculate the monthly Security Amortization Expense for each month m:
a. If SBV0 <0, or if 12 × IRR >1.0 (100%), or if
$ER13SE01.100$
then the full amount of SUPD0 is realized in the first month (SAE1 = −SUPD0).
b. Otherwise:
$ER13SE01.101$
3.6.3.8.4 Whole Loan Accounting Flows Outputs
Whole loan accounting flows outputs are set forth in Table 3-55. Amortization Expense for months m = 1...RM are used in section 3.10, Operations, Taxes, and Accounting, of this appendix.

Table 3-55—Outputs for Whole Loan Accounting Flows
Variable
Description
AEm
Amortization Expense for months m = 1...RM

SAEm
Security Amortization Expense for months m = 1...RM

3.6.4 Final Whole Loan Cash Flow Outputs
The final outputs for section 3.6, Whole Loan Cash Flows, of this appendix are as specified in Table 3-52, and Table 3-55.

3.7 Mortgage-Related Securities Cash Flows
3.7.1 Mortgage-Related Securities Overview
[a] Mortgage-Related Securities (MRSs) include Single Class MBSs, Multi-class MBSs (REMICs or Collateralized Mortgage Obligations (CMOs)), Mortgage Revenue Bonds (MRBs), and Derivative Mortgage Securities such as Interest-Only and Principal-Only Stripped MBSs. MBSs and Derivative Mortgage Securities are issued by the Enterprises, Ginnie Mae and private issuers. MRBs are issued by State and local governments or their instrumentalities. For computational purposes, certain Asset-Backed Securities (ABS) backed by mortgages (Mortgage ABSs backed by manufactured housing loans, second mortgages or home equity loans) are treated as REMICs in the Stress Test.

[b] Cash flows from Single Class MBSs represent the pass-through of all principal and interest payments, net of servicing and guarantee fees, on the underlying pools of mortgages. Cash flows from Multi-Class MBSs and Derivative Mortgage Securities represent a specified portion of the cash flows produced by an underlying pool of mortgages and/or Mortgage-Related Securities, determined according to rules set forth in offering documents for the securities. MRBs may have specific maturity schedules and call provisions, whereas MBSs have only expected maturities and, in most cases, no issuer call provision (other than “cleanup calls” if the pool balance becomes quite small). However, the timing of principal payments for MRBs is still closely related to that of their underlying mortgage collateral. The Stress Test treats most MRBs in a manner similar to single class MBSs. Finally, a small number of Enterprise and private label REMIC securities for which modeling information is not readily available and which are not modeled by a commercial information service (referred to as “miscellaneous MRS”) are treated separately.

[c] In addition to reflecting the defaults of mortgage borrowers during the Stress Period, the Stress Test considers the possibility of issuer Default on Mortgage-Related Securities. Credit impairments throughout the Stress Period are based on the rating of these securities, and are modeled by reducing contractual interest payments and “writing down” principal. No Credit Losses are assumed for the Enterprise's own securities and Ginnie Mae securities (see section 3.5.3, Counterparty Defaults Procedures, of this appendix).

[d] The calculation of cash flows for Mortgage-Related Securities requires information from the Enterprises identifying their holdings, publicly available information characterizing the securities, and information on the interest rate, mortgage performance and credit rating (for rated securities).

[e] Cash and accounting flows—monthly principal and interest payments and amortization expense—are produced for each month of the Stress Period for each security. (Principal- and interest-only securities pay principal or interest respectively.) These cash flows are input to the Operations, Taxes, and Accounting component of the Stress Test.

3.7.2 Mortgage-Related Securities Inputs
3.7.2.1 Inputs Specifying Individual Securities
3.7.2.1.1 Single Class MBSs
The information in Table 3-56 is required for single class MBSs held by an Enterprise at the start of the Stress Test. This information identifies the Enterprise's holdings and describes the MBS and the underlying mortgage loans.

Table 3-56—RBC Report Inputs for Single Class MBS Cash Flows
Variable
Description
Pool Number
A unique number identifying each mortgage pool

CUSIP Number
A unique number assigned to publicly traded securities by the Committee on Uniform Securities Identification Procedures

Issuer
Issuer of the mortgage pool

Original UPB Amount
Original pool balance multiplied by the Enterprise's percentage ownership

Current UPB Amount
Initial Pool balance (at the start of the Stress Test), multiplied by the Enterprise's percentage ownership

Product Code
Mortgage product type for the pool

Security Rate Index
If the rate on the security adjusts over time, the index that the adjustment is based on

Unamortized Balance
The sum of all unamortized discounts, premiums, fees, commissions, etc., such that the unamortized balance equals book value minus face value, adjusted by the Unamortized Balance Scale Factor

Wt Avg Original Amortization Term
Original amortization term of the underlying loans, in months (weighted average for underlying loans)

Wt Avg Remaining Term of Maturity
Remaining Maturity of the underlying loans at the start of the Stress Test (weighted average for underlying loans)

Wt Avg Age
Age of the underlying loans at the start of the Stress Test (weighted average for underlying loans)

Wt Avg Current Mortgage Interest rate
Mortgage Interest Rate of the underlying loans at the start of the Stress Test (weighted average for underlying loans)

Wt Avg Pass-Through Rate
Pass-Through Rate of the underlying loans at the start of the Stress Test (weighted average for underlying loans)

Wtg Avg Original Mortgage Interest Rate
The current UPB weighted average Mortgage Interest Rate in effect at Origination for the loans in the pool

Security Rating
The most current rating issued by any Nationally Recognized Statistical Rating Organization (NRSRO) for this security, as of the reporting date. In the case of a “split” rating, the lowest rating should be given

Wt Avg Gross Margin
Gross margin for the underlying loans (ARM MBS only) (weighted average for underlying loans)

Wt Avg Net Margin
Net margin (used to determine the security rate for ARM MBS) (weighted average for underlying loans)

Wt Avg Rate Reset Period
Rate reset period in months (ARM MBS only) (weighted average for underlying loans)

Wt Avg Rate Reset Limit
Rate reset limit up/down (ARM MBS only) (weighted average for underlying loans)

Wt Avg Life Interest Rate Ceiling
Maximum rate (lifetime cap) (ARM MBS only) (weighted average for underlying loans)

Wt Avg Life Interest Rate Floor
Minimum rate (lifetime floor) (ARM MBS only) (weighted average for underlying loans)

Wt Avg Payment Reset Period
Payment reset period in months (ARM MBS only) (weighted average for underlying loans)

Wt Avg Payment Reset Limit
Payment reset limit up/down (ARM MBS only) (weighted average for underlying loans)

Wt Avg Lookback Period
The number of months to look back from the interest rate change date to find the index value that will be used to determine the next interest rate (ARM MBS only) (weighted average for underlying loans)

Wt Avg Negative Amortization Cap
The maximum amount to which the balance can increase before the payment is recast to a fully amortizing amount. It is expressed as a fraction of the original UPB. (ARM MBS only) (weighted average for underlying loans)

Wt Avg Initial Interest Rate Period
Number of months between the loan origination date and the first rate adjustment date (ARM MBS only) (weighted average for underlying loans)

Wt Avg Unlimited Payment Reset Period
Number of months between unlimited payment resets, i.e., not limited by payment caps, starting with Origination date (ARM MBS only) (weighted average for underlying loans)

Notional Flag
Indicates that amounts reported in Original UPB Amount and Current UPB Amount are notional

UPB Scale Factor
Factor applied to the current UPB that offsets any timing adjustments between the security level data and the Enterprise's published financials

Whole Loan Modeling Flag
Indicates that the Current UPB Amount and Unamortized Balance associated with this Repurchased MBS are included in the Wtg Avg Percent Repurchased and Security Unamortized Balance fields

FAS 115 Classification
The financial instrument's classification according to FAS 115

HPGRK
Vector of House Price Growth Rates for quarters q = 1...40 of the Stress Period

3.7.2.1.2 Multi-Class MBSs and Derivative Mortgage Securities
[a] The information in Table 3-57 is required for Multi-Class MBSs and Derivative Mortgage Securities held by an Enterprise at the start of the Stress Test. This information identifies the MBS and an Enterprise's holdings.

Table 3-57—RBC Report Inputs for Multi-Class and Derivative MBS Cash Flows
Variable
Description
CUSIP Number
A unique number assigned to publicly traded securities by the Committee on Uniform Securities Identification Procedures

Issuer
Issuer of the security: FNMA, FHLMC, GNMA or other

Original Security Balance
Original principal balance of the security (notional amount for Interest-Only securities) at the time of issuance, multiplied by the Enterprise's percentage ownership

Current Security Balance
Initial principal balance, or notional amount, at the start of the Stress Period multiplied by the Enterprise's percentage ownership

Current Security Percentage Owned
The percentage of a security's total current balance owned by the Enterprise

Unamortized Balance
The sum of all unamortized discounts, premiums, fees, commissions, etc., such that the unamortized balance equals book value minus face value, adjusted by the Unamortized Balance Scale Factor.

[b] The Stress Test requires sufficient information about the cash flow allocation rules among the different classes of a Multi-Class MBS to determine the cash flows for the individual class(es) owned by an Enterprise, including descriptions of the component classes of the security, the underlying collateral, and the rules directing cash flows to the component classes. This information is obtained from offering documents or securities data services. In the Stress Test, this information is used either as an input to a commercial modeling service or, for securities that are not so modeled, to derive an approximate modeling treatment as described more fully in this section.

[c] If a Derivative Mortgage Security is itself backed by one or more underlying securities, sufficient information is required for each underlying security as described in the preceding paragraph.

3.7.2.1.3 Mortgage Revenue Bonds and Miscellaneous MRSs
[a] The Stress Test requires two types of information for Mortgage Revenue Bonds and miscellaneous MRS held by an Enterprise at the start of the Stress Test: information identifying the Enterprise's holdings and the contractual terms of the securities. The inputs required for these instruments are set forth in Table 3-58.

Table 3-58—RBC Report Inputs for MRBs and Derivative MBS Cash Flows
Variable
Description
CUSIP Number
A unique number assigned to publicly traded securities by the Committee on Uniform Securities Identification Procedures

Original Security Balance
Original principal balance, multiplied by the Enterprise's percentage ownership

Current Security Balance
Initial principal balance (at start of Stress Period), multiplied by the Enterprise's percentage ownership

Unamortized Balance
The sum of all unamortized discounts, premiums, fees, commissions, etc., such that the unamortized balance equals book value minus face value, adjusted by the Unamortized Balance Scale Factor

Issue Date
The Issue Date of the security

Maturity Date
The stated Maturity Date of the security

Security Interest Rate
The rate at which the security earns interest, as of the reporting date

Principal Payment Window Starting Date, Down-Rate Scenario
The month in the Stress Test that principal payment is expected to start for the security under the statutory “down” interest rate scenario, according to Enterprise projections

Principal Payment Window Ending Date, Down-Rate Scenario
The month in the Stress Test that principal payment is expected to end for the security under the statutory “down” interest rate scenario, according to Enterprise projections

Principal Payment Window Starting Date, Up-Rate Scenario
The month in the Stress Test that principal payment is expected to start for the security under the statutory “up” interest rate scenario, according to Enterprise projections

Principal Payment Window Ending Date, Up-Rate Scenario
The month in the Stress Test that principal payment is expected to end for the security under the statutory “up” interest rate scenario, according to Enterprise projections

Security Rating
The most current rating issued by any Nationally Recognized Statistical Rating Organization (NRSRO) for this security, as of the reporting date. In the case of a “split” rating, the lowest rating should be given.

Security Rate Index
If the rate on the security adjusts over time, the index on which the adjustment is based

Security Rate Index Coefficient
If the rate on the security adjusts over time, the coefficient is the number used to multiply by the value of the index

Security Rate Index Spread
If the rate on the security adjusts over time, the spread is added to the value of the index multiplied by the coefficient to determine the new rate

Security Rate Adjustment Frequency
The number of months between rate adjustments

Security Interest Rate Ceiling
The maximum rate (lifetime cap) on the security

Security Interest Rate Floor
The minimum rate (lifetime floor) on the security

[b] The Payment Window Starting and Ending Dates are projected by the Enterprise on the basis of prospectus information or simulations from a dealer in the securities or other qualified source, such as the structured finance division of an accounting firm, for the two statutory scenarios.

3.7.2.2 Interest Rate Inputs
Interest rates projected for each month of the Stress Period are used to calculate principal amortization and interest payments for ARM MBSs and MRBs, and for Derivative Mortgage Securities with indexed coupon rates. This information is produced in section 3.3, Interest Rates, of this appendix.

3.7.2.3 Mortgage Performance Inputs
Default and Prepayment rates for the loans underlying a single- or multiclass MBS are computed according to the characteristics of the loans as specified in this section 3.7.2, Mortgage-Related Securities Inputs. LTV and Census Region are not uniquely specified for the loans underlying a given security; instead, the Prepayment and Default rates are averaged over all LTV categories, weighted according to the distribution of LTVs given in Table 3-59. (This weighting applies to Time Zero, i.e., the start of the Stress Test; the weightings will change over time as individual LTV groups pay down at different rates. See section 3.7.3, Mortgage-Related Securities Procedures, of this appendix.) Instead of Census Division, the national average HPI is used for all calculations in this section.

Table 3-59—Aggregate Enterprise Amortized Original LTV (AOLTV0) Distribution 1
Original LTV
UPBDistribution
Wt Avg AOLTV for Range
00<LTV≤60

60<LTV≤70

70<LTV≤75

75<LTV≤80

80<LTV≤90

90<LTV≤95

95<LTV≤100

100<LTV

1 Source: RBC Report, combined Enterprises single-family sold loan portfolio. Table 3-59 is updated as necessary with combined Enterprises single-family sold loan group data from the RBC Report in accordance with OFHEO guideline #404. The contents of the table appear at http://www.OFHEO.gov.
Note: Amortized Original LTV (also known as the “current-loan-to-original-value” ratio) is the Original LTV adjusted for the change in UPB but not for changes in property value.
3.7.2.4 Third-Party Credit Inputs
For securities not issued by the Enterprise or Ginnie Mae, issuer Default risk is reflected by haircutting the instrument cash flows based on the rating of the security, as described in section 3.5, Counterparty Defaults, of this appendix.

3.7.3 Mortgage-Related Securities Procedures
The following sections describe the calculations for (1) single class MBSs, (2) Multi-Class MBSs and derivative mortgage securities, and (3) MRBs and miscellaneous MRS.

3.7.3.1 Single Class MBSs
[a] The calculation of cash flows for single class MBSs is based on the procedures outlined earlier in section 3.6, Whole Loan Cash Flows, of this appendix. The collateral (i.e., the mortgage pool) underlying each MBS is treated as one single family Loan Group with characteristics equal to the weighted average characteristics of the underlying loans.

[b] For each MBS, compute the scheduled cash flows specified in Table 3-33, as directed in section 3.6.3.3.3, Mortgage Amortization Schedule Procedures of this appendix, with the following exceptions and clarifications:

1. The Net Yield Rate (NYR) is not used in the MBS calculation. Instead, the Pass-Through Rate (for Fixed-Rate MBSs) and INDEX + Net Margin (for Adjustable-Rate MBSs) are used.
2. PMT is not a direct input for MBSs. (That is, it is not specified in the RBC Report.) Instead, compute PMT from UPB, MIR and remaining amortizing term AT−A0, using the standard mortgage payment formula (and update it as appropriate for ARMs, as described in the Whole Loan calculation).
3. For ARM MBS, interest rate and monthly payment adjustments for the underlying loans are calculated in the same manner as they are for ARM Loan Groups.
4. MBSs backed by Biweekly mortgages, GPMs, TPMs, GEMs, and Step mortgages are mapped into mortgage types as described in section 3.6, Whole Loan Cash Flows, of this appendix.
[c] Use the Loan Group characteristics to generate Default and Prepayment rates as described in section 3.6.3.4.3, Single Family Default and Prepayment Procedures, of this appendix. For the following explanatory variables that are not specified for MBSs, proceed as follows:

1. For fixed rate Ginnie Mae certificates and the small number of multifamily MBS held by the Enterprises, use the model coefficients for Government Loans. For loans underlying Ginnie Mae ARM certificates, use the conventional ARM model coefficients.
2. Set Investor Fraction (IF) = 7.56%
3. Set Relative Loan Size (RLS) = 1.0. For Ginnie Mae certificates, use RLS = 0.75.
4. For LTVORIG of the underlying loans: Divide the MBS's single weighted average Loan Group into several otherwise identical Loan Groups (“LTV subgroups”), one for each Original LTV range specified in Table 3-59. UPB0 for each of these LTV subgroups is the specified percentage of the aggregate UPB0. AOLTV0 for each subgroup is also specified in Table 3-59. For Ginnie Mae certificates, use only the 95 <LTV ≤100 LTV category and its associated weighted average LTV.
5. For each LTV subgroup, compute LTV0 as follows:
$ER13SE01.102$
Where:
HPI = the national average HPI figures in Table 3-60 (updated as necessary from subsequent releases of the OFHEO HPI).
A0 = weighted average age in months of the underlying loans immediately prior to the start of the Stress Test.
AQ0 = weighted average age in quarters of the underlying loans immediately prior to the start of the Stress Test. AQ0 = int (A0/3).
AQ′0 = AQ0 minus the number of whole quarters between the most recently available HPI at the start of the Stress Test and time zero.
If AQ′0≤0, then LTV0 = AOLTV0.

Table 3-60—Historical National Average HPI 1
Quarter 2
HPI
Quarter
HPI
Quarter
HPI
1975Q1
62.45
1983Q4
116.63
1992Q3
177.94

1975Q2
63.50
1984Q1
118.31
1992Q4
178.71

1975Q3
62.85
1984Q2
120.40
1993Q1
178.48

1975Q4
63.92
1984Q3
121.68
1993Q2
179.89

1976Q1
65.45
1984Q4
122.94
1993Q3
180.98

1976Q2
66.73
1985Q1
124.81
1993Q4
182.38

1976Q3
67.73
1985Q2
126.91
1994Q1
183.35

1976Q4
68.75
1985Q3
129.38
1994Q2
183.95

1977Q1
70.70
1985Q4
131.20
1994Q3
184.43

1977Q2
73.34
1986Q1
133.77
1994Q4
184.08

1977Q3
75.35
1986Q2
136.72
1995Q1
184.85

1977Q4
77.71
1986Q3
139.37
1995Q2
187.98

1978Q1
79.96
1986Q4
141.99
1995Q3
190.81

1978Q2
82.75
1987Q1
145.07
1995Q4
192.42

1978Q3
85.39
1987Q2
147.88
1996Q1
194.80

1978Q4
87.88
1987Q3
150.21
1996Q2
195.00

1979Q1
91.65
1987Q4
151.57
1996Q3
195.78

1979Q2
94.26
1988Q1
154.26
1996Q4
197.48

1979Q3
96.24
1988Q2
157.60
1997Q1
199.39

1979Q4
98.20
1988Q3
159.25
1997Q2
201.00

1980Q1
100.00
1988Q4
160.96
1997Q3
203.94

1980Q2
100.86
1989Q1
163.10
1997Q4
206.97

1980Q3
104.27
1989Q2
165.33
1998Q1
210.09

1980Q4
104.90
1989Q3
169.09
1998Q2
212.37

1981Q1
105.69
1989Q4
170.74
1998Q3
215.53

1981Q2
107.85
1990Q1
171.42
1998Q4
218.09

1981Q3
109.21
1990Q2
171.31
1999Q1
220.80

1981Q4
109.38
1990Q3
171.85
1999Q2
224.32

1982Q1
111.02
1990Q4
171.03
1999Q3
228.46

1982Q2
111.45
1991Q1
172.41
1999Q4
232.41

1982Q3
110.91
1991Q2
173.14
2000Q1
235.91

1982Q4
111.96
1991Q3
173.14
2000Q2
240.81

1983Q1
114.12
1991Q4
175.46
2000Q3
245.15

1983Q2
115.33
1992Q1
176.62

1983Q3
116.15
1992Q2
176.26

1 These numbers are updated as necessary from subsequent releases of the HPI after 2000Q3.
2 Note: If the underlying loans were originated before 1975, use the HPI from 1975Q1 as HPIORIG.
6. For each quarter q of the Stress Test, use UPBq and the house price growth rates from the Benchmark regional time period:
$ER13SE01.103$
7. Generate Default, Prepayment and Performance vectors PREm, DEFm and PERFm for each LTV subgroup. When LTVORIG is used as a categorical variable, use the corresponding range defined for each LTV subgroup in Table 3-59. For LTV subgroup 95 <LTV <100, use 90 <LTVORIG in Table 3-35.
[d] For each LTV subgroup, do not compute any Loss Severity or Credit Enhancement amounts. MBS investors receive the full UPB of defaulted loans.

[e] Compute Total Principal Received (TPR), Total Interest Received (TIR), and Amortization Expense (AE) for each LTV subgroup as directed in section 3.6.3.7.3, Stress Test Whole Loan Cash Flow Procedures and section 3.6.3.8.3, Whole Loan Accounting Flows Procedures, of this appendix, with the following exception:

1. For Net Interest Received (NIR), do not use the Net Yield Rate (NYRm). Instead, use the Pass-Through Rate (PTRm) for Fixed Rate Loans, and INDEXm-1-LB + Wt Avg Net Margin, subject to rate resets as described in section 3.6.3.3.3, Mortgage Amortization Schedule Procedures, [a]1.b.3) of this appendix, for ARMs.
2. Calculate Recovery Principal Received using a Loss Severity rate of zero (LS = 0).

[f] Sum over the LTV subgroups to obtain the original MBS's TPR, TIR and AE for m = 1...RM.

[g] Apply counterparty Haircuts in each month m as follows:

1. Compute:
$ER15MR02.014$
Where:
m' = m, except for MBS credit rating below BBB where m' = 120
R = MBS credit rating
2. Compute:
$ER26JA04.011$
[h] The resulting values, for each MBS, of TPR, TIR, AE, and HctAmt for months m = 1...RM are used in the section 3.10, Operations, Taxes, and Accounting, of this appendix.

3.7.3.2 REMICs and Strips
[a] Cash flows for REMICs and Strips are generated according to standard securities industry procedures, as follows:

1. From the CUSIP number of the security, identify the characteristics of the underlying collateral. This is facilitated by using a securities data service.
2. Calculate the cash flows for the underlying collateral in the manner described for whole loans and MBS, based on Stress Test interest, Default, and Prepayment rates appropriate for the collateral.
3. Calculate cash flows for the Multiclass MBS using the allocation rules specified in the offering materials.
4. Determine the cash flows attributable to the specific securities held by an Enterprise, applying the Enterprise's ownership percentage.
5. For securities not issued by the Enterprise or Ginnie Mae, reduce cash flows by applying the Haircuts specified in section 3.5, Counterparty Defaults, of this appendix, as appropriate.
[b] If a commercial information service is used for steps [a] 1 through 4 of this section, the information service may model mortgage product types beyond those described for Whole Loans in section 3.6, Whole Loan Cash Flows, and ARM indexes in addition to those listed in section 3.3, Interest Rates, of this appendix. In such cases, the cash flows used are generated from the actual data used by the information service for the underlying security.

3.7.3.3 Mortgage Revenue Bonds and Miscellaneous MRS
[a] Cash flows for mortgage revenue bonds and miscellaneous MRS are computed as follows:

1. From the start of the Stress Test until the first principal payment date at the start of the Principal Payment Window, the security pays coupon interest at the Security Interest Rate, adjusted as necessary according to the Security Rate Index and Adjustment information in Table 3-58, but pays no principal.
2. During the Principal Payment Window, the security pays principal and interest equal to the aggregate cash flow from a level pay mortgage whose term is equal to the length of the Principal Payment Window and whose interest rate is the Security Interest Rate. If the Security Interest Rate is zero (as in the case of zero-coupon MRBs), then the security pays principal only in level monthly payment amounts equal to the Current Security Balance divided by the length of the Principal Payment Window.
3. For securities not issued by the Enterprise or Ginnie Mae, reduce cash flows by applying the Haircuts specified in section 3.5, Counterparty Defaults, of this appendix, as appropriate.
3.7.3.4 Accounting
Deferred balances are amortized as described in section 3.6.3.8, Whole Loan Accounting Flows, of this appendix, using the Pass-Through Rate (or Security Interest Rate for MRBs) rather than the Net Yield Rate. For principal-only strips and zero-coupon MRBs, assume Allocated Interest is zero. If the conditions in section 3.6.3.8.3.1[a]3.a. of this appendix, apply, do not realize the full amount in the first month. Instead, amortize the deferred balances using a straight line method over a period from the start of the Stress Test through the latest month with a non-zero cash flow.

3.7.4 Mortgage-Related Securities Outputs
[a] The outputs for MBS and MRS Cash Flows, found in Table 3-61, are analogous to those specified for Whole Loans in section 3.6.4, Final Whole Loan Cash Flow Outputs, of this appendix, which are produced for each security for each month.

Table 3-61—Outputs for Mortgage-Related Securities
Variable
Description
TPRm
Total Principal Received in month m = 1...RM

TIRm
Total Interest Received in month m = 1...RM

HctAmtm
Total Haircut amount in month m = 1...RM

AEm
Amortization Expense for months m = 1...RM

[b] These outputs are used as inputs to the Operations, Taxes, and Accounting component of the Stress Test, which prepares pro forma financial statements. See section 3.10, Operations, Taxes, and Accounting, of this appendix.

3.8 Nonmortgage Instrument Cash Flows
3.8.1 Nonmortgage Instrument Overview
[a] The Nonmortgage Instrument Cash Flows component of the Stress Test produces instrument level cash flows and accounting flows (accruals and amortization) for the 120 months of the Stress Test for:

1. Debt
2. Nonmortgage investments
3. Guaranteed Investment Contracts (GICs)
4. Preferred stock
5. Derivative contracts
a. Debt-linked derivative contracts
b. Investment-linked derivative contracts
c. Mortgage-linked derivative contracts
d. Derivative contracts that hedge forecasted transactions
e. Non-linked derivative contracts
[b] Although mortgage-linked derivative contracts are usually linked to mortgage assets rather than nonmortgage instruments, they are treated similarly to debt-linked and investment-linked derivative contracts and, therefore, are covered in this section.

[c] Debt, nonmortgage investments, and preferred stock cash flows include interest (or dividends for preferred stock) and principal payments or receipts, while debt-linked, investment-linked, and mortgage-linked derivative contract cash flows are composed of interest payments and receipts only. Debt, nonmortgage investments, and preferred stock are categorized in one of six classes 2
as shown in Table 3-62.

2 In addition to the items listed here, there are instruments that do not fit into these categories. Additional input information and calculation methodologies may be required for these instruments.

Table 3-62—Debt, Non-Mortgage Investments, and Preferred Stock Classifications
Classification
Description
Fixed-Rate Bonds or Preferred Stock
Fixed-rate securities that pay periodic interest or dividends

Floating-Rate Bonds or Preferred Stock
Floating-rate securities that pay periodic interest or dividends

Fixed-Rate Asset-Backed Securities
Fixed-rate securities collateralized by nonmortgage assets

Floating-Rate Asset-Backed Securities
Floating-rate securities collateralized by nonmortgage assets

Short-Term Instruments
Fixed-rate, short-term securities that are not issued at a discount and which pay principal and interest only at maturity

Discount Instruments
Securities issued below face value that pay a contractually fixed amount at maturity

[d] Derivative contracts consist of interest rate caps, floors, and swaps. The primary difference between financial instruments and derivative contracts, in terms of calculating cash flows, is that interest payments on financial instruments are based on principal amounts that are eventually repaid to creditors, whereas interest payments on derivative contracts are based on notional amounts that never change hands. Debt- and investment-linked derivative contracts are categorized in one of seven classes 3
as shown in Table 3-63:

3 Ibid.

Table 3-63—Debt- and Investment-Linked Derivative Contract Classification
Classification
Description of Contract
Basis Swap
Floating-rate interest payments are exchanged based on different interest rate indexes

Fixed-Pay Swap
Enterprise pays a fixed interest rate and receives a floating interest rate

Floating-Pay Swap
Enterprise pays a floating interest rate and receives a fixed interest rate

Long Cap
Enterprise receives a floating interest rate when the interest rate to which it is indexed exceeds a specified level (strike rate)

Short Cap
Enterprise pays a floating interest rate when the interest rate to which it is indexed exceeds the strike rate

Long Floor
Enterprise receives a floating interest rate when the interest rate to which it is indexed falls below the strike rate

Short Floor
Enterprise pays a floating interest rate when the interest rate to which it is indexed falls below the strike rate

[e] Mortgage-linked swaps are similar to debt-linked swaps except that the notional amount of a mortgage-linked swap amortizes based on the performance of certain MBS pools. Mortgage-linked derivative contracts are divided into two classes 4
as shown in Table 3-64:

4 Ibid.

Table 3-64—Mortgage-Linked Derivative Contract Classification
Classification
Description of Contract
Fixed-Pay Amortizing Swaps
Enterprise pays a fixed interest rate and receives a floating interest rate, both of which are based on a declining notional balance

Floating-Pay Amortizing Swaps
Enterprise pays a floating interest rate and receives a fixed interest rate, both of which are based on a declining notional balance

[f] In a currency swap, the Enterprise receives payments that are denominated in a foreign currency and it makes payments in U.S. dollars. The main difference between currency swaps and the type of swaps discussed above is that in a currency swap principal amounts are actually exchanged between the two counterparties. Currency swaps are divided into two classes, as shown in Table 3-65. 5

5 Ibid.

Table 3-65—Currency Swap Contract Classification
Classification
Description of Contract
Fixed-for-Fixed Currency Swap
Enterprise receives fixed interest payments denominated in a foreign currency and makes fixed, US dollar-denominated payments

Fixed-for Floating Currency Swap
Enterprise receives fixed interest payments denominated in a foreign currency and makes payments in US dollar based on a floating interest rate

3.8.2 Nonmortgage Instrument Inputs
[a] The Nonmortgage Instrument Cash Flows component of the Stress Test requires numerous inputs. Instrument level inputs provided by the Enterprises in the RBC Report are listed in Table 3-66. Many instrument classes require simulated Interest Rates because their interest payments adjust periodically based on rates tied to various indexes. These rates are generated as described in section 3.3, Interest Rates, of this appendix.

Table 3-66—Input Variables for Nonmortgage Instrument Cash Flows
Data Elements
Description
Amortization Methodology Code
Enterprise method of amortizing deferred balances (e.g., straight line)

Asset ID
CUSIP or Reference Pool Number identifying the asset underlying a derivative position

Asset Type Code
Code that identifies asset type used in the commercial information service (e.g., ABS, Fannie Mae pool, Freddie Mac pool)

Associated Instrument ID
Instrument ID of an instrument linked to another instrument

Coefficient
Indicates the extent to which the coupon is leveraged or de-leveraged

Compound Indicator
Indicates if interest is compounded

Compounding Frequency
Indicates how often interest is compounded

Counterparty Credit Rating
NRSRO's rating for the counterparty

Counterparty Credit Rating Type
An indicator identifying the counterparty's credit rating as short-term (‘S’) or long-term (‘L’)

Counterparty ID
Enterprise counterparty tracking ID

Country Code
Standard country codes in compliance with Federal Information Processing Standards Publication 10-4

Credit Agency Code
Identifies NRSRO (e.g., Moody's)

Current Asset Face Amount
Current face amount of the asset underlying a swap

Current Coupon
Current coupon or dividend rate of the instrument

Current Unamortized Discount
Current unamortized premium or unaccreted discount of the instrument adjusted by the Unamortized Balance Scale Factor. If the proceeds from the issuance of debt or derivatives or the amount paid for an asset were greater than par, the value should be positive. If the proceeds or the amounts paid were less than par, the value should be negative

Current Unamortized Fees
Current unamortized fees associated with the instrument adjusted by the Unamortized Balance Scale Factor. Generally fees associated with the issuance of debt or derivatives should be negative numbers. Fees associated with the purchase of an asset should generally be reported as positive numbers

Current Unamortized Hedge
Current unamortized hedging gains (positive) or losses (negative) associated with the instrument adjusted by the Unamortized Balance Scale Factor

Current Unamortized Other
Any other unamortized items originally associated with the instrument adjusted by the Unamortized Balance Scale Factor. If the proceeds from the issuance of debt or derivatives or the amount paid for an asset was greater than par, the value should be positive. If the proceeds or the amounts paid were less than par, the value should be negative

CUSIP_ISIN
CUSIP or ISIN Number identifying the instrument

Day Count
Day count convention (e.g., 30/360)

End Date
The last index repricing date

EOP Principal Balance
End of Period face, principal or notional, amount of the instrument

Exact Representation
Indicates that an instrument is modeled according to its contractual terms

Exercise Convention
Indicates option exercise convention (e.g., American Option)

Exercise Price
Par = 1.0; Options

First Coupon Date
Date first coupon is received or paid

Index Cap
Indicates maximum index rate

Index Floor
Indicates minimum index rate

Index Reset Frequency
Indicates how often the interest rate index resets on floating-rate instruments

Index Code
Indicates the interest rate index to which floating-rate instruments are tied (e.g., LIBOR)

Index Term
Point on yield curve, expressed in months, upon which the index is based

Instrument Credit Rating
NRSRO credit rating for the instrument

Instrument Credit Rating Type
An indicator identifying the instruments credit rating as short-term (‘S’) or long-term (‘L’)

Instrument ID
An integer used internally by the Enterprise that uniquely identifies the instrument

Interest Currency Code
Indicates currency in which interest payments are paid or received

Interest Type Code
Indicates the method of interest rate payments (e.g., fixed, floating, step, discount)

Issue Date
Indicates the date that the instrument was issued

Life Cap Rate
The maximum interest rate for the instrument throughout its life

Life Floor Rate
The minimum interest rate for the instrument throughout its life

Look-Back Period
Period from the index reset date, expressed in months, that the index value is derived

Maturity Date
Date that the instrument contractually matures

Notional Indicator
Identifies whether the face amount is notional

Instrument Type Code
Indicates the type of instrument to be modeled (e.g., ABS, Cap, Swap)

Option Indicator
Indicates if instrument contains an option

Option Type
Indicates option type (e.g., Call option)

Original Asset Face Amount
Original face amount of the asset underlying a swap

Original Discount
Original premium or discount associated with the purchase or sale of the instrument adjusted by the Unamortized Balance Scale Factor. If the proceeds from the issuance of debt or derivatives or the amount paid for an asset were greater than par, the value should be positive. If the proceeds or the amounts paid were less than par, the value should be negative

Original Face
Original face, principal or notional, amount of the instrument

Original Fees
Fees or commissions paid at the time of purchase or sale adjusted by the Unamortized Balance Scale Factor. Generally fees associated with the issuance of debt or derivatives should be negative numbers. Fees associated with the purchase of an asset should generally be reported as positive numbers

Original Hedge
Gains (positive) or losses (negative) from closing out a hedge associated with the instrument at settlement, adjusted by the Unamortized Balance Scale Factor

Original Other
Any other amounts originally associated with the instrument to be amortized or accreted adjusted by the Unamortized Balance Scale Factor. If the proceeds from the issuance of debt or derivatives or the amount paid for an asset were greater than par, the value should be positive. If the proceeds or the amounts paid were less than par, the value should be negative

Parent Entity ID
Enterprise internal tracking ID for parent entity

Payment Amount
Interest payment amount associated with the instrument (reserved for complex instruments where interest payments are not modeled)

Payment Frequency
Indicates how often interest payments are made or received

Performance Date
“As of” date on which the data is submitted

Periodic Adjustment
The maximum amount that the interest rate for the instrument can change per reset

Position Code
Indicates whether the Enterprise pays or receives interest on the instrument

Principal Currency Code
Indicates currency in which principal payments are paid or received

Principal Factor Amount
EOP Principal Balance expressed as a percentage of Original Face

Principal Payment Date
A valid date identifying the date that principal is paid

Settlement Date
A valid date identifying the date the settlement occurred

Spread
An amount added to an index to determine an instrument's interest rate

Start Date
The date, spot or forward, when some feature of a financial contract becomes effective (e.g., Call Date), or when interest payments or receipts begin to be calculated

Strike Rate
The price or rate at which an option begins to have a settlement value at expiration, or, for interest-rate caps and floors, the rate that triggers interest payments

Submitting Entity
Indicates which Enterprise is submitting information

Trade ID
Unique code identifying the trade of an instrument

Transaction Code
Indicates the transaction that an Enterprise is initiating with the instrument (e.g., buy, issue reopen)

Transaction Date
A valid date identifying the date the transaction occurred

UPB Scale Factor
Factor applied to UPB to adjust for timing differences

Unamortized Balances Scale Factor
Factor applied to Unamortized Balances to adjust for timing differences

[b] In addition to the inputs in Table 3-66, other inputs may be required depending on the characteristics of the instrument modeled. For example, the mortgage-linked derivative contract cash flows require inputs describing the performance of the mortgage assets to which they are linked, including Single Family Default and Prepayment rates (See section 3.6.3.4, Single Family Default and Prepayment Rates, of this appendix). Mortgage-linked derivative contract identification numbers (Asset IDs) are used to link the derivative contract to the required pool information that will be used to calculate the cash flows of the corresponding swap.

3.8.3 Nonmortgage Instrument Procedures
In general, non mortgage instruments are modeled according to their terms. The general methodology for calculating cash flows for principal and interest payments is described in this section and is not intended to serve as definitive text for calculating all possible present and future complex instruments. As mentioned in section 3.8.2, Nonmortgage Instrument Inputs, of this appendix, there are some instruments that may require additional input information and calculation methodologies. Simplifying assumptions are made for some instrument terms until they can be modeled more precisely.

3.8.3.1 Apply Specific Calculation Simplifications
[a] In order to produce cash flows, accruals, or amortization of deferred balances, the following simplifications are used for all instruments to which they apply. Should the language in any other portion of section 3.8, Nonmortgage Instrument Cash Flows, of this appendix, seem to conflict with a statement in this section, the language in section 3.8.3.1 takes precedence.

1. For day count methodology, use one of three methodologies 30/360, Actual/360, and Actual/365. All special day counts (i.e. Actual/366 B, Actual/366 S, Actual/366 E, and Actual/Actual) are treated as Actual/365.
2. Set the first index reset date to the First Coupon Date. If the Issue Date is later than the start of the Stress Test, use the Current Coupon Rate to determine the interest paid from Issue Date to First Coupon Date. When a calculation requires a rate that occurs before the start of the Stress Test, use the Current Coupon Rate. This applies to interest accrued but not paid for the start of the Stress test and to rate indexes where applying a Look Back Period requires data prior to the start of the Stress Test.
a. If periodic caps are zero, change them to 999.99; If periodic floors are greater than 1, change them to zero.
b. For instruments which have principal balance changes other than those caused by compounding interest, perform calculations as if the principal changes occur only on coupon dates (coupon dates on the fixed-rate leg for swaps) on or later than the first principal change date.
c. When using a rate index for a specified term in an option exercise rule or as an index, assume that rate is appropriate for the calculation. Do not convert from bond equivalent yield to another yield form for a discount, monthly pay, quarterly pay, semi-annual pay or annual pay instrument.
3. When applying the option exercise rule:
a. For zero coupon and discount securities, instruments with European options, and zero coupon swaps, evaluate option exercise only on dates listed in the instrument's option exercise schedule. For Bermudan options, evaluate option exercise on the first option date in the instrument's option exercise schedule and subsequent coupon dates (coupon dates on the fixed-rate leg for swaps). For American options, evaluate option exercise on the first option date in the instrument's option exercise schedule and subsequent monthly anniversaries of the instrument's first coupon date.
b. Assume all call/put premiums/discounts are zero except for zero coupon instruments (including zero coupon swaps and discount notes). For these exceptions, when calculating a rate to compare with the Enterprise Cost of Funds, use the yield to maturity calculated by equating the face or notional amount plus the unamortized discount at the start of the Stress Test to the present value of the face or notional amount at maturity.
c. Assume basis swaps and floating rate securities have no cancel, put, or call options.
d. If the remaining maturity is greater than 360 months, use the equivalent-maturity Enterprise Cost of Funds as if the remaining maturity is 360 months.
e. In the Stress Test, no preferred stock issued by the Enterprise will be called.
3.8.3.2 Determine the Timing of Cash Flows
Project payment dates from the payment date immediately prior to the start of the stress test according to the Payment Frequency, First Coupon Date, and Maturity Date.

3.8.3.3 Obtain the Principal Factor Amount at Each Payment Date
[a] Where there is no amortization or prepayment of principal, the Principal Factor Amount is 1.0 for each payment date until the stated Maturity Date, when it becomes zero.

[b] For debt and debt-linked derivative contracts that amortize, either a principal or a notional amortization schedule must be provided. If amortization information is unavailable, then the Principal Factor Amount is 1.0 for each payment date until the stated Maturity Date, when it becomes zero.

[c] Monthly prepayment rates are 3.5 percent for fixed-rate and 2.0 percent for floating-rate asset-backed securities. Furthermore, asset-backed securities are modeled through a commercial information service where possible. Instruments that cannot be modeled through the commercial information service are treated in accordance with section 3.9, Alternative Modeling Treatments, of this appendix.

[d] In the case of mortgage-linked derivative contracts, notional amounts are amortized based on the characteristics of the underlying pool in the manner described for principal balances of mortgage-backed securities held by an Enterprise in section 3.7, Mortgage-Related Securities Cash Flows, of this appendix.

3.8.3.4 Calculate the Coupon Factor
The Coupon Factor applicable to a given period, which applies to dividends also, depends on day count conventions used to calculate the interest payments for the instrument. For example, the Coupon Factor for a bond that pays interest quarterly based on a non-compounded 30/360 convention would be 3 (representing the number of months in a quarter) times 30 days divided by 360 days, or 0.25. Table 3-67 lists the most common day count conventions.

Table 3-67—Day Count Conventions
Convention
Coupon Factor Calculation
30/360
Number of days between two payment dates assuming 30 days per month/360

Actual/360
Number of days between two payment dates/360

Actual/365
Number of days between two payment dates/365

Actual/Actual
Number of days between two payment dates/Number of days in the year

3.8.3.5 Project Principal Cash Flows or Changes in the Notional Amount
For all financial instruments, principal outstanding for the current period is determined by multiplying the Original Face by the Principal Factor Amount for the current period. The principal payment equals the amount of principal outstanding at the end of the previous period less the principal outstanding at the end of the current period, or zero if the instrument has a notional amount.

3.8.3.6 Project Interest and Dividend Cash Flows
3.8.3.6.1 Non-Complex Financial Instruments
[a] Fixed-Rate Instruments. The current period principal outstanding is multiplied by the product of the Current Coupon and current period Coupon Factor and rounded to even 100ths of a dollar.

[b] Zero-Coupon Bonds. Interest payments equal zero.

[c] Discount Notes. Interest payments equal zero.

[d] Floating-Rate Instruments. Interest payments are calculated as principal outstanding multiplied by the coupon for the current period. The current period coupon is calculated by adding a spread to the appropriate interest rate index and multiplying by the Coupon Factor. The coupon for the current period is set to this amount as long as the rate lies between the periodic and lifetime maximum and minimum rates. Otherwise the coupon is set to the maximum or minimum rate.

[e] Interest Rate Caps and Floors. These derivative instruments pay or receive interest only if the underlying index is above a Strike Rate (for caps) or below it (for floors). Interest payments are based on notional amounts instead of principal amounts.

1. The interest payment on a long cap is the Original Face multiplied by the amount, if any, by which the index exceeds the Strike Rate, as defined by the equation in Table 3-68. The interest payment on a long floor is the Original Face multiplied by the amount, if any, by which the index is below the Strike Rate. Otherwise interest payments are zero for caps and floors. Interest payments are either paid or received depending on whether the Enterprise is in a long or short position in a cap or a floor.
2. Monthly cash flows for long caps and floors are calculated as illustrated in Table 3-68:
Table 3-68—Calculation of Monthly Cash Flows for Long Caps and Floors
Instrument
Cash Flows
Cap
(I − K) × N × D if I >K; O if I ≤K

Floor
(K − I) × N × D if I <K; O if I ≥K

Where:
N = Original Face
K = Strike Rate
I = interest rate index
D = Coupon Factor
[f] Swaps. A derivative contract in which counterparties exchange periodic interest payments. Each swap leg (pay side or receive side) is modeled as a separate instrument, with interest payments based on the same notional amount but different interest rates.

1. For debt- and investment-linked swaps, each leg's interest payment is determined in the same manner as payments for fixed-rate, floating-rate or zero coupon instruments as described in paragraph [a], [b] and [d] of this section.
2. For mortgage-linked swaps, calculate the reduction in the notional amount due to scheduled monthly principal payments (taking into account both lifetime and reset period caps and floors), Prepayments, and Defaults of the reference MBS or index pool. Reduce the notional amount of the swap for the previous period by this amount to determine the notional amount for the current period. Calculate interest payments or receipts for a given period as the product of the notional amount of the swap in that period, the coupon, and the Coupon Factor applicable for that period.
3.8.3.6.2 Complex Financial Instruments
[a] Some instruments have more complex or non-standard features than those described in section 3.8.3.6.1, Non-Complex Financial Instruments, of this appendix. These complexities can include more sophisticated variants of characteristics such as principal or notional amortization schedules, interest accrual methodologies, coupon reset formulas, and option features. In these instances, additional information may be required to completely specify the contractual cash flows or a proxy treatment for these instruments.

[b] An example of an instrument with complex features is an indexed amortizing swap. This instrument is non-standard because its notional amount declines in a way that is related to the level of interest rates. Its amortization table contains a notional amount reduction factor for a given range of interest rates. To compute cash flows for this instrument, reduce the notional amount on each payment date as specified in the amortization table. (The notional amount at the beginning of the Stress Period is given as an input to the calculation.)

[c] Special treatment is also required for foreign-currency-linked notes, the redemption value of which is tied to a specific foreign exchange rate. These require special treatment because the Stress Test does not forecast foreign currency rates. If these instruments are currency-hedged, then the note plus the hedge comprise a synthetic debt instrument for which only the pay side of the swap is modeled. If these instruments are not currency-hedged, the following treatment applies:

1. In the up-rate scenario, the U.S. dollar per unit of foreign currency ratio is increased in proportion to the increase in the ten-year CMT; therefore, the amount of an interest or principal payment is increased accordingly. For example, if the ten-year CMT shifts up by 50 percent, then the U.S. dollar per unit of foreign currency ratio shifts up by 50 percent. In the Stress Test, the payment would be multiplied by 1.5.
2. In the down-rate scenario, the foreign currency per U.S. dollar ratio is decreased in proportion to the decrease in the ten-year CMT.
[d] Futures and Options on Futures also require special treatment:

1. Settle positions on their expiration dates. Exercise only in-the-money options (settlement value greater than zero).
2. Settle all contracts for cash
3. Calculate the cash settlement amount—the change in price of a contract from the contract trade date to its expiration date. Calculate the price on the expiration date based on stress test interest rates (or, as necessary, forward rates extrapolated from these rates).
4. Amortize amounts received or paid at the expiration date into income or expense on a straight-line basis over the life of the underlying instrument (in the case of an option on a futures contract, the life of the instrument underlying the futures contract).
5. Amortize an option premium on a straight-line basis over the life of the option. (Amortize any remaining balances upon option exercise.)
[e] Swaptions also require special treatment:

1. Assume swap settlement (i.e., initiation of the underlying swap) when a swap option is exercised.
2. Calculate a “normalized” fixed-pay coupon by subtracting the spread over the index, if any, from the coupon on the fixed-rate swap leg.
3. For all exercise types (American, Bermudan, and European), consistent with RBC Rule section 3.8.3.7, assume exercise by the party holding the swap option if the equivalent maturity Enterprise Cost of Funds is more than
a. 50 basis points above the normalized fixed-pay coupon, for a pay-fixed swaption (a call or ‘payor’’ swaption), or
b. 50 basis points below the normalized fixed pay coupon for a receive-fixed swaption (a put or ‘receiver’ swaption).
4. Amortize option premiums on a straight-line basis over the option term. (Amortize any remaining balances upon option exercise).
[f] CPI-Linked Instruments also require special treatment. The stress test lacks the ability to accommodate floating-rate instruments that reset in response to changes in the consumer price index (CPI) as published by the Bureau of Labor Statistics. Enterprise issuance of CPI-linked instruments is tied to swap market transactions intended to create desired synthetic debt structure and terms. In such cases, the true economic position nets to the payment terms of the related derivative contract. Accordingly, in order to accommodate and address the existence of CPI-linked instruments in the Enterprises' portfolios, the net synthetic position shall be evaluated in the stress test. That is, for CPI-linked instruments tied to swap transactions that are formally linked in a hedge accounting relationship, the Enterprise should substitute the CPI-linked instrument's coupon payment terms with those of the related swap contract.

[g] Pre-refunded municipal bonds also require special treatments. Pre-refunded municipal bonds are collateralized by securities that are structured to fund all the cash flows of the refunded municipal bonds until the bonds are callable. Since the call date for the bonds, also referred to as the pre-refunded date, is a more accurate representation of the payoff date than the contractual maturity date of the bonds, the stress test models the bonds to mature on the call date.

[h] If a financial instrument's inputs are described in section 3.1, Data, of this appendix, then model the instrument according to its terms; however, the Director reserves the authority to determine a more appropriate treatment if modeling the instrument according to its terms does not capture the instrument's impact on Enterprise risk. If the financial instrument's inputs are not described in section 3.1, then treat it as described in section 3.9, Alternative Modeling Treatments, of this appendix.

3.8.3.7 Apply Call, Put, or Cancellation Features, if Applicable
[a] In some cases, principal and interest cash flows may be altered due to options imbedded in individual financial instruments. Securities can be called or put and contracts can be cancelled at the option of the Enterprise or the counterparty. The Option Type, Exercise Convention Type, and the Start Date determine when an option may be exercised. There are three standard Exercise Convention Types, all of which are accommodated in the Stress Test:

• American—Exercise can occur at any time after the Start Date of the option.
• European—Exercise can occur only on the Start Date of the option.
• Bermudan—Exercise can occur only on specified dates, usually on coupon payment dates between the Start Date of the option and maturity.
[b] The options are treated in the following manner for each date on which the option can be exercised:

1. Project cash flows for the instrument with the imbedded option assuming that the option is not exercised. If the instrument is tied to an index, assume that the index remains constant at its value on that date.
2. Determine the discount rate that equates the outstanding balance of the security plus option premium and accrued interest to the sum of the discounted values of the projected cash flows. This discount rate is called the yield-to-maturity.
3. Convert the yield-to-maturity to a bond-equivalent yield and compare the bond-equivalent yield with the projected Enterprise Cost of Funds for debt with an equivalent maturity. Interpolate linearly if the maturity is not equal to one of the maturities specified in section 3.3, Interest Rates, of this appendix.
4. If the equivalent-maturity Enterprise Cost of Funds is lower (higher) than 50 basis points below (above) the bond-equivalent yield of the callable (putable) instrument, then the option is exercised. Otherwise, the option is not exercised, and it is evaluated at the next period when the option can be exercised.
[c] Some swap derivative contracts have cancellation features that allow either counterparty to terminate the contracts on certain dates. The cancellation feature is evaluated by comparing the fixed-rate leg of the swap to the Enterprise Cost of Funds. If either leg of the swap is cancelled, then the other leg is cancelled concurrently. Cancellable swaps are treated in the following manner:

1. For each period when an option can be exercised, compare the swap's fixed-leg coupon rate to the Enterprise Cost of Funds with a maturity equivalent to the maturity date of the swap.
2. If the option is a Call, it is deemed to be exercisable at the discretion of the Enterprise. If the option is a Put, it is deemed to be exercisable at the discretion of the Counterparty. If the option is a PutCall, it is deemed to be exercisable at the discretion of either party to the swap. Exercise the option when the swap is out of the money for the party who holds the option. A swap is considered out of the money when the rate on its fixed leg is at least 50 basis point higher or lower, depending upon whether the fixed rate is paid or received, than the like-maturity Enterprise Cost of Funds. For zero coupon swaps in all option exercise periods, use the yield to maturity calculated by equating the notional amount plus the unamortized discount at the start of the Stress Test to the present value of the notional amount at maturity.
a. For example, if the Enterprise holds a call option for a fixed-pay swap and the coupon rate on the fixed-pay leg is at least 50 basis points above the Enterprise cost of funds for a maturity equivalent to that of the swap, then cancel the swap. Otherwise, the swap is not cancelled and it is evaluated the next time that the swap can be cancelled.
3.8.3.8 Calculate Monthly Interest Accruals for the Life of the Instrument
[a] Monthly interest accruals are calculated by prorating the interest cash flows on an actual-day basis. In this section, the term “from” means from and including, “to” means up to and not including, and “through” means up to and including. As an example, from the first to the third of a month is two days from the first through the third is three days. This convention is used to facilitate the day count and does not imply on which day's payments or accruals are actually made. Use one of the three following methodologies with the exception that interest cash flow dates occurring on or after the 30th of a month are considered as occurring on the last day of the month:

1. If the final interest cash flow occurs within the month, the interest accrual for that month is calculated by multiplying the final interest cash flow amount (as calculated in section 3.8.3.6 of this appendix) times the number of days from the beginning of the month through the final maturity date divided by the number of days from the previous interest cash flow date to the maturity date.
2. If an interest cash flow other than the final interest cash flow occurs within a month, the interest accrual for that month is determined by multiplying the interest cash flow amount for the current month times the number of days from the beginning of the month through the interest cash flow date, divided by the number of days from the previous interest cash flow date (or issue date) to this interest cash flow date. To this add the interest cash flow amount for the next interest cash flow date times the number of days from the current month's interest cash flow date to the end of the month, divided by the number of days from the current month's interest cash flow date to the following next interest cash flow date.
3. If no interest cash flows occur during a month other than the issue month, the monthly interest accrual is calculated by multiplying the next interest cash flow amount times the number of days in the month divided by the number of days from the previous interest cash flow date to the next interest cash flow date.
4. If the issue month occurs after the start of the Stress Test, the monthly interest accrual is calculated by multiplying the next interest cash flow amount by the number of days in the month minus the day of issue, divided by the number of days from the issue date to the next interest cash flow date.
3.8.3.9 Calculate Monthly Amortization (Accretion) of Premiums (Discounts) and Fees
[a] Adjust monthly interest accruals (see section 3.10.3.6.1[a]3., of this appendix) to reflect the value over time of discounts, premiums, fees and hedging gains and losses incurred (Deferred Balances). Amortize Deferred Balances that exist at the beginning of the Stress Test until the instrument's Maturity Date. If there are any put, call, or cancel options that are executed, amortize any remaining Deferred Balances in the execution month.

Table 3-69—Inputs for Nonmortgage Instrument Accounting Flows
Variable
Description
Source
MD
Maturity Date
Table 3-66, Input Variables for Nonmortgage Instrument Cash Flows

UDB0
The sum of Current Unamortized Discount, Current Unamortized Hedge, and Current Unamortized Other (Deferred Balances) for the instrument at the start of the Stress Test
Table 3-66, Input Variables for Nonmortgage Instrument Cash Flows

MACRUm
Monthly Interest Accruals
section 3.8.3.8, Calculate Monthly Interest Accruals for the Life of the Instrument

EOMPBAOm
Principal Balance at the end of the month for months m = 0...RM after modeling all options execution
section 3.8.3.6, Project Interest and Dividend Cash Flows

EOMPBm
Principal Balance at the end of the month for months m = 0...RM before modeling any options execution
section 3.8.3.6, Project Interest and Dividend Cash Flows

1. Compute Remaining Term (RM) as follows:
$ER13SE01.106$
Where:
STDT is the Starting Date of the Stress Test
2. For nonmortgage instruments with notional principal, calculate the monthly Amortization Amount (AAm) for each month m = 1...RM:
$ER13SE01.107$
3. For nonmortgage instruments with principal and interest payments,
a. Compute Allocated Interest for all months m (AIm) as follows:
$ER13SE01.108$
b. Calculate the monthly Internal Rate of Return (IRR) that equates the adjusted cash flows (actual principal plus allocated interest) to the Initial Book Value (BV0) of the instrument. Solve for IRR such that:
$ER13SE01.109$
Where:
BV0 = EOMPB0 + UPD0
ACFm = EOMPBm−1 − EOMPBm + AIm
c. Calculate the monthly Amortization Amount (AAm) for each month m = 1...RM:
$ER13SE01.110$
4. For discount notes,
a. Calculate Remaining Maturity in Actual Days (RMD):
$ER13SE01.111$
b. Calculate the month Amortization Amount (AAm) for each month m = 1...RM:
$ER13SE01.112$
Where:
ADAYSm = actual number of days in month m (days from the first of the month through maturity in month RM)
5. For zero coupon bonds,
a. Calculate Remaining Maturity in Actual Days (RMD):
$ER13SE01.114$
b. Calculate Yield Factor (YF):
$ER13SE01.115$
c. Calculate the monthly Amortization Factor (AFm) for each month m = 1...RM:
$ER13SE01.116$
Where:
ADAYSm = actual number of days in month m (days from the first of the month through maturity in month RM):
d. Calculate the monthly Amortization Amount (AAm) for each month m = 1...RM

$ER13SE01.117$
3.8.3.10 Apply Counterparty Haircuts
[a] Finally, the interest and principal cash flows received by the Enterprises for non-mortgage instruments other than swaps and foreign currency-related instruments are Haircut (i.e., reduced) by a percentage to account for the risk of counterparty insolvency, if a counterparty obligation exists. The amount of the Haircut is calculated based on the public rating of the counterparty and time during the stress period in which the cash flow occurs, as specified in section 3.5, Counterparty Defaults, of this appendix.

[b] An Enterprise may issue debt denominated in, or indexed to, foreign currencies, and eliminate the resulting foreign currency exposure by entering into currency swap agreements. The combination of the debt and the swap creates synthetic debt with principal and interest payments denominated in U.S. dollars. The Haircuts for currency swaps are applied to the pay (dollar-denominated) side of the currency swaps, or to the cash outflows of the synthetic debt instrument. Therefore, the payments made by the Enterprise on a foreign currency contract are increased by the haircut amount. The Haircuts and the Phase-in periods for currency swaps are detailed in Table 3-31, under Derivative Contracts.

[c] Haircuts for swaps that are not foreign currency related are applied to the Monthly Interest Accruals (as calculated in section 3.8.3.8, of this appendix) on the receive leg minus the Monthly Interest Accruals on the pay leg when this difference is positive. Use the maximum haircut from Table 3-31 for periods before and after the implementation of netting, as appropriate. After the implementation of netting, net the swap proceeds for each counterparty before applying the haircuts. The following example applies to an Enterprise having two swaps with the same counterparty. On the first swap, the Enterprise pays fixed and receives floating and on the second swap it pays floating and receives fixed. If the counterparty is a net payer to the Enterprise, the haircuts will be applied to the sum of the two receive legs net of the sum of the two pay legs.

3.8.4 Nonmortgage Instrument Outputs
[a] Outputs consist of cash flows and accounting information for debt, nonmortgage investments, preferred stock, and derivative contracts. Cash flows and accounting information outputs are inputs to section 3.10, Operations, Taxes, and Accounting, of this appendix.

[b] Cash flows include the following monthly amounts:

1. Interest and principal payments for debt and nonmortgage investments,
2. Dividends and redemptions for preferred stock, and
3. Interest payments for debt-linked, investment-linked, and mortgage-linked derivative contracts.
[c] Accounting information includes the following monthly amounts:

1. Accrued interest and
2. Amortization of discounts, premiums, fees and other deferred items.
3.9 Alternative Modeling Treatments
3.9.1 Alternative Modeling Treatments Overview
[a] This section provides treatment for items that cannot be modeled in one of the ways specified in paragraph [b] of this section, but must be included in order to run the Stress Test. Because the rule provides treatments for a wide variety of instruments and activities that can be applied to accommodate unusual instruments, OFHEO expects few items to fall into this category.

[b] An Alternative Modeling Treatment (AMT) applies to any on- or off-balance-sheet item that is missing data elements required to calculate appropriate cash flows, or any instrument with unusual features for which this appendix does not:

1. Provide an explicit computational procedure and set of inputs (i.e., the appendix specifies exact data inputs and procedures for a class of instruments to which the item belongs); or,
2. Provide an implicit procedure (used for a general class of instruments), and explicit inputs that allow the item to be fully characterized for computational purposes (i.e., the appendix specifies procedures and data inputs for a class of instruments to which the item does not belong that can be applied to the item to accurately compute its cash flows); or
3. Provide an implicit procedure by exact substitution, i.e., by representing the item as a computationally equivalent combination of other items that are specified in paragraphs (1) or (2) in this section (i.e., the appendix specifies treatments for two or more instruments, which, in combination, exactly produce the item's cash flows); or
4. Permit the approximation of one or more computational characteristics by other similar values that are explicitly specified in this appendix, or in the RBC Report instructions (i.e., the appendix specifies a treatment, or combination of treatments, that can be used as a reasonable proxy for the computational characteristics of the item). Such proxy treatments must be approved by OFHEO. OFHEO may, in its discretion, approve a proposed proxy treatment, adopt a different proxy treatment, or treat items for which a proxy treatment has been proposed by the Enterprises according to the remaining provisions of section 3.9, Alternative Modeling Treatments, of this appendix.
[c] For a given on- or off-balance sheet item, the appropriate AMT is determined according to the categories specified in section 3.9.3, Alternative Modeling Treatments Procedures, of this appendix, based on the information available for that item. The output for each such item is a set of cash and accounting flows, or specific amounts to be applied in section 3.12, Calculation of the Risk-Based Capital Requirement, of this appendix.

3.9.2 Alternative Modeling Treatments Inputs
Table 3-70 identifies the minimal inputs that are used to determine an AMT. (See also section 3.1, Data, of this appendix)

Table 3-70—Alternative Modeling Treatment Inputs
Variable
Description
TYPE
Type of item (asset, liability or off-balance sheet item)

BOOK
Book Value of item (amount outstanding adjusted for deferred items)

FACE
Face Value or notional balance of item for off-balance sheet items

REMATUR
Remaining Contractual Maturity of item in whole months. Any fraction of a month equals one whole month.

RATE
Interest Rate

INDEX
Index used to calculate Interest Rate

FAS115
Designation that the item is recorded at fair value, according to FAS 115

RATING
Instrument or counterparty rating

FHA
In the case of off-balance sheet guarantees, a designation indicating 100% of collateral is guaranteed by FHA

MARGIN
Margin over an Index

3.9.3 Alternative Modeling Treatments Procedures
For each item, one of the following alternatives will be applied:

3.9.3.1 Off-Balance Sheet Items
[a] If the item is a guarantee of a tax-exempt multifamily housing bond, or a single family or multifamily whole-loan REMIC class rated triple-A, or other similar transaction guaranteed by the Enterprises, multiply the face value of the guaranteed instruments by 0.45 percent. This amount is added to the amount of capital required to maintain positive total capital throughout the ten-year Stress Period. Any instruments or obligations with 100 percent of collateral guaranteed by the Federal Housing Administration (FHA) are excluded from this calculation.

[b] Otherwise, add to the amount of capital required to maintain positive total capital throughout the ten-year Stress Period an amount equal to the face or notional value of the item at the beginning of the Stress Period times three percent.

3.9.3.2 Reconciling Items
Reconciling items falling into this category will be treated according to the specifications in section 3.10, Operations, Taxes, and Accounting, of this appendix.

3.9.3.3 Balance Sheet Items
[a] If the item is a trading security recorded at fair value according to FAS 115, then the book value (the face value adjusted for deferred balances) will be converted to cash in the first month of the Stress Test.

[b] Otherwise, if the item is an earning asset, then it is treated as a held-to-maturity asset, based on book value, as follows:

1. In the up-rate scenario, it will be treated as a held-to-maturity bond paying compound interest on a 30/360 basis at maturity, with the item's contractual maturity and rate. The item will be Haircut according to its rating. If no maturity is provided, maturity will be set at 120 months. If no rate is provided, a rate will be assigned at the Initial Enterprise Cost of Funds whose term is equal to the remaining maturity, less 200 basis points (but not less than zero). If no rating is provided, the asset will be classified as unrated.
2. In the down-rate scenario, it will be treated as a held-to-maturity bond paying compound interest on a 30/360 basis at maturity, with the item's contractual maturity and rate. The item will be Haircut according to its rating. If no maturity is provided, maturity will be set at 120 months. If no rate is provided, a rate will be assigned at the floating one-month Enterprise Cost of Funds less 200 basis points (but not less than zero). If no rating is provided, the asset will be classified as unrated.
[c] If the item is a non-earning asset it will remain on the books and earn no interest throughout the Stress Period.

[d] Otherwise, if the item is a liability, then it is treated as follows, based on book value:

1. In the up-rate scenario, it will be treated as non-callable and monthly coupon-paying to maturity on a 30/360 basis. If the coupon rate is not specified, the liability will be given a floating rate at the one-month Enterprise Cost of Funds plus 200 basis points. If no maturity is provided, maturity will be set at 120 months.
2. In the down-rate scenario, it will be treated as non-callable and monthly coupon paying to maturity. If no coupon is provided, the liability will be given a fixed rate at the Initial Enterprise Cost of Funds plus 200 basis points. If no maturity is provided, maturity will be set at ten years.
[e] Unamortized Balances should be amortized on a straight-line basis over the designated remaining maturity of the instrument.

[f] All items in this section are treated as if they had no options or cancellation features. The face value will be held constant until maturity. If an item has an adjustable rate, it is assumed that the interest rate will adjust monthly with no caps and a lifetime floor of zero percent.

3.9.4 Alternative Modeling Treatments Outputs
For each AMT item, the output is a set of cash and accounting flows appropriate to its respective treatment as specified in section 3.9.3, Alternative Modeling Treatments Procedures, or specific amounts to be applied in section 3.12, Calculation of the Risk-Based Capital Requirement, of this appendix.

3.10 Operations, Taxes, and Accounting
3.10.1 Operations, Taxes, and Accounting Overview
This section describes the procedures for determining new debt issuance and investments, computing capital distributions, calculating operating expenses and taxes, and creating pro forma balance sheets and income statements. Input data include an Enterprise's balance sheet at the beginning of the Stress Period, interest rates from the Interest Rates component of the Stress Test, and the outputs from cash flow components of the Stress Test. The outputs of the procedures discussed in this section—monthly pro forma balance sheets, cash flow and income statements for each month of the Stress Test—are the basis for the capital calculation described in section 3.12, Calculation of the Risk-Based Capital Requirement, of this appendix.

3.10.2 Operations, Taxes, and Accounting Inputs
[a] Data described in section 3.1, Data, section 3.3.4, Interest Rates Outputs, section 3.6.4, Final Whole Loan Cash Flow Outputs, section 3.7.4, Mortgage-Related Securities Outputs, and section 3.8.4, Nonmortgage Instrument Outputs, of this appendix, is used to produce monthly pro forma balance sheets and income statements for the Enterprises. In addition to the starting position data, described in the cash flow components, the Enterprises provide the starting position dollar values for the items in Table 3-71.

Table 3-71—Operations, Taxes, and Accounting Inputs
Input
Description
FAS 115 and 125 fair value adjustment on retained mortgage portfolio

FAS 133 fair value adjustment on retained mortgage portfolio

Reserve for losses on retained mortgage portfolio

FAS 115 and 125 fair value adjustments on non-mortgage investments

FAS 133 fair value adjustments on non-mortgage investments

Total cash

Accrued interest receivable on mortgages

Accrued interest receivable on non-mortgage investment securities

Accrued interest receivable on non-mortgage investment securities denominated in foreign currency—hedged

Accrued interest receivable on non-mortgage investment securities denominated in foreign currency—unhedged

Accrued interest receivable on mortgage-linked derivatives, gross

Accrued interest receivable on investment-linked derivatives, gross

Accrued interest receivable on debt-linked derivatives, gross

Other accrued interest receivable

Accrued interest receivable on hedged debt-linked foreign currency swaps
Underlying instrument is GSE issued debt

Accrued interest receivable on unhedged debt-linked foreign currency swaps

Accrued interest receivable on hedged asset-linked foreign currency swaps
Underlying instrument is an asset

Accrued interest receivable on unhedged asset-linked foreign currency swaps

Currency transaction adjustments—hedged assets
Cumulative gain or loss due to changes in foreign exchange rates relative to on-balance sheet assets originally denominated in foreign currency

Currency transaction adjustments—unhedged assets
Cumulative gain or loss due to changes in foreign exchange rates relative to unhedged assets and off-balance sheet items originally denominated in foreign currency

Federal income tax refundable

Accounts receivable

Fees receivable

Low income housing tax credit investments

Fixed assets, net

Clearing accounts
Net book value of all clearing accounts

Other assets

Foreclosed property, net
Real estate owned including property acquired through foreclosure proceedings

FAS 133 fair value adjustment on debt securities

Accrued interest payable on existing fixed-rate debt securities

Accrued interest payable on existing floating-rate debt securities

Accrued interest payable on existing debt issued in foreign currency—hedged

Accrued interest payable on existing debt issued in foreign currency—unhedged

Accrued interest payable on mortgage-linked derivatives, gross

Accrued interest payable on investment-linked derivatives, gross

Accrued interest payable on debt-linked derivatives, gross

Other accrued interest payable

Accrued interest payable debt-linked foreign currency swaps—hedged

Accrued interest payable debt-linked foreign currency swaps—unhedged

Accrued interest payable asset-linked foreign currency swaps—hedged

Accrued interest payable asset-linked foreign currency swaps—unhedged

Principal and interest due to mortgage security investors
Cash received on sold mortgages for onward submission to mortgage security investors

Currency transaction adjustments—hedged debt
Cumulative gain or loss due to changes in foreign exchange rates relative to on-balance sheet debt originally denominated in foreign currency

Currency transaction adjustments—unhedged debt
Cumulative gain or loss due to changes in foreign exchange rates relative to unhedged liabilities and off-balance sheet items originally denominated in foreign currency

Escrow deposits
Cash balances held in relation to servicing of multifamily loans

Federal income taxes payable

Preferred dividends payable

Accounts payable

Other liabilities

Common dividends payable

Reserve for losses on sold mortgages

Common stock

Preferred stock, non-cumulative

Additional paid-in capital

Retained earnings

Treasury stock

Unrealized gains and losses on available-for-sale securities, net of tax, in accordance with FAS 115 and 125

Unrealized gains and losses due to mark to market adjustments, FAS 115 and 125

Unrealized gains and losses due to deferred balances related to pre-FAS 115 and 125 adjustments

Unrealized gains and losses due to other realized gains, FAS 115

Other comprehensive income, net of tax, in accordance with FAS 133

OCI due to mark to market adjustments, FAS 133

OCI due to deferred balances related to pre-FAS 133 adjustments

OCI due to other realized gains, FAS 133

Operating expenses
Average of prior three months

Common dividend payout ratio (average of prior 4 quarters)
Sum dollar amount of common dividends paid over prior 4 quarters and divided by the sum of total of after tax income less preferred dividends paid over prior 4 quarters

Common dividends per share paid 1 quarter prior to the beginning of the stress period

Common shares outstanding

Common Share Market Price

Dividends paid on common stock 1 quarter prior to the beginning of the stress period

Share Repurchases (average of prior 4 quarters)
Sum dollar amount of repurchased shares, net of newly issued shares, over prior 4 quarters and divided by 4

Off-balance-sheet Guarantees
Guaranteed instruments not reported on the balance sheet, such as whole loan REMICs and multifamily credit enhancements, and not 100% guaranteed by the FHA

Other Off-Balance Sheet Guarantees
All other off-balance sheet guaranteed instruments not included in another category, and not 100% guaranteed by the FHA

YTD provision for income taxes
Provision for income taxes for the period beginning January 1 and ending as of the report date

Tax loss carryforward
Net losses available to write off against future years' net income

Tax liability for the year prior to the beginning of the Stress Test

Tax liability for the year 2 years prior to the beginning of the Stress Test (net of carrybacks)

Taxable income for the year prior to the beginning of the Stress Test

Taxable income for the year 2 years prior to the beginning of the Stress Test (net of carrybacks)

Net after tax income for the quarter preceding the start of the stress test

YTD taxable income
Total amount of taxable income for the period beginning January 1 and ending as of the report date

Minimum capital requirement at the beginning of the Stress Period

Specific allowance for loan losses
Loss allowances calculated in accordance with FAS 114

Zero coupon swap receivable

Unamortized discount on zero coupon receivable

[b] Amounts required to reconcile starting position balances from cash flow components of the Stress Test with an Enterprise's balance sheet will be reported in the RBC Report with the related instrument. The corresponding balance for the related instrument will be adjusted accordingly.

3.10.3 Operations, Taxes, and Accounting Procedures
The Stress Test calculates new debt and investments, dividends, allowances for loan losses, operating expenses, and income taxes. These calculations are determined by, and also affect, the pro forma balance sheets and income statements during the Stress Period.

3.10.3.1 New Debt and Investments
[a] For each month of the Stress Test, cash deficits and surpluses are eliminated by issuing new debt or purchasing new investments. The Stress Test calculates cash received and cash disbursed each month in order to determine the net availability of cash. Depending on the calculated net cash position at month end, new short term investments are purchased at mid-month or a mix of long and short term debt is issued at mid-month so that the recalculated net cash position at month end is zero.

[b] For each month of the Stress Test, the following calculations are performed to determine the amount and type of new debt and investments. The short-term investments and appropriate mix of long-term and short-term debt are reflected in the pro forma balance sheets. Interest income or interest expense for the new investments or debt are reflected in the pro forma income statements.

1. In any month in which the cash position is positive at the end of the month, the Stress Test invests the Enterprise's excess cash on the 15th day of that month in one-month Treasury bills that yield the six-month Treasury rate for that month as specified in section 3.3, Interest Rates, of this appendix.
2. In any month in which the cash position is negative at the end of the month, the Stress Test issues a mix of new short-term and long-term debt on the 15th day of that month. New short-term debt issued is six-month discount notes with a discount rate at the six-month Enterprise Cost of Funds as specified in section 3.3, Interest Rates, of this appendix, with interest accruing on a 30/360 basis. New long-term debt issued is five-year bonds not callable for the first year (“five-year-no call-one”) with an American call at par after the end of the first year, semiannual coupons on a 30/360 basis with principal paid at maturity or call, and a coupon rate set at the five year Enterprise Cost of Funds as specified in section 3.3, Interest Rates, of this appendix, plus a 50 basis point premium for the call option. During the Stress Test, the call option for new long-term debt issued is not executed in the up-rate scenario and in the down-rate scenario follows the same call exercise rule as other debt. An issuance cost of 2.5 basis points is assessed on new short-term debt at issue and an issuance cost of 20 basis points is assessed on new long-term debt at issue. New long-term debt is issued to target a total debt mix of short- to long-term debt that is the same as the short- to long-term debt mix at the beginning of the Stress Test. Issuance fees for new debt are amortized on a straight line basis to the maturity of the appropriate instrument.
3. Given the Net Cash Deficit (NCDm) in month m, use the following constants and method to calculate the amount of short-term and long-term debt to issue in month m:
a. Set the Issuance Cost on new short-term debt at issue (ISCOST):
ISCOST = 0.00025
b. Set the Issuance Cost on new long-term debt at issue (ILCOST):
ILCOST = 0.002
c. Calculate Net Short-term Debt Outstanding (NSDO0) and Total Debt Outstanding (TDO0) at the start of the Stress Test (m = 0) using the following methodology:
1) For each month m and each debt and swap instrument i (each swap leg is considered a separate instrument), determine the Month of Next Repricing (MNRm) defined as the first month greater than m in which the instrument matures or repricing can occur whether or not the coupon rate actually changes. Set the Principal Balance (PBm) to be:
a) The principal (or notional principal) outstanding if the instrument cash flows are paid by the Enterprise,
b) Minus the principal (or notional principal) outstanding if the instrument cash flows are received by the Enterprise.
c) Zero if m is less than or equal to the issue month or the month in which an option exercised during the stress test would begin accruing cash flows to or from the Enterprise.
d) Zero if m is greater than or equal to the maturity month or the month in which an option exercised during the stress test would cease further cash flows to or from the Enterprise.
2) Calculate NSDOm by summing PBm,i for all instruments where MNRm,i is less than or equal to m plus 12.
3) Calculate TDOm by summing PBm,i for instruments where MNRm,i, is greater than m.
d. Set the Maximum Proportion of Total Debt (MPD):
$ER15MR02.015$
e. Calculate Discount Rate Factor (DRFm):
$ER15MR02.016$
Where: CFm = six month Enterprise Cost of Funds for month m
f. Calculate the Adjustment Factor for Short-Term Debt Issuance Fees (AFSIFm):
$ER15MR02.017$
g. Calculate the Adjustment Factor for Long-Term Debt Issuance Fees (AFLIFm):
$ER15MR02.018$
h. Calculate the Maximum Long-Term Issuance (MLTIm):
$ER15MR02.019$
i. Calculate Net Short-Term Debt Outstanding (NSDOm) and Total Debt Outstanding (TDOm) for month m using the methodology described in paragraph 3.10.3.1.[b]3.c. of this appendix. Note: This calculation must reflect all new issuances, option exercises, and maturities between the beginning of the Stress Test and month m.
j. Calculate Interim Face Amount of Long-Term Debt to be issued this month (IFALDm):
$ER15MR02.020$
k. Calculate Face Amount of Long-Term Debt to be issued (FALDm):
$ER15MR02.021$
l. Calculate Face Amount of Short-Term Debt to be issued (FASDm):
$ER15MR02.022$
3.10.3.2 Dividends and Share Repurchases
[a] The Stress Test determines quarterly whether to pay dividends and make share repurchases. Dividends are decided upon and paid during the first month after the end of the quarter for which they are declared. If any dividends are paid, the dividend payout cannot exceed an amount equal to core capital less the estimated minimum capital requirement at the end of the quarter. Share repurchases are made during the middle month of the quarter.

1. Preferred Stock. An Enterprise will pay dividends on preferred stock as long as that Enterprise meets the estimated minimum capital requirement before and after the payment of these dividends. Preferred stock dividends are based on the coupon rates of the issues outstanding. The coupon rates for any issues of variable rate preferred stock are calculated using projections of the appropriate index rate. Preferred stock dividends may not exceed core capital less the estimated minimum capital requirement at the end of the preceding quarter.
2. Common Stock. In the first year of the Stress Test, dividends are paid on common stock in each of the four quarters after preferred dividends, if any, are paid unless the Enterprise's capital is, or after the payment, would be, below the estimated minimum capital requirement.
a. First Quarter. In the first quarter, the dividend is the dividend per share ratio for common stock from the quarter preceding the Stress Test times the current number of shares of common stock outstanding.
b. Subsequent Quarters.
1) In the three subsequent quarters, if the preceding quarter's after tax income is greater than after tax income in the quarter preceding the Stress Test, (adjusted by the ratio of the Enterprise's retained earnings and retained earnings after adjustments are made that revert investment securities and derivatives to amortized cost), pay the larger of (1) the dividend per share ratio for common stock from the quarter preceding the Stress Test times the current number of shares of common stock outstanding or (2) the average dividend payout ratio for common stock for the four quarters preceding the start of the Stress Test times the preceding quarter's after tax income (adjusted by the reciprocal of the ratio of the Enterprise's retained earnings and retained earnings after adjustments are made that revert investment securities and derivatives to amortized cost) less preferred dividends paid in the current quarter. In no case may the dividend payment exceed an amount equal to core capital less the estimated minimum capital requirement at the end of the preceding quarter.
(2) If the previous quarter's after tax income is less than or equal to after tax income in the quarter preceding the Stress Test (adjusted by the ratio of the Enterprise's retained earnings and retained earnings after adjustments are made that revert investment securities and derivatives to amortized cost), pay the lesser of (1) the dividend per share ratio for common stock for the quarter preceding the Stress Test times the current number of shares of common stock outstanding or (2) an amount equal to core capital less the estimated minimum capital requirement at the end of the preceding quarter, but not less than zero.
3. Share Repurchases. In the first two quarters of the Stress Test, the capital of the Enterprises will be reduced to reflect the repurchase of shares. The amount of the capital reduction in each of those two quarters will be equal to the average net stock repurchases by the Enterprise during the four quarters preceding the start of the Stress Period. Net stock repurchases equal repurchases less receipts from new stock issued, but not less than zero. Repurchases in each of the first two quarters may occur only up to the point that the amount of core capital exceeds the estimated minimum capital requirement at the end of the first month of the quarter.
4. Minimum Capital Requirements. For the purposes of the Stress Test, the Enterprise's minimum capital requirement is computed by applying leverage ratios to all assets (2.50 percent) and off-balance sheet obligations (0.45 percent), and summing the results. Repurchases of an Enterprise's own previously-issued MBSs are excluded from the minimum capital calculation used in section 3.10.3.2, Dividends and Share Repurchases, of this appendix.
3.10.3.3 Allowances for Loan Losses and Other Charge-Offs
[a] The Stress Test calculates a tentative allowance for loan losses monthly by multiplying current-month Credit Losses (CL in Table 3-52) by twelve, thus annualizing current month Credit Losses. This is a proxy for a loss contingency where it is probable that a loss has been incurred and the amount can be reasonably estimated. For both the retained and sold portfolios, these credit losses include lost principal (net of recoveries from credit enhancements and disposition of the real estate collateral), and foreclosure, holding, and disposition costs. If the tentative allowance for loan losses for the current period is greater than the balance from the prior month less charge-offs (i.e., credit losses) for the current month, a provision (i.e., expense) is recorded. Otherwise, no provision is made and the allowance for loan losses is equal to the prior period amount less current month charge-offs.

[b] Other charge-offs result from Haircuts related to mortgage revenue bonds, private-issue MBS, and non mortgage investments, described in their respective cash flow components.

1. In the case of Enterprise investments in securities, these Haircuts result in the receipt of less principal and interest than is contractually due. Lost principal is recorded as Other Losses when due and not received, while lost interest is recorded as a reduction of Interest Income.
2. In the case of interest rate derivative instruments, these Haircuts result in the receipt of less net interest than is contractually due from, or the payment of more interest than is contractually due to, an Enterprise counterparty. For those swaps that are linked to Enterprise investments, the increase or decrease of net swap interest due is recorded as an adjustment of Interest Income. For those swaps that are linked to Enterprise debt obligations, the increase or decrease of net swap interest due is recorded as an adjustment of Interest Expense.
3.10.3.4 Operating Expenses
[a] The Stress Test calculates operating expenses, which include non-interest costs such as those related to an Enterprise's salaries and benefits, professional services, property, equipment and office space. Over the Stress Period, operating expenses are equal to the sum of two components. The first component in each month is equal to one-third (1/3) of the average monthly operating expenses of the Enterprise in the quarter immediately preceding the start of the Stress Test. The second component changes in proportion to the change in the size of the Enterprise's mortgage portfolio (i.e., the sum of outstanding principal balances of its retained and sold mortgage portfolios). The Stress Test calculates the Enterprise's mortgage portfolio at the end of each month of the Stress Period as a percentage of the portfolio at the start of the Stress Test, and then multiplies the percentage of assets remaining by two-thirds (2/3) of the average monthly operating expenses of the Enterprise in the quarter immediately preceding the start of the Stress Test.

[b] The sum of the two components in paragraph [a], of this section, is multiplied by a factor which equals

$ER13SE01.124$
for the first 12 months of the Stress Test and then equals two-thirds for months 13 and beyond. This product is the Enterprise's operating expense for a given month in the Stress Period.
3.10.3.5 Income Taxes
[a] Both Enterprises are subject to Federal income taxes, but neither is subject to state or local income taxes.

[b] The Stress Test applies an effective Federal income tax rate of 30 percent when calculating the monthly provision for income taxes (e.g., income tax expense). OFHEO may change the 30 percent income tax rate if there are significant changes in Enterprise experience or changes in the statutory income tax.

[c] The Stress Test sets income tax expense for tax purposes equal to the provision for income taxes. The effects of timing differences between taxable income and Generally Accepted Accounting Principles (GAAP) income before income taxes are ignored. Income before taxes is adjusted by the ratio of Enterprise retained earnings and retained earnings after adjustments are made that revert investment securities and derivatives to amortized cost. Therefore, Net Operating Loss (NOL) occurs only when the net income, before the provision for income taxes, is negative.

[d] Payments for estimated income taxes are made quarterly, in the month after the end of the quarter. At the end of each year, the annual estimated tax amount is compared to the annual actual tax amount. In March of the next year, a payment of remaining taxes is made or a refund for overpayment of income taxes is received.

[e] The NOL for the current year is “carried back” to offset taxes in any or all of the preceding two calendar years. (The Enterprises' tax year is the same as the calendar year.) This offset of the prior years' taxes results in a negative provision for income taxes (e.g., income) for the current year. Use of a carry back reduces available carry backs in subsequent years. Any NOL remaining after carry backs are exhausted becomes a carry forward.

[f] Carry forwards represent NOLs that cannot be carried back to offset previous years' taxes, but can be used to offset taxes in any or all of the subsequent 20 years. Carry forwards accumulate until used, or until they expire 20 years after they are generated.

[g] A valuation adjustment is used to eliminate any deferred tax asset.

3.10.3.6 Accounting
[a] The 1992 Act specifies that total capital includes core capital and a general allowance for foreclosure losses. For the Enterprises, this general allowance is represented by general allowances for loan losses on their retained and sold mortgage portfolios. As defined at 12 CFR 1750.2, core capital includes the sum of the following components of equity:

1. The par or stated value of outstanding common stock,
2. The par or stated value of outstanding perpetual, noncumulative preferred stock,
3. Paid-in capital, and
4. Retained earnings.
[b] In order to determine the amount of total capital an Enterprise must hold to maintain positive total capital throughout the ten-year Stress Period, the Stress Test projects the four components of equity listed in paragraph [a] of this section plus general loss allowances as part of the monthly pro forma balance sheets.

[c] Details of an Enterprise's actual balance sheet at the beginning of the Stress Test are recorded from a combination of starting position balances for all instruments for which other components of the Stress Test calculate cash flows and other starting position balances for assets, liabilities, and equity accounts needed to complete an Enterprise's balance sheet.

[d] After recording an Enterprise's balance sheet at the beginning of the Stress Period, the Stress Test creates monthly pro forma balance sheets and income statements by recording output from the cash flow components of the Stress Test; recording new debt and investments (and related interest), dividends, loss allowances, operating expenses, and taxes; and applying accounting rules pertaining to pro forma balance sheets and income statements.

3.10.3.6.1 Accounting for Cash Flows and Accounting Flows
[a] Balances at the beginning of the Stress Test are obtained from the RBC Report. Subsequent changes to related pro forma balance sheet and income statement accounts are obtained from data generated by cash flow components of the Stress Test as follows:

1. Retained Loans. For Retained Loans, interest cash flows in the first month of the Stress Period reduce accrued interest receivable at the beginning of the Stress Test. Subsequent months interest cash flows are recorded as accrued interest receivable and interest income in the month prior to receipt. When the interest cash flows are received, accrued interest receivable is reduced. Monthly principal cash flows (including Prepayments and defaulted principal) are recorded as reductions in the outstanding balance of the loan group. Net losses on Defaults are charged off against the allowance for loan losses. Amortization of deferred discounts increases interest income; amortization of deferred premiums decreases interest income.
2. Mortgage Revenue Bonds. For mortgage revenue bonds, interest cash flows in the first month of the Stress Period reduce accrued interest receivable at the beginning of the Stress Test. Subsequent months' interest cash flows are recorded as accrued interest receivable and interest income in the month prior to receipt. When the interest cash flows are received, accrued interest receivable is reduced. Monthly principal cash flows (including Prepayments) are recorded in the month received as a reduction in the outstanding balance of mortgage assets. Defaulted principal is charged off when due and is not received. Amortization of deferred discounts increases interest income; amortization of deferred premiums decreases interest income.
3. Nonmortgage Instruments. Principal repayments of nonmortgage instruments reduce the nonmortgage instrument and increases or decreases cash. When the interest cash flows are received or paid, accrued interest receivable or payable is reduced. Accrued interest includes both amounts at the beginning of the Stress Period and subsequent monthly accruals (also recorded as interest income or interest expense). Amortization of deferred discounts and premiums increases or decreases interest income or interest expense. Defaulted principal is charged off when due and not received.
4. Sold Portfolio. Sold portfolio cash flows include monthly guarantee fees, float, and principal and interest due MBS investors. Guarantee fees are recorded as income in the month received. Principal and interest due mortgage security investors does not affect the balance sheet; however, interest earned on these amounts (float) is recorded as income in the month the underlying principal and interest payments are received. Principal payments received and defaulted loan balances reduce the outstanding balance of the sold portfolio. Losses (net of recoveries) are charged off against the allowance for losses on the sold portfolio (a liability on the pro forma balance sheets) and reduce cash. Amortization of deferred premiums and discounts increases or decreases guarantee fees.
3.10.3.6.2 Accounting for Non-Cash Items
[a] Changes in the pro forma balances for other parts of the Enterprise's balance sheet not resulting from cash flows are recorded as described in the following nine steps:

1. Unrealized Gains and Losses.
a. The valuation impact of any Applicable Fair Value Standards (AFVS), cumulative from their time of implementation, will be reversed out of the starting position data, by debiting any accumulated credits, and crediting any accumulated debits.
(1) AFVS are defined as GAAP pronouncements that require or allow fair value measurements, e.g., EITF 99-20, FAS 65, FAS 87, FAS 115, FAS 133, FAS 140, FAS 149 and FIN 45. Valuation impacts of AVFS pertain only to amounts that are measured at fair value and not to other amounts that are included in AFVS but are not measured at fair value.
(2) The GAAP pronouncements covered by this treatment are subject to OFHEO review. The Enterprises will submit a list of standards and pronouncements that are being reversed in their RBC Reports.
b. After reversing the valuation impact of AFVS, any affected items are presented as follows:
(1) If absent the adoption of the AFVS, the affected transactions measured at fair value would have been accounted for on an amortized cost basis, they are presented as if they had always been accounted for on an amortized cost basis. Amounts not measured at fair value are represented as specified by GAAP and are presented using current GAAP rules.
(2) To the extent that transactions would not have been accounted for on an amortized cost basis, they are accounted for as if they were income and expense items.
2. Low Income Housing Tax Credit Investments. Low income housing tax credit investments at the beginning of the Stress Test are converted to cash on a straight line basis over the first six months of the Stress Period.
3. Other Assets. The following other assets at the beginning of the Stress Test are converted to cash as follows:
a. Clearing accounts and other miscellaneous receivables (e.g., fees receivable, accounts receivable, and other miscellaneous assets) in the first month of the Stress Test.
b. Earning assets (see section 3.9, Alternative Modeling Treatments, of this appendix)
c. Items not covered by a. and b. of this section on a straight-line basis over the first five-years of the Stress Test.
4. Real Estate Owned (REO). Real estate owned at the beginning of the Stress Test is converted to cash on a straight-line basis over the first six months of the Stress Test.
5. Fixed Assets. 25 percent of fixed assets (net of accumulated depreciation) as of the beginning of the Stress Test remain constant over the Stress Test. The remaining 75 percent is converted to cash on a straight line basis over the ten-year Stress Period. Depreciation is included in the base on which operating expenses are calculated for each month during the Stress Period.

6. Principal and Interest Payable. Principal and interest payable to an Enterprise's mortgage security investors at the beginning of the Stress Test are paid during the first two months of the Stress Test (one-half in month one and one-half in month two).
7. Other Liabilities. The following liabilities at the beginning of the Stress Test are paid in the first month of the Stress Test, reducing cash:
a. Escrow deposits
b. Other miscellaneous liabilities
8. Commitments. No gains or losses are recorded when commitments are added to the Enterprise's sold portfolio. See section 3.2.1, of this appendix.
9. Fully-Hedged Foreign Currency-Denominated Liabilities. Amounts that relate to currency swaps and foreign currency-denominated liabilities will be treated as follows:
a. Recorded balances that correspond to converted foreign currency-denominated liabilities will be amortized in a manner that is consistent with scheduled pay leg exchanges of notional amounts as set forth in corresponding currency swaps. The unamortized premiums, discounts and/or fees that are associated with these liabilities will be amortized as described in section 3.8, of this appendix, as if they were associated with the pay legs of the corresponding currency swap. Any differences will be reflected as an increase or decrease in Retained Earnings.
b. Interest payable amounts associated with currency swaps will be settled in a manner that is consistent with the contractual terms for these instruments.
c. Receivable amounts associated with currency swaps and interest payable amounts associated with foreign currency-denominated debt will be reversed against Retained Earnings.
d. The adjustments in a., b. and c., of this section, will take place at the start of the Stress Test. These treatments are not applied to instruments that are modeled under AMT (see section 3.9, Alternative Modeling Treatments, of this appendix) or foreign currency-denominated instruments that are not fully hedged.
3.10.3.6.3 Other Accounting Principles
The following additional accounting principles apply to the pro forma balance sheets and income statements:

1. All investment securities are treated as held to maturity. As such, they are recorded as assets at amortized cost, not at fair value.
2. All non-securitized mortgage loans will be classified as “held-to-maturity” and will be accounted for on an amortized cost basis.
3. Effective control over the collateral for collateral financings is with the party that originally delivered such collateral.
4. Enterprise Real Estate Investment Trust (REIT) subsidiaries are consolidated. Specifically, REIT assets are treated as Enterprise assets. Preferred stock of the REIT is reflected as Enterprise debt. Dividends paid on the preferred stock are reported as interest expense.
5. Treasury stock is reflected as a reduction in retained earnings.
3.10.4 Operations, Taxes, and Accounting Outputs
For each month of the Stress Period, the Stress Test produces a pro forma balance sheet and income statement. The Operations, Taxes and Accounting component outputs 121 monthly and 11 annual balance sheets, 120 monthly and 10 annual income statements, and 120 monthly and 10 annual cash flow statements, including part-year statements for the first and last calendar years of the Stress Test when necessary. These pro forma financial statements are the inputs for calculation of the risk-based capital requirement (see section 3.12, Calculation of the Risk-Based Capital Requirement, of this appendix).

3.11 Treatment of New Enterprise Activities
3.11.1 New Enterprise Activities Overview
[a] Given rapid innovation in the financial services industry, OFHEO anticipates the Enterprises will become involved with new mortgage products, investments, debt and derivative instruments, and business activities, which must be accommodated in the Stress Test in order to capture all of the risk in the Enterprises' businesses. New accounting entries resulting from these innovations and changes in accounting must also be accommodated. The regulation is sufficiently flexible and complete to address new Enterprise activities as they emerge, using the procedures outlined in this section. However, OFHEO will monitor the Enterprises' activities and, when appropriate, propose amendments to this regulation addressing the treatment of new instruments, activities, or accounting treatments.

[b] For the purpose of this section of the appendix, the term New Activity means any type of asset, liability, off-balance-sheet item, accounting entry, or activity to which a Stress Test treatment has not previously been applied. In addition, the Director has the discretion to treat as a New Activity: (1) any activity or instrument with characteristics or unusual features that create risks or hedges for the Enterprise that are not reflected adequately in the specified treatments for similar activities or instruments; and (2) any activity or instrument for which the specified treatment no longer adequately reflects the risk/benefit to the Enterprise, either because of increased volume or because new information concerning those risks/hedges has become available.

3.11.2 New Enterprise Activities Inputs
[a] Complete data and full explanations of the operation of the New Activity sufficient to understand the risk profile of the New Activity must be provided by the Enterprise. The Enterprises are required to notify OFHEO, pursuant to § 1750.12(c), of proposals related to New Activities as soon as possible, but in any event no later than five calendar days after the date on which the transaction closes or is settled. The Enterprises are encouraged to suggest an appropriate capital treatment that will fully capture the credit and interest rate risk in the New Activity. Information on New Activities must also be submitted and appropriately identified as such in the RBC Report.

[b] The Stress Test will not give an Enterprise the capital benefit associated with a New Activity where OFHEO determines that the impact of that activity on the risk-based capital level of the Enterprise is not commensurate with the economic benefit to the Enterprise.

3.11.3 New Enterprise Activities Procedures
[a] OFHEO will analyze the risk characteristics and determine whether an existing approach specified in the appendix appropriately captures the risk of the New Activity or whether some combination or adaptation of existing approaches specified in the appendix is appropriate. For example, the Stress Test might employ its mortgage performance components and adapt its cash flow components to simulate accurately the loss mitigating effects and counterparty credit risk of credit derivatives.

[b] Where there is no reasonable approach using existing combinations or adaptations of treatments specified in this appendix that could be applied within the timeframe for computing a quarterly capital calculation, the Stress Test will employ an appropriately conservative treatment, consistent with OFHEO's role as a safety and soundness regulator. Such treatment may include an alternative modeling treatment specified in section 3.9, Alternative Modeling Treatments, of this appendix, or some other conservative treatment that OFHEO deems more appropriate.

[c] OFHEO will provide the Enterprise with its estimate of the capital treatment as soon as possible after receiving notice of the New Activity. In any event, the Enterprise will be notified of the capital treatment in accordance with the notice of proposed capital classification provided for in § 1777.21 of this chapter.

[d] After a treatment has been incorporated into a final capital classification, OFHEO will provide notice of such treatment to the public, including the other Enterprise. OFHEO will consider any comments it receives from the public regarding the treatment during subsequent quarters. OFHEO may change the treatment as a result of such input or otherwise, if OFHEO determines that the risks of the New Activity are not appropriately reflected in a treatment previously adopted.

3.11.4 New Enterprise Activities Outputs
The Stress Test will generate a set of cash and/or accounting flows reflecting the treatment applied to the New Activity.

3.12 Calculation of the Risk-Based Capital Requirement
3.12.1 Risk-Based Capital Requirement Overview
The risk-based capital requirement is the sum of (1) the minimum amount of total capital that an Enterprise must hold at the start of the Stress Test in order to maintain positive total capital throughout the ten-year Stress Period, for all financial instruments explicitly modeled in the Stress Test (Stress Test capital subtotal) and (2) certain additional amounts relating to off-balance-sheet items addressed in section 3.9, Alternative Modeling Treatments, of this appendix, and (3) 30 percent of that sum for management and operations risk. The Stress Test capital subtotal is determined based on monthly total capital figures from the pro forma financial statements, the additional amounts related to off-balance-sheet items, and Enterprise short term borrowing and investment rates.

3.12.2 Risk-Based Capital Requirement Inputs
[a] Inputs to the capital calculation are outputs from section 3.3, Interest Rates, section 3.9, Alternative Modeling Treatments, and section 3.10, Operations, Taxes, and Accounting, of this appendix.

[b] For each month of the Stress Test, the following inputs are from, or used in the creation of, pro forma financial statements projected in section 3.10, Operations, Taxes, and Accounting, of this appendix:

1. Total capital
a. The par or stated value of outstanding common stock,
b. The par or stated value of outstanding perpetual, noncumulative preferred stock,
c. Paid-in capital,
d. retained earnings, and
e. allowance for losses on retained and sold mortgages less specific losses calculated in accordance with FAS 114,
2. Provision for income taxes (income tax expense),
3. Valuation adjustment that reduces benefits recorded from net operating losses when no net operating loss tax carrybacks are available, and
4. An Enterprise's cash position prior to the decision to issue new debt or purchase new investments to balance the balance sheet (see section 3.10.3.1, New Debt and Investments, of this appendix).
[c] For present-value calculations, the Stress Test uses the six-month Enterprise Cost of Funds or the six-month CMT yield as described in section 3.3, Interest Rates, of this appendix.

[d] The amount for off-balance-sheet items that are not explicitly modeled is obtained from section 3.9.3.1, Off-Balance Sheet Items, of this appendix.

3.12.3 Risk-Based Capital Requirement Procedures
[a] The following eight steps are used to determine the Stress Test capital subtotal and the risk-based capital requirement for an Enterprise:

1. Determine the effective tax rate in each month. If the provision for income taxes is positive (reflecting taxes owed) or negative (reflecting tax refunds to be received), then the effective tax rate is 30 percent. If the provision for income taxes is zero after applying any valuation adjustments (see section 3.10.3.6, Accounting, of this appendix), then the effective tax rate applied in step 3. of this section is zero.
2. Determine whether an Enterprise is an investor or a borrower in each month of the Stress Period. In months where an Enterprise has outstanding six-month discount notes that were issued during the stress test, then the Enterprise is a borrower. Otherwise, the Enterprise is an investor.
3. Determine the appropriate monthly discount factor for each month of the Stress Period:
a. In months where an Enterprise is an investor, the monthly discount factor is based on the yield of short-term assets:
$ER13SE01.125$
b. In months where an Enterprise is a borrower, the monthly discount factor is based on the cost of the Enterprise's short-term debt:
$ER13SE01.126$
Where:
0.00025 is the factor that incorporates the issuance and administrative costs for an Enterprise's new discount notes.
4. Compute the appropriate cumulative discount for each month of the Stress Period. The cumulative discount factor for a given month is the monthly discount factor for that month multiplied by the cumulative discount factor for the preceding month. (The cumulative discount factor for the first month of the Stress Period is the monthly discount factor for that month.) Thus, the cumulative discount factor for any month incorporates all of the previous monthly discount factors.
5. Discount total capital for each month of the Stress Period to the start of the Stress Period for both interest rate scenarios. Divide the total capital for a given month by the cumulative discount factor for that month.
6. Identify the Stress Test capital subtotal, which is the lowest discounted total capital amount from among the 240 monthly discounted total capital amounts.
7. From the Stress Test capital subtotal, subtract the capital required for off-balance sheet items not explicitly modeled in the Stress Test, as calculated in section 3.9.3.1, Off-Balance Sheet Items, of this appendix. Then subtract the resulting difference from the Enterprise's total capital at the start of the Stress Period. The resulting number is the amount of total capital that an Enterprise must hold at the start of the Stress Test in order to maintain positive total capital throughout the ten-year Stress Period.
8. Multiply the minimum total capital amount by 1.3 for management and operations risk.
9. Subtract the net increase (or add the net decrease) in Retained Earnings related to Fair Value Hedges at the start of the stress test made in accordance with section 3.10.3.6.2[a]1.b. of this appendix.
3.12.4 Risk-Based Capital Requirement Output
The output of the calculations in this section is the risk-based capital requirement for an Enterprise at the start date of the Stress Test.

4.0 Glossary
This glossary is intended to define terms in the Regulatory appendix that are used in a computationally specific sense that require a precise quantitative definition.

A
Accounting Flows: one or more series of numbers tracking various components of the accounting computations over time, analogous to “Cash Flows.”

Age: of a Mortgage Loan, for computational purpose: the number of scheduled payment dates that have occurred prior to the time at which the Age is determined. The Age of a newly originated Mortgage is zero prior to its first payment date.

Amortization Expense: used in the accounting sense of the monthly allocation of a one-time amount (positive or negative) over time, not to describe amortization of principal in a mortgage.

Amortization Schedule: for a Mortgage Loan, a series of numbers specifying the (1) principal and (2) interest components of each Mortgage Payment, and (3) the Unpaid Principal Balance after each such payment is made.

Allocated Interest: in certain accounting calculations, the amount of interest deemed to be received on a certain date according to an allocation formula, whether or not equal to the amount actually received on that date (see, e.g., section 3.6.3.8.3, Whole Loan Accounting Flows Procedures, of this appendix).

Aggregate Limit: see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

B
Balance Limit: see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

Balloon Payment: the final payment of a Balloon Loan, the principal component of which is the entire Unpaid Principal Balance of said loan at the time the Balloon Payment is contractually due.

Balloon Loan: a Mortgage Loan that matures before the Unpaid Principal Balance is fully amortized to zero, thus requiring a large final Balloon Payment.

Balloon Date: the maturity date of a Balloon Loan.

Benchmark: used as an adjective to refer to the economic environment (including interest rates, house prices, and vacancy and rental rates) that prevailed in the region and time period of the Benchmark Loss Experience.

Benchmark Census Division: the Census Division, designated by OFHEO, that is used to determine house prices and vacancy and rental rates of the Stress Period.

Benchmark Loss Experience (BLE): the rates of default and loss severity of loans in the state/year combination (containing at least two consecutive origination years and contiguous areas with a total population equal to or greater than five percent of the population of the United States) with the highest loss rate.

Burnout: in describing Mortgage Prepayments, the reduced rates of Prepayment observed with Mortgage Loans that were not prepaid during earlier periods when it would have been advantageous to do so.

C
Cash Flow Hedges: cash flow hedges as defined by FAS 133.

Census Division: any one of the nine geographic areas of the United States so designated by the Bureau of the Census. The OFHEO House Price Index determined at the Census Division level is used in the Stress Test.

Claim Amount: the amount of Credit Enhancement that an Enterprise is eligible to receive as a reimbursement on mortgage loan losses, which is often but not always equal to the total amount of the loss.

Commitment Loan Groups: hypothetical groups of Mortgage Loans assumed to be originated during the months immediately after the start of the Stress Test pursuant to Commitments made but not yet fulfilled by the Enterprises prior to the start of the Stress Test to purchase or securitize loans.

Contract: a Mortgage Credit Enhancement contract covering a distinct set of loans with a distinct set of contractual terms.

Constant Maturity Treasury (CMT) Rate: see table 3-18, Interest Rate and Index Inputs.

Counterparty Type: classification used to specify the appropriate Haircut level in section 3.5, Counterparty Defaults, of this appendix.

Credit Enhancement: for the GSEs, agreements with lenders or third-parties put in place to reduce or limit mortgage credit (default) losses for an individual loan. See section 3.1.2.1.1, Loan Group Inputs, of this appendix.

D
Debt Service Coverage Ratio: see section 3.6.3.5.3.1, Explanatory Variables, of this appendix.

Default: for purposes of computing rates of mortgage default and losses, see the specific process specified in section 3.6.1, Whole Loan Cash Flows Overview, of this appendix.

Defaulting Fraction: in any month, for any group of loans, the proportion of loans newly defaulted in that month expressed as a fraction of the initial loans (by number or by balance, depending on how Prepayment and Default Rates are measured) in the loan group; see, e.g., section 3.6.3.4.3.2, Prepayment and Default Rates and Performance Fractions, of this appendix.

Defaulted UPB: the Unpaid Principal Balance (UPB) of a loan in the month that it Defaults.

Deferred Balances: see section 3.6.3.8.1, Whole Loan Accounting Flows Overview, of this appendix.

Derivative Mortgage Security: generally refers to securities that receive cash flow with significantly different characteristics than the aggregate cash flow from the underlying mortgage loans, such as Interest-Only or Principal-Only Stripped MBSs or REMIC Residual Interests. See section 3.7.1, Mortgage-Related Securities Overview, of this appendix.

Deposit Limit: see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

Distinct Credit Combination (DCC): see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

E
Enterprise Cost of Funds: Cost of funds used in computing the cost of new debt for the Enterprises during the Stress Test, as specified in section 3.3.3.[a]3.c., of this appendix.

Enterprise Loss Position: see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

F
Fair Value Hedges: fair value hedges as described in FAS 133.

Float Income: the earnings on the investment of loan principal and interest payments (net of the Servicing Fee and Guarantee Fee) from the time these payments are received from the servicer until they are remitted to security holders. See section 3.6.1, Whole Loan Cash Flows Overview, of this appendix.

G
Gross Loss Severity: Loss Severity including the excess, if any, of Defaulted UPB over gross sale price of an REO property, fees, expenses and certain unpaid interest amounts, before giving effect to Credit Enhancement or any other amounts received on account of a defaulted loan (all such amounts expressed as a fraction of Defaulted UPB); see section 3.6.3.6.2, Single Family Gross Loss Severity, and section 3.6.3.6.3, Multifamily Gross Loss Severity, of this appendix.

Guarantee Fee: the amount received by an Enterprise as payment for guaranteeing a mortgage loan; see, e.g., section 3.6.3.2, Payment Allocation Conventions, of this appendix.

H
Haircut: the amount by which payments from a counterparty are reduced to account for a given probability of counterparty failure.

I
Initial: used as an adjective to specify conditions at the start of the Stress Test, except in defined terms; see also Time Zero.

Initial Rate Period: for an Adjustable Rate Mortgage, the number of months before the mortgage interest rate changes for the first time. Also known as “teaser period.”

Interest-only Period: for interest-only loans, the period of time for which the monthly payment covers only the interest due. (During the interest-only period, the UPB of the loan stays constant until maturity or a changeover date. For loans that mature, a Balloon Payment in the amount of the UPB is due at maturity. In other cases, the loan payment is recast at the changeover date and the loan begins to amortize over its remaining term.) See section 3.6.3.3.1, Mortgage Amortization Schedule Overview, of this appendix.

Interest Rates: the Constant Maturity Treasury yields and other interest rates and indexes used in the Stress Test.

Investor-owned: a property that is not owner-occupied.

L
Loan Limit: used to describe a type of Credit Enhancement; see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

Loan Group: a group of one or more mortgage loans with similar characteristics, that are treated identically for computational purposes in the Risk-Based Capital calculations.

Loss Severity: the amount of a mortgage loss divided by the Defaulted UPB.

Loss Sharing Arrangements (LSA): see section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

M
Maximum Haircut: as defined in section 3.5, Counterparty Defaults, of this appendix.

Modified Pool Insurance: a form of Single Family Mortgage Credit Enhancement described in section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

Mortgage Insurance (Primary Mortgage Insurance): a type of credit enhancement that pays claims up to a given limit on each loan. See section 3.6.3.6.4.1, Mortgage Credit Enhancement Overview, of this appendix.

Mortgage Related Security: a collective reference for (1) securities directly backed by mortgage loans, such as Single Class MBSs, Multi-Class MBSs (REMICs or Collaterilized Mortgage Obligations (CMOs)); (2) Derivative Mortgage-Backed Securities (certain multi-class and strip securities) issued by Fannie Mae, Freddie Mac, and Ginnie Mae; (3) Mortgage Revenue Bonds issued by State and local governments and their instrumentalities; or (4) single class and Derivative Mortgage-Backed Securities issued by private entities. See section 3.1.2.2, Mortgage-Related Securities Inputs, of this appendix.

N
Negative Amortization: as defined in section 3.6.3.2.1, Allocation of Mortgage Interest, of this appendix.

Net Loss Severity: Gross Loss Severity reduced by Credit Enhancements and any other amounts received on account of a defaulted loan (all such amounts expressed as a fraction of Defaulted UPB).

Net Yield Rate: the Mortgage Interest Rate minus the Servicing Fee Rate.

New Activity: as defined in section 3.11, Treatment of New Enterprise Activities, of this appendix.

Notional Amount: the amount analogous to a principal balance which is used to calculate interest payments in certain swap transactions or derivative securities.

O
Original: used as an adjective to specify values in effect at Loan Origination.

Origination: for a Mortgage Loan with monthly payments, the date one month prior to the first contractual payment date.

Owner-Occupied: a property, or a Mortgage Loan backed by a property, that is a single family residence which is the primary residence of the owner.

P
Pass-Through Rate: the Mortgage Interest Rate minus the Servicing Fee and the Guarantee Fee.

Performing Fraction: in any month, for any group of loans, the proportion of loans that have not either prepaid or defaulted in that month or any prior month, expressed as a fraction of the loans at the start of the Stress Test (by number or by balance, depending on how Prepayment and Default rates are measured) in a loan group; see e.g., section 3.6.3.4.3.2, Prepayment and Default Rates and Performance Fractions, of this appendix.

Prepaying Fraction: in any month, for any group of loans, the proportion of loans that prepay in full in that month expressed as a fraction of the loans at the start of the Stress Test (by number or by balance, depending on how Prepayment and Default rates are measured) in the loan group; see e.g., section 3.6.3.4.3.2, Prepayment and Default Rates and Performance Fractions, of this appendix.

Prepayment: the prepayment in full of a loan before its contractual maturity date

Prepayment Interest Shortfall: as defined in section 3.6.3.1, Timing Conventions, of this appendix.

R
Risk-Based Capital (RBC) Report: The form in which Enterprise data is to be submitted for purposes of calculating the risk-based capital requirement, as described in section 3.1, Data, of this appendix.

Relative Spread: as defined in section 3.6.3.4.3.1, Single Family Default and Prepayment Explanatory Variables, of this appendix.

Retained Loans: as described in section 3.6.1, Whole Loan Cash Flows Overview, of this appendix.

S
Scheduled Principal: the amount of principal reduction that occurs in a given month according to the Amortization Schedule of a mortgage loan; see section 3.6.3.3, Mortgage Amortization Schedule, of this appendix.

Servicing Fee: portion of mortgage interest payment retained by servicer.

Sold Loans: as described in section 3.6.1, Whole Loan Cash Flows Overview, of this appendix.

Spread Accounts: a form of Credit Enhancement; section 3.6.3.6.4, Mortgage Credit Enhancement, of this appendix.

Stress Period: the 10-year period covered by the Stress Test simulation.

Stress Test: the calculation, which applies specified economic assumptions to Enterprise portfolios, described in this appendix.

Strike Rate: the interest rate above/below which interest is received for caps/floors.

Subordination Agreements: a form of Credit Enhancement in which the cash flows allocable to a portion of a mortgage pool are used to cover losses on loans allocable to another portion of the mortgage pool; see section 3.6.3.6.4, Mortgage Credit Enhancement, of this appendix.

T
Time Zero: used to designate the conditions in effect at the start of the Stress Test, as defined in section 3.6.3.1, Timing Conventions, of this appendix.

U
Unpaid Principal Balance (UPB): the Unpaid Principal Balance of a loan or loan group based solely on its Amortization Schedule, without giving effect to any missed or otherwise unscheduled payments.

W
Whole Loan: a mortgage loan.

[66 FR 47806, Sept. 13, 2001, as amended at 67 FR 11861, Mar. 15, 2002; 67 FR 66535, Nov. 1, 2002; 68 FR 7312, Feb. 13, 2003; 71 FR 75087, Dec. 14, 2006; 73 FR 35895, June 25, 2008]