[Federal Register Volume 59, Number 77 (Thursday, April 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9688]


[[Page Unknown]]

[Federal Register: April 21, 1994]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner
[Docket No. N-94-3752; FR-3698-N-01]

 

Interest Rate for the Section 235(r) Mortgage Insurance Program

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Notice of change in interest rate.

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SUMMARY: This notice announces a change in the maximum interest rate 
for mortgages to be insured under section 235(r) of the National 
Housing Act. The section 235(r) maximum interest rate is to be 
determined by the Secretary of HUD and published in the Federal 
Register. Mortgage market conditions now dictate that the Secretary 
increase the section 235(r) maximum rate from 7.00 percent to 8.00 
percent. There is no change being made in the maximum margin of 
additional percentage points that may be added to the maximum rate if 
the established conditions are met. Therefore, the maximum for the 
premium section 235(r) interest rate will be 9.50 percent (8.00 percent 
for the rate of interest and 1.50 percent for the margin of additional 
percentage points).

EFFECTIVE DATE: April 21, 1994.

FOR FURTHER INFORMATION CONTACT: John N. Dickie, Director, Program 
Evaluation Division, room B-133, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410; telephone 
(202) 755-7470, Ext. 117; (TDD) (202) 708-4594. (These are not toll-
free numbers.)

SUPPLEMENTARY INFORMATION: Section 235(r) of the National Housing Act 
(12 U.S.C. 1715z) authorizes the Secretary to insure mortgages that 
refinance mortgages insured under section 235. The purpose of the 
program is to reduce the interest rate insured and assisted under 
section 235, so that the assistance payments which the Department pays 
on behalf of mortgagors is reduced. The regulations implementing the 
program are contained in 24 CFR part 235 (subpart H, on the refinancing 
of mortgages under section 235(r).
    The interest rate for these loans is set by the Secretary and 
published in the Federal Register as authorized by 24 CFR 
235.1202(b)(3). The previous section 235(r) interest rate of 7.00 
percent was published in the Federal Register on October 8, 1993 (58 FR 
52499). The market conditions dictate a change in the section 235(r) 
interest rate commencing on the date of publication of this notice.
    The most recent HUD survey of Mortgage Market conditions (i.e., 
Secondary Market Prices and Yields), an OMB-designated Principal 
Federal Indicator, found that the dominant national FHA rate being 
quoted to potential homebuyers for ``lock-in'' commitments of 60 days 
or more was 7.50 percent on March 1, 1994, with an average of .42 
points, and an effective interest rate of 7.56 percent. The 7.50 
percent rate was dominant in most parts of the country. The same survey 
showed that FHA primary market effective interest rates continued to 
track FHA secondary market prices and yields. The average secondary 
market price reported for 7.50 percent FHA loans was $99.36 per $100, 
for a yield of 7.59 percent. The primary market rates and secondary 
market yields were up about 50 basis points from the February 1st 
survey.
    The bond market has slumped substantially since February 4, 1994, 
when the Federal Reserve Board announced the first of two recent 
quarter-point increases in the target Federal-funds rate. Bond yields 
have risen dramatically as a result of investors' reaction to this 
action of the Federal Reserve, the Federal Reserve's repeated 
statements that it intends to increase rates further when needed to 
prevent inflation, and improving economic conditions which increase the 
possibility of inflation. The yield on 30-year Treasury bonds was 6.31 
percent on February 3, 1994 and rose to 7.11 percent on March 31. Now 
that fears of inflation have returned, the yield curve for Treasury 
bonds has climbed and long-term rates are likely to be significantly 
higher in the next few months than they have been on the average in the 
recent past.
    Most FHA mortgages are funded in the GNMA mortgage-backed 
securities market. Considering a spread, GNMA yields track Treasury 
market rates. Moreover, there is a 50 basis point spread between FHA 
contract interest rates and GNMA coupon rates (this covers the GNMA 
guarantee fee and servicing cost), and stable FHA mortgage interest 
rates tend to be about 50 basis points (.5 percent) above GNMA coupon 
rates. Since March 1, 1994, GNMA prices have continued to decline and 
yields to rise. By April 1, 1994, the GNMA 6.50 percent security (7.00 
percent FHA loans) was trading in the two-month forward market at about 
ten points discount. Increasing the Section 235(r) rate by a full 
percentage point to 8.00 percent would permit such mortgages currently 
to be sold in the secondary market at a much more marketable discount.
    Trends in conventional mortgage interest rates also confirm that 
the section 235(r) rate should be raised to 8.0 percent. On March 31, 
1994, the Federal Home Loan Mortgage Corporation announced that the 
average interest rate for 30-year mortgages was 8.04 percent, up from 
6.97 percent on February 4.
    Adjusting the section 235(r) rate to 8.00 percent will bring this 
rate back into line with the rest of the FHA current production loans. 
Therefore, the maximum rate for section 235(r) mortgages is 8.00 
percent beginning with the publication date of this notice. The maximum 
margin of additional percentage points that may be added to the maximum 
rate under 24 CFR 235.1202(b)(3)(i)(B) will remain at 1.50 percent.
    The subject matter of this notice is categorically excluded from 
HUD's environmental clearance procedures, in accordance with 24 CFR 
50.20(l). For that reason, no environmental finding has been prepared 
for this notice.

    Dated: April 15, 1994.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 94-9688 Filed 4-20-94; 8:45 am]
BILLING CODE 4210-27-P