[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Rules and Regulations]
[Pages 61846-62005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28902]
[[Page 61845]]
_______________________________________________________________________
Part X
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 81
The Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac) Regulations; Final Rule
Federal Register / Vol. 60, No. 231 / Friday, December 1, 1995 /
Rules and Regulations
[[Page 61846]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Secretary
24 CFR Part 81
[Docket No. FR-3481-F-03]
RIN 2501-AB56
The Secretary of HUD's Regulation of the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac)
AGENCY: Office of the Secretary, HUD.
ACTION: Final rule.
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SUMMARY: This final rule implements the Secretary's regulatory
authorities respecting the Federal National Mortgage Association
(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation
(``Freddie Mac'') (collectively the ``Government-Sponsored
Enterprises'' or ``GSEs'') under the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (``FHEFSSA''). FHEFSSA's
purpose is to establish a new regulatory framework for the GSEs that
reflects their unique status as shareholder-owned corporations that
receive substantial public benefits. FHEFSSA substantially overhauled
the regulatory authorities and structure for GSE regulation and
required the issuance of this rule.
FHEFSSA directs the Secretary to establish three separate housing
goals for the GSEs' mortgage purchases financing: housing for low- and
moderate-income families; housing located in central cities, rural
areas, and other underserved areas; and special affordable housing to
meet the unaddressed needs of low-income families in low-income areas
and very-low-income families. Under this rule, the Secretary sets the
level of each goal and specifies the requirements for counting mortgage
purchases toward meeting the goals. The rule also includes procedures
for monitoring and enforcing performance under the goals.
In addition, FHEFSSA requires the Secretary to prohibit
discrimination by the GSEs in their mortgage purchases and establishes
new responsibilities for the Secretary and the GSEs with respect to the
Fair Housing Act and the Equal Credit Opportunity Act. This rule
implements these authorities. The rule also sets forth requirements for
the Secretary's review and approval of new programs of the GSEs, GSE
submission of mortgage purchase data and reports to the Secretary, the
Secretary's dissemination of data and protection of proprietary
information, and enforcement and other proceedings under this rule.
EFFECTIVE DATE: January 2, 1996, except that Sec. 81.62(c) shall not be
effective until April 1, 1996, so that the first mortgage report
required to be submitted by the GSEs under that section will cover
mortgage purchases through the second quarter of 1996 and will not be
due until September 1, 1996.
FOR FURTHER INFORMATION CONTACT: Janet Tasker, Director, Office of
Government-Sponsored Enterprises, Room 6154, telephone (202) 708-2224;
or, for questions on data or methodology, Harold Bunce, Director,
Financial Institutions Regulation, Office of Policy Development and
Research, Room 8204, telephone (202) 708-2770; or, for legal questions,
Kenneth A. Markison, Assistant General Counsel for Government Sponsored
Enterprises/RESPA, Office of the General Counsel, Room 9262, telephone
(202) 708-3137. The address for all of these persons is: Department of
Housing and Urban Development, 451 Seventh Street, S.W., Washington,
D.C. 20410. A telecommunications device for deaf persons (TDD) is
available at (202) 708-9300. (The telephone numbers are not toll-free.)
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Statement
The information collection requirements contained in this rule have
been submitted to the Office of Management and Budget (OMB) for review
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), as
implemented by OMB in regulations at 5 CFR part 1320. No person may be
required to respond to, or may be subjected to a penalty for failure to
comply with, these information collection requirements until they have
been approved and HUD has announced the assigned OMB control number.
The OMB control number, when assigned, will be announced by separate
notice in the Federal Register. In accordance with Sec. 1320.11(h) of
the implementing regulations, OMB has 60 days from today's publication
date in which to approve, disapprove, or instruct HUD to make a change
to the information collection requirements in this rule.
The final rule addresses comments submitted to OMB and HUD on the
collection of information requirements in the proposed rule. In
addition, HUD has consulted with members of the public and affected
agencies regarding these collections of information. In revising the
requirements from those that appeared in the proposed rule, HUD has
evaluated the necessity and usefulness of the collection of
information; reevaluated HUD's estimate of the information collection
burden, including the validity of the underlying methodology and
assumptions; and minimized the burden on respondents for the
information collection requirements, to the extent compatible with the
Secretary's responsibilities under the authorizing statute. This final
rule provides for the use of electronic collection techniques.
General
Purpose
This final rule establishes new regulations implementing the
Secretary of Housing and Urban Development's (``the Secretary's'')
authority to regulate the GSEs. The authority exercised by the
Secretary is established under:
(1) The Federal National Mortgage Association Charter Act (``Fannie
Mae Charter Act''), which is Title III of the National Housing Act,
section 301 et seq. (12 U.S.C. 1716 et seq.);
(2) The Federal Home Loan Mortgage Corporation Act (``Freddie Mac
Act''), which is Title III of the Emergency Home Finance Act of 1970,
section 301 et seq. (12 U.S.C. 1451 et seq.); \1\ and
\1\ This rule refers to the Fannie Mae Charter Act and the
Freddie Mac Act collectively as the ``Charter Acts.''
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(3) FHEFSSA, enacted as Title XIII of the Housing and Community
Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992,
and codified, generally, at 12 U.S.C. 4501-4641). FHEFSSA substantially
changed the Secretary's authorities respecting the GSEs, requiring the
Secretary to promulgate new regulations.
This rule implements these authorities and authorities under the
Charter Acts, replaces the Secretary's current regulations governing
Fannie Mae and, for the first time, establishes regulations governing
Freddie Mac.
Background
Fannie Mae and Freddie Mac are congressionally chartered,
shareholder-owned corporations that have been regulated by HUD since
1968 and 1989, respectively. The GSEs were chartered by Congress to:
(1) Provide stability in the secondary market for residential
mortgages;
(2) Respond appropriately to the private capital market;
(3) Provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to mortgages on
housing for low- and moderate-income families involving a
[[Page 61847]]
reasonable economic return that may be less than the return earned on
other activities) by increasing the liquidity of mortgage investments
and improving the distribution of investment capital available for
residential mortgage financing; and
(4) Promote access to mortgage credit throughout the Nation
(including central cities, rural areas, and other underserved areas) by
increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for residential mortgage
financing.\2\
\2\ Sections 301(b) of the Freddie Mac Act and 301 of the Fannie
Mae Charter Act.
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In exchange for carrying out their public purposes, the GSEs enjoy
substantial public benefits not provided to other private corporations
in the secondary mortgage market, which include: (1) Conditional access
to a $2.25 billion line of credit from the U.S. Treasury; \3\ (2)
exemption from securities registration requirements of the Securities
and Exchange Commission and the States; \4\ and (3) exemption from all
State and local taxes, except property taxes.\5\ In addition to these
benefits, the GSEs enjoy the implicit benefit of the financial market's
assumption that, even though no Federal guarantee exists,\6\ should a
GSE fail to meet its obligations, the Federal Government and,
ultimately, the American taxpayer would stand behind the obligations of
the GSEs. As a result of their Government-sponsored status, the GSEs
borrow at approximately the same rates as the Department of
Treasury,\7\ and their cost of doing business is less than that of
other competitors in the mortgage market. In return for the substantial
benefits that the GSEs receive, they are expected to serve certain
public purposes, and are subject to congressionally imposed limitations
on their undertakings and to HUD's regulation.
\3\ Sections 306(c)(2) of the Freddie Mac Act and 304(c) of the
Fannie Mae Charter Act.
\4\ Sections 306(g) of the Freddie Mac Act and 304(d) of the
Fannie Mae Charter Act.
\5\ Sections 303(e) of the Freddie Mac Act and 309(c)(2) of the
Fannie Mae Charter Act.
\6\ The GSEs' obligations are not guaranteed by the United
States. See, e.g., sections 1302(4), 1381(f), and 1382(n) of FHEFSSA
(requiring each GSE to state in its obligations and securities that
such obligations and securities ``are not guaranteed by the United
States'').
\7\ Congressional Budget Office, Controlling the Risks of
Government-Sponsored Enterprises, at 10 (April 1991).
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Provisions of FHEFSSA
Because Congress perceived a need to increase protection to the
taxpayers from any potential financial losses or risks posed by the
GSEs, FHEFSSA established an independent financial regulator within
HUD--the Office of Federal Housing Enterprise Oversight (OFHEO)--which
is responsible for the financial safety and soundness of the GSEs.
At the same time, to assure that the GSEs accomplish their public
purposes, Congress clarified and expanded the Secretary's specific
powers and authorities respecting the GSEs. FHEFSSA provides that,
except for the authority of the Director of OFHEO over all matters
related to financial safety and soundness, the Secretary has general
regulatory power over the GSEs and is required to make all rules and
regulations necessary to ensure that the purposes of FHEFSSA and the
Charter Acts are carried out.\8\
\8\ Section 1321 of FHEFSSA.
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FHEFSSA specifically requires the Secretary to establish, monitor,
and enforce three separate goals for the GSEs' mortgage purchases on:
(1) Housing for low- and moderate-income families (Low- and
Moderate-Income Housing Goal);
(2) Housing located in central cities, rural areas, and other
underserved areas (Geographically Targeted Goal); and
(3) Special affordable housing meeting the ``unaddressed housing
needs of low-income families in low-income areas and very low-income
families'' (Special Affordable Housing Goal).
Under FHEFSSA, the Secretary is to establish each of the housing
goals after consideration of certain statutorily prescribed factors
relevant to the particular goal. The Secretary's findings concerning
each of these factors are set forth in the appendices to this rule,
which are published in today's Federal Register after the text of the
rule. These appendices will not be codified in the Code of Federal
Regulations.
FHEFSSA also establishes new fair lending requirements for the
GSEs. Under FHEFSSA, the Secretary must, by regulation, prohibit the
GSEs from discriminating in their mortgage purchases because of ``race,
color, religion, sex, handicap, familial status, age, or national
origin, including any consideration of age or location of the dwelling
or the age of the neighborhood or census tract where the dwelling is
located in a manner that has a discriminatory effect.'' \9\ The
Secretary must also:
\9\ Section 1325(1).
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(1) By regulation, require the GSEs to submit data to assist the
Secretary in investigating whether a mortgage lender has failed to
comply with the Fair Housing Act and the Equal Credit Opportunity Act
(``ECOA'');
(2) Obtain and make available to the GSEs information from other
regulatory and enforcement agencies on violations by lenders of the
Fair Housing Act and ECOA;
(3) Direct the GSEs to take various remedial actions against
lenders found to have engaged in discriminatory lending practices in
violation of the Fair Housing Act or ECOA; and
(4) Periodically review and comment on the GSEs' underwriting and
appraisal guidelines, to ensure that the guidelines are consistent with
the Fair Housing Act and FHEFSSA.
FHEFSSA also details the Secretary's authority to review and
approve new programs of the GSEs and establishes procedures under which
the GSEs may contest determinations on new program requests. FHEFSSA
maintains the Secretary's authority to require reports from the GSEs on
their activities and requires the GSEs to submit detailed, specific
data on their mortgage purchases. FHEFSSA assigns the Secretary other
responsibilities, including establishing a public-use database
containing data gathered from the GSEs on mortgage purchases, and
protecting proprietary information provided by the GSEs. FHEFSSA
terminates the former regulations governing Fannie Mae and requires
that the Secretary issue new regulations governing both GSEs.
Transition Period
FHEFSSA established a transition period of calendar years 1993 and
1994, to provide time for the Secretary to collect data and implement
FHEFSSA's provisions. For the transition period, FHEFSSA established
targets for mortgage purchases by the GSEs on housing for low- and
moderate-income families and housing located in central cities, rural
areas, and other underserved areas. For the transition years, the
targets for both of these goals were set at 30 percent of the GSEs'
mortgage purchases. The target amounts were the same as the percentage
goals established under HUD's Fannie Mae regulations, which were
originally promulgated in 1979 and codified under the former Fannie Mae
regulations in 24 CFR part 81. During the transition, only mortgages
located in central cities, as designated by the Office of Management
and Budget (OMB), counted toward the Geographically Targeted Goal.
FHEFSSA required that the Secretary establish interim goals to improve
the GSEs' performance relative to these targets, so that the GSEs would
meet the targets by the end of the transition
[[Page 61848]]
period. FHEFSSA also established specific dollar amounts for purchases
by the GSEs of mortgages under the Special Affordable Housing Goal. For
the transition years, the legislative history of FHEFSSA indicates that
the goal should be higher than the GSEs' 1992 performance.
Interim Notices
As required by FHEFSSA, on October 13, 1993, the Secretary
published notices of interim housing goals establishing requirements
necessary to implement the transition housing goals; 10 the GSEs
reviewed and commented on the notices prior to publication.
\10\ 58 FR 53048 and 53072.
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The Interim Notice for Fannie Mae established that, of the dwelling
units financed by Fannie Mae's mortgage purchases: (1) In 1993 and
1994, 30 percent should be affordable to low- and moderate-income
families; (2) in 1993, 28 percent and, in 1994, 30 percent should be
located in central cities; and (3) during the 1993-94 period, at least
$16.4 billion in mortgages should meet the Special Affordable Housing
Goal.
The Interim Notice for Freddie Mac established that, of the
dwelling units financed by Freddie Mac's mortgage purchases: (1) In
1993, 28 percent and, in 1994, 30 percent should be affordable to low-
and moderate-income families; (2) in 1993, 26 percent and, in 1994, 30
percent should be located in central cities; and (3) during the 1993-94
period, at least $11.9 billion in mortgages should meet the Special
Affordable Housing Goal.
In late 1994, when it became apparent that this rulemaking would
not be completed in time to establish new housing goals for 1995, the
Secretary issued a final regulation extending the 1994 goals for both
GSEs into 1995.11
\11\ 59 FR 61504 (November 30, 1994).
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The Proposed Rule
On February 16, 1995 (60 FR 9154), HUD published a proposed rule to
implement the Secretary's authorities under FHEFSSA and the Charter
Acts. The proposed rule raised the level of the goals. It also provided
that, in accordance with FHEFSSA, the Geographically Targeted Goal
would be expanded to include rural and other underserved areas, and
that the goal would be directed to the underserved portions of these
areas. The proposal reformulated the categories of the Special
Affordable Housing Goal and proposed new counting requirements based on
experience gained in the transition period. The proposed rule also
would have established procedures for review of new programs, detailed
prohibitions against discrimination, scaled back reporting requirements
from the former Fannie Mae regulations and the Interim Notices, and
included detailed requirements for book entry of GSE securities and
procedures under FHEFSSA.
Final Rule
In response to the proposed rule, HUD received 163 comments. The
comments came from the GSEs; individuals; representatives of lending
institutions, community, and consumer groups; Members of Congress;
local and State governments; and others. Following full consideration
of the comments and discussions with the GSEs and outside entities, HUD
developed this final rule. The final rule is consistent with the
approach announced in the proposed rule, but includes significant
revisions in light of the comments. The final rule:
(1) Establishes housing goals that are greater than those
established under the regulations for the transition and will ensure
that the GSEs continue and strengthen their efforts to carry out
Congress's intent that the GSEs provide the benefits of a secondary
market to families throughout the Nation;
(2) Requires the GSEs to take appropriate steps to facilitate fair
housing for all citizens, recognizing the GSEs' leadership role in the
lending industry without forcing the GSEs to act in an enforcement
capacity better left to the Government;
(3) Establishes conditions and procedures by which the Secretary
will exercise his or her statutory authority to review new programs of
the GSEs, but in a manner that will not create a disincentive for the
GSEs to be innovative in developing new mortgage finance initiatives;
(4) Implements reporting requirements for the GSEs that are not
unduly burdensome and will allow the Secretary and Congress to monitor
the GSEs' activities appropriately;
(5) Requires dissemination of information on the GSEs' activities
to the public, while protecting the GSEs' legitimate commercial
interests in proprietary data; and
(6) Establishes fair procedures for enforcement actions and other
regulatory procedures under FHEFSSA.
Discussion Of Public Comments
Overview of the Public Comments
Of the 163 comments received, by far the most detailed were the
submissions of the two directly affected GSEs--Fannie Mae and Freddie
Mac. Each GSE submitted comments of more than 200 pages, supported by
numerous appendices, exhibits, and footnotes. Although occasionally
voicing approval of provisions of the proposed rule, the GSEs'
comments, in the main, registered substantial opposition to key
features.
In addition, comments were received from 26 national or regional
industry-related groups or associations; 26 nonprofit organizations; 10
Members of Congress; 22 governors and mayors, 10 State and local
agencies; 24 banks, lenders, or other real estate professionals; 40
individuals; 12 and 3 legal organizations. HUD reviewed and
considered all of these comments in writing the final rule.
\12\ The 40 comments from individuals were form letters, signed
by persons from several different States but containing identical
information except for, in a few instances, written-in additional
observations. These comments were limited to housing goals issues
and generally favored, and recommended strengthening of, the rule.
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The portion of the rule most frequently discussed by the commenters
was Subpart B--Housing Goals, some aspect of which attracted comments
from 146 of the 163 commenters. Eighty-three of these comments
reflected general approval of the proposed rule's approach to the
goals. Fifty-three others were in opposition, in whole or in part,
while 10 contained mixed statements of support and opposition.
Other major subject areas of the proposed rule (subpart C--Fair
Housing, subpart D--New Program Approval,and Subpart E--Access to
Information) attracted the attention of only a minority of the
commenters. Fifty-five of the 62 commenters who addressed the new
program approval provisions opposed them in whole or in part, with only
3 commenters setting out unqualified approval, and 4 others expressing
a mixture of favorable and unfavorable comments.
Thirty commenters opposed one or more major elements of the rule's
treatment of fair housing concerns, while 11 favored the rule. Two
comments featured well-mixed supporting and opposing views. The
majority of the institutional commenters and lenders who did address
the issues of fair housing stated their opposition to the rule's
treatment. Only among the nonprofit organizations did a majority of the
commenters addressing the issue express support for the proposed rule's
handling of the subject. Commenters often addressed Subpart E,
Reporting Requirements, in the context of other statements pertaining
to housing goals, fair housing, or both. Accordingly, the commenters'
views on reporting are
[[Page 61849]]
largely included in the discussion of subparts B and C.
Only 10 commenters addressed the access to information issue. Of
these, six (including the GSEs) were substantially opposed to the
rule's provisions, while four supported the rule or urged stronger
provisions in favor of broader public disclosure of GSE information.
In all subject areas, the GSEs' expressions of opposition to
important features of the rule were backed by a majority of the
national or regional industry associations submitting comments, as well
as by commenters representing banks and other lenders. On the other
hand, several associations expressed notable support for some of the
same features.
A higher proportion of the commenting nonprofit organizations
supported important aspects of the rule as proposed, although many of
these commenters also opposed individual features of the proposal and
offered suggestions for modifications or compromises that would
accomplish similar aims. A number of nonprofit organizations also
recommended further strengthening of the rule, especially as it relates
to housing goals.
Comments from Governors and Mayors tended to concentrate on the
goals. In general, these comments opposed the definitions in the
proposed rule of ``central city,'' ``rural area,'' and other key terms
that determine the transactions that count toward achievement of the
housing goals. Twelve of the 22 State and local political leaders who
commented expressed opposition to the program approval portions of the
rule. The 10 comments from State and local governmental agencies
focused largely on housing goals issues, but were more diverse in their
views, with 5 agencies generally supporting the rule, 4 opposing
significant portions of it, and 1 expressing a mixture of favorable and
unfavorable comments.
Members of Congress submitting comments mainly addressed housing
goals issues, with 6 of the 10 criticizing the rule. Six Members also
opposed aspects of the new program approval subpart. Three Members
voiced support for the proposed rule's approach to housing goals, and
one expressed support for the rule's fair housing provisions.
A discussion of general and specific comments on the rule follows.
HUD has read and considered all of the comments received from the
public in developing this final rule. Although not all of the comments
are addressed explicitly in this preamble, often because HUD's response
is implicit in the general discussion of the rule or other comments or
because the comments were minor, HUD acknowledges the value of all of
the comments submitted in response to the proposed rule.
Other Public Input
In addition to the comments received, HUD sought information from
the GSEs and other market participants to verify or revise assumptions
and data HUD used in developing the rule. During this rulemaking, HUD
held numerous meetings with the GSEs, lenders, developers, nonprofit
groups, public-interest representatives, and other Federal agencies to
discuss issues related to the rule, including the methodology used to
establish market shares, current conditions in rural lending, and
current conditions in the multifamily market. Additional information on
these meetings is contained in the public docket file of this rule in
Room 10276 at HUD Headquarters. HUD also conducted a series of detailed
analyses of various technical issues raised in the comment letters. To
assist in analyzing these issues, HUD contracted with researchers and
academicians in universities and the private sector to carry out
independent evaluations of HUD's methodology. HUD also consulted
broadly with researchers and economists at other Government agencies,
the GSEs, and housing trade groups to critique and refine the
underlying analytical work used in establishing the housing goals.
Subpart A--General
Overview
The GSEs commented that various parts of the proposed rule were not
legally sustainable because the Secretary's actions were, for example,
``unreasonable,'' ``arbitrary,'' ``capricious,'' ``not supported by a
cogent rationale,'' ``in direct conflict with the plain meaning of the
Act,'' or ``an improper exercise of the Secretary's discretion.'' HUD
has carefully reviewed these concerns and applicable case law,13
and has concluded that its exercise of regulatory authority in
promulgating this final rule is, in all respects, well within the
discretion accorded to HUD by Congress under FHEFSSA and is well-
supported by ample evidence and considered reasoning.
\13\ See, e.g., Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, 467 U.S. 837 (1984).
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Section 81.2--Definitions
Many of the definitions remain the same as in the proposed rule or
have been modified for purposes of clarity only. This final rule,
however, does change some definitions substantially in response to
comments. This section of the preamble mainly discusses changes in
definitions relating to housing goals. The preamble text concerning
subpart D discusses the definition of ``new program'', and the text
concerning subpart F discusses the definitions of ``proprietary
information'' and ``public data''.
Contract Rent. Freddie Mac asked that the definition of ``contract
rent'' be revised to allow the GSEs to decrease contract rent by the
amount of any ``rent concessions.'' Supporting, generally, the rule's
contract rent definition, Freddie Mac commented that: underwriting
determinations are based on post-concession rents; Freddie Mac adheres
to that general practice; and allowing rent concessions to be taken
into account would materially increase affordability of some units.
Under FHEFSSA, the affordability of housing units and their
eligibility for counting towards a goal is based on their rents. Rent
concessions are relatively short-term in nature. Their consideration in
calculating rents would result in unrealistically low levels of rent,
considering that after the rent concession period ends, the rents are
increased. Accordingly, it is not appropriate to consider rent
concessions in defining or determining rent.
Dwelling unit. Freddie Mac objected to the inclusion of a
definition for ``dwelling unit'' in the rule. Freddie Mac asserted that
under section 302(h) of the Freddie Mac Act, which defines
``residential mortgage,'' Freddie Mac is authorized to define
``dwelling unit.''
Although Freddie Mac is authorized to define the term ``dwelling
unit'' under the Freddie Mac Act, it is appropriate that this final
rule define the term under FHEFSSA. The Secretary is charged with
measuring the extent of compliance with the housing goals under section
1336 of FHEFSSA. Because FHEFSSA specifically authorizes the Secretary
to consider units in formulating the goal, a definition of the term
``unit'' or ``dwelling unit'' is integral to counting GSEs' purchases
toward achievement of the goals.
The GSEs also commented that, if ``dwelling unit'' is defined under
the rule, the definition of ``dwelling unit'' should include the
following types of housing: (1) A single-family dwelling with a home
office; (2) dwelling units in an apartment complex with retail space or
a day care center; and (3) single-room-occupancy buildings and group
homes that may lack separate kitchens
[[Page 61850]]
or bathrooms for each unit of residence. In response to this point, the
definition of ``dwelling unit'' is changed in the final rule to include
single room properties, dwellings that include offices, and dwellings
located in mixed-use properties.
Median Income. Freddie Mac, addressing the Low- and Moderate-Income
Goal, commented that the definition of ``median income'' should be
revised to permit household income in nonmetropolitan areas to be
measured against the greater of the county median income or the
statewide nonmetropolitan median. Freddie Mac noted that ``the proposed
rule would classify a borrower with an income of $12,000 living in a
county with median income of $11,000 as 'upper income.''' The final
rule (in Sec. 81.15) clarifies that ``median income'' for families
outside of metropolitan statistical areas (MSAs) means the greater of
the county median income or the statewide nonmetropolitan median income
for the area where the property is located.
Mortgages and Interests in Mortgages. The GSEs commented that, in
tracking the Freddie Mac Act, the definition of ``mortgage'' appears to
have dropped a line relating to interests in mortgages. Freddie Mac
suggested adding to the rule's definition ``* * * and includes
interests in mortgages. Such term shall also include a mortgage, lien,
or other security interest on the stock or membership certificate.''
(Emphasis in original.)
FHEFSSA requires the Secretary to establish goals for the
``purchases of mortgages.'' The proposed and final rules specifically
allow certain interests in mortgages, such as participations and credit
enhancements, to count toward achievement of the goals, because these
transactions are essentially the same as mortgage purchases. The final
rule provides that ``interests in mortgages'' are mortgages and count
toward achievement of the housing goals. Because defining mortgages to
include all ``interests in mortgages'' is potentially over-inclusive
and may encompass transactions or activities that are not equivalent
and should not appropriately count toward achievement of the goals, the
counting provisions in Sec. 81.16(b) list specific types of
transactions that do not count toward achievement of the goals,
including certain ``interests in mortgages.''
Refinancing. Freddie Mac commented that, by excluding from the
definition of ``refinancing'' the renegotiation of a multifamily
mortgage when a balloon payment is due within one year, it is not clear
whether the excluded activity is intended to be treated as a ``mortgage
purchase.'' The final rule includes as new mortgages multifamily
mortgages that have balloon payments due within 1 year after the date
of closing of the renegotiated mortgages.
Very-low-Income. Freddie Mac commented that the term ``very-low-
income'' should be defined consistently with certain other HUD
regulations and programs. Freddie Mac noted that these programs'
formulas for determining eligibility sets the ``very-low-income'' limit
above 60 percent of the local area median income in 48 metropolitan
areas and 1,502 nonmetropolitan counties with either unusually low
income or unusually high housing costs. Freddie Mac urged HUD to create
exceptions to the definition of ``very-low-income'' for multifamily
projects benefiting from a Federal assistance program, where such
projects are located in areas with either unusually low income or
unusually high housing costs.
As part of the Special Affordable Housing Goal, Congress
specifically required the Secretary to establish a housing subgoal that
targets very-low-income families. Section 1303(19) of FHEFSSA defines
``very low-income'' as:
(1) In the case of owner-occupied units, income not in excess of 60
percent of area median income; and
(2) In the case of rental units, income not in excess of 60 percent
of area median income, with adjustments for smaller and larger
families, as determined by the Secretary.
In certain HUD programs the Secretary has statutory authority to
make the type of adjustments that Freddie Mac has requested HUD to make
under FHEFSSA. However, FHEFSSA does not provide similar authority. The
only adjustments to the definition of ``very-low-income'' that are
permissible under FHEFSSA are adjustments for smaller and larger
families in the case of rental units.
Subpart B--Housing Goals
Overview
The greatest amount of controversy in the public comments centered
on the housing goals. Fannie Mae and a number of commenters focused on
the levels of the goals, the concept of ``leading the industry,'' and
the methodology used to estimate the size of the conventional market
for each of the goals. In its critique of the housing goals portion of
the proposed rule, Freddie Mac advanced six major concerns: (1) The
market estimates are flawed and will result in infeasible goals over
time; (2) the proposed rule does not establish a link between
identified housing needs and the housing goals; (3) HUD has not
adequately taken market volatility into account in establishing the
goals; (4) the GSEs' previous performance is incorrectly assessed; (5)
the proposed rule presents too narrow a concept of leading the
industry; and (6) the proposed rule does not adequately address the
risks posed by increased levels of multifamily purchases. Freddie Mac
also expressed concern that in establishing the goals as proposed, HUD
would micromanage the type and location of the GSEs' mortgage
purchases, severely limiting the GSEs' ability to respond to the market
in a timely manner.
General comments on the housing goals are discussed in this
section. More detailed analyses of some of these issues are presented
in four technical appendices immediately following the text of the
rule, as well as in an economic analysis of the rule prepared by HUD.
Levels of the Goals
Fannie Mae requested that the levels of the goals be set lower than
in the proposed rule, commenting that the housing goals should be set
at a ``reasonable and appropriate share'' of Fannie Mae's business.
Fannie Mae also urged HUD to refrain from frequent adjustments in the
goals and to avoid increasing the goals if Fannie Mae exceeded them.
Similarly, Freddie Mac stressed the necessity of setting
``conservative'' goals that are capable of being met under a variety of
economic conditions.
Both GSEs agreed that HUD had not adequately considered the impact
that changes in national economic conditions could have on the size of
the conventional, conforming market. The GSEs commented that HUD was
assuming, in its market estimates, that the unusually favorable
economic and housing market conditions of 1993-1994 would continue in
the future.
A number of commenters, mainly representing public-interest
organizations, asked for more aggressive goal-setting, urging that the
levels of the goals were too low, given the benefits provided to the
GSEs by virtue of their Federal charters, their current levels of
performance, and the scope of the nation's housing problems.
Some commenters, primarily industry representatives, expressed
concern with the proposed rule's stated intention to set future goals
at higher levels. A number of commenters joined with the GSEs in
recommending that goals remain stable over the long term and be imposed
at reasonable levels that not
[[Page 61851]]
only assure the GSEs will increase their support of low- and moderate-
income housing, but also reflect that economic conditions may influence
the capacity of the GSEs to support such housing in any given year.
The GSEs held differing views on how far into the future the goals
should be fixed. Fannie Mae commented that the goals should be fixed
for a substantial period of time, to allow the GSEs to incorporate the
goals into their long-range business plans and corporate strategies.
Freddie Mac expressed serious doubt that meaningful goals could be
established for a period more than two years into the future.
Under the rule, the following goals are established: the annual
goal for each GSEs' purchases of mortgages on housing for low- and
moderate-income families is--for 1996, 40 percent of the total number
of dwelling units financed by that GSE's mortgage purchases in 1996
and, for each of the years 1997-99, 42 percent of the total number of
dwelling units financed by that GSE's mortgage purchases in each of
those years; the annual goal for each GSEs' purchases of mortgages on
housing located in central cities, rural areas, and other underserved
areas is--for 1996, 21 percent of the total number of dwelling units
financed by that GSE's mortgage purchases in 1996 and, for each of the
years 1997-99, 24 percent of the total number of dwelling units
financed by that GSE's mortgage purchases in each of those years; and
the annual goal for each GSEs' purchases of mortgages on special
affordable housing is--for 1996, 12 percent of the total number of
dwelling units financed by that GSE's mortgage purchases in 1996 and,
for each of the years 1997-99, 24 percent of the total number of
dwelling units financed by that GSE's mortgage purchases in each of
those years; additionally, the special affordable housing goal for each
of these years shall include mortgage purchases financing dwelling
units in multifamily housing totalling not less than 0.8 percent of the
dollar volume of mortgages purchased by the respective GSE in 1994. For
2000 and thereafter the Secretary shall establish new annual goals;
pending establishment of goals for 2000 and thereafter, the annual goal
for each of those years for each of the three goals shall be the same
as the 1999 goals.
The levels of the housing goals established in this final rule meet
the following objectives: they are reasonable and appropriate, they
reflect consideration of the statutory factors for establishing housing
goals, and they are set far enough into the future to allow the GSEs to
engage in long-term planning.
First, the levels of the three housing goals are reasonable and
appropriate, as summarized below in the discussion of each of the
housing goals and detailed further in the appendices. The goals have
been set judiciously in relation to reasonable estimates of the market
share of the mortgages originated that would qualify under the goals.
The levels of the goals also reflect the cyclical nature of the
mortgage markets and the need to provide a margin for unforeseen
macroeconomic impacts.
Second, the levels of the goals reflect a full consideration of all
factors for consideration under FHEFSSA. The GSEs expressed concern
that the process used by the Secretary for establishing the levels of
the goals was too rigid, driven primarily by the market-share estimates
for each of the goals. This concern is unfounded. In establishing the
goals, the Secretary carefully considered the factors mandated by
FHEFSSA. These factors, which encompass more than just the estimate of
the market for each goal, include housing needs, the financial
conditions of the GSEs, economic and demographic conditions, previous
performance, and the GSEs' leadership role within the industry. The
appendices that accompany this rule explain in detail the evaluation of
these factors.
The levels of the goals represent a benchmark against which the
GSEs' performance can be measured. The levels are designed to be
standards, not ceilings. They are not so high that the GSEs are likely
to fail to meet the goals. Instead, the levels of the goals represent a
reasonable and appropriate share of the GSEs' business that--at a
minimum--should be devoted to meeting the needs of lower-income renters
and home buyers and of residents of areas underserved by the mortgage
markets. The final rule has been revised to allow the GSEs maximum
flexibility in choosing how they achieve the goals. The levels of the
goals also reflect careful consideration of the concerns expressed by
the GSEs and other commenters that economic and demographic conditions
be taken into account. The levels of the goals have been set so that
they should be attainable in economic conditions more adverse than
those experienced in the past few years.
Third, HUD considered carefully the comments expressing concern
about the future levels of the goals. To provide the GSEs with the
predictability needed to manage their operations, the levels of the
goals have been established for the next four years. The Secretary can,
by regulation, change the level of the goals for the years 2000 and
beyond based on the experience of the previous years. If the Secretary
elects not to change them, they will be left at the 1999 levels for
future years.
Leading the Industry
The proposed rule asserted that the GSEs have a responsibility
because of their Federal charters to lead the industry in expanding
housing opportunities for low-income home buyers and renters and for
residents of underserved areas. The proposed rule requested comment on
how the Secretary should consider ``leading the industry'' in
establishing the levels of the housing goals.
Freddie Mac commented that the proposed rule's presentation of
``leading the industry'' was too narrow. Freddie Mac argued that HUD,
in suggesting that leading the industry only be judged on percentage
terms, ignored the GSEs' non-goal-related activities that provide
stability and liquidity to the mortgage markets. Freddie Mac suggested
that HUD should view industry leadership to include GSE activities that
broaden the entire market, including ``pioneering innovation, the
establishment of new business practices and programs, and the
generation of market efficiencies.'' Further, HUD should evaluate the
GSEs' charge to lead the industry in qualitative, and not just
quantitative, terms.
Several industry commenters echoed Freddie Mac's concerns about
considering ``leading the industry'' in merely percentage terms. They
commented that Congress had included the ability of the GSEs to lead
the industry as one of several factors to be considered. Further, they
noted that leading the industry can be demonstrated in many ways beyond
just the level of mortgage purchases. Reaching reasonable goals would
be a component of leadership, the Mortgage Bankers Association
(``MBA'') commented, but ``the attainment of steadily increasing
benchmarks should not be regarded as a prerequisite for leadership.''
Other commenters differed with this approach. The National Training
and Information Center (``NTIC'') commented that the proposed goals
were ``too low'' and ``do not ensure that the GSEs will 'lead the
market' in the production of affordable housing and housing in
underserved areas.'' NTIC stated that, although the GSEs achieved the
1993 goals, the goals and the GSEs ``ha[d] not made a significant
presence in these neighborhoods.'' The Los Angeles Housing Department
argued
[[Page 61852]]
that the GSEs ought to purchase ``a higher percentage of mortgages than
are originated by the market under each housing goal.''
The GSEs' efforts to create liquidity and stability in the mortgage
markets, as well as the introduction of innovative products,
technology, and processes, clearly demonstrate their leadership role
within the industry. These activities have strengthened the mortgage
industry and increased its ability to serve homeowners and renters of
all incomes throughout the country. Congress chartered the GSEs to
carry out four public purposes: (1) To provide stability; (2) to
respond appropriately to the mortgage markets; (3) to assist the
residential mortgage market, including serving low- and moderate-income
families; and (4) to promote access to mortgage credit throughout the
nation. In FHEFSSA, Congress acknowledged, as does HUD, the substantial
contributions the GSEs have made and continue to make in creating
liquidity and stability in the overall mortgage market. However, in
FHEFSSA, Congress developed a mechanism to ensure that the GSEs served
lower-income families and underserved areas. HUD, through its focus on
the housing goals and performance-based measurements, is carrying out
that congressional intent.
Purpose of the Goals
Freddie Mac commented that HUD had premised the proposed rule on
the mistaken belief that the GSEs are not fulfilling their statutory
purposes. Freddie Mac asserted that its 1993 and 1994 performance under
the housing goals ``demonstrate[s] that Freddie Mac is strongly
committed to fulfilling its obligation to serve [lower-income
households and residents of specific areas].''
Both GSEs commented that a clear connection had not been
established between the general housing needs of low- and moderate-
income households and those needs that can be addressed by the GSEs.
Freddie Mac stated that it is not a problem of availability of mortgage
credit that dominates the unaddressed needs of low-income families, but
a lack of sufficient incomes or subsidies to support homeownership or
rental payments.
Freddie Mac expressed concern that the proposed rule was based upon
a ``fundamental misinterpretation'' of what Congress had intended to
achieve through FHEFSSA. Freddie Mac denied that FHEFSSA's passage
reflected a congressional presumption that the GSEs had failed to serve
lower-income households or certain geographic areas adequately.
Both GSEs suggested that the goals amounted to using the GSEs to
allocate credit. Fannie Mae also suggested that the goals were being
used to assign to the GSEs the responsibility for alleviating specific
housing needs. Both GSEs argued that Congress had no such intent.
The GSEs' comments that the housing goals result in credit
allocation by the Secretary are difficult to understand. Congress
created the GSEs and provided them federally derived benefits to
achieve national housing purposes. Congress also required the
establishment of explicit goals for the GSEs' purchases of mortgages
financing housing for lower-income households and in communities
underserved by the mortgage markets. Congress created the GSEs to
develop liquidity and stability in the mortgage markets, and Congress
specifically charged the GSEs to provide credit to low- and moderate-
income households and to all areas. Congress clearly believed that
doing so was not inconsistent with the GSEs' operation as profitmaking,
shareholder-owned entities.
Criticism that HUD failed to establish a clear connection between
identified housing needs and the proposed housing goals reflects a
misunderstanding of the requirements placed on the Secretary by
FHEFSSA. FHEFSSA directs the Secretary to establish the housing goals
after analyzing a number of factors, including national housing needs.
HUD's analysis, set forth in the appendices, describes the decline in
homeownership rates and the loss of affordable rental stock, and
provides background information on the current state of the nation's
housing needs. These analyses are not designed as a blueprint for the
GSEs' achievement of the housing goals. Nor do they suggest that all
those needs identified can or should be met through GSE activities.
These analyses do, however, set forth the bases for establishing these
goals.
Credit Risk of Multifamily Purchases
Freddie Mac commented that the proposed rule had not adequately
addressed the higher credit risk it might face in meeting higher
housing goals. Freddie Mac claimed that it would have to purchase
``significantly higher levels'' of multifamily mortgages, a business
with a different and higher level of risk than single-family lending.
Further, Freddie Mac argued that any additional losses it might
experience in order to achieve higher goals would be a direct subsidy
on the part of Freddie Mac--something not required by FHEFSSA.
HUD agrees that multifamily financing is a different business than
single-family financing, posing a different level of risk. In
considering the issue of credit quality in the multifamily market, HUD
finds it instructive to compare the levels of activity between the two
GSEs. In 1994, Fannie Mae purchased five times as many multifamily
mortgages as Freddie Mac. Even after factoring in the relative sizes of
the businesses of each GSE--Fannie Mae's overall dollar volume of
business is about 25 percent larger than Freddie Mac's--a substantial
disparity still exists. Fannie Mae's significantly greater volume of
multifamily purchases has not impaired the company's financial health.
Further, the economic analysis prepared for this rule does not support
the argument that the goals will expose the GSEs to unacceptably high
levels of credit risk. Sufficient investment-quality opportunities
exist in the marketplace to allow Freddie Mac to achieve all of the
housing goals without resorting to the purchase of riskier mortgages.
HUD recognizes that Freddie Mac experienced losses on its
multifamily business in the late 1980s, in part because of flawed
corporate oversight mechanisms, resulting in Freddie Mac's withdrawal
from the multifamily market. However, half a decade has passed since
that experience, providing Freddie Mac with sufficient time to develop
a multifamily business. Indeed, Freddie Mac has publicly committed
itself to this market. Leland Brendsel, Chairman and Chief Executive
Officer of Freddie Mac, articulated the GSE's attitude toward this
market segment, noting that ``our re-entry into the multifamily market
[is] * * * our most important next step in meeting our nation's housing
needs. We are committed to having the right people, programs, and
systems in place so that our multifamily mortgage purchases will be
sustainable over the long term.'' 14 HUD accepts as sincere
Freddie Mac's repeated public statements and representations that it is
committed to a long-term, meaningful role in the multifamily market;
the housing goals take that commitment into account.
\14\ Prepared statement of Leland C. Brendsel before the
Subcommittee on General Oversight, Investigations, and the
Resolution of Failed Financial Institutions of the Committee on
Banking, Finance and Urban Affairs, U.S. House of Representatives,
April 20, 1994, pp. 4-5.
[[Page 61853]]
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Market Estimates in Establishing the Goals
In establishing the goals, the Secretary is required to assess,
among a number of factors, the size of the conventional market for each
goal. HUD developed a straightforward technique for estimating the size
of the conventional conforming market for each of the goals. This
technique draws on the existing major sources of data on mortgage
market activity.
Both GSEs expressed strong criticism of HUD's use of specific data
elements in constructing its estimates of market size; for example,
estimates of the proportion of 1- to 4-unit rental properties or the
levels of multifamily originations. Although both GSEs criticized how
data had been interpreted in HUD's market-share models, neither GSE,
nor any other commenter, objected to HUD's basic model for calculating
the size of the markets relevant to each of the housing goals. However,
Freddie Mac provided a detailed set of objections to the use of certain
data sources or assumptions, concluding that HUD's market estimates
were ``fatally flawed.'' Fannie Mae argued that market estimates
employed by HUD ``created an artificial market description based on
interpretations of the data available to [HUD], which are not
consistent.'' Fannie Mae commented that the Secretary deliberately
selected existing data interpretations to yield higher goals. Several
other commenters, all industry trade groups, also criticized aspects of
HUD's market-share estimates.
Freddie Mac maintained that the flaws in HUD's estimation process
would result in goals that were too high, because HUD had overestimated
the size of the rental market. Freddie Mac presented a comparison of
available market-share estimates, explained deficiencies it believed
were present in the data employed by HUD, and claimed that HUD had
chosen the least-favorable of the databases that could have been
employed in reckoning appropriate goals for the GSEs.
Both GSEs argued that the role of multifamily financing in the
mortgage market was consistently overstated in the proposed rule.
Freddie Mac provided data to support its assertion that the rule's
estimates of multifamily originations overstated both the total amount
of originations to be expected and the degree to which multifamily
originations are available to the secondary market.
Both GSEs commented that HUD's analysis ignored the impact that
changes in national economic conditions can have on the size of the
mortgage market. The GSEs noted that their recent efforts to expand the
reach of the secondary market in support of lower-income households
were assisted by highly favorable interest rates and economic
conditions that will likely not persist. Several commenters suggested
that HUD consider more fully the impact of changing economic
conditions.
In considering the levels of the goals, HUD examined carefully the
comments on the methodology used to establish the market share for each
of the goals. HUD contracted with the Urban Institute to conduct an
independent review that drew upon its resources of well-respected
academicians and others in evaluating HUD's methodology. Based on that
thorough evaluation, as well as HUD's additional analysis, the basic
methodology employed by HUD is a reasonable and valid approach to
estimating market share, and Freddie Mac's claim that the methodology
is ``fatally flawed'' is without merit.
HUD agrees that a comprehensive source of information on mortgage
markets is not available. HUD considered and analyzed a number of data
sources for the purpose of estimating market size, because no single
source could provide all the data elements needed. In the appendices,
HUD has carefully defined the range of uncertainty associated with each
of these data sources and has conducted sensitivity analyses to show
the effects of various assumptions. Technical papers prepared by the
Urban Institute and other academicians support HUD's analysis.
A number of technical changes have been made in response to the
comments and the evaluation by outside experts, but the approach for
determining market size has not been modified substantially. The
detailed evaluations show that the methodology, as modified, produces
reasonable estimates of the market share for each goal.
In response to concerns expressed about the volatility of the
mortgage markets over time, HUD has taken three steps with regard to
the methodology. First, HUD conducted detailed sensitivity analyses for
each of the housing goals to reflect economic conditions that are less
conducive to homeownership than those that existed during 1993 and
1994. Second, HUD elaborated further on the impact of increased
interest rates on long-term affordability and the ability of lower-
income households to become homeowners. Third, with regard to
volatility in the multifamily market, the Urban Institute, at HUD's
request, designed a ``steady-state'' multifamily originations model
that produces an alternative means of estimating multifamily
originations. This alternative model is designed to generate
conservative forecasts of future multifamily loan originations because
it omits refinancing activity and balloon loans due to mature in the
next several years. This model is less sensitive to year-to-year
fluctuations in the historical volume of mortgage originations.
Criticism of the methodology focused, in part, on the estimated
size of the multifamily market. The GSEs proposed that HUD use the
volume of originations as reported in the Home Mortgage Disclosure Act
(``HMDA'') database--$15 billion in 1994--as the accurate number of
multifamily originations, as opposed to HUD's $30 billion estimate
derived from other data sources. Four of the studies HUD commissioned
from the Urban Institute considered various aspects of the multifamily
market. HUD also consulted with experts at the Federal Reserve Board,
at the Bureau of the Census, and in industry trade groups to assist HUD
in carefully evaluating the GSEs' claim that HMDA data provide an
accurate number of total multifamily originations.
HUD found a consensus that HMDA data underreports multifamily
originations. HMDA, alone, is not an accurate survey of the total
market; it was not designed to be one. It includes only information
reported by a subset of institutions that originate multifamily loans:
large commercial banks, thrifts, and mortgage bankers in metropolitan
areas. In addition, HMDA underestimates multifamily lending by both
mortgage bankers and commercial banks. The additional analyses
conducted in response to the comments support the $30 billion
multifamily estimate used by HUD.
Three-Year Rolling Average
Fannie Mae and an industry commenter suggested that HUD measure
performance against each goal using a 3-year rolling average. Fannie
Mae contended that a 3-year average ``will ameliorate the difficulty
that can arise in managing to a specific goal when major factors in the
marketplace that are outside of our control can heavily influence our
ability to manage to a specific goal level.''
FHEFSSA and the legislative history do not support use of a 3-year
rolling average. Instead, they provide a scheme whereby the Secretary
is to set goals for each year and performance is to be evaluated during
and at the end of each year by the Secretary. FHEFSSA provides that the
housing goals are
[[Page 61854]]
``annual'' goals. Moreover, if the Secretary determines that there is a
substantial probability that the GSE will fail to meet a goal ``in the
current year'' and a housing plan is required, the housing plan is to
describe the actions the GSE will take ``to make such improvements as
are reasonable in the remainder of such year.'' 15 Similarly, if
the Secretary determines that a GSE has failed to meet a housing goal,
the requisite housing plan is to describe the actions the GSE will take
``to achieve the goal for the next calendar year.'' 16 The
legislative history also refers to the goals as annual goals.17
\15\ Section 1336(c)(2)(B).
\16\ Section 1336(c)(2)(A).
\17\ See, e.g., S. Rep. No. 282, 102d Cong., 2d Sess, at 5
(1992) (S. Rep.); H.R. Rep. No. 206, 102 Cong., 1st Sess., at 34 and
36 (1991) (H. Rep.); 138 Cong. Rec. S8607 (daily ed. June 23, 1992)
(statement of Sen. Riegle); 138 Cong. Rec. S17908 (daily ed. Oct. 8,
1992) (statement of Sen. Cranston).
---------------------------------------------------------------------------
Interpreting the statute to allow the use of a 3-year rolling
average, instead of an annual goal with performance assessed by whether
the GSE meets each year's individual goal, would render the statutory
provisions insignificant or inoperative. Such a structure would ignore
an ``elementary rule of [statutory] construction that effect must be
given, if possible, to every word clause and sentence of a statute.''
18 Accordingly, the Secretary has determined that using a 3-year
rolling average was not intended by or permitted under FHEFSSA and,
therefore, the final rule contains annual goals. Fannie Mae's root
concern--that macroeconomic and other conditions outside its control
may render a goal infeasible--is addressed in those provisions of the
rule concerning evaluation of GSE performance; these conditions are
considered in determining whether a goal was or is feasible. The
Secretary can modify a goal, or determine that it was infeasible, if
economic conditions change.
\18\ 2A Norman J. Singer, Sutherland on Statutory Construction
Sec. 46.06 (5th ed. 1993).
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Low- and Moderate-Income Goal, Section 81.12
The proposed rule provided that 38 percent of the total number of
dwelling units financed by each GSE's 1995 mortgage purchases and 40
percent of their 1996 purchases finance housing for low- and moderate-
income families. In 1994, Fannie Mae reported that its performance was
45.83 percent under the Low- and Moderate-Income Goal in the Interim
Notice of Housing Goals; Freddie Mac reported its performance as 37.46
percent. As detailed in the appendices, the Secretary determined that
the conventional conforming market for this goal is 48-52 percent. This
final rule requires that 40 percent of the total number of dwelling
units financed by each GSE's mortgage purchases in 1996 and 42 percent
in 1997-1999 be affordable to low- and moderate-income families.
Fannie Mae objected to the goal set forth in the proposed rule,
recommending a permanent goal of 38 percent, unless and until the
economic environment changes significantly. Other commenters stated
that the goal was not high enough to challenge the GSEs to increase
their mortgage purchases for low- and moderate-income housing. These
commenters emphasized the leadership capacity of the GSEs and indicated
that an increase in secondary market activity by Fannie Mae and Freddie
Mac would help the industry as a whole, because the GSEs' business
decisions influence the rest of the market.
The Low- and Moderate-Income Housing Goal established in the final
rule is reasonable and appropriate considering the factors set forth in
FHEFSSA. HUD addressed the comments on the potential for fluctuations
in the market by setting the level of the goal conservatively, relative
to market estimates, with the understanding that dramatic changes in
the market may require reevaluation of the level of the goal. However,
current examination of the size of the market available to the GSEs
demonstrates that the number of mortgages secured by housing for low-
and moderate-income families is more than sufficient for the GSEs to
achieve the goal. Appendices A and D provide extensive detail on the
statutory factors considered in establishing the level of the goal.
A number of commenters also requested that the goal include
subgoals, targeting a portion of the GSEs' business to multifamily
housing and a portion to single-family housing. One commenter also
requested the establishment of subgoals to focus a percentage of the
GSEs' business on low-income households and another percentage on
moderate-income households. Such subgoals would ensure that the GSEs
undertake more complex and more time-consuming, and less standard,
business to achieve the goal. Subgoals are not established at this time
because: (1) The statute provides that subgoals under the Low- and
Moderate-Income Goal are unenforceable; (2) subgoals suggest
micromanagement of the GSEs' business decisions and unnecessary
regulatory interference by HUD; and (3) the Low- and Moderate-Income
Goal was designed to focus a portion of the GSEs' business on housing
for both low- and moderate-income families, whether that housing is
single-family or multifamily, rental or owner-occupied: a unitary goal
should achieve this purpose.
Central Cities, Rural Areas, and Other Underserved Areas Goal, Section
81.13
This section of the preamble discusses the public comments on the
Central Cities, Rural Areas, and Other Underserved Areas Goal
(``Geographically Targeted Goal''), first for urban and then for rural
mortgage purchases financing housing in these areas. It also addresses
a cross-cutting issue of the legal basis for defining the
Geographically Targeted Goal in the manner implemented by this rule.
Level of Geographically Targeted Goal
The Central Cities, Rural Areas, and Other Underserved Areas Goal
(``Geographically Targeted Goal'') is established in this rule at 21
percent of GSE business in 1996, and 24 percent in 1997-1999. Under the
proposed rule, the Geographically Target Goal would have been
established: for 1995, at 18 percent; for 1996, at 21 percent; for 1997
and 1998, a percentage ranging from 21 percent to the proportion or
percentage or mortgages qualifying under the goal that are originated
in that year's market (``the amount of the market'') or the amount of
the market plus an additional percentage; and for each year after 1998,
a percentage ranging from 21 percent to the amount of the market or the
amount of the market plus an additional percentage or, if HUD does not
set an annual goal for those years, the goal for such years shall be
the same as the most recent goal established by HUD pending further
adjustment by HUD through rulemaking. In Appendix D, HUD estimates that
the mortgage market in the areas covered by this goal will account for
25-28 percent of the total number of newly mortgaged dwelling units. In
1994, 29 percent of Fannie Mae's purchases financed dwelling units
located in all underserved areas, as defined in the final rule,
compared with 24.2 percent of Freddie Mac's purchases.
Mortgage Purchases in Metropolitan Areas, Including Central Cities and
Other Underserved Areas
The rule provides that for properties in metropolitan areas,
mortgage purchases will count toward the goal when such purchases
finance properties that are located in census tracts where either the
median income of families in the tract does not exceed 90 percent of
the area median income, or minorities comprise 30 percent or more of
the
[[Page 61855]]
residents and the median income of families in the tract does not
exceed 120 percent of the area median income. This definition has been
revised from that in the proposed rule which encompassed areas at 80
percent (rather than 90 percent) of median income.
As detailed in Appendix B, this goal emerges from HUD's
consideration of the six statutorily mandated factors for establishing
the goal, supported by HUD's and other researchers' analyses of
mortgage lending data. The final rule's use of a census-tract-based
approach to identify underserved metropolitan areas is supported by the
legislative history of FHEFSSA.
The final rule's definitions of central cities and other
underserved areas, as the underserved census tracts of these areas,
encompass 47 percent of metropolitan census tracts and 44 percent of
metropolitan residents. The average mortgage denial rate in these
tracts is 21 percent--almost twice the denial rate in the non-included
tracts. The definition in the final rule adds 3,657 tracts to the
definition in the proposed rule. These added tracts also have
significant problems with access to mortgage credit, as evidenced by
relatively high mortgage denial rates.
The commenters' recommendations for the underserved area definition
as it applies to central cities and other underserved areas can be
organized into three categories: (1) count all mortgages in OMB-defined
central cities; (2) count mortgages in certain census tracts, as in the
proposed rule or defined more broadly than under the proposed rule; and
(3) modify the list of OMB-defined central cities to include or exclude
various cities.
Tract-Based Versus Whole-City Approaches
Fannie Mae strongly objected to HUD's census-tract-based
formulation of this goal, insisting that the goal should include
``central cities,'' as defined as such on lists issued periodically by
OMB, in addition to high-minority or low-income census tracts in the
remaining portions of metropolitan areas as well as rural areas. Fannie
Mae's objections were based on both policy and legal arguments; the
discussion of the policy issues follows immediately and the legal
arguments are considered at the end of this section of the preamble.
Fannie Mae commented that its experience in developing partnerships
with central cities demonstrates that including only underserved
segments of central cities and rural areas, thereby focusing Fannie
Mae's attention especially on low-income or minority communities, would
be a mistake. Fannie Mae stated that ``community leaders, Congress, and
many national policy makers argue that the health of low-income and
minority communities within central cities is tied directly to the
overall health of the community.''
A number of commenters also disagreed with the proposed rule's use
of a census-tract-based approach, arguing that it did not reflect the
manner in which political leaders, real estate professionals, and
lenders work in cities. According to the Mortgage Insurance Companies
of America, ``rewriting the geographic goals to narrow them
substantially is inconsistent with the objective of improving cities.''
The MBA expressed concern that the criteria for the Geographically
Targeted Goal would exclude areas that are experiencing or are about to
experience ``transitioning minority and low-income demographic
patterns''; MBA recommended that HUD broaden the areas covered. The
National Association of Realtors (NAR) noted that, conceptually,
excluding certain parts of central cities from the definition should
not result in less mortgage activity for those cities, because ``such
an approach could actually improve overall credit flows by focusing GSE
attention on those specific areas most in need.'' However, NAR went on,
``actual marketplace dynamics are more complex than the theory,'' and
called for a ``more holistic approach to addressing the mortgage credit
needs of the central cities.''
Other commenters supported the idea of targeting by means of census
tracts, as proposed. Although Freddie Mac commented that the scope of
the goal should be broadened, Freddie Mac ``applaud[ed] the Secretary's
general methodological approach in defining what areas should be
included'' in the Geographically Targeted Goal. Representative Joseph
P. Kennedy ``strongly support[ed] the idea of not using the OMB
definition of central cities for this goal, since it is clear that the
OMB definition does not identify areas underserved by the mortgage
markets.'' The American Bankers Association (ABA) commented that using
the OMB list of central cities ``has not done enough to focus the GSEs
on the truly underserved portions of urban markets;'' it favored
targeting the GSEs' activities on underserved areas, rather than entire
cities. The Local Initiatives Support Corporation (LISC) agreed that
jurisdictional boundary lines were not particularly useful in
identifying places that need better access to mortgage credit and noted
with approval that the proposed rule ``dovetails with new regulations
implementing the Community Reinvestment Act which also focus on low-
income geographies.''
HUD's Analysis of Metropolitan Underserved Areas
Under FHEFSSA, HUD may define the terms ``central cities'', ``rural
areas'', and ``other underserved areas''. The research conducted by the
GSEs, other mortgage-market economists, and HUD supports the premise
that the location of a census tract--whether it is within a central
city or not--has minimal impact on whether the tract is underserved.
Instead, these studies have found that mortgage availability in a
census tract is strongly correlated with the minority concentration or
median income of that tract. The most thorough studies available
demonstrate that areas with lower incomes and higher shares of minority
residents consistently have poorer access to mortgage credit, with
higher denial rates and lower origination rates for mortgages. With
income, minority composition, and other relevant census tract variables
controlled for, differences in credit availability between central
cities and suburbs are minimal.
Under its contract with HUD, the Urban Institute evaluated the
proposed definition of central cities and underserved areas, as well as
the use of various alternatives advanced by commenters. The Urban
Institute researchers criticized the use of the OMB definition of
central cities--encompassing all areas of designated cities--because
that definition treats all areas in central cities as if they have
equal mortgage-access problems, when, in fact, areas within central
cities are not homogeneous in this regard.19 Use of the OMB
definition of central cities, as advanced by Fannie Mae, would add
8,833 central city tracts to the 13,554 central city tracts included
under this final rule's definition. Credit access is not a problem in
these added tracts--their mortgage denial rate is 11 percent, or half
of the average denial rate in the tracts covered by this final rule.
Based on comparisons such as these, HUD has concluded that a targeted
approach for defining underserved areas is required, to target the goal
and the GSEs' activities to assuring access to mortgage credit in
central cities.
\19\ Urban Institute, George Galster, ``Comments on Defining
`Underserved' Areas in Metropolitan Regions,'' prepared for the U.S.
Department of Housing and Urban Development, August 15, 1995.
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HUD considered the comments that this goal should facilitate
coordination of GSE outreach with the efforts of city governments to
expand investment in
[[Page 61856]]
their jurisdictions. The Secretary does not believe the more targeted
approach adopted in this rule inhibits such valuable coordination. Many
urban revitalization programs and reinvestment efforts, in fact, target
specific neighborhoods and areas, rather than an entire city. These
programs operate on the common-sense premise that targeting all areas
would result in no meaningful targeting. Cities use a neighborhood-
based approach, for example, in implementing their Community
Development Block Grant programs, defining enterprise communities and
empowerment zones, and focusing the activities of redevelopment
authorities.
HUD also considered the argument that the lending industry is
oriented toward market areas defined in city-wide terms. However, the
lending industry does not generally approach lending activity from a
city-wide perspective. Lenders generally try to achieve geographic
diversification within a city, making distinctions among submarkets.
Further, the efforts of lenders to comply with the Community
Reinvestment Act 20 are clearly census-tract-based and are
targeted to neighborhoods, not to all parts of a city.
\20\ The Community Reinvestment Act, 12 U.S.C. 2901 et seq.,
generally requires financial institutions to meet the credit needs
of the communities in which the institutions are located.
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Broaden Tract-Based Approach
Freddie Mac's major observation on the scope of the goal was that
the definition of underserved areas should be expanded to include
census tracts where: (1) the median income of families is not greater
than 100 percent of the area median income; or (2) 20 percent or more
of the residents in the census tracts are minority.
This alternative definition would add substantially more tracts to
the goal, and these tracts have substantially lower denial rates than
the tracts included under the final rule. This is noteworthy because it
indicates that Freddie Mac believes that access to credit is more
limited in more areas throughout the nation than does HUD. The mortgage
credit denial rate for the tracts added by the Freddie Mac definition
is 15 percent, which is only slightly higher than the denial rate for
all metropolitan areas and is significantly less than the 21 percent
denial rate in the tracts covered by the goal established in the final
rule.
Freddie Mac commented further that if the Secretary increased the
scope of the goal to include moderate-income census tracts, a broad,
geographically-based goal would be established, which would be
consistent with the Low- and Moderate-Income Goal and Congress's
intention not to ``force the enterprises to `target' to meet niche
markets.'' HUD does not believe that the final rule's definition, which
covers nearly half of all metropolitan residents, defines a niche
market.
Finally, HUD notes in response to criticism that the goals overlap,
that the three goals established by Congress are distinct. In contrast
to the other goals, income of borrowers is not used in the
Geographically Targeted Goal as a requirement, but as a proxy for those
areas that are underserved by mortgage markets, based on the lower
origination and higher denial rates found in low-income census tracts.
The Geographically Targeted Goal does not depend on the income or
minority status of the individual borrower; the location of the
property determines whether units count under the goal. Some overlap,
however, among the goals can be expected, given the close relationship
between the purposes of serving low- and moderate-income families and
promoting ``access to mortgage credit throughout the Nation (including
central cities, rural areas, and underserved areas) * * *.'' 21 To
the extent that overlap exists, the rule takes this into account, by
providing that mortgage purchases may count toward each of the goals.
\21\ Sections 1381(a)(4) and 1382(a)(4) of FHEFSSA.
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Modify OMB List of Central Cities
Fannie Mae suggested that HUD could exclude from the OMB ``central
cities'' list some central cities that do not qualify, statistically,
as underserved. MBA, which recognized problems with the OMB list, and
the National Association of Affordable Housing Lenders recommended
developing criteria for excluding well-served cities from the OMB list.
A large mortgage company commented that the Secretary should use OMB's
list of central cities and then add other cities that clearly have
underserved needs, but are not on OMB's list. The National Association
of Home Builders (NAHB) recommended that HUD develop a formula for
excluding from the OMB list the higher-income cities, and then adding
``underserved'' areas of other central cities and certain other non-
rural jurisdictions.
The Secretary has carefully considered whether modifying the OMB
list of Central Cities will address the fundamental concern with
continued use of the OMB definition: is it consistent with the
congressional intent to focus a portion of the GSEs' business on
communities that are underserved by the mortgage markets? Modifying the
OMB list to eliminate well-served cities, or retaining the OMB list and
adding distressed non-central cities, does not meet this fundamental
concern. In most cities, some parts are not underserved. Retaining the
bulk of OMB-defined central cities would include many well-off areas
that are not experiencing mortgage credit problems, and it would not
appropriately focus the GSEs on those urban neighborhoods that require
particular attention from the mortgage markets.
Mortgage Purchases in Nonmetropolitan Areas
The final rule provides that for properties in non-metropolitan
areas, mortgage purchases will count toward the Geographically Targeted
Goal where such purchases finance properties that are located in
counties where: either minorities comprise at least 30 percent of the
residents and the median income in the county does not exceed 120
percent of the State nonmetropolitan median income; or the median
income does not exceed 95 percent of the greater of the State or
nationwide nonmetropolitan median income.22
\22\ In New England, portions of counties that are outside
metropolitan areas are used in place of counties.
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This section of the preamble briefly discusses the nature of rural
lending, describes the basic characteristics of HUD's definition of
rural areas, and provides HUD's responses to comments received on the
definition of rural areas.
Problems in Rural Lending
Defining ``rural areas'' requires a different approach than
defining ``central cities'' and ``other underserved areas'' because of
the lack of mortgage data in nonmetropolitan areas, differences in
housing needs between urban and rural areas, and the difficulty of
implementing mortgage programs at the census tract-level 23 in
rural areas. As discussed in Appendix B, evaluating which rural
locations are underserved in terms of access to mortgage credit cannot
be done with HMDA data, on which HUD mainly relied in defining urban
underserved areas. There are few conclusive studies on access to
mortgage credit in rural areas, and the studies that do exist only
suggest broad
[[Page 61857]]
conclusions about credit flows in these areas.
\23\ Block Numbering Areas (BNAs) in rural areas correspond to
census tracts in metropolitan areas. For the sake of simplicity, in
this section this rule refers to BNAs as census tracts.
---------------------------------------------------------------------------
For this reason, HUD consulted with researchers from academia, the
Department of Agriculture (USDA), the Census Bureau, and the Housing
Assistance Council (HAC). HUD also conducted a series of forums to
solicit information on rural mortgage markets from rural lenders, rural
housing groups, and the GSEs. The discussions at the forums focused on
the unique nature of mortgage lending and the role of the secondary
market in rural areas.
Mortgage lending in rural areas is very different from lending in
urban areas. The heterogeneity of housing types, the nontraditional and
often seasonal incomes of rural borrowers, and the lack of credit
history for many rural borrowers make underwriting in rural areas
difficult for lenders. Appraisers lack comparable sales data or must
rely on comparables over 1-year old or in a nearby town in order to
determine the value of a property.
Participation of rural lenders in the secondary market is limited.
The low volume of loans originated by rural lenders serving smaller
rural communities makes rural lending business less profitable, and
thus less attractive, to secondary market firms. Based on 1991
Residential Finance Survey data, which is supported by information from
rural lenders and the USDA, rural lenders are more likely than urban
lenders to make short-term loans, 3- to 5-year balloon mortgages, or
adjustable rate mortgages and to hold mortgages in portfolio. Larger
financial institutions, which have experience with the secondary
market, often target the larger rural communities and focus less on
remote areas.
Some studies report significant barriers to accessing mortgage
credit in remote areas and areas with high concentrations of minorities
and low-income households. Barriers include lower lender participation
in Federal mortgage credit programs such as those of the Rural Housing
and Community Development Service, the Federal Housing Administration,
and the Department of Veterans Affairs, lack of financial capacity
among lenders, lack of private mortgage insurance, and a decreasing
number of lending institutions located in rural communities as a result
of the savings and loan crisis of the 1980s.
Characteristics of HUD's Rural Areas Definition
Recognizing both the difficulty in defining rural areas and the
need to encourage GSE activity in such areas, HUD has chosen a
relatively broad, county-based definition of rural areas as the
underserved areas outside of a metropolitan area. HUD's definition
includes 1,511 of the 2,305 counties in nonmetropolitan areas and
accounts for 54 percent of the nonmetropolitan population.
Response to Public Comments
County-Based Definition. Most commenters, including the GSEs, had
argued that a definition based on rural census tracts was ill-advised
because lenders in rural areas do not understand or lend on the basis
of census tracts. Fannie Mae commented that census tracts have ``no
practical meaning'' in rural areas from a marketing standpoint and that
geographic measurements used in the rule should be ``widely understood,
easily measured, and practical from a marketing point of view,'' but
that census tracts in rural areas ``fail these tests.''
Freddie Mac joined Fannie Mae in arguing that the use of a rural
definition based on census tracts was ill-advised because of geocoding
inaccuracies.24 Freddie Mac added that the rule, as proposed would
have automatically excluded single census-tract counties, such as parts
of Texas, which, Freddie Mac noted, include some of the poorest
counties in the country.25
\24\ Geocoding is the process by which a lender or the GSE
identifies the location of a property's address by census tract,
postal code, or some other geographic identifier.
\25\ Freddie Mac noted that, by definition, these tracts will
have median family income equal to 100 percent of the county [tract]
median, thus making them, under the proposed rule, ineligible for
the Geographically Targeted Goal based on income.
---------------------------------------------------------------------------
In contrast, some commenters, such as HAC, noted that a county-
based definition is not as targeted as a tract definition, because it
excludes tracts that could be considered underserved in otherwise-
served counties and includes tracts that could be considered adequately
served in underserved counties. HAC cited its own analysis of a
multitude of data and commented that the appropriate criterion for
rural underserved areas would be census tracts with at least 20 percent
minority residents and not more than 100 percent of area-wide median
income, and that the secondary ``income-only'' criterion should be 90
percent of area-wide median. HAC presented statistical evidence to show
that its recommended definitions would: (1) capture a higher percentage
of underserved nonmetropolitan areas; and (2) solve the problem of
omission of census tracts with predominantly white populations. HAC
also recommended supplementing the income and income/minority
population criteria with a special rural area criterion related to
remoteness (such as the Beale codes 26) and sparse population.
\26\ Beale codes are used by the Economic Research Service (ERS)
to classify nonmetropolitan counties according to urban population
size and adjacency to metropolitan areas.
---------------------------------------------------------------------------
This final rule uses the county designation, rather than a census
tract-based definition. Counties are easy to identify and geocode,
which will simplify the reporting process for lenders who provide the
GSEs with loan-level data on mortgages. County boundaries in rural
areas are commonly recognized by housing industry representatives
involved in the loan and marketing process, including lenders and
appraisers.
Even though HUD recognizes that a census-tract definition better
targets underserved areas, HUD has decided to use a county-based
definition in rural areas because the operational difficulties
associated with applying census tract boundaries outweigh the benefits
of improved targeting of underserved rural areas. HUD recognizes that,
under its county-based definition, the GSEs could achieve the goal by
purchasing mortgages primarily located in the parts of underserved
counties that have higher incomes. Although 21 percent of the
homeowners who live in underserved counties under this definition
reside in served tracts, these tracts accounted for 39 percent of GSE
purchases in 1994. HUD will require the GSEs to continue to report
nonmetropolitan mortgage purchases at the tract level as they have done
for 1993 and 1994, to enable HUD to assess the desirability of
refinement of the definition in the future.
Area for Median Income. Both Freddie Mac's and Fannie Mae's
comments on the proposed rule's census tract definition in non-
metropolitan areas recommended that tract median income be compared to
the greater of county median income or statewide nonmetropolitan median
income, to ensure the inclusion of poor tracts in poor counties.
Freddie Mac noted that using only county median income could have the
result that census tracts ``that would be considered poor by any
realistic measure * * * would nonetheless be excluded from the goal's
coverage because they happen to be in a very poor county.''
Accordingly, for purposes of the definition of ``rural areas,'' the
rule's new definition of ``underserved areas'' provides that the median
income for a county is compared to the greater of State or nationwide
nonmetropolitan median
[[Page 61858]]
income. Comparing county median income to the greater of statewide
nonmetropolitan or nationwide nonmetropolitan median income ensures
that poor counties in poor States will be included in the definition of
rural areas.
Moreover, the addition of the nationwide designation of median
income addresses a concern expressed by HAC that the proposed
definition cover states that have counties with high poverty rates but
low minority concentrations. With the nationwide designation, counties
in poor States, such as Fulton County, Kentucky, which has a 30 percent
poverty rate, will be included as rural areas. The county median income
is low relative to national median income, but not low relative to
State median income. Without availability of comparison to nationwide
income, Fulton County would not be considered a rural area.
Remote Areas. HAC expressed concern that remote rural areas are
more likely to be underserved than those closer to urban areas. NAHB
also addressed the issue of rural remoteness and recommended that HUD
include counties in certain Beale Codes based on their rural character,
low urbanization, and non-adjacency to a metropolitan area. The rule's
revised nonmetropolitan county definition adequately targets remote
counties. The definition picks up 84 percent of the population that
reside in remote counties, as determined by Beale Codes.
Geographic Coverage of Rural Areas and Demographic Indicators. HUD
uses two demographic indicators--median income and minority
concentration--to identify rural areas. These two indicators correlate
with the common characteristics of underservedness. Fannie Mae
recommended that the rural definition include no demographic
indicators, stating ``the geographic goal was not supposed to focus on
fractions of geographic areas.'' Fannie Mae's definition of rural
areas, therefore, would include all nonmetropolitan counties. As noted
below, HUD does not agree that the Geographically Targeted Goal was
meant to include all rural areas.
Freddie Mac suggested that HUD use a definition covering rural
areas where median income was at or below 100 percent of State median
or where 20 percent of the population was minority. Under Freddie Mac's
definition, 221 counties in addition to those covered by the definition
on the final rule, covering an additional 5.97 million people, would be
considered rural areas. Because HUD does not consider these additional
counties as being underserved by the mortgage market, HUD is not
including these additional counties in its definition of rural areas.
Legal Authority To Limit Goal to Underserved Portions
As noted above, part of Fannie Mae's justification of a definition
using whole ``central cities'' as defined by OMB was based on Fannie
Mae's interpretation of FHEFSSA. HUD believes that Fannie Mae has
interpreted the statutory language too narrowly, and that FHEFSSA did
grant HUD latitude to select from among reasonable definitional
approaches to establish a goal that is appropriately targeted toward
areas underserved by the mortgage lending industry.
Fannie Mae's comments and an opinion prepared for Fannie Mae by the
law firm of Arnold and Porter, and submitted with Fannie Mae's
comments, raised several legal objections to the proposed rule. One
argument was that HUD cannot apply the qualifier ``underserved'' to
limit central cities or rural areas to only portions of central cities
or rural areas that are underserved.
While FHEFSSA does not refer to ``underserved areas of central
cities'' or ``underserved areas in rural areas,'' a general rule of
statutory construction provides that, to determine the word or words to
which the antecedent applies, one may look to legislative
history.27 ``Where the sense of the entire act requires that a
qualifying word or phrase apply to several preceding or even succeeding
sections, the word or phrase will not be restricted to its immediate
antecedent.'' 28
\27\ United States v. Brandenburg, 144 F.2d 656, 660-61 (3d Cir.
1944) (``a clause modifies that antecedent which the draftsman
intended it to modify'').
\28\ Sutherland Secs. 47.33 and 47.26. See also State v. McGee,
122 Wash.2d 783, 864 P.2d 912, 914 (1993); Nemzin v. Sinai Hospital,
143 Mich. App. 798, 372 N.W.2d 667, 668-69 (1985).
---------------------------------------------------------------------------
The legislative history of FHEFSSA makes clear that the goal is to
address underserved areas. In explaining the conference bill on the
floor of the Congress, then-Chairman Gonzalez stated: ``In establishing
the definition of a central city and in determining compliance with
such a goal, the Secretary should, to the extent possible, exclude
purchases made in non-low income census tracts that happen to otherwise
be within the central cities area.'' 29 Focusing on ``inner-
cities'' rather than entire OMB cities, the legislative history
provides that ``[t]he purpose of these goals is * * * to service the
mortgage finance needs of low- and moderate-income persons, racial
minorities and inner-city residents,'' and noted that ``mortgage
discrimination and redlining have effectively disadvantaged certain
geographic areas, particularly inner city and rural areas.'' 30
\29\ 138 Cong. Rec. H11453, H11457 (daily ed. Oct. 5, 1992).
Rep. Gonzalez made the identical statement at 138 Cong. Rec. H11077,
H11099 (daily ed. Oct. 3, 1992).
\30\ S. Rep. at 32, 34, and 41 (emphases added). See also 138
Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of Sen.
Riegle) (``inner-city lending * * * is a very important part of this
legislation'').
---------------------------------------------------------------------------
The ``Plain Meaning''
Fannie Mae commented that the plain meaning of FHEFSSA had been
breached by HUD in changing the definition of ``central cities'' from
the transition definition and that Congress did not intend that HUD
revise that definition in the years following the 2-year transition
period. For the transition years of 1993-94, FHEFSSA mandated that the
Geographically Targeted Goal be directed only to ``central cities'' as
defined by OMB, and HUD extended this approach to 1995 by regulation.
However, following the transition, FHEFSSA authorized the Secretary to
define central cities and to expand the goal to target ``rural areas''
and ``other underserved areas.'' Fannie Mae commented that Congress
intended that only ``other'' underserved areas--that is, areas in
addition to central cities and rural areas generally (which, Fannie Mae
declared, also were to be considered ``underserved'')--be subject to
HUD redefinition in the rule. Fannie Mae commented that ``Congress
actually provided the definition of `central cities' in the subsection
on the two-year transition period. . . . There is no indication in the
statute that Congress intended the definition of `central cities' to be
restricted or narrowed after the two-year transition period.''
Section 1334(d)(3) of FHEFSSA did define ``central cities'' as the
OMB list of central cities. Congress, however, placed that definition
in the transitional provisions of the Geographically Targeted Goal and
thereby limited it to the transition period (1993-94). Had Congress
chosen for HUD to continue using that definition after the transition
period, Congress could have placed the definition in the general
definition section of FHEFSSA. Congress did not do so.
Fannie Mae's argument that HUD must continue with the transition
period definition of central cities would effectively render
superfluous the language of the statute that explicitly limits the
application of the definition to the transition period. The argument,
[[Page 61859]]
thus, would controvert the general rule of statutory construction that
effect must be given, if possible, to every word, clause and sentence
of a statute.31 ``A statute should be construed so that effect is
given to all its provisions, so that no part will be inoperative or
superfluous, void or insignificant, and so that one section will not
destroy another unless the provision is the result of obvious mistake
or error.'' 32
\31\ Sutherland Sec. 46.06. See also United States v. Menasche,
348 U.S. 528, 538-39 (1955); Moskal v. United States, 498 U.S. 103,
109-10 (1990).
\32\ Sutherland Sec. 46.06. See also United States v. Talley, 16
F.3d 972, 975-76 (8th Cir. 1994); Bridger Coal Co./Pacific Minerals,
Inc. v. Director, Office of Workers' Compensation Programs, United
States Dept. of Labor, 927 F.2d 1150, 1153 (10th Cir. 1991).
---------------------------------------------------------------------------
``Rural Areas'' and ``Central Cities'' Are Not Terms of Art
Fannie Mae also asserted that ``central cities'' is a term of art
in housing legislation and that ``rural areas'' has a clear meaning.
Fannie Mae commented that OMB has never limited its list of cities in
the manner contemplated by the proposed rule. HUD's definition,
therefore, is inconsistent with commonly understood meaning and
contradicts FHEFSSA's purpose. Fannie Mae argued that the definition of
``central cities'' for the transition period ``is a clear indication of
the type of definition that Congress had in mind when considering this
goal.''
The terms ``central cities'' and ``rural areas'' are not terms of
art and do not have clear meanings. While other statutes and
regulations contain definitions of ``central cities'' and ``rural
areas,'' these definitions are not uniform. With respect to ``central
cities,'' the fact that Congress felt the need to define ``central
cities'' for the transition period indicates that the term may have
more than one reasonable interpretation. In fact, different Federal
agencies define central cities differently.33
\33\ Compare 55 Fed. Reg. 12155 (Mar. 30, 1990) (definition of
``central cities'' used by the Statistical Policy Office of OMB)
with 41 C.F.R. Sec. 101-17.003-35 (General Services Administration's
Federal Property Management Regulations).
Related definitions used by the Bureau of the Census, define
``urbanized area central places'' in a manner which indicates that
the ``central'' area could be only a portion of a political unit.
The Bureau of the Census provides that for extended cities, an
``urbanized area central place'' includes those metropolitan area
central cities entirely or partially within the urbanized area, but
that only the urban portion of an extended city is classified as
central. 55 Fed. Reg. 42593 (Oct. 22, 1993).
---------------------------------------------------------------------------
Fannie Mae's comments concede that the term ``rural areas'' has no
established meaning in housing legislation. While other statutes and
regulations contain definitions of ``rural areas,'' these are not
uniform.34 Moreover, while the terms ``central cities'' and
``rural areas'' have been used in other statutes, the purposes of those
statutes have been very different, i.e., they have not been designed to
set goals for providing mortgage credit to such areas. For example,
OMB's statutory authority for defining central cities is the Paperwork
Reduction Act, and OMB's purpose is to define areas that are
``central'' to a large geographic area. OMB established criteria for
central cities which were relevant to this charge. Were HUD to focus on
the same criteria, HUD would be taking into account factors that are
not directly relevant to determining whether an area is underserved by
mortgage credit.
\34\ See, e.g., 42 U.S.C. 11501(a)(2)(B); 24 CFR 596.3
(definition based on having population of less than 50,000 and being
outside of a Metropolitan Statistical Area (MSA)); 12 U.S.C.
2019(b)(3) (definition based simply on having a population of 2500
or less); 42 U.S.C. 294o(e) (definition based simply on being
outside of an MSA).
---------------------------------------------------------------------------
The construction given to a term in one statute is not to be
imparted to the construction of the same or similar term in another
act, or even another section of the same act, if the purposes of the
two acts or sections are different.35 Given the different purposes
of the statutes and regulations defining ``central cities'' and ``rural
areas,'' those definitions do not bar HUD from, and in fact mitigate in
favor of HUD's, adopting definitions for these terms more consistent
with the overall structure and purposes of FHEFSSA and its legislative
history.
\35\ Laffey v. Northwest Airlines, Inc., 567 F.2d 429, 461-62 n.
230 (D.C. Cir. 1976), cert. denied, 434 U.S. 1086 (1978).
---------------------------------------------------------------------------
Special Affordable Housing Goal, Section 81.14
FHEFSSA requires the Secretary to establish Special Affordable
Housing Goals for the GSEs' mortgage purchases on rental and owner-
occupied housing to meet the then-existing unaddressed needs of, and to
be affordable to, low-income families in low-income areas and very-low-
income families. Under the proposed rule, the goal was equally divided
between rental (single-family and multifamily) and owner-occupied
housing. The rental portion of the goal was targeted to very-low-income
families while the owner-occupied portion targeted very-low-income
families in addition to low-income families in low-income areas.
In response to comments received and upon further consideration by
the Secretary, this final rule substantially changes the proposed
rule's formulation of the Special Affordable Housing Goal. First,
mortgage purchases financing housing for low-income renters in low-
income areas now count toward achievement of the goal. Second, the
equal division between rental and owner-occupied housing has been
removed. Instead, each GSE may choose the type of housing (rental,
owner-occupied, single-family, or multifamily) to finance to achieve
the goal. However, the goal does require a set minimum of each GSE's
purchases to be multifamily mortgages. Finally, the goal allows
dwelling units affordable to low-income families in multifamily
properties to count where thresholds, based on the LIHTC thresholds,
are met.
The final rule provides that the Special Affordable Housing Goal
for 1996 is 12 percent of the total number of dwelling units financed
by each GSE's mortgage purchases. The goal for 1997-1999 and pending
new goals is 14 percent. Of the total Special Affordable Housing Goal,
each GSE must annually purchase multifamily mortgages in an amount at
least equal to 0.8 percent of the total dollar volume of mortgages
purchased by the respective GSE in 1994. In Appendix D, HUD estimates
that 20-23 percent of the conventional conforming mortgage market would
qualify under the Special Affordable Housing Goal. In 1994, 16.7
percent of Fannie Mae's purchases financed dwelling units that would
count toward the achievement of this goal, as defined in the final
rule, compared with 11.4 percent of Freddie Mac's purchases. In 1994,
Fannie Mae purchased $1.91 billion of mortgages on multifamily housing
that would have counted toward the achievement of this goal, or 1.25
percent of its total 1994 business. In 1994, Freddie Mac purchased $425
million of mortgages on multifamily housing that would have counted
toward this goal, or 0.36 percent of its total 1994 business.
Rental and Owner Subgoals
Both GSEs' objected to the fact that the proposed rule would have
imposed a 50-50 split between rental and owner-occupied housing for the
Special Affordable Housing Goal. Fannie Mae commented that the
Secretary ``failed to provide an acceptable rationale'' for dividing
the Special Affordable Housing Goal equally between rental and owner-
occupied dwelling units and provided ``no compelling justification''
for such a split. Freddie Mac also commented that the creation of
subgoals for rental and owner-occupied housing made it more difficult
to attain the overall goal--even under circumstances in which
performance on the owner-occupied subgoal might far surpass the level
set by the regulation.
[[Page 61860]]
Fannie Mae also commented that the even split between rental and
owner-occupied housing would ``significantly alter'' the basic
character of the goal. While Fannie Mae achieved all four subgoals
during the transition years 1993-1994, Fannie Mae stated that it had
done so by ``significantly larger margins'' in its single-family
business, and that this relative ease in meeting subgoals in owner-
occupied housing reflected the relative shares of Fannie Mae business
represented by single-family and multifamily acquisitions.
Congress intended that the Secretary have broad authority to
redesign the sub-categories under the goal. The Senate Report states,
``During a transition period, specific dollar amounts are set for four
separate income and housing categories to emphasize that each of these
areas needs attention. After the experience of the first two years, the
[Secretary] may redesign the categories to target more effectively low-
income family needs and reflect any gaps in GSE performance.'' 36
Moreover, FHEFSSA provides that goals should be established for
``rental and owner occupied housing.'' 37 The Secretary considered
the statutorily prescribed factors in section 1333(a)(2) prior to
establishing the proposed goal and, therefore, the Secretary's actions
were neither arbitrary nor capricious. Notwithstanding the fact that
the proposed rule would have withstood judicial scrutiny, the Secretary
determined for policy reasons to revise the Special Affordable Housing
Goal. These revisions include removing the 50-50 split between renter
and owner-occupied housing, and replacing it with a more flexible
division.
\36\ S. Rep. at 37.
\37\ Paragraph 1333(a)(1).
---------------------------------------------------------------------------
Level of Special Affordable Housing Goal
Freddie Mac commented that the Special Affordable Housing Goals
proposed for 1995 and 1996 are ``unrealistically high and very likely
infeasible within the meaning of the Act.'' Fannie Mae agreed, arguing
that the proposed level of the goal is unreasonable and recommending
that the Secretary establish the Special Affordable Housing Goal at no
more than 8 percent. Fannie Mae considered the proposed 11 and 12
percent goals ``less unreasonable'' if the Special Affordable Housing
Goal included low-income renters in low-income areas. Other commenters,
largely nonprofit organizations, felt that the proposed goals both for
home ownership and rental housing were too low.
The levels of the Special Affordable Housing Goal in the proposed
and final rules are both feasible and reasonable. The Special
Affordable Housing Goal is consistent with updated and further refined
market share data and analyses, and is reasonable given the GSEs' past
performance. While the specifics of the analyses are detailed in
Appendices C and D, the major findings supporting this goal level are
summarized below.
The proposed rule contained an appendix that analyzed market share
data from the American Housing Survey and HMDA. That analysis
demonstrated that the GSEs were purchasing much smaller proportions of
mortgages of very-low-income families originated by the market than
they were purchasing loans of higher-income families. Based on
additional and updated analysis of the market data, the original
conclusion, discussed in the proposed rule--that there are available
mortgages in the very-low-income end of the mortgage market for the
GSEs to increase the share of very-low-income mortgage originations
they purchase--is unchanged. Additionally, analysis of market share
estimates indicates that approximately 20-23 percent of the
conventional conforming mortgage market would qualify under the Special
Affordable Housing Goal as it is defined in the final rule. This
analysis provides further support that the Special Affordable Housing
Goal is both feasible and eminently reasonable.
The GSEs' 1994 performance also indicates that the goal is
achievable. Using the final rule's conventions for what will count
toward the goal, 16.7 percent of Fannie Mae's 1994 business and 11.4
percent of Freddie Mac's would have qualified under the goal.
Authority To Establish Special Affordable Subgoals
Freddie Mac commented that FHEFSSA provides that the Secretary
shall establish ``a'' Special Affordable Housing Goal. Freddie Mac
argued that the Secretary's proposed approach to implementing the
Special Affordable Housing Goal was not authorized by law because, as
proposed, it was either two completely separate goals (one for rental
housing and one for owner-occupied housing) or one goal with two
subgoals.
FHEFSSA authorizes the Secretary, both during the transition and
thereafter, to establish the goal and define portions thereof. It does
not indicate that subgoals are unenforceable or otherwise prevent the
Secretary from defining enforceable portions. For the transition
period, FHEFSSA itself subdivided the Special Affordable Housing Goal
into two separate portions--single-family and multifamily--and went on
to define specifically what counted towards each portion. For the
period following the transition, FHEFSSA provides that the Secretary
``shall establish a special affordable housing goal.'' 38 FHEFSSA
did not define the structure of the goal, but specified that it should
meet the then-existing unaddressed needs of low-income families in low-
income areas and very-low-income families. The legislative history
indicated that, following the transition, the Secretary was to redefine
the goal. Under FHEFSSA and legislative intent, the Secretary has
adequate flexibility to adjust the goals ``to target more effectively
low-income family needs and reflect any gaps in GSE performance.''
39
\38\ Section 1333(a)(1) (emphasis added).
\39\ S. Rep. at 37.
---------------------------------------------------------------------------
Freddie Mac also commented that section 1333 of FHEFSSA, in
establishing the Special Affordable Housing Goal, does not refer to
subgoals. Freddie Mac emphasized that, in contrast, section 1332 of
FHEFSSA, establishing the Low- and Moderate-Income Housing Goal, and
section 1334, establishing the Geographically Targeted Goal,
specifically provided that the Secretary may establish subgoals. To
Freddie Mac, the omission of a similar provision from section 1333
means that such subgoals are not authorized. Freddie Mac relies on the
doctrine of in pari materia, which provides that statutes dealing with
the same matter or subject shall be construed together. Thus, Freddie
Mac argues that sections 1332-34 deal with the same matter, i.e.,
housing goals, and that the Secretary failed to construe those sections
together.
The provisions on subgoals referred to by Freddie Mac at sections
1332 and 1334 concerning the Low- and Moderate-Income Housing Goal and
the Geographically Targeted Goal provide that while the Secretary may
establish subgoals, they are not enforceable. The omission of a similar
provision in section 1333 is not an indication that subgoals or
subcategories within the overall goal are prohibited; rather, such
omission indicates that to the extent that subgoals or subcategories
are promulgated for the Special Affordable Housing Goal, no bar exists
to enforcing them. Since section 1333 contemplates the use of
enforceable subgoals or subcategories, section 1333 does not include
the same type of restriction against enforcing subgoals as do sections
1332 and 1334.
[[Page 61861]]
Rental Versus Multifamily
A number of commenters, including the MBA, the Enterprise
Foundation, the NTIC, the National Low Income Housing Coalition
(NLIHC), and the California Reinvestment Committee, expressed concern
that the proposed Special Affordable Housing Goal did not have an
explicit focus on the multifamily market. They argued that the GSEs
should have some explicit regulatory requirement to purchase
multifamily mortgages, in order to sustain a secondary market for
affordable multifamily loans. These commenters and others recommended
that the Secretary establish a subgoal for the purchase of multifamily
mortgages. Other commenters, including CANICCOR, the National League of
Cities, and the City of Los Angeles, while not recommending an explicit
multifamily subgoal, urged the Secretary to require that the GSEs
support an active secondary market for multifamily loans.
In light of these comments and additional analysis, the Secretary
reconsidered the proposed rule's focus on rental--as opposed to
multifamily--mortgages and has revised the goal. The final rule
provides that a relatively small portion of the goal must be achieved
through the purchase of multifamily mortgages. The remainder of the
goal can be achieved through the purchase of multifamily or single-
family mortgages--whether owner-occupied or 1- to 4-unit rental
properties. A secondary market providing liquidity for financing of 1-
to 4-unit rental properties already exists. In the multifamily arena,
however, a secondary market for affordable multifamily mortgages is
still developing. Given the GSEs' overall experience and financial
strength, it is reasonable to expect that they play major roles in the
development of a stable secondary market for affordable multifamily
mortgages.
Freddie Mac raised concerns that an increased level of multifamily
purchases within the Special Affordable Housing Goal could lead to
credit risk problems. Freddie Mac argued that a higher level of
multifamily purchases may not be possible without relaxing underwriting
standards and purchasing higher-risk properties.
It is the Secretary's intention that the goal ensure that the GSEs
maintain a consistent focus on the very-low-income portion of the
housing market where housing needs are great. Clearly, the intention of
the goal is not to promote or encourage the undertaking of unnecessary
credit risks on the part of the GSEs. The market data presented and
analyzed demonstrates that the level of the Special Affordable Housing
Goal is attainable, and the structure of the goal provides the GSEs
with adequate flexibility to achieve it without taking unnecessary
credit risk. In addition, the Secretary notes that Congress indicated
that ``Freddie Mac should be expected to implement strong multifamily
programs in the near future. The Committee intends that the [goals] be
set at levels consistent with each enterprise having a significant
multifamily program.'' 40
\40\ S. Rep. at 35-36.
---------------------------------------------------------------------------
Units Versus Dollars
Freddie Mac argued that the Secretary's decision to express the
Special Affordable Housing Goal as a percentage of overall units
financed by a GSE is not supported by FHEFSSA and that the statute
requires the Special Affordable Housing Goal to be established in
dollars of mortgage purchases. NAHB provided a critique of a percent-
of-business measurement and urged HUD to retain a dollar-volume target
that could be reset each year based on ``assessment of need, subsidy
availability, and refined market estimates.'' NAHB's concern grows out
of its belief that the Special Affordable Housing Goal, because of its
focus on very-low-income mortgages, is tied to the availability of
public subsidies, which are not market-driven.
Fannie Mae, on the other hand, did not oppose the change to a
percentage-of-business goal and stated that such a goal will ``more
accurately reflect contemporaneous market trends because it is `self-
adjusting'. It is a more equitable and sensible approach to a changing,
and sometimes volatile, market.'' Other commenters, including the
National Council of State Housing Agencies and America's Community
Bankers agreed, describing the percentage-of-business approach as a
more appropriate way to measure the impact of the GSEs' mortgage
purchases.
The Secretary has concluded that the statute permits the Secretary
to set the goals as a percentage of units financed by the GSEs, as long
as the percentage arrived at exceeds the dollar floor prescribed in
FHEFSSA. Section 1333(a)(1) of FHEFSSA provides: ``The special
affordable housing goal established under this section for [a GSE]
shall not be less than one percent of the dollar amount of the mortgage
purchases by the [GSE] for the previous year.'' (emphasis added)
When interpreting a statute, a court should only go beyond the text
of a statute if the text is ambiguous.41 Such interpretation of
FHEFSSA reveals that it requires the Secretary to: (1) Establish a
Special Affordable Housing Goal; and (2) establish the Special
Affordable Housing Goal so that it will equal or exceed the one percent
dollar amount in section 1333(a)(1). Courts will not reject the literal
meaning of a statute unless such an interpretation ``leads to absurd
results when applied.'' 42 In this case, the Secretary's
interpretation of section 1333(a)(1)--to allow the Secretary to
establish the Special Affordable Housing Goal as a percentage of
dwelling units financed, while ensuring that the Special Affordable
Housing Goal will be set high enough to meet the floor or minimum
required under section 1333(a)(1)--is consistent with FHEFSSA and
appropriate policy.
\41\ National Tax v. Havlik, 20 F.3d 705 (7th Cir. 1994).
\42\ Blue Cross v. Weitz, 913 F.2d 1544, 1548 (11th Cir. 1990).
---------------------------------------------------------------------------
The Secretary recognizes the validity of the concerns expressed by
Freddie Mac and several other commenters that financing for affordable
multifamily units is tied to the availability of public subsidies,
which are not market-driven. Therefore, the final rule establishes the
multifamily portion of the goal as a percentage of each GSE's business
in 1994, rather than for each year. The Secretary believes that 1994
was a reasonable baseline year for the GSEs, given the decline in
mortgage originations. Consequently, 1994 represents a reasonable
baseline from which to calculate a portion of the Special Affordable
Housing Goal that should be devoted to multifamily mortgages.
Low-Income Renters in Low-Income Areas
Under the proposed rule, the Special Affordable Housing Goal would
have been directed to rental housing for very-low-income families and
to owner-occupied housing for low-income families in low-income areas
and very-low-income families. Both GSEs argued that the Special
Affordable Housing Goal must also be targeted to mortgage purchases on
housing for low-income renters in low-income areas and that this
category was improperly excluded from the proposed goal.
The Secretary agrees that the statute requires the inclusion of
low-income rental units in low-income areas. Section 1333 of FHEFSSA
provides that the goal should address ``the then-existing unaddressed
needs of, and affordable to, low-income families in low-income areas
and very low-income
[[Page 61862]]
families.'' Inasmuch as there are unaddressed needs of low-income
renters in low-income areas and of very-low-income renters, the
Secretary has determined that mortgages for low-income renters in low-
income areas should be included under the goal. The final rule reflects
this change.
Counting of Rental Units
The proposed rule specified that only rental units affordable to
very-low-income families (i.e., families whose incomes are 60 percent
of area median income or less) would count toward the goal. This
altered a convention applicable to the Special Affordable Housing Goal
in 1993-1995 that any low-income rental unit in a multifamily property
where at least 20 percent of the units are affordable to especially
low-income families (i.e., families whose incomes are 50 percent of
area median income or less) or where at least 40 percent of the units
are affordable to very-low-income families (i.e. families whose incomes
are 60 percent of area median income or less) would count toward the
goal.
A number of commenters, including both GSEs, the MBA, the
Association of Local Housing Finance Agencies, and the Enterprise
Foundation, argued that the proposed rule's approach would create a
regulatory incentive for the GSEs to focus only on mortgage purchases
for buildings that are entirely occupied by very-low-income tenants, at
the expense of financing mixed-income buildings. These commenters
argued that an exclusive focus on 100-percent very-low-income buildings
is contrary to HUD policy established in other contexts emphasizing
mixed-income rental developments as more beneficial for residents and
communities. The Secretary concluded that the comments have validity
and has revised the final rule to use the transition-period convention
of counting all low-income units in buildings where the percentage of
such units meets the thresholds used during the transition which, in
turn, were modeled on the LIHTC.
Refinancings From Portfolio
Under the Interim Notices establishing transition goals, HUD did
not allow any credit toward the Special Affordable Housing Goal for the
refinancing of mortgages held by the GSEs in portfolio. The proposed
rule provided credit for these refinancings--as long as they were
economically motivated transactions initiated by the borrower--to count
toward the goal. Both Fannie Mae and Freddie Mac supported this
approach. Several commenters expressed concern that including
refinancings would create a disincentive for the GSEs to focus on new
originations for lower-income households.
The exclusion of refinancings, as provided in the Interim Notices,
imposed significant compliance burdens on the GSEs in order to identify
those purchases of refinanced mortgages that represented mortgages
previously purchased by the GSEs. Further, this provision was contrary
to the common method of financing multifamily properties using
relatively short-term balloon mortgages, which by their nature must be
refinanced frequently to maintain project viability. Refinancings in
this context serve the goal of continued availability of housing
meeting the goals. For these reasons, the final rule maintains that
economically motivated, arm's-length refinancings will count toward the
Special Affordable Housing Goal.
General Requirements, Section 81.15
Insufficient Information
Performance under each of the housing goals is based on a fraction
that is converted into a percentage. The numerator of this fraction is
the number of dwelling units that count toward the achievement of a
particular housing goal. The denominator is the number of dwelling
units (for all mortgages purchased) that could, under appropriate
circumstances, count toward achievement of a goal. Under Sec. 81.15(b)
of the proposed rule, dwelling units with insufficient information to
determine whether the unit scored toward a GSE's goal performance would
be excluded from the numerator, but included in the denominator.
Freddie Mac objected that this provision was too strict and ``distorts
the reports to Congress on * * * purchases of mortgages counted within
* * * the goals.'' Freddie Mac recommended that, when a given threshold
of completeness of data is met, the GSE be permitted to eliminate from
the denominator up to a given percentage of units lacking sufficient
data.
HUD is aware that the GSEs have incomplete data for mortgages
originated before 1993. Consequently, when a GSE lacks sufficient
information to determine whether a mortgage originated before 1993
counts toward achievement of any of the housing goals, the purchase of
that mortgage may be excluded from the denominator for purposes of
measuring goal performance. However, the goals must be structured in a
manner that will create incentives for the GSEs to obtain and provide
the data necessary to determine whether the purchase of mortgages
originated during or after 1993 count toward the housing goals.
Permitting the GSEs to exclude from the denominator, because a GSE
lacked complete information, mortgage purchases (of post-1992
originations) that did not meet the goals would create a disincentive
to the collection of such information. This result is contrary to the
legislative history, which emphasizes the importance of accurate and
comprehensive data. Accordingly, the final rule requires all mortgages
originated after 1992 to be included in the determination of the GSE's
performance under each of the housing goals.
Double-Counting
Some dwelling units financed by a GSE mortgage purchase count
toward achievement of one, two, or all three housing goals under
Sec. 81.15(d) of the proposed rule. Two commenters objected to
permitting double- or triple- counting. One commenter noted that the
GSEs may not have to alter their ``programmatic focus to any great
extent'' to meet the goals. In the final rule, HUD has allowed counting
mortgage purchases toward one or more of the goals, because double
counting is consistent with congressional intent. The Senate Report on
FHEFSSA 43 provides that the goals be ``overlapping, in that each
[GSE] activity counts toward the achievement of each goal, if any, for
which the activity qualifies.''
\43\ S. Rep. at 63.
---------------------------------------------------------------------------
Use of Rent
Freddie Mac commented that Sec. 81.15(f)(5) should be clarified so
that use of average rent-by-unit-type continues to be an acceptable
means for reporting rent levels and determining affordability of non-
owner-occupied units. Freddie Mac claimed that requiring it to obtain
individual unit rent data would be a large drain on resources and would
place Freddie Mac at a competitive disadvantage relative to its non-GSE
competitors. Because the current reporting system has worked
satisfactorily and the GSEs' reporting burden is an important
consideration, the rule has been changed to conform to Freddie Mac's
suggestion.
Seasoned Mortgages
In determining whether mortgages count toward the goals, Freddie
Mac asked for revision of Secs. 81.15(f)(6) and 81.16(c)(6), to allow
the GSEs to use tenant information (for 2- to 4-unit mortgages) and
income or rent level information (for single-family
[[Page 61863]]
mortgages) as of the time of origination, regardless of the age of the
mortgages when acquired by the GSE. According to Freddie Mac, the rule
would then conform to industry practice and would avoid requiring the
modification of data collection and underwriting practices for these
types of units. This practice was also allowed under the Notice of
Interim Housing Goals published in October 1993, to avoid costly
reverification of information. For the same reasons, the final
regulation continues this requirement.
Split Areas
Freddie Mac criticized Sec. 81.15(g) of the proposed rule, which
would have provided an allocation formula for split census tracts in
measuring performance under the Geographically Targeted Goal, as
``cumbersome and inconsistent with HMDA requirements'' in its treatment
of determining area median income in census tracts that cross
metropolitan area boundaries in New England. Freddie Mac stated that
the additional precision in reporting that HUD was apparently seeking
was not worth the cost. Freddie Mac recommended that where the ``area''
cannot be determined and the census tract or property lies in a ``split
area,'' the GSEs should be permitted to use the convention adopted by
the Federal Financial Institutions Examination Council (FFIEC) for HMDA
reports. The final rule adopts this suggestion, which uses an
allocation that distinguishes only portions of the county within a
metropolitan area from those portions outside of a metropolitan area.
Special Counting Requirements, Section 81.16
Low-Income Housing Tax Credit Purchases (LIHTC) and Mortgage Revenue
Bonds (MRB)
Fannie Mae objected to Secs. 81.16(b) (1) and (2) of the proposed
rule, which would have provided that the GSEs' LIHTC equity investments
and MRB purchases would not count toward any of the goals, including
the Special Affordable Housing Goal. Fannie Mae commented that the
Secretary's position on these forms of investment is ``inconsistent and
counter-productive.'' Several other commenters agreed with Fannie Mae.
One commented that the Secretary should at least give credit for LIHTCs
in central cities and underserved areas. Another commenter stated that
LIHTC equity investments are not mortgage purchases and, therefore, it
might be appropriate to place ``an upper limit on the amount of credit
to be taken for such activities.''
The final rule does not change the provision that the purchase of
LIHTCs will not count toward the housing goals. The GSEs' support of
affordable housing through the provision of equity in exchange for tax
benefits is an important activity. Although the legislative history
states that equity investments should not count toward the achievement
of the Special Affordable Housing Goal, the legislative history
indicates that it is the Secretary's decision whether the purchase of
LIHTCs should count toward achievement of the other two housing
goals.44 Because the purchase of LIHTCs is not the equivalent of
the purchase of a mortgage, equity investments in LIHTCs do not count
toward achievement of any of the housing goals.
\44\ See, e.g., S. Rep. at 38; H. Rep. at 60 and 61.
---------------------------------------------------------------------------
Freddie Mac commented that the purchase of MRBs should receive full
credit. Freddie Mac commented that:
* * * where revenue bonds are issued that are not supported by
any pledge or promise from the state or local issuer of the bonds,
or by any other credit enhancement or collateral, other than the
payments from the mortgage itself, the purchaser of these bonds
would be in the exact same economic position as the purchaser of the
mortgage itself.
The final rule allows units financed by a mortgage revenue bond
purchased by the GSEs to count under the housing goals with certain
restrictions to assure that such MRB purchases are the functional
equivalent of mortgage purchases by the GSEs. Under the rule, purchases
of MRBs count only where the MRB is to be repaid from the principal and
interest of the underlying mortgages originated with funds made
available by the MRB. Purchase of an MRB which is either a general
obligation of a state or local government or agency or is otherwise
credit enhanced, by any government or agency, third party guarantor or
surety, will not count.
Risk-Sharing Arrangements
Freddie Mac commented that the exception in Sec. 81.16(b)(3) should
be modified so that mortgages purchased by the GSEs under risk-sharing
arrangements with HUD or other Federal agencies would receive full
credit under the Special Affordable Housing Goal. Freddie Mae stated
that such an approach would better comport with the statutory language
and would provide an incentive for completing mortgage purchases that
may entail greater underwriting risks and a higher level of monitoring.
Freddie Mac commented that HUD's rationale in the proposed rule for
denying full credit under risk-sharing arrangements of the kind
described was ``flawed,'' and that the Secretary lacked authority under
FHEFSSA to refuse to give credit, or to provide for only partial
credit.
NTIC disagreed with Freddie Mac's comment and with the proposed
rule's provision of partial credit for risk-sharing activities. NTIC
asserted that the GSEs' risk-sharing activities should supplement
affordable housing programs, not replace them. NTIC stated: ``The
legislation was enacted to ensure regular, conventional business is
available to all citizens and neighborhoods. Allowing Fannie and
Freddie to use the government's money to make their goals is
unacceptable!''
Under section 1333(b)(1)(A) of FHEFSSA, the Secretary is required
to give full credit toward the Special Affordable Housing Goal for the
purchase or securitization of federally-insured or guaranteed mortgages
where: (1) such mortgages cannot be readily securitized through the
Government National Mortgage Association or any other Federal agency;
(2) the GSEs' participation substantially enhances the affordability of
the housing subject to such mortgages; and (3) the mortgages involved
are on housing that otherwise qualifies under the Special Affordable
Housing Goal to be considered for purposes of that goal. The Secretary
has determined that the GSEs' current risk-sharing activities meet the
requirements in (1) and (2). To the extent the third requirement is
satisfied, risk-sharing activities will receive full credit toward
achievement of the Special Affordable Housing Goal under the final
rule, as long as the dwelling units financed meet the other
requirements of the goal.
Furthermore, the final rule provides full credit under the Low- and
Moderate-Income Goal and the Geographically Targeted Goal for mortgages
purchased under risk-sharing arrangements where the GSE assumes
substantial risk, which serve to increase available housing
opportunities. HUD intends to monitor future GSE purchases under risk-
sharing arrangements to assure that providing full credit for such
purchases remains warranted.
Forward Commitments
Freddie Mac commented that Sec. 81.16(b)(4) should be revised to
permit commitments to purchase mortgages to count as mortgage purchases
in the year the commitments were made. Freddie Mac stated that such
revision would make the rule consistent with requirements imposed under
FHEFSSA, which mandate that Freddie Mac hold
[[Page 61864]]
capital against forward commitments. Freddie Mac added that the rule
could add language to ensure against ``double counting.''
Under FHEFSSA, the Secretary is to establish housing goals for
mortgage purchases. Section 1303(11) of FHEFSSA defines mortgage
purchases to include mortgages purchased for portfolio or
securitization. The use of the past tense of the verb, i.e.,
``purchased,'' rather than the future tense, i.e., ``purchased or to be
purchased,'' indicates that a transaction does not constitute a
mortgage purchase simply because a mortgage may be purchased in the
future based on a commitment, but that the mortgage must actually have
been ``purchased.'' Accordingly, this section of the rule has not been
revised.
Second Homes
Freddie Mac commented that Sec. 81.16(b)(5) should be eliminated so
that the purchase of mortgages on secondary residences would receive
full credit toward the goals. Freddie Mac stated that the majority of
secondary residences are located in low- and moderate-income census
tracts and ``serve an important role in bolstering local housing
markets and providing a supplement to the local housing stock.''
Many second homes, which are frequently owned by affluent families,
are located in predominantly low- or moderate-income areas. These
second homes provide few, if any, affordable housing opportunities for
the permanent residents of areas defined as underserved. Accordingly,
the final rule does not provide goal credit for secondary residences.
Credit Enhancements
Freddie Mac expressly supported the Secretary's decision to allow
credit enhancements to count toward achievement of the housing goals.
However, Freddie Mac commented that certain revisions should be made to
Sec. 81.16(c)(1): (1) the requirement that the GSE provide specific
mortgages as collateral should be dropped because it does not relate to
the economic substance of a credit enhancement or to the rating of the
bonds; (2) in a credit enhancement, Freddie Mac does not ``guarantee
bonds,'' but ensures that payments are made on the underlying
mortgages; thus, the reference to guaranteeing should be omitted; (3)
the proposed rule was unclear because it referred to ``State or local
housing finance agency'' in one place and ``any entity'' in another
place; Freddie Mac commented that ``any entity'' should be used; and
(4) the rule should include credit enhancements where a GSE
``'reinsures' mortgage insurance provided by a public purpose mortgage
insurance entity or fund.'' Freddie Mac provided revised language for
this section consistent with its comments.
The National Council of State Housing Agencies stated that it was
``pleased'' that HUD proposed to count the GSEs' credit enhancement
transactions, and it opposed the rule's limitation of this credit to
transactions in which a GSE provides specific mortgages as collateral.
The counting of a credit enhancement should not depend on whether a
GSE's insurance of mortgage payments is provided through
collateralizing specific mortgages. This section of the rule has been
modified to require the GSE to provide only a specific contractual
obligation to ensure mortgage payments. In addition, the Secretary
agrees with Freddie Mac that reinsurance of mortgage insurance provided
by a public purpose mortgage insurance entity or fund is beneficial to
the mortgage markets. Accordingly, the Secretary has decided that, on a
case-by-case basis, a GSE may seek the Secretary's approval for
counting such transactions toward the achievement of the housing goals.
The Secretary does not want to create a regulatory distortion of
corporate decisions on how to develop and initiate credit enhancement
transactions. The inconsistency in the proposed rule--limiting credit
enhancement transactions to State and local agencies--referred to by
Freddie Mac has been removed, and the broader language that it
recommended has been adopted.
Real Estate Mortgage Investment Conduits (REMICS)
Freddie Mac commented that Sec. 81.16(c)(2) should be drafted so
that purchases of REMICs would count toward fulfillment of all three
housing goals ``to the extent that the purchase of the mortgages
underlying the REMICs would provide credit under the goals and there is
no resulting 'double counting' of these mortgages.'' Freddie Mac stated
that this type of transaction increases the liquidity of the mortgage-
backed securities market and lowers costs for borrowers.
Fannie Mae commented that the purchase of REMICs should count
toward the goals because such activity is functionally equivalent to a
mortgage purchase. Fannie Mae commented: ``REMICs that do not contain
MBS [Mortgage-Backed Securities] or mortgages purchased by Fannie Mae,
Freddie Mac, or a government insured entity do not cause `double
counting' . . . .'' Fannie Mae noted that it has never purchased a
REMIC that contained anything other than mortgages and property related
to mortgages. (Under the Internal Revenue Service (IRS) Code, 26 CFR
1.860G-2(a)(4) and 1.856-3(c), REMICs may include other interests in
real property such as ``options to acquire land or improvements
thereon'' and ``timeshare interests.'')
In large measure, HUD agrees with these comments concerning
purchases of REMICs. Accordingly, the purchase of REMICs by the GSEs
may count toward the goals as long as the underlying mortgages or
mortgage-backed securities were not previously purchased or issued by
the GSEs or otherwise would result in double counting. Subject to the
same restrictions, the guarantee of a REMIC by a GSE may also count
toward the goals.
HUD recognizes that the development of new and distinct REMIC
structures is dynamic and HUD does not in any manner seek to impede
these developments. However, the GSEs are advised that when there is
any question about whether a new structure meets these restrictions for
counting under the goals, the GSEs should seek the advice of HUD before
counting the transaction.
Participations
Instead of counting participations in mortgages toward achievement
of the housing goals based on the percentage of the participation
purchased by a GSE, as proposed under Sec. 81.16(c)(4), Freddie Mac
commented that the rule should provide for full credit whenever the
GSE's participation percentage is 50 percent or more and no credit when
a participation is below 50 percent.
Freddie Mac's proposal would reduce the reporting and compliance
burden, and the final rule adopts this proposal. Participations have
played, and are expected to play, a de minimis role in the GSEs'
purchases, and for that reason the counting approach adopted should
have little impact on housing goal performance.
Second Mortgages
In response to the proposed rule's questions concerning whether and
how to count second mortgages, Freddie Mac commented that second
mortgages should receive full, rather than partial, credit under the
goals, because of the difficulty in arriving at an appropriate means of
allocating partial credit and because second mortgages frequently
fulfill the same purpose as refinancing, at lesser cost to the
borrower. Fannie
[[Page 61865]]
Mae generally agreed. The Los Angeles Housing Department commented:
If a second mortgage loan is made to a low income or minority
borrower who otherwise would have had to resort to the loan
companies which charge exorbitant interest rates and points (``hard
money lenders'') the loan should carry full GSE credit. Otherwise,
the loan is being made to borrowers who have already shown
themselves to be a good risk, and should not generate full credit.
To simplify counting and monitoring for goals purposes and
encourage the GSEs to purchase second mortgages, including low- and
moderate-income rehabilitation loans, the final rule, by revising the
definition of ``mortgage,'' provides that second mortgages will receive
full credit toward achievement of the housing goals. This change will
be monitored closely by HUD, to assure, for example, that a GSE does
not purchase an excessive number of second mortgages with low unpaid
principal balances solely to enhance goal performance.
Income Level Definitions--Tenants (Family Size Not Known), Section
81.18
Freddie Mac commented that Sec. 81.18 (determining affordability
for rental units where family size is not known) should apply to actual
tenants because Freddie Mac normally has data on unit size, instead of
family size, for actual tenants.
HUD agrees and has inserted ``actual or'' before the word
``prospective'' where it appears in Sec. 81.18. Unit size serves as an
adequate proxy for family size in instances where the data on family
size is not readily available, and requiring family size information
could, in some cases, impose an unnecessary cost on the GSEs in
exchange for very little information.
Rent Level Definitions for Tenants (Income Not Known), Section 81.19
Freddie Mac objected to Sec. 81.19(d), which would have provided
that, for purposes of determining whether a rental unit is affordable,
units without data on the number of bedrooms must be counted as
efficiency units in making affordability calculations. Freddie Mac
commented that this assumption would have the effect of understating
the GSEs' performance against the goals, and if information is
available on the number of bedrooms of a high percentage of units in a
property, the GSE should be allowed to apply the known percentages of
efficiencies, one-bedrooms, etc., to the unknown units.
The formulation in the proposed rule has been maintained has been
maintained in the final rule. It provides an incentive for the GSEs to
secure necessary information regarding bedroom size. Freddie Mac's
suggestion would increase HUD's burden in monitoring performance
without improving accuracy of the data, and this is contrary to the
intent in estimating affordability. Therefore, the assumption
respecting efficiency units is not changed.
Additional Goals/Subgoals
Several commenters suggested that the Secretary should, in some
manner, provide for additional goals and subgoals. One commenter
advocated additions to the regulation to ensure that members of
minority communities have access to housing finance from the GSEs
commensurate with the minority groups' locally determined percentage
shares of single-family mortgage purchases. Similarly, several other
commenters suggested subgoals for purchases of mortgages on properties
occupied by minority households. Another commenter recommended that
regional goals be set, taking into account the variation in housing
markets from city to city, as well as urban-rural variations. In a
similar vein, another commenter suggested that the Secretary ``require
the GSEs to increase their . . . purchases in areas of acute need.''
Two commenters recommended that the Secretary establish a goal
under which the GSEs would receive full credit toward achievement of
the goals for the disposition of real property to nonprofits.
HUD is refraining from establishing a range of subgoals in this
final rule. HUD is concerned about micromanaging the GSEs' efforts to
achieve the housing goals. In addition, the objectives sought by the
commenters can be served through the three existing goals.
Notice and Determination of Failure To Meet Goals, Section 81.21
Although Freddie Mac supported the proposed rule's ``close
adherence'' to the language of FHEFSSA in Secs. 81.21 and 81.22 of the
proposed rule on monitoring and enforcement, Freddie Mac commented on
several points. Under the proposed Sec. 81.21(a), the Secretary, in
determining whether a GSE has failed or there is a substantial
probability that a GSE will fail to meet a housing goal, will consider
the GSEs' reports and ``other data available to the Secretary.''
Freddie Mac noted that it did not understand what ``other data''
referred to and Freddie Mac commented that the phrase should be
clarified or removed.
In response to this comment and to mirror FHEFSSA, Sec. 81.21 no
longer refers to the information that the Secretary will consider in
making the determination.
Freddie Mac commented that Sec. 81.21(b)(1) should be revised to
track section 1336(b)(2) of FHEFSSA so that a GSE has 30 days from the
date of notice to respond to a preliminary determination from the
Secretary. The final regulation has been revised to reference the
requirement of section 1336(b).
Housing Plans, Section 81.22
In determining feasibility of a housing goal under Sec. 81.22(a),
Fannie Mae commented that the final rule should note specifically that
the economic environment and fiscal and monetary policies outside
Fannie Mae's control will sometimes determine a particular goal's
feasibility.
Section 1336(b)(3)(A)(ii) of FHEFSSA provides that, in determining
the feasibility of a housing goal, the Secretary must consider market
and economic conditions and the GSE's financial condition. The
regulation includes this language and the specific reference suggested
by Fannie Mae is not needed.
Under Sec. 81.22(b)(4), the proposed rule would have allowed the
Secretary to require a GSE's housing plan to address additional matters
as required by the Secretary. Freddie Mac objected to the ``any
additional matters'' language and insisted that only the statutory
description should be used.
The final rule does not make this change because the Secretary may
find it necessary and proper to require the GSE to include specific
additional matters relevant to achieving the goal in a housing plan.
Citing section 1336(c)(3) of FHEFSSA, which provides that the
Secretary shall, by regulation, establish a deadline for submission of
housing plans and that such deadline may not be longer than 45 days
after notice to the GSE, Freddie Mac asked for 45 days for submission
of a housing plan, rather than the 30-day period provided for in
Sec. 81.22(c).
FHEFSSA allows the Secretary to establish a time period of less
than 45 days and the Secretary has determined that 30 days is necessary
to avoid further delay in achieving the housing goal.
Under Sec. 81.22(e), where the first two housing plans submitted by
a GSE are disapproved by the Secretary, Freddie Mac commented that the
GSEs be granted 30 days to submit a third housing plan, rather that the
15-day period provided for in Sec. 81.22(e).
In the event that a GSE's housing plans are so deficient that the
Secretary disapproves the first two submitted by
[[Page 61866]]
the GSE, the Secretary notes that the GSE will have already had a total
of 60 days to develop the first two plans. At that point, the GSE's
plan should be sufficiently developed so that an additional 30 days is
unnecessary to develop a third plan. Accordingly, this provision has
not been changed.
Subpart C--Fair Housing
The GSEs' Role
While expressing their strong commitment to participating in the
elimination of discriminatory practices in the mortgage lending
process, both GSEs, in similar arguments, objected to certain features
of Subpart C--Fair Housing.
Both enterprises outlined their efforts to encourage fair lending
practices by primary mortgage lenders through outreach, consumer
education, and innovative products. The GSEs stressed their interest in
contributing to the elimination of unlawful discrimination in the
mortgage finance industry. However, both objected to a fair housing
enforcement role which they argued the proposed rule would have imposed
on them.
Fannie Mae saw its appropriate role in fair lending as being a
provider of outreach, consumer education, and flexible, innovative
mortgage products to its customers. Freddie Mac also maintained that
its primary role should be to provide a ready source of financing for
all creditworthy borrowers and to provide market leadership. Freddie
Mac took issue with what it saw as the proposed rule's implication that
it should be doing more with respect to fair lending.
Several other commenters endorsed the GSEs' position in this regard
and stated that, for the GSEs, the role of regulator is inconsistent
with the business partnership relationship that exists between the GSEs
and their customers. A major mortgage company commented that GSEs ought
not be required to develop fair lending plans, because such plans
would, in effect, establish the GSEs as ``primary market regulators.''
Referencing its long established business partnership with both GSEs,
the commenter said it did not want these entities ``to also be our
regulators.''
On the other hand, the San Diego Housing Commission had no
objection to an expanded role for GSEs associated with fair housing:
The proposed rule essentially requires the GSEs to cooperate
with HUD in providing data and other information to assist in the
investigation of mortgage discrimination by a lender with which
either does business. * * *
In general Fannie Mae and Freddie Mac have been successful in
expanding the availability of credit, lowering interest rates, and
in stabilizing and liquefying the finance market. However, there
have been shortcomings in the extent to which they help meet the
housing needs of households at the lower end of the housing market.
Given their size and the key role they play in housing finance, they
are in a position to wield a significant amount of influence.
This final rule follows the clearly expressed intention of Congress
that the GSEs comply with the Fair Housing Act and the Equal Credit
Opportunity Act (``ECOA'') and aid the efforts of investigators.45
HUD does not intend that the GSEs will become the Federal government's
regulatory or enforcement operation for the primary mortgage market.
The Federal fair lending enforcement agencies, not the GSEs, enforce
the fair lending laws.
\45\ See S. Rep. at 43-44.
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HUD has carefully examined the various points made by the GSEs and
other commenters on subpart C of the proposed rule. This final rule
contains modifications which respond to the commenters' concerns about
the proposed rule's nondiscrimination requirements, assessment of
disparate results, and information and recordkeeping requirements.
Additionally, many suggestions made by the commenters for language
changes and modifications of other aspects of the proposal have been
accepted and incorporated. These revisions are discussed elsewhere in
this preamble.
Disparate Impact
Freddie Mac argued that section 1325(1) of FHEFSSA reaches only
intentional discrimination and that application of a disparate impact
test is therefore unauthorized. Both GSEs claimed that, even if the
disparate impact standard was supported by FHEFSSA, HUD had misstated
the standard as articulated by the courts, and had shifted the burden
of proof from the plaintiff to the GSE. Other commenters shared this
view, although there was little comment in support of Freddie Mac's
assertion that FHEFSSA prohibits only intentional discrimination.
Fannie Mae claimed that there is no statutory basis and little case law
in support of applying a disparate impact analysis to matters arising
under ECOA or the Fair Housing Act.
Several other industry commenters joined in this criticism of the
proposed rule. The ABA, the MBA, the Western League of Savings
Institutions and a major mortgage lender all characterized the
application of disparate impact analysis or an ``effects test''
standard in this particular rule as premature and a potential source of
marketplace uncertainty.
Both GSEs urged HUD to postpone application of the disparate impact
standard in this rule until the issue is addressed in the HUD's broader
Fair Housing Act regulations. Adopting the standard in FHEFSSA rules
first, the GSEs claimed, would create confusion and increase the
likelihood of the development of divergent standards governing mortgage
finance. Both GSEs and several major industry organizations argued that
subpart C would result in a dual enforcement mechanism, applicable to
their operations but not to other segments of the housing marketplace,
and would subject them to the application of legal theories that are
``largely untested in mortgage finance.'' The GSEs urged the Secretary
not only to delay implementation of a disparate impact standard in
advance of a fair lending addition to HUD's Fair Housing regulations,
but also to coordinate the development of any such revisions with
primary market financial institution regulators and the Department of
Justice. Fannie Mae claimed that none of these regulators or enforcers
has provided industry-wide guidance to date.
The American Bankers Association questioned the proposed rule's
explanation of business necessity, suggesting that it failed to afford
the GSEs adequate guidance. It further maintained that HUD's position
on the meaning of business necessity was inconsistent with and
constituted a more difficult legal test than the understanding of the
term reflected in the Interagency Policy Statement on Discrimination in
Lending (``Interagency Policy Statement'').\46\
\46\ 59 FR 18266 (1994).
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Fannie Mae also claimed that the proposed rule would create a
potential ``litigation and enforcement nightmare'' for the GSEs and
that the rule would inhibit innovation. Freddie Mac argued that the
rule would also inhibit the GSEs' efforts to identify and eradicate
barriers in their underwriting guidelines.
Section 1325(1) of FHEFSSA requires the Secretary to prohibit the
GSEs from discriminating ``in any manner''-- including a prohibition on
any consideration of the age or location of a dwelling or neighborhood
in a manner that has a ``discriminatory effect.'' The use of the
phrases ``in any manner'' and ``discriminatory effect'' in section
1325(1) makes clear Congress's intent
[[Page 61867]]
that the statute's prohibitions extend beyond intentional
discrimination. The Senate Report states that Congress intended to
proscribe ``policies and practices, including inappropriate
underwriting guidelines, [which] may unintentionally yield
discriminatory patterns in mortgage lending.'' \47\ The Senate
Committee report cited testimony that ``. . .there are other business
practices of the enterprises which have the effect of discriminating
against minorities . . . .'' \48\ Examples cited by the Senate Report
included differential pricing and fee structures for mortgage products
which effectively discouraged lending in minority and low-income
communities.\49\
\47\ S. Rep. at 43 (emphasis added).
\48\ Id. at 31 (emphasis added).
\49\ See id.
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However, HUD has taken into account the considerable comments it
received from the GSEs and others, and has determined to track the
statutory prohibition as enacted by Congress.
In response to the GSEs' comments regarding a lack of guidance, the
disparate impact (or discriminatory effect) theory is firmly
established by Fair Housing Act case law. That law is applicable to all
segments of the housing marketplace, including the GSEs. All of the
circuit courts, except for the D.C. Circuit which has not considered
the issue, have held that the Fair Housing Act includes claims based
upon the disparate impact theory.\50\
\50\ No courts have ever held in Fair Housing Act or ECOA cases
that the disparate impact standard does not apply to lenders.
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All the Federal financial regulatory and enforcement agencies
recognize the role that disparate impact analysis plays in scrutiny of
mortgage lending. In the Interagency Policy Statement, the bank,
thrift, and credit union regulators, the Justice Department, Treasury,
OFHEO, Federal Trade Commission (FTC), and HUD jointly recognized the
disparate impact standard as a means of proving lending discrimination
under the Fair Housing Act and ECOA. The disparate results assessment
requirement included in this final rule mirrors the statutory
requirement and is consistent with the Interagency Policy Statement,
which explicitly applies a similar ``disparate impact'' standard to
proving violations of the Fair Housing Act and ECOA.\51\
\51\ Additionally, the Federal Reserve, in its Regulation B,
recognizes the role of disparate impact analysis under ECOA. 12 CFR
202.6(a)(2); Federal Reserve System Handbook at 1-24.
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Congress, in enacting FHEFSSA, expressly stated that it was
concerned with the subtle, often ``unintentional'' forms of
discrimination that are the hallmark of present-day unlawful conduct,
and that the law was enacted to ensure that the enterprises would in no
way contribute to the continuance of such discrimination in mortgage
lending.\52\
\52\ S. Rep. at 42-43.
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Prohibitions Against Discrimination
Freddie Mac objected to the use, in Sec. 81.42(b)(1) of the
proposed rule, of the term ``based on race, color . . .'' (etc.),
suggesting that the statutory phrase ``because of'' be substituted.
This final rule, which now mirrors the language of the statute,
incorporates this suggestion. Section 81.43 of this final rule also
follows the language of the statute in requiring assessments ``based
on'' protected status. In the context of this rule, HUD considers the
terms ``based on'' and ``because of'' to be synonymous.
Appraisals
Freddie Mac found the proposed rule's treatment of age and location
troubling, even where the purpose of the rule was to set forth specific
exemptions allowing consideration of such factors. Freddie Mac stated
that the listed exemptions might be limiting and that the exemption as
set out conflicted with the appraisal exemption in the Fair Housing
Act. Freddie Mac also asked that the age/location-related exemption be
removed from this final rule, asserting that the use of age or location
in underwriting is appropriate so long as it is not used to
discriminate.
In this final rule, Sec. 81.42 parallels the language of the
statute and no longer contains the list of examples of location factors
which may properly be considered in an appraisal and in other aspects
of the underwriting process. Section 805(c) of the Fair Housing Act, 42
U.S.C. 3605(c) addresses appraisals. The HUD regulation which
implements this section provides that ``nothing in this section
prohibits a person engaged in the business of making or furnishing
appraisals of residential real property from taking into account
factors other than race, color, religion, sex, handicap, familial
status or national origin.'' 24 CFR 100.135. It is HUD's view that the
Fair Housing Act and FHEFSSA allow the consideration of the age or
location of a dwelling as long as that consideration is not used in a
manner that discriminates unlawfully.
Assessment of Disparate Results
Both GSEs objected to conducting a disparate results assessment as
part of the Annual Housing Activities Report (AHAR) required by
FHEFSSA, a report further discussed in Sec. 81.63 of subpart E. Both
GSEs objected to the manner in which the disparate results assessment
would have been implemented by Sec. 81.43 of the proposed rule, insofar
as that section would have required the GSEs to set forth fully the
basis for their conclusions that a business necessity exists for any
policies and practices which yield disparate results. Freddie Mac
contended that the Secretary has no authority to require the
assessments.
Freddie Mac also stated that the business practices assessment
requirement would result in a massive diversion of resources from
Freddie Mac's core business activities and detract from its abilities
to fulfill its mission.
Fannie Mae stated that the proposed rule, as well as HUD
administrative law decisions, suggest that Fannie Mae must accompany
the demonstration of business necessity with a showing that no less
discriminatory alternative exists for serving that business necessity,
and that this would involve proving a negative assumption. Similar
objections were stated with reference to the provisions requiring the
GSEs to assess their underwriting and appraisal guidelines. Fannie Mae
also claimed that the proposed rule provided no effective guidance to
the GSEs concerning how to apply this test to their operating
procedures and how to measure whether facially-neutral policies have a
disparate impact on a protected class.
The GSEs further asserted that the business practices assessment
and underwriting appraisal guidelines requirements place an excessive
burden on the GSEs and that HUD underestimated this burden in its
Regulatory Impact Analysis. Fannie Mae and Freddie Mac both objected to
what they perceived as a shift in responsibility for analysis of data
and enforcement from HUD to the GSEs.
MBA opposed the inclusion of the ``less discriminatory
alternative'' prong of the disparate impact analysis set out in the
rule, arguing that making it the GSE's burden to establish this prong
would be unfair and inconsistent with case law on which the theory is
based. Although opposing any requirements for GSEs to develop fair
lending plans, and joining the objections to the disparate impact
provisions, MBA nevertheless saw it as the proper function of the GSEs
to develop a business practices assessment along the lines required by
subpart D.
Finally, Freddie Mac claimed that the system of ``self-testing''
required by the business practices assessment conflicts with the clear
trend set by the
[[Page 61868]]
Department of Justice and federal financial regulatory institutions.
The Fair Housing Act and its implementing regulations, which were
promulgated in 1989, apply to the GSEs and include a detailed
prohibition against discrimination in the purchasing of loans and set
forth the business necessity defense to a disparate impact claim
involving the purchasing of loans.53 Thus, when taken together,
the Fair Housing Act regulations and case law, the Civil Rights Act of
1991, and the Interagency Policy Statement provide sufficient guidance
concerning the application of the statutorily required assessment of
disparate results.
\53\ 24 CFR 100.125.
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The GSEs' assertions concerning the regulatory burden of compliance
with the requirements outlined in Sec. 81.43 of the proposed rule have
been given careful consideration. Accordingly, HUD has substantially
modified this section of the rule, which, as revised, now largely
tracks the statutory language of sections 1381 and 1382 of FHEFSSA.
These sections of the statute require the GSEs to include, in their
AHAR to the Secretary and Congress, assessments of disparate results of
various types of policies and practices. The GSEs are directed
specifically to ``assess underwriting standards, business practices,
repurchase requirements, pricing, fees, and procedures * * * that may
yield disparate results based on the race of the borrower'' in their
annual reports.54
\54\ Sections 1381(p) and 1382(s) of FHEFSSA.
---------------------------------------------------------------------------
The disparate results assessment is a statutorily-mandated part of
the AHAR under FHEFSSA. This final rule implements that statutory
mandate by requiring that the GSEs assess whether their business
practices are discriminatory on the bases of race, color, religion,
sex, handicap, familial status, age or national origin, since all of
these are prohibited bases listed in section 1325(1) of FHEFSSA and the
Secretary is charged with prohibiting the GSEs from discriminating in
any manner based on all of these prohibited factors. The Secretary is
authorized to implement the statute's disparate results assessment
requirement in this manner. Sections 1381(p) and 1382(s) of FHEFSSA
authorize the Secretary to require the GSEs to submit any other
information in their AHARs that the Secretary considers appropriate.
However, the Secretary recognizes that data may not be currently
available to assess whether certain practices are discriminatory on the
bases of handicap, familial status and religion.
This rule does not impose a requirement upon the GSEs to ask
lenders to report information regarding the religion or handicap of
potential borrowers. Nor is it intended, for purposes of this section,
that the GSEs ask lenders to report any information other than that
which the lenders currently report, or any information which lenders
may not inquire about under ECOA or the Fair Housing Act. ECOA
regulations generally prohibit creditors from inquiring about an
applicant's race, color, religion, or national origin. The Fair Housing
Act also generally prohibits inquiries regarding an applicant's race,
color, national origin, religion, sex, familial status or handicap.
However, ECOA regulations do allow a creditor to collect information
regarding an applicant's race, national origin, sex, marital status,
and age for monitoring purposes. Additionally, HMDA regulations require
lenders to collect information on race or national origin and sex of an
applicant or borrower.
These revisions address the GSE's concerns regarding undue
regulatory burden. The streamlining of the reporting requirements
included in Sec. 81.43 of this final rule reduces the GSEs' compliance
burden and requires fewer submissions to HUD. The AHARs under subpart E
already require the GSEs to assess the impact of their own decisions
with a conscious goal of ensuring that they do not violate the law, and
to include, as the statute requires, ``revisions thereto to promote
affordable housing and fair lending.''
In developing this final rule, HUD has recognized that regulatory
provisions intended as guidance may sometimes become prescriptive and
can lead unnecessarily to micromanagement. The GSEs themselves should
be afforded the opportunity to use their capabilities to develop a
functional assessment method that ensures the fulfillment of the
precise statutory directive. The regular assessment by the GSEs of
policies and practices to determine whether they may be yielding
disparate results, and the evaluation of that assessment by HUD, will
carry out FHEFSSA's mandate to prohibit discrimination in any manner.
Additionally, section 1325(6) of FHEFSSA requires review by the
Secretary of the GSEs' underwriting and appraisal guidelines to ensure
that they are consistent with the Fair Housing Act and that section.
The language in Sec. 81.43(b) mirrors the language of the statute.
Data Submission
Freddie Mac raised a series of concerns about the proposed rule's
implementation of sections 1325(2) and (3) of FHEFSSA, authorizing the
Secretary to require submission of information to assist the Secretary
to determine whether a lender with which the enterprise does business
has failed to comply with the Fair Housing Act and ECOA. Freddie Mac
objected to being required to respond to requests from any agency other
than the Secretary, pointing out that Sec. 81.44(b) of the proposed
rule suggested that other Federal agencies might make direct requests
to the GSEs.
Freddie Mac objected to the rule's suggestion that information
could be requested by the Secretary pertaining to the mortgage sales of
lenders operating in the ``same or similar areas'' as a lender about
whom a request for data had been made. Freddie Mac objected on cost and
resources grounds, and requested that the rule be limited to requiring
only the provision of data pertaining to lenders (a) against whom a
complaint has been filed; (b) where other evidence supports an
investigation; and (c) where the data in Freddie Mac's possession is
not otherwise publicly available.
Freddie Mac also objected to HUD's characterization, in the
proposed rule, of materials to be sought from it as ``information.''
Freddie Mac argued that ``data'' meant facts that were a matter of
direct observation, while ``information'' included ``knowledge gained
through communication, research, instruction, etc.'' Insisting on the
distinction, Freddie Mac objected to the creation of ``an unfettered
right of the Secretary to require the enterprises to conduct
sophisticated statistical analyses that * * * might be helpful to
complete an investigation * * *.'' Fannie Mae asked that the rule be
revised to state that GSEs are required to provide only data: (a) owned
by the GSE; (b) in response to requests by the Secretary; (c) in
connection with an ongoing investigation by the Secretary (rather than
other organizations); (d) pertaining only to a particular lender
pursuant to specific allegations of discrimination; and (e) that has
not already been supplied and is not readily obtainable from other
sources.
Other housing industry commenters also requested that investigative
data sought by HUD be limited to active investigations already in
progress, because requiring the GSEs to produce an analysis of each of
their lenders could poison the business relationship between GSEs and
their customers, and
[[Page 61869]]
involve high additional costs for the GSEs. The National Association of
Mortgage Brokers (NAMB), the California Association of Realtors, the
Western League of Savings Institutions, the ABA, the NAR, and a major
mortgage company all joined in protesting what they considered the
prospect of excessive information collection, employing GSE resources.
NAR raised concerns about ``privileged data on lenders'' and indicated
that the organization's concern was ``magnified when the proposed
requirement to provide information is coupled with a request that the
GSEs conduct an analysis of the data.'' It urged that HUD's requests
for data and analysis be limited to situations involving allegations of
discrimination.
To address these concerns, Sec. 81.44(b)(1) of this final rule has
been modified to clarify that other Federal agencies responsible for
ECOA enforcement which wish to request information from the GSEs
pursuant to FHEFSSA must do so by submitting that request through the
Secretary. The words ``without limitation'' referencing, in the
proposed rule, the types of information that may be requested, have
been removed in this final rule at Sec. 81.44(b)(1) and (2). Section
81.44(a) also has been modified to make it clear that the GSEs are only
required to submit such information under FHEFSSA after it has been
requested by the Secretary.
Additionally, in accordance with the President's initiative on
regulatory reform, the examples provided in Sec. 81.44(b)(1) and (2) of
information which may be requested have been removed from this final
rule. By removing those examples, HUD does not intend to limit, in any
way, the information it may request pursuant to section 1325 of FHEFSSA
and Sec. 81.44 regarding violations by lenders of the Fair Housing Act
and ECOA. Requested information may include information on mortgages
sold to the GSE by the lender or lenders under investigation, the
mortgage sales of lenders operating in the same or similar areas, and
information on representations and certifications to the GSEs by the
lender or lenders under investigation. Information requested from the
GSEs' established data systems may include comparing the loans
purchased by the GSE from a particular lender to data on the racial
composition of census tracts or providing data on loans sold to the GSE
by lenders operating in the same geographical area. In the interests of
regulatory reform, the reference to comparative and other data that
would be collected under Sec. 81.44(b)(1) and (2) has been removed, but
HUD will seek such data when appropriate.
Where comparative data about the performance of other lenders is
considered relevant to an ongoing investigation, HUD has the authority
under the Fair Housing Act to require anyone, including the GSEs, to
provide material or testimony. 24 CFR 103.200, 103.215, 103.220. It is
consistent for the GSEs to provide such information pursuant to this
section.
Although no other commenters repeated Freddie Mac's distinction
between ``data'' and ``information,'' several joined Fannie Mae in
arguing that only information about an identified object of
investigation, and not available from other sources, should be sought
through the GSEs. Freddie Mac also asserted that HUD has grossly
underestimated the resource drain on Freddie Mac that Sec. 81.44 would
entail. Again referencing the Regulatory Impact Analysis for the
proposed rule, Freddie Mac objected that HUD had misstated and
oversimplified the work burden associated with the GSE's provision of
required data. Several industry commenters echoed Freddie Mac's
position on this issue.
Section 1325(3) of FHEFSSA uses the terms ``data'' and
``information'' interchangeably. The legislative history shows that the
Congress intended that the GSEs would actively assist HUD by providing
data for ``investigative purposes.'' 55 Nor does the statute, or
its goals, support Fannie Mae's suggestion that the rule be revised to
state that the GSEs are required to provide only information owned by
them and not readily available from another source. Congress intended
that the GSEs submit information that they are ``privy to and
collect,'' and there is no requirement that the GSEs own such
information.56 That language indicates Congress' intent that the
Secretary have access, upon request, to information other than that
owned by the GSEs.
\55\ See S. Rep. at 43-44.
\56\ See S. Rep. at 43-44.
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HUD is sensitive to the need to limit reporting burdens upon both
lenders and the GSEs to the minimum level consistent with effectively
implementing statutory requirements. As a practical matter, HUD does
not anticipate that requests for information from the GSEs pursuant to
an investigation will generally require the GSEs to seek additional
information from lenders, nor does it expect that it generally will
seek information from the GSEs when that information is readily
available from other sources. Rather, as mandated by the statute, the
GSEs will assist HUD in investigations by providing existing and
available data and information upon request by HUD. HUD does not expect
that Sec. 81.44 will result in new reporting burdens on lenders, and
does not expect that it will impose onerous burdens on the GSEs. Nor
does HUD intend for the GSEs to conduct fair lending investigations or
otherwise act as an enforcement arm of the Federal government.
For matters involving the Fair Housing Act, the Secretary will only
issue requests for information about lender-based data in circumstances
involving investigations, as defined by the Fair Housing Act
regulations found at 24 CFR part 100, subpart D. For matters involving
only ECOA, Sec. 81.44(b)(1) provides that the Secretary will only issue
requests for information from the GSEs upon a request from the
responsible Federal financial regulatory agency.
In response to comments, the revised Sec. 81.44 omits the
provisions in the proposed rule which would have required the GSEs to
volunteer information regarding potential violations of the Fair
Housing Act or ECOA and which would have required the GSEs to submit
other information to HUD or the other lending regulators.57
\57\ While the requirement to volunteer information about
violations has been removed from the rule, this change does not
shield the GSEs from potential legal liability if they participate
in discrimination. See section 1325(1) of FHEFSSA; sections 804 and
805 of the Fair Housing Act, 42 U.S.C. 3604-3605; and 24 CFR
100.125.
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Finally, Freddie Mac objected that HUD ought to revise Sec. 81.44
to assure that any data-providing burdens fall equally on the two
competing GSEs.
HUD anticipates that regular reporting and data-provision
requirements imposed upon the GSEs will not differ. However, the
subject matter of Sec. 81.44 is the provision of information to assist
in investigations. The nature of each particular investigation will
determine what information is necessary. Because information will only
be sought as needed, it would be unnecessarily burdensome, both for the
GSEs and HUD, for the Secretary routinely to make duplicate requests
for information to both GSEs when it is not otherwise necessary.
Evidentiary Value of Data
Freddie Mac argued strongly that it could not make determinations,
in any event, concerning whether its practices produced disparate
results among its lenders, since Freddie Mac has no means of collecting
data for loans that were declined as a proximate result of Freddie Mac
requirements. There was
[[Page 61870]]
support among the other industry commenters concerning what they
considered the limited evidentiary value of GSE application data. MBA
noted that information solely from the GSEs would ``give a distorted
view of a lender's performance since lenders originate loans for other
investors and loans with FHA insurance are sold into the secondary
market through Ginnie Mae.''
HUD is aware that lender information received from the GSEs
generally will include only those transactions in which a GSE has been
a participant. However, that is not a basis for concluding that there
is no evidentiary value in information provided by the GSEs in
accordance with the requirements of FHEFSSA and this final rule. The
legislative history of FHEFSSA clearly indicates that Congress
considered information possessed by the GSEs to be of potential value
in investigations.58
\58\ ``In the course of their day-to-day operations the
enterprises are privy to and collect certain data which may be
instructive regarding the practices of mortgage lenders. The
reporting of such data should aid investigative efforts.'' S. Rep.
at 43-44; see also sections 1325(2) and (3) of FHEFSSA.
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Submission of Information to the GSEs
HUD will make information regarding violations of ECOA or the Fair
Housing Act available to the GSEs pursuant to Sec. 81.45. Information
to be made available regarding violations will include decisions by
Administrative Law Judges, Federal courts, the Secretary, or decisions
of other courts applying Federal, State or local fair lending laws. HUD
recognizes that the information to be made available to the GSEs will
be limited by applicable law, memoranda of understanding between the
agencies and other arrangements regarding such issues as
confidentiality, the right to privacy, and the protection of
supervisory information.
HUD recognizes that because the GSEs may take action pursuant to
their own policies and agreements, the clause in the proposed rule at
Sec. 81.45(b) which authorized them to do so was not necessary.
Therefore, the clause has been deleted from this final rule.
In consultations, the federal financial regulators raised concern
that Sec. 81.45 of the proposed rule, which directed the Secretary to
obtain information from federal financial regulators and others
regarding violations of the Fair Housing Act and ECOA, would require
the reporting of violations which might be unrelated to mortgage
lending discrimination.
In response to these concerns, Sec. 81.45(b) of this final rule
limits the information required to be obtained from other Federal
regulatory or enforcement agencies to violations by lenders involving
discrimination with respect to the availability of credit in a
residential real-estate-related-transaction. This change more clearly
describes the scope of the data required by this final rule.
In addition, while the rule directs the Secretary to obtain
information regarding single violations of the Fair Housing Act in
real-estate-related transactions, in response to federal financial
regulator concerns involving ECOA violations, the Secretary will obtain
information from regulators regarding violations of ECOA by lenders
only in circumstances in which there is either more than a single ECOA
violation, or the ECOA violation could also be a violation of the Fair
Housing Act.
Remedial Actions
Section 1325(5) of FHEFSSA authorizes the Secretary to direct the
GSEs to take various remedial actions against lenders that have been
found to have engaged in discriminatory lending practices in violation
of the Fair Housing Act or ECOA, pursuant to a final adjudication on
the record, and after opportunity for an administrative hearing.
Freddie Mac commented that HUD had not defined ``final adjudication on
the record'' in the proposed rule, and had employed the term ``final
determination'' in its place, contrary to section 1325(5) of FHEFSSA.
Freddie Mac requested that the term ``final adjudication on the
record'' be defined to include recognition that such an adjudication
could only result from a United States court or established
administrative proceeding, with an unappealable decision on the merits
having found a lender to have violated substantive (i.e., not technical
or recordkeeping) provisions of ECOA or the Fair Housing Act.
Congress intended that remedial actions would be imposed only on
lenders that had been found to have violated the Fair Housing Act or
ECOA by a court or administrative law judge, after a trial on the
merits, and after that decision was no longer subject to appeal.59
\59\ ``This section also provides for remedial actions against
lenders who have been found to have violated the Fair Housing Act or
the Equal Opportunity Act [sic] by the appropriate administrative
agency with enforcement responsibility . . . . Any hearing regarding
a remedial action should be held only after there has been a final
administrative or judicial decision, after hearing or trial on the
merits, and not subject to appeal, as provided in the applicable
statute.'' S. Rep. at 44.
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Section 81.46(c)(1) provides that the Secretary shall direct a GSE
to take remedial action only after a final determination has been made
that a lender has violated ECOA or the Fair Housing Act. The term
``final determination'' means, within the context of Sec. 81.46, a
final administrative or judicial decision, after hearing or trial on
the merits, which is not subject to appeal. For the purposes of finding
that there has been a final determination that a lender violated the
Fair Housing Act, the implementing regulations at 24 CFR 104.930 and
104.950 establish that a final decision may be made by the Secretary or
a HUD Administrative Law Judge, and that a final decision becomes
conclusive unless appealed within the statutory period. If a party to
the case elects to have that case heard in U.S. District Court pursuant
to section 812(o) of the Fair Housing Act, 42 U.S.C. 3612(o), the
District Court may decide the case, and that decision becomes
conclusive unless appealed within the period established by the Federal
Rules of Appellate Procedure. For the purposes of finding a violation
of ECOA, a final determination means that a final decision on a
complaint must have been made by an appropriate United States District
Court or any other court of competent jurisdiction, and that decision
must be no longer subject to appeal.
Congress also indicated that after a final determination has been
made that a lender violated the Fair Housing Act or ECOA, HUD should
conduct a hearing on the record before imposing any remedial
action.60 The term ``final adjudication on the record,'' as used
in section 1325(5) of the statute, provides for the use of the formal
adjudicative process set forth in Secs. 554-557 of the Administrative
Procedure Act.
\60\ ``Before imposing any remedial action, HUD shall conduct a
hearing on the record in accordance with the Administrative
Procedure Act.'' S. Rep. at 44.
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Freddie Mac objected to the phrase ``indefinite suspension'' as
used in the rule. Freddie Mac claimed that, as used in the statute,
``suspension'' clearly implied a temporary (and definite) remedial
action, and that HUD's use of the term ``indefinite'' suspension
constituted a rule-created additional, more severe, form of remedy.
MBA addressed a related concern. In light of the broad scope of
remedies outlined in the statute, MBA objected to the rule's use of the
phrase ``other remedial action,'' saying that it was inappropriate for
the Secretary to assert general discretion to take any other action
against lenders without providing
[[Page 61871]]
the opportunity for notice and comment rulemaking as to what that
action might be.
This final rule no longer includes the phrase ``other remedial
action.'' However, HUD does not agree with Freddie Mac's assertion that
the statutory term ``suspension'' is a limiting one. The terms
``temporary'' and ``indefinite'' clarify the statutory term, which did
not provide any time limits for suspensions to be applied. Accordingly,
this final rule continues to provide for temporary suspension or
indefinite suspension as alternative remedial actions, depending upon
the severity of the discriminatory conduct.
Freddie Mac also objected to the fact that the rule does not
provide it with a role in connection with any administrative hearing
concerning remedial action against a lender. In contrast, the ABA,
although supportive of GSE positions on several issues, found no fault
with the procedural protections in the proposed rule, and stated its
belief that the rule provides necessary and appropriate procedural
safeguards for lenders. The statute does not provide a role for the
GSEs in connection with an administrative hearing concerning remedial
action against a lender.
Additionally, Freddie Mac regarded the list of factors to be
considered in determining whether to apply a remedial action, found at
Sec. 81.46(c)(3) of the proposed rule, as excessively broad, inclusive
of potentially irrelevant considerations, and in contravention of the
statute's express intent to limit remedial actions to final
adjudications. This final rule provides useful guidance in carrying out
the statutory requirement, in section 1325(5), that the Secretary shall
direct the GSEs to undertake appropriate remedial actions. The rule
states that before giving the GSEs and the lender notice of any
remedial action to be taken, the Secretary shall, as a threshold
matter, solicit and fully consider the views of the Federal financial
regulatory agency responsible for the subject lender. If such
responsible Federal financial regulatory agency makes a written
determination that a particular remedial action will threaten the
financial safety and soundness of the lender, the Secretary shall
consider other remedial actions. For the purposes of Sec. 81.46,
``remedial actions'' will include only those actions relating to the
business relationship between the GSE and the lender.
The rule provides a list of factors to be considered when directing
remedial action. This list has been shortened in this final rule to
combine similar factors, in accordance with the President's initiative
on regulatory reform. For example, in determining the appropriate
remedial action, the Secretary may consider a lender's history with
respect to enforcement actions or lawsuits brought against it under
ECOA, the Fair Housing Act, or substantially equivalent state or local
laws, including cases that are conciliated, settled, or otherwise
resolved, as well as private fair housing lawsuits and judgments,
settlements, conciliations, or other resolutions. Conciliations and
settlements may be considered as mitigating or aggravating factors. For
example, a broad class settlement with comprehensive remedial relief
may evidence a lender's good faith and affirmative attempts to correct
discrimination and may be a mitigating factor when determining whether
to impose a remedial action pursuant to Sec. 81.46 against that lender
based on an adjudicated finding involving isolated discriminatory acts
of a single employee. On the other hand, if a lender enters into a
similar settlement, but fails to adhere to it, that may be viewed as an
aggravating factor when determining whether to impose a remedial action
based on an adjudicated finding that the lender has engaged in
discrimination. Similarly, if a GSE has taken action against a lender
under its own policies or contractual agreements, such action may also
be considered as a mitigating or aggravating factor, depending upon the
circumstances and the remedial action under consideration.
HUD recognizes that in selling loans to the secondary market,
lenders are required to use the secondary market's underwriting
guidelines. Under Sec. 81.46(c)(3)(viii) of this final rule, to the
extent that a primary lender is found liable under the Fair Housing Act
or ECOA for use of a facially neutral, appropriately applied
underwriting guideline that is required in order to sell loans to a
secondary mortgage market, the Secretary will take that into account in
determining the appropriate sanction, if any, to direct the GSE to
impose on the primary lender. In such instances, the Secretary will
generally direct a settlement or a reprimand as a remedial action.
The statute did not provide for any special consideration of the
effect of remedial actions on the GSEs. However, as provided in
Sec. 81.46(c)(3), where warranted, the Secretary shall solicit and
fully consider the views of the Director regarding the effect of the
action(s) that are contemplated on the safety and soundness of the GSE.
In addition, Sec. 81.46(c)(3)(ix) of this final rule provides that
``[a]ny other information deemed relevant by the Secretary'' may be
taken into account in determining the level of remedial action, and
information concerning the impact on the GSEs may be relevant in
particular cases.
Additional Fair Lending Issues
The Western League of Savings Institutions encouraged HUD to
approach the task of overseeing fair lending practices from an entirely
different perspective. HUD, the commenter said, should be concerned
with marketplace entities ``not currently subject'' to Federal
regulation, and objected to what it perceived as ``dual oversight'' of
some depositary institutions. It also recommended that, since HUD will
review and comment on existing and revised GSE underwriting guidelines
under the regulation, lenders who rely on those underwriting guidelines
should be provided a ``safe harbor'' in the regulation.
Regarding the commenter's concern about ``dual oversight,'' FHEFSSA
requires HUD to assume certain enforcement responsibilities, and it
does not permit HUD to limit this oversight to particular institutions.
In response to the request for a ``safe harbor,'' HUD does not believe
this regulation is the appropriate vehicle to address the liability of
lenders under the Fair Housing Act. The statute speaks only to the
sanctions which the Secretary shall mandate that a GSE impose on a
primary lender after an adjudication that the primary lender has
discriminated. In directing a sanction under FHEFSSA, the Secretary
relies on a prior judicial or administrative determination of a Fair
Housing Act or ECOA violation. HUD recognizes that lenders are subject
to the investigative and enforcement powers under the fair lending laws
of HUD, the Department of Justice, the federal financial regulatory
agencies and the FTC. To limit duplicative enforcement activities, HUD
will ordinarily ensure that remedial actions the Secretary directs a
GSE to take against a lender will not be in the nature of those which
could have been, but were not, imposed directly against a lender in the
course of an enforcement action by HUD, the Department of Justice, or
the lender's primary regulator. HUD will consider, as factors in this
determination, whether HUD, the Department of Justice, or the lender's
primary regulator took an enforcement action, whether the sanction was
a result of private litigation, whether additional facts have come to
light, and whether the law has changed.
[[Page 61872]]
Industry commenters generally opposed the ``fair lending plan''
suggestion on which HUD sought comment and posed questions. Other
commenters asserted that the GSEs should be required to prepare a fair
lending plan. In the interest of reducing regulatory burden, HUD has
not included a fair lending plan as a requirement in the final rule.
Subpart D--New Program Approval
In General
Section 1322(a) of FHEFSSA charges the Secretary with ``requir[ing]
each [GSE] to obtain the approval of the Secretary for any new program
of the [GSE] before implementing the program.''
The provisions of the proposed rule which sought to implement this
authority met with strong objections from the GSEs and others. In light
of the comments, which are detailed below, these provisions have been
significantly revised to assure that: (1) the program review process is
not unnecessarily burdensome; (2) ambiguity in the definition of terms
cannot conceivably lead to required HUD approval of undertakings other
than those reasonably recognizable as ``new programs''; and (3)
constructive innovations by the GSEs, involving variations on existing
programs, will be neither delayed nor derailed by HUD review processes.
The revision of subpart D consists, in large measure, of conforming its
language in key areas with the provisions of the statute with only the
addition of necessary housekeeping provisions.
In light of the significant changes in the provisions on new
program approval included in this final rule, this preamble summarizes
the positions of the GSEs and other commenters in less detail than
would be necessary were the proposed rule to have been adopted with
only minor alteration. However, all of the comments on the proposal
have been thoroughly reviewed by HUD. In general, the comments argued
that: (1) HUD did not have statutory authority to promulgate the new
program approval provisions of the proposed rule; and (2) these
provisions would result in inappropriate micromanagement of the GSEs by
HUD, which would inhibit the GSEs' flexibility and ability to adopt new
products quickly. The Secretary is confident that: (1) HUD does have
the statutory authority to establish new program approval procedures as
described in the proposed rule; and (2) these procedures would not have
inevitably led to micromanagement. Nonetheless, substantial changes
were made to this section to address the concern of the GSEs and other
commenters with the proposed procedures. The changes should not be
interpreted as reflecting concurrence with the bulk of the comments but
rather as an effort toward streamlining the final rule.
The Comments
Both entities read the proposal's definitions of ``new program''
and ``significantly different programs'' as effectively requiring that
the Secretary's approval be sought for ``product variations, pilots,
and demonstrations'' within existing GSE programs. Based on this
expansive interpretation, the GSEs argued that the proposal would
exceed the Secretary's authority.61 Each GSE recommended that the
Secretary withdraw the entire subpart,62 or, in the alternative,
simply track the statutory language, without embellishment.
\61\ Comments from NAR took a different view: ``We are not
contesting the Department's authority to conduct such program
approval, since we believe the statute is very clear on this
point.'' Nevertheless, NAR believed the proposed rule's new program
review authority was ``too broad and ambiguous'' and recommended
that the ``parameters for identifying new programs need to be
clarified.''
\62\ Although many other commenters also were critical of
features of the New Program Approvals subpart, only a few joined the
GSEs in recommending the subpart's total withdrawal. The MBA, NAMB,
and the California Association of Realtors did recommend withdrawal
of the subpart. MBA recommended, alternatively, elimination of the
New Program Approvals provisions or limiting them to the precise
terms of FHEFSSA, which, MBA declared, ``are self-implementing.''
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Fannie Mae claimed that these provisions were: (1) arbitrary and
capricious, and failed to consider relevant ``business necessities'';
(2) an impermissible attempt by the Secretary to ``micro-manage'' the
GSEs; (3) inconsistent with expressed congressional intent; (4) not
contemplated by FHEFSSA, and unauthorized under the Secretary's general
regulatory authority; and (5) inconsistent with the ``general
principles'' set out by HUD as governing its own approach to rulemaking
in this instance. Fannie Mae also argued that, during its 20 years of
experience with HUD's existing program approval process, no evidence
exists that a detailed regulation similar to that proposed was
necessary.
Freddie Mac's comments were nearly identical. Freddie Mac concluded
that the definitions contained in the proposed rule would lead to an
enormous expansion of GSE activities subject to Secretarial review.
Freddie Mac's comments suggested that: (1) The only threshold for
submission of matters for new program review should be whether they are
``significantly different'' from prior programs; (2) only section 305
of the Freddie Mac Charter may serve as a basis for denying a new
program approval request; (3) the term ``program'' should be defined to
refer only to ``any broad and general plan or course of action for the
purchasing, servicing, selling, lending on the security of, or
otherwise dealing in conventional mortgages;'' (4) any reference to
``pilot or demonstration program''--the only part of the proposed
definition that does not appear in the statute--be stricken; and (5) no
attempt should be made to define when a program is ``significantly
different,'' relying, instead, on the GSEs' to submit ``truly
significant new initiatives'' for prior approval.
Some industry commenters, including the ABA, that joined the GSEs
in questioning the scope of subpart D clearly believed that a more
carefully tailored version of the approval provisions would be useful.
These commenters believed it important that HUD ensure that ``the GSEs'
activities are restricted to those activities they were chartered to
do--purchase and securitize mortgages.''
Commenters, whether supportive of the GSE position or concerned
about restricting the GSEs to Charter Act purposes, consistently argued
that flexibility and the ability to move quickly to adopt new products
were essential elements of the GSEs' contribution to affordable
housing. A few commenters suggested that the Secretary allow the GSEs
greater latitude to begin implementation of new programs, but to review
the new activity ``as it is being introduced, to determine if it should
be curtailed or modified.''
The Secretary's Response
Section 1322--new program approval--is an essential responsibility
of HUD and the Federal Government to ensure that the GSEs remain
faithful to their statutory purposes and serve the public interest.
Accordingly, while significant revisions have been made, the final rule
does not diminish the importance of this function. The GSEs argued that
no regulation was required to carry out this function. The Secretary
believes the final rule properly recognizes this statutory duty and
establishes a mechanism for carrying out the responsibility assigned.
The Final Rule
The rule has been streamlined considerably to address the GSEs'
apprehension about micromanagement to which the proposed rule
apparently
[[Page 61873]]
gave rise. The Secretary has removed the definition of ``significantly
different programs'' contained in Sec. 81.52(e) of the proposed rule
and will use only the statutory definition of new program. Although
many believed the proposed definition included virtually all new GSE
activities in new products, the definition was intended to clarify that
the Secretary's authority extended only to genuinely new programs--and
not to new products. Because the definition seems to have added to, not
reduced, the confusion, the definition has been dropped.
The final rule also eliminates, in the definition of ``new
program'' in Sec. 81.2, the reference to pilot or demonstration
program(s). The proposed Sec. 81.52(d) has been eliminated. That
section provided that ``grandfathered'' programs remained subject to
any limitations and requirements included in the Secretary's approval
of the new programs. This concept is inherent in FHEFSSA's definition
of ``new program'' and was superfluous. For similar reasons, the rule
also eliminates specific reference to activities carried out under
sections 309(h) of the Fannie Mae Charter Act or 303(d) of the Freddie
Mac Act.
In lieu of the proposed requirement that the GSEs submit requests
for programs that ``reasonably raise questions'' as to whether they are
significantly different, the final rule maintains only, in
Sec. 81.52(d), the provision that the Secretary may request information
about a program where the Secretary believes that the program may be
subject to HUD review. Where, based on the information submitted, the
Secretary determines such a request is warranted under the statute, the
rule preserves the Secretary's authority to require that the GSE submit
a request. This provision is consistent with the legislative intent
that a new program that differs significantly ``must be submitted for
prior approval.'' 63
\63\ S. Rep. at 2.
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Freddie Mac commented that the GSEs have a ``right * * * not to
submit matters for approval that are beyond the scope of * * * the
Act.'' Submissions for programs will only be required where the program
is within the scope of FHEFSSA's review requirements. In the course of
any such submission, the regulation invites the affected GSE to
indicate in its response its views respecting whether the program is,
in fact, subject to the Secretary's review.
Section 1322(c)(1) of FHEFSSA requires that a GSE ``submit to the
Secretary a written request for approval * * * that describes the
program.'' This final rule sets out the precise information the
Secretary regards as necessary for the ``description'' of a new
program. The information requested in Sec. 81.53(b) of the final rule
is the minimum necessary to carry out the Secretary's statutory duty.
These are essential housekeeping requirements; they place no excessive
burdens on the GSEs and are tailored to the principal goals of the
Secretary's review: assurance that new program initiatives comport with
the Charter Acts and are in the public interest. Under FHEFSSA, unless
additional information is required, the Secretary must complete a new
program review within 45 days. The housekeeping requirements will
facilitate the review process and likely obviate the need for
additional information.
With the substantial revisions that have been made, the final rule
represents an effort to demonstrate that the Secretary will act in the
least intrusive manner possible. The Secretary does not want to
promulgate a regulation that imposes excessive burdens on the GSEs, or
that addresses problems that are not expected to arise. The Secretary
believes that new program requests can be acted upon in a less
intrusive manner than the procedures set out in the proposed rule may
have suggested.
The Secretary has reason to believe, based on experience, that the
GSEs will act properly. In the event the Secretary believes that a GSE
has undertaken a ``new program'' within the meaning of the statute
without prior approval, FHEFSSA and the final rule contain adequate
mechanisms for effective inquiry. Furthermore, the Secretary has
adequate statutory and regulatory authority to revise this rule in the
future, should events prove that a more detailed rule is necessary to
carry out the Secretary's mandate.
Subpart E--Reporting Requirements
Sections 309(m) and (n) of the Fannie Mae Charter Act and 307(e)
and (f) of the Freddie Mac Act require that the GSEs submit data about
their mortgage purchases to the Secretary and submit reports to
Congress and the Secretary concerning the GSEs' housing activities.
FHEFSSA, at section 1326, mandates that the Secretary require each GSE
``to submit reports on its activities to the Secretary as the Secretary
considers appropriate.'' Section 1324 of FHEFSSA requires that the
Secretary report to Congress by June 30 of each year on the activities
of the GSEs. This final rule implements all of the applicable reporting
requirements, to enable the Secretary to monitor the GSEs' activities
and report to Congress appropriately.
In promulgating the proposed rule, the Secretary reviewed the
reporting requirements for Fannie Mae, contained in the then-existing
Fannie Mae regulation, which required Fannie Mae to submit numerous
reports to the Secretary. The Secretary determined that a simpler, more
effective and less burdensome reporting system should be instituted for
both GSEs.
Mortgage Reports, Section 81.62
Although reporting requirements in the proposed rule were
streamlined compared to earlier requirements imposed by the Secretary,
Freddie Mac found the reporting requirements ``excessive.'' In
particular, Freddie Mac objected to submitting loan-level data on a
quarterly basis. Freddie Mac asserted that quarterly loan-level data
submissions were never contemplated by Congress and that Congress
intended that a level of information equivalent only to that obtained
from annual reporting under HMDA would be required. Fannie Mae argued
that quarterly reports of loan-level data could potentially provide a
misleading picture of performance.
Consistent with the Administration's efforts to streamline
regulations and reduce reporting requirements, the Secretary has
further reduced the frequency and the volume of data submissions.
Section 81.62 requires the following information:
First- and third-quarters reports--tables aggregating
loan-level mortgage data; and
Second- and fourth-quarter reports--tables aggregating
loan-level mortgage data as well as loan-level data.
Thus, instead of requiring the submission of the loan-level data
with each quarterly report, as proposed, the final rule now requires
submission of loan-level data only with the second and fourth quarter
reports. (The fourth quarter mortgage report also now serves as the
Annual Mortgage Report and is designated as such.) In response to GSE
comments, the final rule also clarifies that the quarterly mortgage
reports need only include year-to-date data, not quarterly data plus
year-to-date data as suggested in the proposed rule.
FHEFSSA charges the Secretary with responsibility for monitoring
and enforcing the GSEs' compliance with the housing goals during the
course of each year, and requires that the Secretary take action where
a GSE fails--or there is a substantial probability that a GSE will
fail--to meet any housing goal. The Secretary has determined that
quarterly reports, with semiannual reporting of loan-level data, are
essential to ensuring that the
[[Page 61874]]
Secretary has the minimum information needed to carry out these
monitoring, compliance, and other regulatory responsibilities.
Requiring quarterly reporting is well within the Secretary's
authority under FHEFSSA. The Secretary, under section 1321, has
``general regulatory power over each enterprise and shall make such
rules and regulations as shall be necessary and proper to ensure that
this part and the purposes of the [Charter Acts] are accomplished.''
Section 1327 mandates that the Secretary require reports on the GSEs'
activities ``as appropriate,'' and FHEFSSA's amendments to the Charter
Acts specifically require the GSEs to collect, maintain, and provide to
the Secretary detailed data on mortgages purchased financing both
single-family and multifamily properties ``in a form determined by the
Secretary.'' 64
\64\ Sections 307(e)(1)(E) of the Freddie Mac Act and 309(m)(1)
of the Fannie Mae Charter Act.
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No convincing indication 65 exists that Congress intended the
HMDA schedules or procedures to serve as a controlling model.66
FHEFSSA did not seek to lessen reporting. Indeed, FHEFSSA required
detailed reporting of mortgage data and extensive annual reporting on
GSE housing activities to both Congress and the Secretary. In enacting
FHEFSSA, Congress was particularly concerned about the lack of
information on the GSEs' mortgage purchases. The legislative history
describes FHEFSSA's reporting requirements and states:
\65\ The House Bill, H.R. 2900, 102d Cong., 1st Sess., did
require ``annual'' reporting in the HMDA manner. However, sections
121(l) and 122(k) of that bill were changed substantially before the
law was enacted.
\66\ The Senate Report expressed Congressional intent that the
Secretary should be more aggressive in monitoring the GSEs'
activities. See S. Rep. at 33.
* * * an information vacuum has severely impeded Congressional
efforts to measure Fannie Mae's compliance with regulatory housing
goals that have been in force since 1978. The committee believes
that enactment of this bill will fill this vacuum on an expeditious
basis by mandating the creation of modern state of the art data
systems by both enterprises.67
\67\ S. Rep. at 38-39.
Freddie Mac also expressed concern about the disclosure of mortgage
data on less than an annual basis; e.g., if Freddie Mac provided first-
quarter loan-level data, it did not want that data released until after
the end of the year, and Freddie Mac wanted the data included with all
other data from that year so that the timing of its mortgage purchases
could not be determined.
It was not intended that quarterly or semi-annual loan-level data
be placed in the public-use database. Loan-level data submitted with
the second-quarter report are required only so that the Secretary can
assess the GSE's current condition under the goals, to facilitate the
Secretary's monitoring functions; the final rule so indicates. Because
other-than-year-end loan-level data are by nature preliminary,
submitted as a condition report, subject to revision, and may cause
substantial harm if prematurely released, the inclusion of such data in
the public-use database would be inappropriate. Of the mortgage data
submitted under section 309(m) of the Fannie Mae Charter Act and
section 307(e) of the Freddie Mac Act, the only loan-level mortgage
data that shall be placed in the public-use database is year-end data,
consistent with subpart F of this rule.
Freddie Mac stated that developing and modifying its systems to
comply with these reporting requirements would take some time and,
because of this, Freddie Mac requested an exemption from reporting for
a reasonable time following the issuance of final regulations. In
response, notwithstanding the effective date for other provisions of
this rule, the second-quarter mortgage report for 1996 is the first
such report required.
Annual Housing Activities Report, Section 81.63
FHEFSSA requires the GSEs to submit an Annual Housing Activities
Report (AHAR) to Congress and the Secretary. Under FHEFSSA, the AHAR
must, among other things, describe actions that the GSE has undertaken
during the preceding year or is planning to undertake to: promote and
expand its attainment of its statutory purposes; standardize credit
terms and underwriting guidelines for multifamily housing and
securitize multifamily housing mortgages; and promote and expand
opportunities for first-time home buyers. FHEFSSA also requires that,
for the AHAR, the GSEs assess underwriting standards and other business
practices and procedures that affect the purchase of mortgages for low-
and moderate-income families or that may yield disparate results. The
AHAR also must include annual compilations of year-to-date mortgage
data (but not loan-level data) and any other information that the
Secretary considers necessary for the report and requests in writing.
Fannie Mae objected to the requirement that the AHAR provide
information on the extent to which the mortgages purchased ``have been
used in conjunction with public subsidy programs.'' Fannie Mae argued
that it was only required to report on subsidy programs ``under Federal
law'' and that the proposed ``public subsidy'' requirement was too
broad, administratively burdensome, time-consuming, and unreliable,
because lenders frequently do not report the presence of State/local
subsidy programs.
While the Charter Act amendments do specifically require the GSEs
to provide information on the extent to which mortgage purchases have
been used in conjunction with public subsidy programs under Federal
law, the Secretary may require information concerning the presence of
non-Federal subsidies under FHEFSSA's authorization to the Secretary to
``request other information [for the AHAR] that the Secretary considers
appropriate.'' Nevertheless, HUD has decided to remove this requirement
because information on public subsidies is frequently unavailable and
often inaccurate, and generally cannot be obtained in sufficient detail
to be useful.
The proposed rule would have required each GSE to provide an AHAR
within 60 days after the end of each calendar year. Fannie Mae asked
that this period be extended to 90 days. Since FHEFSSA requires that
the Secretary report to Congress by June 30 of each year on the
activities of each GSE, the GSEs' AHARs are needed substantially prior
to that date in order to allow sufficient time for HUD to develop the
Secretary's report. In an attempt to address the needs of the GSEs and
HUD, the final rule provides that AHARs will be due 75 days after the
end of the calendar year. The first AHAR required under this rule will
be the report covering calendar year 1996 (due in 1997).
Periodic Reports, Section 81.64
Fannie Mae objected to the requirement in Sec. 81.64 of the
proposed rule that all releases of information disclosed to entities
outside the GSE be submitted to HUD. Fannie Mae argued that the
requirement: was excessive, expensive, and of no practical use to HUD;
violated the principles of Executive Order 12866; and could compromise
the GSE's competitive position and the need for confidentiality. Fannie
Mae suggested that the requirement be removed from the regulation or
modified to specify that the GSEs need provide to HUD only
``significant announcements'' and could provide those simultaneously
with public announcement.
While the burden of compliance with Sec. 81.64 has been
exaggerated, no necessity exists for transmittal of
[[Page 61875]]
insignificant data. For this reason, HUD has revised Sec. 81.64 to
create a self-policing mechanism. The specific categories of
information listed in the section--i.e., Housing Advisory Council
material, press releases, investor reports, proxy statements, and
seller-servicer guides--must all be provided to the Secretary. For all
other information released to entities outside the GSE, if the GSE
determines that such information is relevant to the Secretary's
regulatory responsibilities under FHEFSSA or its Charter Act, the GSE
must provide the information to the Secretary. At the same time, the
Secretary continues to have the authority to request information on an
as-needed basis.
Other Information and Analyses, Section 81.65
Freddie Mac opposed Sec. 81.65 of the proposed rule, which stated
that ``GSEs shall furnish to the Secretary the data underlying the
reports required under this subpart.'' Freddie Mac called such ``open-
ended'' requirements burdensome, costly, and not reasonably related to
the Secretary's mission. Freddie Mac said that any additional reports
the Secretary may wish to require must be related to Charter Act
activities of the GSEs. Fannie Mae also objected to this requirement
and suggested that ``underlying data'' should instead be requested by
HUD on a case-by-case and ``as-needed'' basis.
The Secretary's broad authority to require reports under section
1327 of FHEFSSA encompasses the authority to require additional
analyses and reports that the Secretary considers ``appropriate.''
However, requirements in the proposed rule for the GSEs to submit
``underlying data'' were not intended to require that the GSEs submit a
massive quantity of data as a matter of course in support of each
report. In fact, underlying data will only be sought by the Secretary
on a case-by-case basis. Therefore, any required submission of
underlying data will be the subject of a specific request from the
Secretary to one or both GSEs and will be based on an actual need for
supporting data in order to fulfill the Secretary's responsibilities.
The final rule has been clarified to this effect.
Other Reporting Issues
Published simultaneously with this final rule is an Appendix E
which is a list entitled ``Required Loan-level Data Elements'' which
details the reporting formats and the loan-level data elements required
to be collected and compiled by each GSE on each single-family and
multifamily mortgage purchased. The Secretary may revise the list of
loan-level data by notice to the GSEs. Fannie Mae, referencing the
proposed rule's loan-level data listings, objected to submitting the
following data elements, identified by their numerical listing in the
Appendix to the proposed rule:
For single-family mortgage purchases--Number 24,
Refinancing Loan from Own Portfolio; Number 31, Lender Institution;
Number 38, Public Subsidy Program; Numbers 45 and 46, Family size of
borrower (and co-borrower); and Numbers 54 and 55, Low- and Moderate-
Income Goal flag and Special Affordable Housing Goal flag; and
For multifamily mortgage purchases--Number 26, Lender
institution; Number 36, Low and Moderate-Income Goal flag; and Number
37, Special Affordable Housing Goal flag.
Fannie Mae's objections to these data elements were based,
variously, on relevancy, unavailability of the data in existing
information databases, unreliability of data furnished by lenders, and
availability of the data to HUD by other means. In addition, Fannie Mae
commented that the furnishing of ``lender institution'' data would
violate confidentiality between Fannie Mae and its lenders.
Data Element Number 24, Refinancing Loan from Own Portfolio, is not
required in the final rule, because these data were required under the
interim notices for technical monitoring purposes that no longer apply.
Data Elements Number 31 (Single-family) and Number 26
(Multifamily), designating Lender Institution (Element Number 27 in
Appendix E of this final rule), are important elements for the
monitoring of GSE reporting. The name of the lender institution will
facilitate the Secretary's verification of loans reported as being sold
to the GSEs. Since these data are already reported by lenders under
HMDA, disclosing the lender institution would not violate
confidentiality between the GSEs and their lenders.
Data Element Number 38, Public Subsidy Program data (for single-
family properties), have not been reported by Fannie Mae because it
asserts that the data are of such poor quality that the data are not
meaningful. Freddie Mac has reported public subsidy data to HUD, but
Freddie Mac's data indicates that public subsidies are involved in less
than one-quarter of one percent of its single-family mortgage
purchases. Given the available data, this data element has been deleted
from the list of required data elements.
Data Elements Numbers 45 and 46, Family size of borrower (and co-
borrower), are not currently collected by the GSEs, and the final rule
does not require the GSEs to collect these data at this time. However,
because family size is an important element for determining the
affordability of units, the Secretary reserves the right to collect
these data at a later date.
Data Elements Numbers 54 and 55 (Single-family) and Numbers 36 and
37 (Multifamily), Low- and Moderate-Income Goal flag and Special
Affordable Housing Goal flag, are not required fields under the final
rule. The Secretary has determined that this information can be derived
from other data elements.
Although HAC commented that the Secretary should use census tracts/
BNAs instead of counties, in the definition of rural areas, HAC also
commented that, if a county-based definition is used, the Secretary
should insist that the GSEs at least report their progress under the
Geographically Targeted Goal by census tract/BNA, ``so that HUD can
determine the extent to which the GSEs are meeting the goal in
purchasing mortgages in `served' portions of counties.'' Accordingly,
although the Secretary has changed the definition of rural areas from a
census tract to a county basis (as discussed above), the final rule (at
Data Element Number 7) requires the BNA locations for mortgage
purchases, to facilitate research and analyses of GSE purchases in non-
metropolitan areas. Since 1993, the GSEs have been reporting to HUD BNA
locations of mortgages located in non-metropolitan areas.
Subpart F--Access to Information
FHEFSSA requires the Secretary to establish a public-use database
and release to the public certain categories of information submitted
by the GSEs concerning their mortgage purchases. The statute also
requires protection of proprietary information the GSEs submit to the
Secretary.
FHEFSSA requires a public-use database so that the public will have
access to data and information on the GSEs' performance toward meeting
the Charter Act purposes of providing mortgage credit to the broadest
range of families throughout the nation. Congress indicated its intent
that the GSE public-use database supplement HMDA data.68 In
complying with the public-use database requirements, HUD will make
publicly available maximum nonproprietary mortgage purchase data and
information to the widest range of
[[Page 61876]]
housing groups, State and local governmental entities, academicians,
and other persons and entities, so that, for example, these entities
may monitor the efforts of the GSEs toward meeting their Charter Act
purposes.
\68\ See, e.g., S. Rep. at 39.
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``Balancing'' Test
The preamble to the proposed rule stated that, in making as much
data as possible available, the Secretary would engage in ``balancing
the proprietary concerns of the GSEs.'' Freddie Mac commented, however,
that Congress did not intend the Secretary to balance the public
interest to determine whether information was proprietary; rather
Congress encouraged the Secretary to ``be creative in finding ways to
release certain types of information--without revealing proprietary
information.''
Neither the preamble nor the final rule incorporates a balancing
test for determining whether information is proprietary. While the
legislative history of FHEFSSA does discuss ``balanc[ing] the sometimes
competing interests of the enterprises against the public's interest in
access to information,'' it also provides that HUD should ``whenever
possible develop disclosure and access methods that take into account
any proprietary concerns, while continuing public access to
information.'' 69 Therefore, the Secretary has determined that the
public interest in knowing about the GSEs' activities must be addressed
through the careful and considered design of a public-use database that
makes maximum appropriate data and information available to the public
in creative ways--including aggregating--while protecting proprietary
information.
\69\ S. Rep. at 44.
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Definition of ``Proprietary Information''
Section 1326 of FHEFSSA authorizes the Secretary to provide, by
regulation or order, that certain information shall be treated as
``proprietary information'' and not subject to disclosure to the public
either (1) in the public-use database established pursuant to section
1323 (which consists of mortgage data submitted by the GSEs under
section 309(m) of the Fannie Mae Charter Act and section 307(e) of the
Freddie Mac Act); or (2) through public dissemination of the AHARs of
the GSEs (which the GSEs submit to the Secretary and Congress pursuant
to sections 309(n)(3) of the Fannie Mae Charter Act and 307(f)(3) of
the Freddie Mac Act). Section 81.2 of the proposed rule defined the
term ``proprietary information'' as ``all categories of information and
data submitted to the Secretary by a GSE that contain trade secrets or
privileged or confidential, commercial or financial information that,
if released, would cause the GSE substantial competitive harm.''
Consistent with the statutory language of section 1326 of FHEFSSA
and in light of the comments by the GSEs, the final rule clarifies that
the designation ``proprietary information'' for purposes of this rule
applies only to mortgage data (that the GSEs submit to the Secretary
under sections 309(m) of the Fannie Mae Charter Act and 307(e) of the
Freddie Mac Act), and AHAR information (that the GSEs submit to the
Secretary under sections 309(n) of the Fannie Mae Charter Act and
307(f) of the Freddie Mac Act), since other types of information are
not candidates for inclusion in the public-use data base. However, as
discussed more fully below, where a GSE seeks to protect from
disclosure confidential business information that is not mortgage data
that the GSE submits to the Secretary under section 309(m) of the
Fannie Mae Charter Act or section 307(e) of the Freddie Mac Act, and is
not information that the GSE submits to the Secretary in the AHARs
under section 309(n) of the Fannie Mae Charter Act or section 307(f) of
the Freddie Mac Act, the GSE may seek protection of such confidential
business information under HUD regulations at 24 CFR Part 15. This
final rule clarifies and supplements Part 15 with respect to GSE
information. FHEFSSA's specific designation of data and information as
``proprietary information'' is designed to distinguish that mortgage
data and AHAR information that is to be included in the public-use
database and disseminated to the public and data that may be withheld.
It is not to be confused with the function that the designation of
information as ``confidential business information'' serves under Part
15. (That term distinguishes business information, as defined in 24 CFR
15.54, which a submitter may seek to have withheld from public
disclosure under the Freedom of Information Act (FOIA) 70, from
other information.)
\70\ 5 U.S.C. 552.
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The issue of the scope of mortgage data that should be treated as
``proprietary'' and withheld from public disclosure drew only limited
comment. Only ten of the 163 public comments treated the issue in any
level of detail.
Both GSEs commented extensively on this subpart of the rule,
recommending protections against the release of certain identified data
elements the GSEs considered proprietary. Six of the other ten
commenters (including MBA and NAHB) supported the GSEs' position
favoring strong controls on release of proprietary information. In
contrast, the American Civil Liberties Union Foundation (ACLU), in
comments filed on behalf of ACLU, the NAACP Legal Defense and
Educational Fund, Inc., the Puerto Rican Legal Defense and Education
Fund, and the National Council of La Raza, favored strict limitations
on treating information provided by the GSEs under FHEFSSA as
proprietary.
The Prospect of Competitive Harm
While Freddie Mac indicated that the definition of proprietary
information in the proposed rule was ``generally consistent'' with
definitions of the term in similar contexts, Freddie Mac proposed
several additions to the scope of the definition. Freddie Mac, citing
FHEFSSA's legislative history, contended that it was the intention of
Congress that the Secretary withhold data if it ``would be likely to
cause the GSE substantial competitive or financial harm, or substantial
harm to the GSE's ability to fulfill its statutory purposes.'' In
suggesting that the term ``financial harm'' be added, Freddie Mac
criticized the use of the term ``competitive harm'' by itself as too
narrow. In suggesting that the ability to fulfill statutory purposes be
added, Freddie Mac argued that because the GSEs have ``express public
purposes,'' it is not merely competitive harm that must be averted, but
also the possibility that disclosure of data could ``frustrate the
GSEs' ability to fulfill their statutory purposes, by decreasing the
liquidity of the secondary mortgage market and [thus] decreasing market
stability.''
Fannie Mae pointed out that it had asked for proprietary protection
for only 23 of 80 database elements. Fannie Mae, in supplementary
comments dated July 24, 1995, urged the adoption of the revisions to
the definition of ``proprietary information'' indicated in Freddie
Mac's comments.
The final rule adopts the GSEs' comment that the definition include
a ``likely to cause competitive harm'' standard. HUD finds this
formulation to be consistent with the body of case law interpreting
Exemption 4 of FOIA,71 which focuses on likely competitive
harm,72 as well as related regulations of other Federal financial
regulators governing the confidentiality of business
information.73
\71\ 5 U.S.C. 552(b)(4); 24 CFR 15.21(a)(4).
\72\ See Critical Mass Energy Project v. NRC, 975 F.2d 871 (D.C.
Cir. 1992), cert. denied, 113 S. Ct. 1579 (1993).
\73\ See, e.g., 40 CFR 2.208(e)(1); 19 CFR 201.6(a).
[[Page 61877]]
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Exemption 4 of FOIA authorizes the withholding of ``trade secrets
and commercial or financial information obtained from a person and
privileged or confidential.'' Accordingly, the exemption covers
material that is substantively very similar to the information
protected as proprietary under FHEFSSA. Because the case law
interpreting the FOIA exemption is well-developed and FHEFSSA does not
define the term ``proprietary,'' HUD has chosen to formulate a
definition that largely tracks interpretations of the FOIA exemption,
so that interpretation of the term as it applies to mortgage data and
AHAR information under FHEFSSA may draw upon the body of FOIA law.
It is not necessary to add a specific reference to ``financial''
harm to the definition of ``proprietary information.'' The exclusion of
this term from the definition keeps the definition more consistent with
FOIA provisions respecting confidential business information and
related law. Section 81.74(b)(1) of the rule provides that the
Secretary will consider information on adverse financial consequences
that would result from disclosure, in determining what information is
proprietary. In general, ``financial'' harm will also involve
``competitive'' harm. Even where the disclosure of information would
not harm one GSE relative to the other, the disclosure may nonetheless
cause competitive harm, because the GSEs also compete with other
private-sector firms, as well as individuals seeking an advantage with
respect to the GSEs. The definition, as modified, will protect against
financial harm by protecting the GSEs against substantial competitive
harm.
It is not necessary to expand the definition to refer specifically
to the GSE's ability to fulfill statutory purposes. Again, exclusion of
this terminology avoids inconsistency with FOIA and similar
definitions. The final rule allows the GSEs to advance arguments, for
the Secretary's consideration, regarding any effect that disclosure
would have on the GSEs' ability to fulfill statutory purposes.
Plain Meaning
In its original comments--prior to its July 24, 1995, letter
endorsing much of Freddie Mac's approach to the definition of
``proprietary''--Fannie Mae's comments on the definition of
``proprietary information'' focused on an assertion that the term
``proprietary'' has a settled ``plain'' meaning which should be
incorporated into the rule, i.e., the entire range of business
information that a GSE holds closely as an owner of private property.
Fannie Mae supported its claim based on the definition in Webster's
dictionary.
Supreme Court precedent, however, reveals that the established
approach under case law is more complicated. The mere fact that a
statutory term is defined in a dictionary does not establish the term's
plain meaning or deny the agency charged with administration of the
statute the authority to provide a reasonable interpretation.74
\74\ See, e.g., National R.R. Passenger Corp. v. Boston & Me.
Corp., 503 U.S. 407, 418-19 (1992).
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The term ``proprietary'' has several alternative dictionary
definitions, depending on the dictionary consulted. Aside from the fact
that the designation as ``proprietary information'' for purposes of
FHEFSSA only applies to mortgage data and AHAR information, HUD's
definition, as revised in this final rule, is similar to the definition
Congress has ascribed to the term in other legislation, including
statutes enacted just days before FHEFSSA's October 28, 1992, enactment
date.75 In addition, HUD's definition is generally consistent with
the definitions of other Federal administrative agencies.76
\75\ See, e.g., 42 U.S.C. 13293 (Energy Policy Act of 1992,
enacted Oct. 24, 1992); 10 U.S.C. 2506(e)(3) (Defense Conversion
Reinvestment and Transition Assistance Act of 1992, enacted Oct. 23,
1992); 15 U.S.C. 5104(a) (Steel and Aluminum Energy Conservation and
Technology Competitiveness Act of 1988).
\76\ See, e.g., 48 CFR 1805.202(d); 10 CFR 51.16(a); 10 CFR
1504.204(a).
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The definition that Fannie Mae advanced is not legally supported
and is too broad. If any information obtained and held by a person by
virtue of being an owner of property qualifies as proprietary, all such
information submitted to HUD would have to be withheld from disclosure.
Such a definition would effectively undermine the Secretary's ability
to release nonproprietary information; it would allow the GSEs to force
proprietary treatment of any information by merely labeling it as such.
Such a definition would also improperly apply the specific designation
``proprietary information'' under FHEFSSA to materials other than
mortgage data and AHAR information.
Other Comments on Definition
Freddie Mac also asked that Sec. 81.73 be augmented to provide that
HUD take into account the extent to which particular information, when
taken together with other information, could reveal proprietary
information. This final rule has been modified to specify that this is
one of the additional facts that the Secretary will consider.77
\77\ See Sec. 81.74(b)(6).
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Public-use Database
Consistent with section 1323(a) of FHEFSSA, this final rule
establishes a public-use database of mortgage data concerning the
characteristics of individual mortgage purchases of the GSEs, including
census tract, location, race, and gender of mortgagors.
In accordance with FHEFSSA, this final rule provides that the
Secretary may not, by regulation or order, make available to the public
information that the Secretary determines is proprietary information.
The Secretary, however, may not restrict access to the income, census
tract location, race, and gender data of single-family properties. When
the Secretary grants a GSE's request for proprietary treatment of
mortgage data, the Secretary will issue an order or promulgate a
regulation providing that the mortgage data is proprietary and shall
not be included in the public-use database.
In addition to mortgage data, the Secretary will make publicly
available in the public-use database information in the GSEs' AHARs,
which are submitted to the Secretary and Congress, and comprise a
detailed picture of the GSEs' activities. Proprietary information in
the AHARs may be withheld from the public if the GSE requests, and the
Secretary agrees with, designation of the information as proprietary
information, pursuant to a regulation or order.
On June 7, 1994, the Secretary published a Temporary Order 78
protecting GSE data and information deemed to be proprietary, pending
public comment and further review. Published simultaneously with this
final rule and adopted by the Secretary through this rule, is an
Appendix 7 containing an Order entitled ``GSE Mortgage Data and AHAR
Information: Proprietary Information/Public-use Data'' which Appendix F
of this final rule contains the most current listing of data and
information deemed proprietary by the Secretary and supersedes the
Temporary Order. The Secretary may revise this list by regulation or
order.
\78\ 59 FR 29514.
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The public-use database also will not include information the
release of which would invade personal privacy, 79
[[Page 61878]]
or information required to be withheld under the Trade Secrets
Act.80
\79\ A bank commented that it was concerned about ``right to
privacy issues'' regarding communication between HUD and the GSEs:
``We hope that rights of individual borrowers are not compromised
due to creative interpretations of the laws and regulations for the
sake of political expediency.''
The Privacy Act of 1974, 5 U.S.C. 552a, and FOIA exemption 6, 5
U.S.C. 552(b)(6), pertain to the disclosure of information on
individuals. HUD may withhold information from the public pursuant
to the Privacy Act or FOIA Exemption 6.
\80\ 18 U.S.C. 1905.
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Availability of ``Public Data''
Section 81.2 of the rule revises the proposed rule's definition of
``public data'' to clarify that it only includes mortgage data
submitted to the Secretary by the GSEs (under section 309(m) of the
Fannie Mae Charter Act or 307(e) of the Freddie Mac Act) relating to
the GSEs' mortgage purchases, and AHAR information (submitted to the
Secretary by the GSEs under sections 309(n) of the Fannie Mae Charter
Act or 307(f) of the Freddie Mac Act), to the extent that the Secretary
determines such mortgage data or AHAR information is not proprietary
and should be made publicly available. Freddie Mac was concerned that
the definition in the proposed rule could be misconstrued to require
HUD to disclose all nonproprietary mortgage data submitted to HUD,
including data submitted for reasons unrelated to the rule's reporting
requirement in Sec. 81.62. Similarly, Fannie Mae had recommended that
the definition be revised to limit its scope.
Under section 1323 of FHEFSSA, HUD has authority to include in the
public-use database mortgage data required under section 309(m) of the
Fannie Mae Charter Act or section 307(e) of the Freddie Mac Act. In
addition, HUD will make publicly available the information in the GSEs'
AHARs, except for information the Secretary determines to be
proprietary.81
\81\ The GSEs are required by sections 309(n)(3)(B) and
307(f)(3)(B) their Charter Acts to make available publicly reports
they provide to HUD pursuant to sections 309(n) and 307(f) of the
Charter Acts, unless HUD has determined such information to be
proprietary under section 1326 of FHEFSSA. HUD will facilitate this
requirement by providing public access to this information.
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HUD's public-use database will only include mortgage data submitted
by the GSEs under section 309(m) of the Fannie Mae Charter Act or
section 307(e) of the Freddie Mac Act and information in the GSEs'
AHARs, except for information the Secretary determines to be
proprietary, and only where the Secretary determines that it ``should
be made publicly available.'' Since other information or data that the
GSEs may submit pursuant to subpart E would not fit the definitions of
``mortgage data'' or ``public data'' used in the rule, that information
or data will not be included in the public-use database.
Timing of Disclosure
In its comments on the proposed rule, Fannie Mae addressed public
comments on the June 7, 1994, Temporary Order. Fannie Mae regarded as
unpersuasive arguments that competitive harm to the GSEs would not
occur because data would be outdated when finally released publicly.
Fannie Mae commented that, for single-family products, a time lag of
less than 12 months would be insufficient to allow adequate recovery of
investment. In the case of multifamily products, Fannie Mae claimed
that even the passage of 2 years would be insufficient protection,
because competitive harm is caused by affording competitors crucial
information allowing them to ``pick the loans off at liquidation,
thereby eroding our market share and investment return on the market
research and development that preceded our booking the loan
initially.''
NAHB strongly supported the creation of a public-use database, but
suggested compromise on the question of release of proprietary
information. To address the GSEs' concerns regarding confidentiality of
data, NAHB suggested that the Secretary grant requests for proprietary
treatment for a specified time period, such as two years.
In analyzing whether information is proprietary, the Secretary
will, when appropriate, consider the effect of the passage of time in
determining if the release of information would likely cause
substantial competitive harm.
Requests for Proprietary Treatment
The regulation establishes procedures for the GSEs to request
proprietary treatment of mortgage data and AHAR information submitted
to the Secretary and clarifies and supplements HUD regulations at 24
CFR Part 15 as they apply to GSE requests for confidential treatment of
other business information. When a GSE submits information to the
Secretary, the GSE shall designate what part of the information the GSE
deems to be mortgage data or AHAR information that is ``proprietary
information'' under FHEFSSA or other types of confidential business
information for purposes of FOIA. Depending on the type of information
submitted, HUD either will process the request in accordance with the
procedures in Secs. 81.73-81.75, or upon a FOIA request, in accordance
with the procedures in 24 CFR Part 15 as clarified and supplemented in
this subpart.
Section 81.73(d) of this final rule makes clear that while any
request for proprietary treatment is pending, none of the information
that is the subject of the request will be disclosed. Part 15 contains
a similar protection, which applies to GSE submissions designated as
confidential. HUD will not release material marked confidential except
in accordance with Part 15 and this final rule.
Fannie Mae objected to the requirement in Sec. 81.73 of the
proposed rule that the GSE submit a certification and justification for
the Secretary to designate mortgage data or information as
``proprietary information'' under FHEFSSA.
In response to Fannie Mae's comment, HUD has greatly streamlined
the regulation. First, under Sec. 81.73, it is now optional for the GSE
to submit a statement explaining the bases for the GSE's assertion that
mortgage data or AHAR information is proprietary. In instances in which
HUD has not previously issued an order or regulation determining the
data or information to be proprietary, HUD urges the GSEs to provide
such a supporting statement and address in the statement the factors
that the Secretary will consider in making determinations of whether
data or information is proprietary. Conclusory statements that
particular data or information would aid competitors or would impair
business dealings, or similar statements, will not provide the kind of
views that will be useful to the Secretary.
Second, the final rule eases the requirements by providing that
where there is an existing regulation or order designating mortgage
data or AHAR information as proprietary, it is sufficient for the GSE
to stamp the information as proprietary and reference the order or
regulation. When a GSE supports a request for proprietary treatment by
citing an existing order or regulation, HUD will determine whether the
data or information comes within the order or regulation. If the data
or information is proprietary under such order or regulation, it will
not be disclosed except in accordance with other provisions in this
subpart, e.g., Congressional requests.
The factors the Secretary will apply in making a determination in
response to a request for proprietary treatment are identified in
Sec. 81.74. The factors in Sec. 81.74(b) will be applied where the
request for proprietary treatment pertains to data submitted by the
GSEs in the reports required under section 309(m) of the Fannie Mae
Charter Act or section 307(e) of the Freddie Mac Act, or AHAR
information for which there is no order or regulation covering the
materials for which proprietary treatment is requested.
[[Page 61879]]
When the Secretary accords proprietary treatment to mortgage data
or AHAR information, the rule establishes procedures for the Secretary
to issue a temporary order, an order, or a regulation to withhold
proprietary information and to inform the public of the withholding. If
the Secretary does not determine such mortgage data or AHAR information
to be proprietary information, the Secretary will provide the GSE with
an opportunity for a meeting on the matter, during which the GSE may
provide comments and additional views. After the meeting, the Secretary
will determine, in writing, which data or information is proprietary
and will notify the GSE 10 working days before the data or information
is made available to the public. The rule is now more consistent with
HUD FOIA regulations regarding protections for confidential business
information in general.82
\82\ See 24 CFR 15.54(g).
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FOIA Requests
Information on the GSEs may be requested by the public pursuant to
FOIA. Subpart F of this rule clarifies and supplements HUD's FOIA
regulations 83 with respect to information submitted by the GSEs.
\83\ 24 CFR Part 15.
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FOIA provides that several classes of records are exempt from
mandatory disclosure. A memorandum dated October 4, 1993, from the
President to Heads of Departments and Agencies, emphasizes the
importance of public disclosures under FOIA. The implementing
memorandum from the Attorney General, attached to the President's
memorandum, instructed agencies to disclose information unless
disclosure would harm an interest protected by a FOIA exemption.
Additional Safeguards for Proprietary and Confidential Information
FOIA Exemption 8 protects from mandatory disclosure information
``contained in or related to examination, operating, or condition
reports prepared by, on behalf of, or for the use of the Department in
connection with its responsibility for the regulation or supervision of
financial institutions.'' 84 Section 1319F of FHEFSSA specifically
provides that HUD is an agency responsible for the regulation and
supervision of financial institutions for purposes of this exemption.
Accordingly, where appropriate, the Secretary may invoke this exemption
to withhold GSE information.
\84\ 5 U.S.C. 552(b)(8); 24 CFR 15.21(a)(8).
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To address comments of Fannie Mae requesting additional safeguards
for the protection of information, the rule also has been revised to
clarify that while HUD may make information available for the
confidential use of other government agencies in their official duties
or functions, all such information remains the property of HUD, and
unauthorized use or disclosure of information may be subject to the
penalties provided in 18 U.S.C. 641.
FOIA Exemption 4 covers ``trade secrets and commercial or financial
information obtained from a person and privileged or confidential.''
85 When appropriate, the Secretary may invoke this exemption to
withhold GSE information in response to a FOIA request. In addition,
the Trade Secrets Act forbids Government officers and employees from
releasing trade secrets and other confidential business information.
HUD will not disclose information in violation of the Trade Secrets
Act, notwithstanding the indication in 24 CFR 15.21 that a requested
record will not be withheld under FOIA unless it both comes within one
of the FOIA exemptions and there is need in the public interest to
withhold the record.
\85\ 5 U.S.C. 552(b)(4), 24 CFR 15.21(a)(4).
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Fannie Mae commented that the Secretary should review the rules of
the financial institution regulators governing the confidentiality of
materials, and should incorporate the same protections for proprietary
information. Fannie Mae commented that OFHEO was adopting its own
confidentiality rules to parallel financial institution regulators'
protections, and HUD and OFHEO should assure that all submitted
materials receive ``consistent protection.''
On March 3, 1995, HUD promulgated new amendments to its FOIA
regulations that incorporate explicit protections for business
information in accordance with Executive Order 12600.86 Part 15
regulations are fully applicable to GSE data and information provided
to HUD. Indeed, Part 15 applies to a broader range of information that
the GSEs submit to HUD, since they are not limited in applicability to
mortgage data that the GSEs submit under section 309(m) of the Fannie
Mae Charter Act or section 307(e) of the Freddie Mac Act and AHAR
information the GSEs submit under section 309(n) of the Fannie Mae
Charter Act or section 307(f) of the Freddie Mac Act. HUD has carefully
reviewed the safeguards afforded by these new FOIA regulation
amendments and this subpart and has concluded that many of the concerns
raised by Fannie Mae regarding the protection of proprietary
information were previously addressed through those amendments.
\86\ See 24 CFR part 15, subpart F.
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As indicated in the preamble to the revised FOIA rules, ``[t]he
amendment consolidates the FOIA process under the supervision of a
designated officer, which assures more consistent and prompt response
to FOIA requests.'' Centralized control also serves to protect against
erroneous disclosure. The FOIA amendments state that, except as
otherwise provided, HUD officers and employees are prohibited from
disclosing business information, except to other HUD officers or
employees who are properly entitled to such information for the
performance of their official duties.87 This provision is similar
to that of other financial regulators.88
\87\ 24 CFR 15.54(l)(2).
\88\ See, e.g., 12 CFR 309.6(b) (FDIC).
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In response to another Fannie Mae comment about disclosures by
HUD's agents, HUD notes that its amended FOIA rules prohibit HUD
officers and employees from directly or indirectly using or allowing
the use of business information obtained through or in connection with
Government employment that has not been made available to the general
public.89 Also, Sec. 81.76(e) of this final rule includes
safeguards against disclosure of GSE data and information by
contractors. The FOIA regulations also provide other safeguards
consistent with Executive Order 12600, which Fannie Mae commented
should be included in HUD's regulations.90
\89\ 24 CFR 15.54(l)(1).
\90\ See 24 CFR 15.54(f), (g), (i).
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When a GSE desires that HUD accord confidential treatment to
information other than the mortgage data submitted by the GSEs in the
reports required under section 309(m) of the Fannie Mae Charter Act or
section 307(e) of the Freddie Mac Act, and other than AHAR information,
the GSE should follow the procedures for protection from disclosure of
such information in 24 CFR Part 15, as clarified and supplemented by
this subpart.
Release of Information to Congress, Comptroller General, or Pursuant to
Legal Process
Paragraph 81.76(d) of the proposed rule stipulated that the
Secretary would provide information requested by Congress, the
Comptroller General, or pursuant to subpoena or other legal process
``without regard to the provisions of this section.'' Both GSEs
[[Page 61880]]
objected to this provision, and were supported by the MBA. Freddie Mac
commented that the Secretary has a fiduciary duty to maintain the
confidentiality of GSE proprietary information and that duty would be
breached by proposed Sec. 81.76(d) to the extent the provision allowed
disclosure without any exercise of judgment on the part of the
Secretary. Furthermore, Freddie Mac argued that materials disclosed
based on a subpoena should be safeguarded to the extent possible
against further disclosure to third parties. Freddie Mac asked for
provisions, similar to those found in existing HUD regulations,91
to the effect that the Secretary and his or her counsel would determine
whether to honor particular subpoenas or requests. Fannie Mae asserted
that HUD's ``unconditional commitment'' to provide congressional access
to all committees and subcommittees ``totally conflicts with practices
observed by other financial institution regulators.''
\91\ 24 CFR 15.71-15.74.
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The intention of the proposed rule was not that HUD would provide
GSE data or information to Congress without any appropriate safeguards;
rather, that nothing in this subpart of the rule should be construed to
grant authority to the Secretary to withhold information from or to
prohibit the disclosure of information to Congress, the Comptroller
General, a court of competent jurisdiction pursuant to a subpoena, or
where otherwise required by law. HUD safeguards for handling such
requests would still apply. Accordingly, Sec. 81.77 of the final rule
provides that ``nothing in this subpart F may be construed to grant
authority to the Secretary under FHEFSSA to withhold any information
from or to prohibit the disclosure of any information'' to Congress,
the Comptroller General, or pursuant to a subpoena or legal process.
This formulation is in keeping with the practice of other
agencies.92 HUD notes that Congress, the Comptroller General, and
the courts all have procedures to safeguard proprietary and
confidential information.93
\92\ See 12 CFR 309.6(c)(8) (Federal Deposit Insurance
Corporation); see also 40 CFR 2.209(b)(1) and 2.209(d); 15 CFR
325.16; 21 CFR 20.86 and 20.87.
\93\ See, e.g., United States v. American Tel. & Tel. Co., 551
F.2d 384, 386-87 and nn.2-3 (D.C. Cir. 1976) (discussing
congressional rules); 4 CFR Part 81-83 (General Accounting Office
regulations governing the disclosure of information); Fed. R. Civ.
Proc. 26(c) (judicial protective orders).
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This final rule specifies that HUD--in providing data or
information in response to requests from Congress, the Comptroller
General, and the courts--will, where applicable, include a statement to
the effect that the GSE regards the data or information as proprietary
or confidential, public disclosure of the information may cause
competitive harm to the GSE, and the Secretary has determined that the
information is proprietary or confidential. In addition, the rule
provides that, to the extent practicable, HUD will provide notice to
the GSEs after such a request for proprietary or confidential
information is received and before HUD provides information in response
to the request.
The revised rule makes clear that HUD's discretion to take
additional steps to protect GSE data or information in appropriate
circumstances is not precluded. These steps could include, for example,
seeking on a GSE's behalf, or supporting a GSE motion for, a protective
order when a court subpoenas HUD to produce GSE data or information.
Section 81.77 also clarifies the scope of requests that are to be
considered official requests from Congress. This change responds to a
specific GSE comment that the request must be from a committee with
appropriate jurisdiction, to conform more closely to FOIA procedures
and similar authorities. The rule has also been modified to conform
language concerning HUD disclosures to the Comptroller General to the
language in other HUD regulations.94
\94\ See 24 CFR 16.11(a)(5).
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Furthermore, in response to a comment by Fannie Mae, Sec. 81.77(c)
of the final rule now makes clear that safeguards under HUD regulations
at 24 CFR 15.71-15.74 apply. These provisions govern the production of
documents or testimony when a subpoena, order, or other demand of a
court or other authority is issued. The rule extends these protections
to situations in which demands are made on non-HUD employees (including
contractor employees) who have custody of exempt records, and is
modeled after regulations of other financial regulators.95 The
Secretary notes that a recent decision 96, may limit the ability
to withhold information pursuant to such a regulation and that case law
on this issue is evolving. In response to Fannie Mae's comment that
OFHEO and HUD should adopt consistent procedures on this point, the
Secretary notes that OFHEO is in the process of promulgating rules
applicable to OFHEO employees.97
\95\ See, e.g., 12 CFR 792.41 and 792.42.
\96\ In re Bankers Trust Co., 61 F.3d 465 (6th Cir. 1995).
\97\ See 60 FR 25162 (1995) (proposed rule May 11, 1995).
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Pro-Disclosure Comments
Comments received from the ACLU, which dealt exclusively with
proprietary information issues, advocated more expansive disclosure of
GSE data. The ACLU argued that only information elements that both GSEs
considered proprietary should even be considered for designation as
proprietary. The ACLU commented that, even then, proprietary treatment
frequently should be declined in an exercise of the Secretary's
discretion. The ACLU asserted the public-interest purposes of the Fair
Housing Act, ECOA, and FHEFSSA, and stated:
Given these factors, we believe that Fannie Mae and Freddie Mac
cannot be considered similar to purely private, profit-making
enterprises. The true measure of the effectiveness of the GSEs is
not their maximization of profit, but their compliance with mandates
established by the Congress and the Secretary. ``Proprietary'' for
the GSEs should not mean ``will harm competition'' but rather ``will
harm the ability to carry out governmental mandates. * * *''
The ACLU favored a presumption that information is not proprietary
and suggested a standard for determining whether information is
proprietary. Under the ACLU formulation, the burden would be on the
GSEs to establish the need for nondisclosure. To meet this burden, the
GSEs would have to establish that disclosure would frustrate the goals
set by the statute or the Secretary, not ``merely'' that disclosure
would hurt the GSEs' competitive positions.
HUD, however, must recognize congressional intent, as expressed
through the Charter Acts and legislative history, that the GSEs be
self-supporting, profit-making entities. Although the GSEs receive
substantial Federal benefits, they are not Government agencies. The
GSEs do face competition from each other and from other private sector
firms and, accordingly, have legitimate proprietary interests that the
Congress explicitly intended to be respected. The ACLU's definition
would unjustifiably dismiss any competition-based arguments for
withholding sensitive information.
The ACLU also objected to the possibility that the Secretary would
make determinations that particular material was proprietary solely on
the basis of submissions by the GSEs. Such determinations, the ACLU
insisted, should be subjected to public
[[Page 61881]]
participation and comment before any information is deemed
``proprietary.''
Under FHEFSSA, there is no requirement that any party other than
the GSEs be afforded a right to comment before determining that GSE
information is proprietary. To the extent that the Secretary employs
the rulemaking process in making determinations of the proprietary
nature of mortgage data submitted by the GSEs, the Secretary will
follow applicable Administrative Procedure Act procedures.
Issues Regarding Specific Data Elements
Freddie Mac commented that information on pricing, fees and other
key aspects of business strategy were to be considered proprietary and
protected from disclosure to the public. Information on pricing, fees,
and other key aspects of business strategy will be withheld to the
extent they are proprietary under this rule or otherwise protected from
public disclosure under other authorities and HUD regulations.
NAHB suggested that some of the ``data fields'' sought to be
protected by the GSEs as proprietary have been provided in HMDA data
``with apparently little harm to either the borrowers or the lending
institutions.'' These fields, NAHB added, would be very helpful, in
utilizing HUD and HMDA databases together. These fields include:
Purpose of Loan; Occupancy Code; Loan Balance at Acquisition.
Additionally, NAHB asserted, certain fields claimed as possibly
proprietary were needed for use in research by academicians and
governmental entities. NAHB requested, ``at a minimum,'' that the
following data fields be included:
For single-family housing:
Loan to Value Ratio at Origination
Purpose of Loan, Product Type, and Loan Term
Occupancy Code, Number of Units.
And for multifamily housing:
Purpose of Loan, Loan Type, and Loan Term
Mortgagor Type
Average Reported Rent OR Rent Plus Utilities OR Rent
Affordability Level
Public Subsidy Program.
With respect to single-family loan-level data, HUD must consider
the GSEs' proprietary concerns in determining whether a data element
can be released at the census tract level or whether some form of
aggregation would be sufficient to protect the proprietary nature of
the data in a public release. HUD developed a national-level database
file structure that has no geographic identifiers. Certain data
elements are recoded into categories to prevent exact identification of
specific elements. The national data files are used to supplement
census-tract-based public use data files.
For single-family purchases by the GSEs, the national data files
contain purpose of the loan, occupancy code, number of units, and the
loan-to-value ratio at origination which are recoded into five
categories (0-60, 60-80, 80-90, 90-95, and over 95). The census tract
and national files do not contain Product Type or Loan Term data since,
taken together, these two elements have been deemed proprietary by the
Secretary.
For multifamily purchases by the GSEs, a number of elements were
deemed proprietary because of the nature of the multifamily market--the
size of the market and the way multifamily properties are financed. The
fact that these data elements were proprietary led the Secretary to
deem Loan Type, Loan Term, Mortgagor Type, and Public Subsidy Program
fields as proprietary to protect these data elements. HUD does release
the Purpose of the Loan and the affordability of the units, by
category, on the national multifamily public use data file.
CANICCOR, an Interfaith Council on Corporate Accountability, urged
that, at a minimum, the public be provided all the information that is
provided for each loan by primary market lenders under HMDA. This data,
CANICCOR said, includes:
Geocoding to the census tract level;
Income of borrower;
Borrower's/Co-borrower's race or national origin;
Borrower's/Co-borrower's gender or sex;
Whether owner or non-owner occupancy;
Purchaser (i.e., which GSE);
Type of loan (e.g., conventional);
Purpose (i.e., home purchase, refinance, home
improvement);
Dollar amount of loan; and
Seller identification.
HUD, in its development of the public-use database, considered the
availability of the data to the public through sources outside of the
GSE data, including HMDA. The public-use database, either through the
census tract file or the national data file, contains all of the above
elements.
Subpart G--Procedures for Actions and Review of Action
This subpart establishes procedures for hearings, disclosures of
orders and agreements between the Secretary and the GSEs in enforcement
actions, and judicial review. Generally, these procedures concern
actions by the Secretary to enforce housing goal-related matters under
subpart B of the rule and reporting requirements under subpart E. In
addition, this portion of the preamble addresses certain procedural
issues involving the approval of new programs.
As stated in the proposed rule's preamble, the housing goal
requirements of this rule are enforced through the imposition of cease-
and-desist orders and civil money penalties. FHEFSSA is prescriptive
because of the seriousness of these actions; therefore this final rule
often references or restates the statutory requirements. However, in a
few instances, which are discussed in more detail throughout this
portion of the preamble, the final rule augments the statutory
procedures to promote the purposes of the legislation and to better
recognize the legitimate interests of the GSEs in these proceedings.
Both GSEs submitted detailed comments on the provisions of subpart
G. The arguments and suggestions for change submitted by the two GSEs
were markedly similar. On this subject matter, Freddie Mac presented
the more detailed objections, so the Freddie Mac comments will be the
principal focus of the discussion of the subpart.
Closely Following the Statutory Text
Freddie Mac asserted that this subpart of the regulation should
mirror the procedural requirements set forth in FHEFSSA. However,
Freddie Mac commented that the proposed rule's provisions ``variously
depart from [FHEFSSA], or from the Administrative Procedure Act.''
Additionally, to avoid the ``inefficiencies of litigation,'' Freddie
Mac recommended an explicit provision in HUD's enforcement procedures
for a HUD/GSE exchange of views before any enforcement action is
initiated.
Freddie Mac objected to provisions in Secs. 81.82 and 81.83 on the
grounds that cease-and-desist orders and imposition of civil penalties
were limited to violations of the statute, whereas provisions of the
rule could be read as authorizing sanctions for violations of the
procedural rule itself. Freddie Mac commented that FHEFSSA permits the
Secretary to seek an order only for violations of the statute--not its
implementing regulations. Similarly, Freddie Mac urged, the
Administrative Procedure Act (APA) requires that no sanction or order
may be imposed
[[Page 61882]]
``except within jurisdiction delegated to the agency and as authorized
by law.'' \98\
\98\ 5 U.S.C. 558(b).
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While HUD agrees that it is the statute, and not the regulations,
that serves as the foundation for any order sought by the Secretary,
Freddie Mac's argument suggests that regulatory elaboration may never
properly be employed to augment the recitation of statutory authority
in connection with an enforcement provision. This is incorrect; it is
clear that regulatory references legitimately may be included. Only
reference to a regulatory section that exceeds the Secretary's
authority would raise a valid legal issue; the references Freddie Mac
refers to are reasonably related to the purposes of the enabling
legislation. Rather than causing ``confusion,'' these regulatory
references help to clarify, and even to limit, the statutory language.
The change sought might itself create confusion. Accordingly, the rule
retains the regulatory cross-references, and cites both them and the
statutory references.
Freddie Mac suggested that the final rule include various
procedures to avoid enforcement actions. Freddie Mac cited Executive
Order 12778 on Civil Justice Reform in support of its argument that the
rule should mandate a preenforcement process, which could include
informal discussions, negotiations, and compromise.
HUD expects that, in connection with a pending enforcement action
against a GSE, it will frequently be appropriate to solicit the GSE's
views in order to explore mutually agreeable resolutions of perceived
problems. This option is always available to the Secretary; every
reason exists to expect it will be used. However, Freddie Mac's
suggestion that the rule should provide expressly for preenforcement
procedures in every case--that is, to turn an existing option of the
Secretary into a right of the GSEs--is unwarranted. Fact situations may
differ too markedly to expect that obligatory preenforcement procedures
would always be the proper course. Under Sec. 81.21, the GSE already is
afforded an opportunity to respond to the Secretary's preliminary
determination that it has failed to meet its housing goals--a response
that will precede any HUD requirement for submission of a housing plan.
Settlement following the issuance of charges also is permitted under
hearing procedures at 24 CFR 30.420. (Part 30 procedures are
incorporated by reference into this final rule.)
Given the already-available procedures that will foster the
amicable resolution of most disputes, the change Freddie Mac has
proposed is unnecessary and is contrary to the spirit of the
Administration's efforts to simplify regulations. Potentially, the
change could result in institutionalized delay in the hearing process.
Executive Order 12278 is, in relevant part, directed at encouraging
techniques to avoid full litigation after charges have been filed. By
its own terms, the Executive Order creates no obligation on an agency's
part to alter its standards for the acceptance of settlements, or to
change existing delegations of settlement or litigation authority.
While the Secretary shares the GSEs' interest in minimizing needless
litigation, the existing authority to attempt a voluntary pre-charge
resolution on a case-by-case basis will accomplish this goal as well as
Freddie Mac's suggested procedure.
Freddie Mac also asked for modification of the rule to allow a GSE
to recommend and request the appointment (at the GSE's expense and with
the Secretary's approval) of ``special expert'' hearing officers to
hear all or part of any enforcement action. These special officers
would then sit in lieu of, or under the supervision of, a HUD
Administrative Law Judge (ALJ).
Freddie Mac commented that these enforcement actions are likely to
involve ``highly technical statistical and financial proof on arcane
issues * * *.'' While the Secretary hopes and believes that the ALJs
will not be called upon to hear these matters often, the ALJs do have
experience with handling technical, statistical, and financial matters;
there is every reason to believe they will make well-reasoned decisions
in any enforcement actions brought under this rule.
Furthermore, the option suggested by Freddie Mac is not available:
the person who must preside over the taking of evidence in these
proceedings is prescribed by the APA. While procedures authorized under
the Alternative Dispute Resolution Act \99\ could be used in particular
instances--when the parties agreed to their use--a regulatory procedure
calling for unilateral Secretarial designation of a special expert at
the behest of a GSE would conflict with the APA, as applicable under
FHEFSSA. No necessity exists to cite in the rule the existence of
alternatives that are available via agreement of the parties.
\99\ 5 U.S.C. 571-583.
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The Public Interest
Freddie Mac commented that Sec. 81.83(c) (calling for the
Secretary's consideration of ``other factors that the Secretary
determines in the public interest warrant consideration'' in the course
of imposing civil money penalties) cannot be adopted in the manner set
out in the proposed rule. Rather, Freddie Mac claimed, FHEFSSA required
the Secretary to establish, by rule, following notice and comment,
those ``other factors'' to be considered in measuring the conduct of
violators.
The reference in the proposed rule to ``other factors * * *'' is
too broad, and that formulation has been deleted. However, inasmuch as
the Secretary is authorized to consider the nature of the injury to the
public in establishing the amount of the penalty and other factors that
the Secretary may determine by regulation to be appropriate, the final
rule eliminates the ``other factors'' phrase in favor of a ``public
interest'' formulation like that contained in FHEFSSA.
Freddie Mac also commented that the statutory language permits the
Secretary to consider only ``actual'' injury to the public, and that
the use of the term ``nature of the injury to the public'' in the
proposed rule is unacceptably subjective. Clearly, under the
Secretary's authority to adopt other factors through rulemaking, the
rule could include ``nature of the injury to the public'' as a separate
factor, if necessary. The final rule, however, returns to the concise
statutory formulation, ``injury to the public,'' without regulatory
elaboration. HUD does not intend to place narrow limits on the
interpretation of the statutory phrase, and will consider, in
evaluating a particular fact situation, reasonable application of this
factor, including the nature of the injury involved.
Consultation
Freddie Mac also requested that the Secretary limit consultation
with the Director of OFHEO concerning any enforcement proceeding
against a GSE to consultation before the enforcement proceeding is
actually undertaken. Freddie Mac suggested that the proposed rule's
formulation allowing the Director's participation in an ongoing
enforcement proceeding would be ``inconsistent with the Director's
independence from the Secretary, and would be in the nature of a
prohibited ex parte contact.'' However, Freddie Mac said, ex parte
problems could be avoided if the consultation (which Freddie Mac
favored) took place only before institution of an enforcement
proceeding.
Freddie Mac asserted that once an adversary proceeding has
commenced, due process requires that any review by the Director be
conducted openly, in writing, and included in the
[[Page 61883]]
administrative record. Further, the affected GSE should be provided an
opportunity to supplement the record and to respond.
Limiting the Secretary's consultations with the Director of OFHEO
to communications that occur before the institution of an action would
needlessly limit the Secretary's authority in a manner not contemplated
by FHEFSSA. Section 81.83(d)(5) of the rule, cited by Freddie Mac as
the source of its comments on the subject matter, is, with one minor
exception, a recitation of the statutory language.\100\
\100\ Only a reference to the Notice of Intent--a reference to
which Freddie Mac made no objection--contains material not found in
the text of FHEFSSA.
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Freddie Mac's suggestion that these communications between the
Secretary and the Director would be ``in the nature of'' ex parte
communications prohibited by the APA simply is off the mark. Section
1345(c)(1)(C) of FHEFSSA provides that, in establishing standards and
procedures governing the imposition of civil money penalties, the
Secretary may provide for such review by the Director. Under this
provision, Congress intended that open communication between the
Secretary and the Director of OFHEO be permitted without implicating
the ex parte prohibitions in 5 U.S.C. 557(d)(1).
With reference to Freddie Mac's due process concerns, the Secretary
is mindful of the need for fairness and openness throughout the process
leading to a possible imposition of penalties. An affected GSE would
have full access to discovery procedures that will permit review of any
decisionmaking process that involves the Director of OFHEO.
Accordingly, the final rule does not place limits on Secretary/Director
communications.
Standard of Proof
Both GSEs commented on the standard of proof in cease-and-desist
and civil money penalty proceedings. Freddie Mac cited Steadman v. SEC,
450 U.S. 91 (1981) as authority for application of the ``preponderance
of the evidence'' standard of proof to both types of proceedings.
Fannie Mae stated that the APA's standard of proof is ``substantial
evidence,'' and that this standard should be made consistent in
provisions governing both cease-and-desist and civil money penalty
proceedings.\101\
\101\ The proposed rule set out the preponderance of the
evidence standard to govern civil money penalty cases, and the
substantial evidence standard for other administrative proceedings
under FHEFSSA.
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Under FHEFSSA, the standard of proof to be applied is governed by
the APA.\102\ As Freddie Mac noted in its comments, the Supreme Court
in Steadman has found the statutory ``substantial evidence'' phrase to
mean a ``preponderance of the evidence'' burden of proof for the
proponent of an order, and the final rule reflects this change.
\102\ 5 U.S.C. 556(d).
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General Procedural Questions
Freddie Mac asked for a variety of other revisions affecting
Sec. 81.84 on Hearings:
Freddie Mac requested a ``clarification'' to the effect that the
ALJ must modify a hearing schedule at the GSE's request, unless HUD can
show good reason why the GSE's request should be denied. Freddie Mac
urged that the GSE, rather than the hearing officer, is in the best
position to judge the feasibility of a particular hearing schedule.
Furthermore, Freddie Mac argued, FHEFSSA ``suggests a congressional
determination that such requests should ordinarily be allowed.''
The proposed rule at Sec. 81.84(c) provided that the ALJ would set
a hearing schedule ``[u]nless an earlier or later date is requested by
a GSE and is granted by the Administrative Law Judge * * *.'' The
regulatory formulation is similar to the statute, which provides, at
section 1342(a)(2), ``* * * unless an earlier or later date is set by
the hearing officer at the request of the enterprise * * *.''
Therefore, on its face, the statute provides for the setting of the
date by the ALJ, with an opportunity for the GSE to ``request'' a
change. The Secretary sees no basis for limiting the ALJ's discretion,
and the rule is unchanged.
Freddie Mac also asked that the rule be modified to provide a
procedure for a GSE to request the Secretary to seek enforcement of a
subpoena issued and served in connection with a hearing or in discovery
proceedings under the rule. The Secretary is sympathetic to the thrust
of this comment by Freddie Mac, i.e., that the GSE should have the same
right to enforcement of a subpoena as does the Secretary. However,
FHEFSSA does not grant a right to subpoenaing parties to apply directly
for a judicial order requiring compliance with a subpoena. The
Secretary, under FHEFSSA, can only request that the Attorney General
bring judicial actions to enforce subpoenas. Because direct judicial
enforcement by either party is not specifically provided as a matter of
law, HUD has developed an administrative mechanism in the final rule
providing for recognition of the GSEs' interest in requesting
enforcement action through the Secretary. Consistent with the
availability of remedies under the statute, this will improve equity
between HUD and the GSEs in discovery.
Freddie Mac asked that the final rule be amended to specify that
waiver, by a GSE, of an ALJ hearing on the disapproval of a new program
on public interest grounds would not constitute a ``failure to appear''
within the meaning of Sec. 81.84(g). (As proposed, the rule stated that
a failure to appear by a GSE shall be taken as consent to the
disapproval of a new program.) Freddie Mac said that, in cases
involving program disapprovals, a GSE may sometimes wish to expedite
judicial review, and urged that the GSE's waiver of an administrative
hearing on program disapproval not be treated as a consent to the HUD
action.
The final rule does not adopt the change. The statute requires, in
section 1322, that HUD provide the GSEs with ``notice of, and
opportunity for, a hearing on the record'' after the Secretary submits
a report to the Congress to the effect that a new program has been
disapproved. The Secretary concludes that this language indicates a
preference for providing the GSEs with administrative remedies.
Therefore, if the Secretary has refused to approve a new program
because the Secretary believes it is not in the public interest, HUD
should provide the forum in which appeal of the Secretary's initial
disapproval is heard and in which the GSE can offer further evidence on
the matter.
Both GSEs requested language indicating more expressly that conduct
is only ``alleged'' in notices of charges for cease-and-desist
proceedings. (The proposed rule at Sec. 81.82(b)(1)(i), in describing
the content of a ``charge'' notification, made reference to a ``* * *
concise statement of the facts constituting the conduct upon which the
Secretary has relied * * *.'') The final rule includes the word
``alleged'' before ``conduct'' where the reference is to conduct that
remains to be proven. However, it is not necessary to reiterate in the
rule that the conduct remains to be proven in a hearing.
Fannie Mae recommended revising Sec. 81.84(e) of the rule to
increase its specificity regarding how the Secretary will serve notices
and filings required under this subpart G. Fannie Mae suggested that
HUD follow the Federal Reserve Board rules of service--rules that
provide, among other things, details on what types of U.S. mail may be
used, and when electronic transmission is acceptable.
[[Page 61884]]
The proposed rule adopted by incorporation the requirements of 24
CFR 30.425(c)(3) governing how service is to be made. The final rule
has been revised to accept the GSEs' suggestion and to model the rule
governing service after the provisions in the Uniform Rules of Practice
and Procedure that have been adopted by the Federal financial
regulators.
Closed Proceedings
Freddie Mac requested that the final rule provide explicitly for
motions by the GSE to close a hearing, with any ALJ determination on
that question to be made reviewable by the Secretary on an
interlocutory basis. Freddie Mac argued that the affected GSE is more
likely than the ALJ to appreciate how an open hearing would affect its
employees, shareholders, customers and borrowers, and its ability to
perform its public mission. Freddie Mac proposed that the motion first
be made before the ALJ, with discretionary review by the Secretary
during an established, brief time period before the hearing is
permitted to continue.
FHEFSSA permits the Secretary to determine that a hearing should be
closed to the public, or that a document or part of a document should
be sealed. The proposed rule implemented this authority in
Secs. 81.84(h) and 81.85(c), but did not provide additional procedures,
beyond those available under the statute or part 30, subpart E, as
incorporated.
Under 24 CFR part 30, subpart E, a GSE may move for an order from
the ALJ providing for a closed hearing or sealed document. In response
to Freddie Mac's comment, the final rule also provides an additional
mechanism for interlocutory review by the Secretary of an ALJ's
decision in both of these situations. Section 81.84(h) allows a GSE to
request the Secretary to review an ALJ's denial of a timely motion for
a closed hearing. The hearing is stayed while the Secretary makes a
determination on the need to close the hearing. Section 81.85(c)
provides that a party may request immediate review by the Secretary of
an ALJ's denial of a protective order relating to documents for which
disclosure would be contrary to the public interest. However, unless
request for protection of the documentary evidence meets specific
timing requirements or the Secretary directs otherwise, the obligation
to produce the documents at a hearing will not be affected by the
request for review by the Secretary of the ALJ's decision on
disclosure.
Appeal-Related Issues
Freddie Mac urged that provisions in the final rule ``conform to
statutory requirements'' limiting the Secretary to 90 days to decide an
appeal of an ALJ ruling. Proposed Sec. 81.84(k) allowed the Secretary
an additional 30 days, at his or her discretion, in addition to the
statutory 90-day period set out in section 1342(b)(1). Additionally,
Freddie Mac objected to the provision in Sec. 81.84(l), permitting
remand of a case to an ALJ for additional proceedings, to the extent
that remand might have the effect of extending the 90-day time
provision established for a final decision. Freddie Mac asked that the
Secretary's authority to remand to an ALJ be limited, unless the
parties consent to any remand that extends the time for an ultimate
decision. The final rule eliminates any reference to a discretionary
extension of time triggered by written notice to the parties. However,
under the final rule the Secretary's remand of a case to an ALJ for
additional proceedings is a ``decision'' within the meaning of FHEFSSA.
This approach is consistent with recent case law.103
\103\ Mountain Side Mobile Estates Partnership v. Secretary of
HUD, 56 F.3d 1243, 1248 (10th Cir. 1993). Furthermore, under the
rule, if a decision is remanded for further proceedings, the ALJ is
required to issue an initial decision on remand within 60 days of
the date of issuance of the final decision, unless it is impractical
to do so.
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Freddie Mac also commented on the proposed rule's procedural
provisions on time-to-file and page limitations on appeals. Freddie Mac
stated that procedures set out in Sec. 30.910 for the Secretary's
review of ALJ decisions were inadequate in cases involving the GSEs,
because of the complex, fact-intensive nature of anticipated cases and
the broad public policy implications likely to be involved. Freddie Mac
requested that the rule make clear that provisions of Sec. 30.910,
including 15-day time and 10-page statement limits for appeals, may be
waived by the Secretary upon the motion of a party. Although Freddie
Mac agreed that expeditiousness and simplicity are ``generally
desirable,'' it asserted that such limits may not be appropriate in
cases involving national housing policies.
As a general matter the Secretary has authority to waive HUD
regulations, including those provisions to which Freddie Mac has raised
objection, as well as other procedural rules from 24 CFR part 30 that
are incorporated by reference. Nevertheless, the page-limit, and, in
some cases, the time-limit, provisions set out in Sec. 30.910 might be
inadequate in cases arising under this rule. For that reason, the final
rule makes waiver of those specific provisions easier, by providing
that any such waiver of the part 30 page- and time-limits for notices
of appeal or any other waivers under this subpart will not trigger
publication requirements for general waivers. Waiver requests, when
reasonable in light of the subject matter of a particular proceeding
and other factors, can be expected to be dealt with suitably by an ALJ
or the Secretary.
Freddie Mac asked that, because of the importance of these
decisions, the Secretary provide for oral argument on appeal at the
request of a GSE. Predicting that cases arising under FHEFSSA will be
rare, Freddie Mac argued that providing for oral argument by right
would not impose a significant burden on the Secretary.
Nothing in the proposed rule would prevent the Secretary from
granting a right to oral argument in connection with a particular
appeal of an ALJ decision. A GSE may petition for such an opportunity
and the Secretary may, in an appropriate case, agree to it. However, it
is unnecessary to provide in the regulation for additional mandatory
procedural rights that may be provided in the Secretary's discretion,
when necessary.
Freddie Mac commented that the rule need not repeat FHEFSSA's
provisions governing judicial review of HUD enforcement actions. For
example, Freddie Mac criticized the provisions of proposed
Sec. 81.83(e), which detailed the procedures through which the
Secretary could seek the aid of the U.S. District Court to collect a
civil money penalty. Provisions that only detail functions of the
reviewing court have been stricken in the final rule. The final rule
now cross-references statutory provisions governing judicial
procedures.
Fannie Mae asked for clarification on an ``apparent inconsistency''
between FHEFSSA and the proposed rule concerning who is responsible for
filing the record of an administrative proceeding with the appellate
court. The statute says the Secretary shall file, while the proposed
rule stated the Office of Administrative Law Judges shall file. The
provision Fannie Mae questioned is an intentional delegation to the
Office of Administrative Law Judges, in the interest of efficiency, and
is unchanged in the final rule.
Commenting on Sec. 81.86 of the proposed rule, Freddie Mac said
that the rule ignored the fact that FHEFSSA treats enforcement of
cease-and-desist orders and civil money penalties orders differently.
Freddie Mac argued that the two enforcement actions had been dealt with
differently in FHEFSSA to reflect a congressional judgment that fact
[[Page 61885]]
situations involving cease-and-desist orders may require immediate
action, while the collection of a civil money penalty might more
readily be deferred. The rule has been revised to reflect the statutory
language.
Freddie Mac also questioned the inclusion of a provision in
Sec. 81.86(c) providing that the Secretary ``may obtain such other
relief as may be available, including attorney fees and other expenses
* * *.'' FHEFSSA, Freddie Mac asserted, made explicit reference to
attorney fees only in instances where a GSE has refused, after
adjudication, to pay a civil money penalty. The final rule eliminates,
from Sec. 81.86, the reference to attorney fees. The provision more
specifically addressing failures to comply with an order imposing a
civil money penalty (Sec. 81.83(e)) cross-references the statutory
provision.
New Program Procedures
The proposed rule provided, under the procedures for review of the
Secretary's disapproval of a program request on grounds that the
program is not authorized, that the GSE may request an opportunity to
review and supplement the record, or may request a meeting with the
Secretary. The final rule allows the GSE to supplement the record
timely in writing and/or through a meeting. Freddie Mac expressed
concern in its comments about the procedures outlined in Sec. 81.54.
The proposed rule provided that such a meeting ``shall not be on the
record * * *.'' Freddie Mac's concern was that materials furnished in
response to the invitation to supplement the record--or statements made
at the meeting with the Secretary or his designee--might belong on the
record, because they might help a court to decided that the Secretary's
decision was not arbitrary and capricious, or would otherwise assist in
pinpointing the issues in dispute. Additionally, Freddie Mac said, a
record would help to avoid arguments about what happened at such a
meeting.
Because there is no statutory requirement that any opportunity be
provided for a meeting with an affected GSE to review a program
disapproval on these grounds, the question of how such a meeting should
be conducted is one solely within the Secretary's discretion.104
The intention of the proposed ``off the record'' provision was to
afford GSE representatives some assurance that statements made by them
at such a meeting would not be used in a manner adverse to the
interests of the GSE.
\104\ However, written materials submitted at such a meeting, or
in lieu of requesting a meeting, are considered as having been
submitted with the intention of supplementing the record, as
permitted under Sec. 81.54(a)(1).
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While the Secretary does not want to reverse the position taken in
the proposed rule and provide that all such post-decision meetings will
be held on the record, the final rule removes the above-quoted negative
declaration from Sec. 81.54(a). Instead, the Secretary will establish
procedures for any such meeting on a case-by-case basis.105
\105\ As a note of further clarification, the final rule
continues to permit a GSE freely to supplement the record in
writing, either at the meeting with the Secretary or designee, or in
a separate submission.
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Subpart H--Book Entry Procedures
Both the GSEs and the Book-Entry Treasury Regulations Task Force of
the Investment Securities Subcommittee of the UCC Committee of the
Business Law Section of the American Bar Association (``ABA Task
Force'') stated that revising book-entry procedures would be premature
in light of continuing work on a comprehensive revision of the Treasury
Department book-entry regulations.106 The Federal Reserve Bank of
New York--which operates the book-entry system--also urged HUD to delay
implementation of new book-entry provisions.
\106\ The Treasury Department is revising its book entry
regulations to reflect a major revision to Article 8 of the Uniform
Commercial Code (UCC). Treasury withdrew proposed changes to its own
regulations pending the completion of additional UCC work. See 57 FR
12244 (Apr. 9, 1992), and 58 FR 59972 (Nov. 12, 1993).
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Fannie Mae discussed the book-entry provisions briefly, indicating
that the proposed rule's revisions to the book-entry provisions were so
minor that any revision was unnecessary. Pending the overhaul of the
book-entry system by Treasury, Fannie Mae recommended preserving the
current book-entry regulations to ``avoid confusion and certain
regulatory inefficiency.'' However, Fannie Mae recommended deleting
Sec. 81.45(b) of the current book-entry regulations, consistent with
the proposed rule, because without this deletion, Fannie Mae must
request a waiver whenever it issues securities in definitive form.
Freddie Mac commented that it ``strongly opposes'' adoption of
proposed Subpart H, calling it ``at best premature and at worst
potentially destructive.'' Freddie Mac requested that, if HUD
determines it is necessary to promulgate subpart H at this time,
Secs. 81.94(d) and 81.95 be ``recast'' to allow Freddie Mac to maintain
its ability to decide whether to allow conversion of its securities to
definitive form. Current Freddie Mac regulations allow a depositor to
withdraw securities from the book-entry system and convert to
definitive form only if the securities provide for such conversion
pursuant to the offering materials. Since 1985, Freddie Mac's offering
materials have not provided such a right of conversion--a practice it
comments is in keeping with current market practice. Freddie Mac said
that while the proposed HUD rules appear to mirror part O of Treasury's
regulations, the Treasury Department has informed Freddie Mac ``that in
practice it has not issued its own offerings in definitive form since
1986, notwithstanding the language of Part O, unless the offering
circular specifically allows.'' Freddie Mac therefore concluded that
the HUD proposal could put the GSEs at a competitive disadvantage
respecting other competing issuers, including Treasury.
The GSEs' current book-entry regulations date back to the late
1970s and are codified in separate parts of the CFR.107 These
regulations are essential to permit the GSEs to avail themselves of
Federal Reserve book-entry systems. Under HUD's general regulatory
power respecting the GSEs, the proposed rule sought to establish a
uniform, modern set of book-entry regulations applicable to both Fannie
Mae and Freddie Mac modelled on the current book-entry procedures
established by the Treasury.108 Recently, by regulation and at the
request of Fannie Mae, the Secretary specifically extended the Fannie
Mae book-entry regulations to allow Fannie Mae to continue to use the
book-entry system pending the issuance of this comprehensive
rule.109
\107\ 24 CFR part 81, subpart E (Fannie Mae) and 1 CFR part 462
(Freddie Mac).
\108\ See 31 CFR 306.115 et seq.
\109\ 59 FR 54366 (Oct. 28, 1994).
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Based on the comments, the Secretary has decided to postpone
adopting uniform book-entry regulations for the GSEs pending completion
of the revised Treasury Department book-entry regulations. For HUD to
act now to finalize a complete set of regulations for both GSEs, and
then shortly to revise them, would only lead to confusion. HUD will
work with the Treasury Department to adopt revised regulations
simultaneously. These regulations will be substantively identical for
both GSEs and will provide a level playing field. In the interim,
Fannie Mae and Freddie Mac book-entry regulations shall remain
effective, essentially in their current form. The final rule makes only
three changes.
The Fannie Mae book-entry regulations are modified to delete
Sec. 81.45(b), as requested by Fannie Mae.
[[Page 61886]]
This provision requires use of book-entry procedures and has
necessitated that Fannie Mae formally request a waiver each time
definitive certificates are to be issued. Fannie Mae's requests for
waivers under this section have always been granted. Nonetheless, work
on these requests has frequently tied up both HUD and Fannie Mae staff.
In removing this section, HUD recognizes that under Freddie Mac's
regulations, securities may be issued in definitive form only where the
offering circular so provides. While HUD considered adding this
provision to current Fannie Mae regulations, it determined instead to
await Treasury Department revisions before addressing the matter.
In addition, the current Fannie Mae book-entry regulations are
moved to subpart H and renumbered, using the numbering scheme in the
proposed regulation, Secs. 81.91-99. HUD explored the possibility of
maintaining the book-entry procedures as subpart E, and redesignating
and renumbering subparts E through I of the proposed rule, as had been
suggested by Fannie Mae. HUD determined, however, that the organization
of the regulation was more sensible if the book-entry provisions were
placed near the end of the part, because other subparts were of more
universal interest. Moreover, moving and redesignating five sections of
the proposed rule would be more confusing to the public than moving the
book-entry procedures. Finally, in the interest of consistency, the
term ``Fannie Mae'' is substituted for the term ``Federal National
Mortgage Association'' in this subpart.
Subpart I--Other Provisions
Both GSEs commented on a provision of HUD's proposed rule that
provided that the Secretary could conduct regulatory examinations of
the GSEs at any time, to determine whether the GSEs were complying with
statutory requirements. The primary argument made by both GSEs was that
the Secretary does not possess examination authority, because Congress
specifically took this authority away from the Secretary under FHEFSSA
and gave it to the Director of OFHEO. Freddie Mac also argued that the
Secretary does not possess this authority pursuant to FHEFSSA's grant
to the Secretary of ``general regulatory authority,'' because
examination authority may only be implied if that authority is
necessary, indispensable, and essential. Freddie Mac argued that the
authority is not necessary, indispensable, or essential, because the
Secretary may monitor the GSEs' compliance by using the reports and
data that the GSEs provide to HUD.
The section on regulatory examinations has been removed. However
another provision, making clear the Secretary's authority to verify
information, has been added to the rule at Sec. 81.102. Sections
1381(k) and 1382(e) of FHEFSSA removed the Secretary's explicit
statutory authority to ``examine and audit the books and financial
transactions'' of the GSEs. However, that elimination of the
Secretary's explicit statutory grant of authority to conduct
examinations does not mean that the Secretary has no alternative but to
accept, as accurate and complete, whatever data, information, or
reports the GSEs may provide. Rather, the Secretary may independently
verify the accuracy and completeness of the data, information, and
reports, including conducting on-site verification, when verification
is reasonably related to determining whether the GSEs are complying
with the law. The Secretary does not anticipate exercising this
authority often, but only where such verification is necessary.
The authority to verify information when necessary is derived from
section 1321 of FHEFSSA, which accords the Secretary ``general
regulatory power over each enterprise,'' as well as the enumerated
powers conferred on the Secretary by FHEFSSA. The Supreme Court has
repeatedly held that a grant to an agency of ``general regulatory
authority,'' extends to the agency those unenumerated powers that are
``reasonably related to the purposes of the enabling legislation.''
110 This standard has been accepted by every Federal Court of
Appeals.111 Independent verification of the information provided
by the GSEs is reasonably related to the Secretary's performing out his
or her statutory duties.
\110\ Mourning v. Family Publications Service, Inc., 411 U.S.
356, 369 (1973) (quoting Thorpe v. Housing Authority of City of
Durham, 393 U.S. 268, 280-81 (1969)).
\111\ See, e.g., Action on Smoking and Health v. CAB, 699 F.2d
1209, 1212 (D.C. Cir. 1983).
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Freddie Mac acknowledged in its comments that ``HUD could have
implicit examination authority only if that authority were necessary,
indispensable and essential to monitor GSE compliance with'' provisions
of the Charter Acts. In support of its ``necessary, indispensable, and
essential'' standard, Freddie Mac cited one Circuit Court
decision,112 which involved the authority of bankruptcy judges to
conduct jury trials. That case is distinguishable on several grounds
and does not represent the correct standard to apply here, in light of
Supreme Court holdings adopting a ``reasonably related'' standard,
which every Federal Circuit Court has followed.
\112\ In re United Mo. Bank of Kansas City, N.A., 901 F.2d 1449,
1456 (8th Cir. 1990).
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In a landmark decision, the Supreme Court specifically addressed
the scope of an agency's authority to investigate a regulated entity
absent an explicit grant of statutory authority to conduct such
investigations.113 In that case, the Court held that the Federal
Trade Commission (FTC) possessed authority to require additional
reports from a corporation it regulated, even though the FTC did not
have specific authority to require such reports under applicable law or
the consent decree that it sought to enforce.
\113\ United States v. Morton Salt Co., 338 U.S. 632 (1950).
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In reaching its decision, the Court rejected Morton Salt's argument
that enforcing compliance with the decree had to ``rest upon
respondents' honor unless evidence of a violation fortuitously comes to
the Commission.'' Rather, ``the Commission, in view of its residual
duty of enforcement,'' could ``affirmatively satisfy itself that the
decree is being observed.'' 114 The Court indicated that the FTC's
authority to investigate compliance with consent decrees in this manner
derived from its authority to initiate contempt proceedings for the
violation of such decrees, concluding that the authority to initiate
contempt proceedings ``must have contemplated that the Commission could
obtain accurate information from time to time on which to base a
responsible conclusion that there was or was not cause for such a
proceeding.'' 115
\114\ 338 U.S. at 640.
\115\ Id. at 639.
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The Secretary, like the FTC, is charged with the authority to
initiate enforcement actions upon determining that the law has been
violated. This enforcement responsibility contemplates that the
Secretary will obtain accurate information on which to base a
responsible conclusion that there is or is not cause for such a
proceeding. The Secretary, like the FTC, is accorded a number of
investigative functions. For the Secretary, these investigatory
functions include the authority to require reports (e.g., FHEFSSA,
section 1327), gather data from the GSEs on their mortgage purchases
(FHEFSSA, sections 1381(o) and 1382(r)), 116
[[Page 61887]]
monitor compliance with the housing goals (FHEFSSA, section 1336), and
issue subpoenas (FHEFSSA, section 1348).117 The Secretary's
functions, like the FTC's functions, include making factual
determinations. For the Secretary these determinations include: (1)
Whether a GSE is complying with the housing goals; (2) whether a GSE
has made a good-faith effort to comply with a housing plan; and (3)
whether a GSE has submitted the mortgage information and reports
required under sections 1381(o), 1382(r), or 1337 of FHEFSSA. Under
Morton Salt, these functions, along with the Secretary's general
regulatory powers, support the Secretary's authority to verify
independently the completeness and accuracy of data, information, and
reports submitted by the GSEs, including conducting on-site
verification when doing so is reasonably related to determining whether
the GSEs are complying with the law.
\116\ Sections 1381(o) and 1382(r) of FHEFSSA require that the
GSEs ``collect, maintain, and provide to the Secretary, in a form
determined by the Secretary,'' mortgage data pertaining to single-
family and multifamily mortgages. These provisions provide the
Secretary with broad discretion to determine the ``form'' in which
the data is to be provided, as well as what information, other than
the mortgage characteristics indicated in the statute, the Secretary
may also require.
\117\ ``Administrative authority to inspect and copy business
records was implied as a reasonable projection of a principle
reflected in a statutory grant of subpoena power.'' 2B Norman J.
Singer, Sutherland on Statutory Construction Sec. 55.04 (5th ed.
1992) (citing Porter v. Gantner & Mattern Co., 156 F.2d 886 (9th
Cir. 1946)).
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Freddie Mac maintains that the Secretary can sufficiently monitor
compliance through the extensive data and reports that the GSEs are
required to provide. Freddie Mac points out that the Secretary can use
the mortgage purchase data required to be submitted to verify the
accuracy of the housing goal performance reported in the annual
reports. Freddie Mac asserts, ``If a GSE fails to submit required
reports or data required under the Act or its charter, HUD can initiate
enforcement proceedings and, incidental to those proceedings, can issue
subpoenas for the production of documents and witnesses.''
However, without the authority to verify the completeness and
accuracy of the data, information, or reports submitted by each GSE,
the Secretary would be hampered in making the determinations that are
required. Such a situation could result in the Secretary erroneously
concluding that the GSEs are complying with FHEFSSA's requirements when
they are not, or that they are not complying with FHEFSSA's
requirements when they are. Thus, where the Secretary determines that
it is necessary to verify independently the data, information, or
reports provided by the GSEs, including conducting on-site
verification, such verification is ``reasonably related to the purposes
of the enabling legislation.''
Information Collection and Cost/Benefit Analysis
Freddie Mac argued that HUD's estimates of the cost of GSE
compliance with the reporting requirements were grossly understated in
the analysis provided with the proposed rule. Freddie Mac noted that
HUD's estimate of its own costs to review the data was much higher than
the costs estimated for the GSEs.
HUD did not act arbitrarily in estimating its own costs to review
data as substantially higher than the costs to the GSEs of providing
the data. HUD's estimates of costs did not include the GSEs' costs of
amassing the data, including systems costs, because the cost estimates
were intended to measure the incremental costs associated with
compiling the data from the GSEs data systems, i.e., producing the
tables, reports, and loan-level data tapes. The estimates also are not
intended to reflect costs associated with data elements that the GSEs
would collect in the absence of the final rule. Moreover, the costs
should not reflect any analytical research conducted by the GSEs with
respect to the data or the housing goals.
However, the Secretary does appreciate the GSEs' commitment to
diligence in checking the accuracy of the data, and those costs have
been accounted for in reviewing the information collection provisions
in the final rule. In addition, after reviewing the comments on all
areas of the rule in which information collection considerations were a
factor, HUD revised its cost estimates to reflect more accurately the
costs of producing each of the reports required by the rule. These
revised cost estimates have been provided to OMB, and the Economic
Analysis that analyzes the costs and benefits associated with the
provisions of this final rule is available to the public, as noted
under ``Significant Regulatory Action'' in the ``Other Matters''
section of this preamble.
Other Matters
Environmental Impact
In accordance with 40 CFR 1508.4 of the regulations of the Council
on Environmental Quality and 24 CFR 50.20 of the HUD regulations, the
policies and procedures contained in this rule do not affect a physical
structure or property and relate only to statutorily required
accounting and reporting procedures, and, therefore, are categorically
excluded from the requirements of the National Environmental Policy
Act.
Executive Order 12866
This rule constitutes a ``significant regulatory action'' as that
term is defined in subsection 3(f) of Executive Order 12866 on
Regulatory Planning and Review issued by the President on September 30,
1993. A preliminary review of the rule indicated that it might, as
defined in that Order, have an annual effect on the economy of $100
million or more. Accordingly, an economic Analysis was prepared and is
available for review and inspection in Room 10276, Rules Docket Clerk,
Office of the General Counsel, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410-0500.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that this rule would not have a significant
economic impact on a substantial number of small entities. The
requirements of the proposed rule are directed toward the accounting
procedures used in the mortgage servicing industry and the disclosure
to consumers of related information.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under subsection
6(a) of Executive Order 12612, Federalism, has determined that the
policies contained in this rule would not have substantial direct
effects on States or their political subdivisions, or the relationship
between the federal government and the States, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the rule is not subject to review under the Order. The
requirements of the rule are directed toward the accounting procedures
used in the mortgage servicing industry and the disclosure to consumers
of related information.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this rule does not have
the potential for significant impact on family formation, maintenance,
and general well-being, and, thus, is not subject to review under the
Order. No significant change in existing HUD policies or programs will
result from promulgation of this rule, as those
[[Page 61888]]
policies and programs relate to family concerns.
List of Subjects in 24 CFR Part 81
Accounting, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements, Securities.
1. For the reasons set out in the preamble, part 81 of Title 24 of
the Code of Federal Regulations is revised to read as follows:
PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL
MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN
MORTGAGE CORPORATION (FREDDIE MAC)
Subpart A--General
Sec.
81.1 Scope of part.
81.2 Definitions.
Subpart B--Housing Goals
Sec.
81.11 General.
81.12 Low- and Moderate-Income Housing Goal.
81.13 Central Cities, Rural Areas, and Other Underserved Areas
Housing Goal.
81.14 Special Affordable Housing Goal.
81.15 General requirements.
81.16 Special counting requirements.
81.17 Affordability--Income level definitions--family size and
income known (owner-occupied units, actual tenants, and prospective
tenants).
81.18 Affordability--Income level definitions--family size not
known (actual or prospective tenants).
81.19 Affordability--Rent level definitions--tenant income is not
known.
81.20 Actions to be taken to meet the goals.
81.21 Notice and determination of failure to meet goals.
81.22 Housing plans.
Subpart C--Fair Housing
Sec.
81.41 General.
81.42 Prohibitions against discrimination.
81.43 Reports; underwriting and appraisal guideline review.
81.44 Submission of information to the Secretary.
81.45 Obtaining and disseminating information.
81.46 Remedial actions.
81.47 Violations of provisions by the GSEs.
Subpart D--New Program Approval
Sec.
81.51 General.
81.52 Requirement for program requests.
81.53 Processing of program requests.
81.54 Review of disapproval.
Subpart E--Reporting Requirements
Sec.
81.61 General.
81.62 Mortgage reports.
81.63 Annual Housing Activities Report.
81.64 Periodic reports.
81.65 Other information and analyses.
81.66 Submission of reports.
Subpart F--Access to Information
Sec.
81.71 General.
81.72 Public-use database and public information.
81.73 GSE request for proprietary treatment.
81.74 Secretarial determination on GSE request.
81.75 Proprietary information withheld by order or regulation.
81.76 FOIA requests and protection of GSE information.
81.77 Requests for GSE information on behalf of Congress, the
Comptroller General, a subpoena, or other legal process.
Subpart G--Procedures for Actions and Review of Actions
Sec.
81.81 General.
81.82 Cease-and-desist proceedings.
81.83 Civil money penalties.
81.84 Hearings.
81.85 Public disclosure of final orders and agreements.
81.86 Enforcement and jurisdiction.
81.87 Judicial review.
Subpart H--Book-Entry Procedures
Sec.
81.91 Definitions.
81.92 Authority of Reserve Bank.
81.93 Scope and effect of book-entry procedure.
81.94 Transfer or pledge.
81.95 Withdrawal of Fannie Mae securities.
81.96 Delivery of Fannie Mae securities.
81.97 Registered bonds and notes.
81.98 Servicing book-entry Fannie Mae securities; payment of
interest; payment at maturity or upon call.
81.99 Treasury Department regulations; applicability to Fannie Mae.
Subpart I--Other Provisions
Sec.
81.101 Equal employment opportunity.
81.102 Independent verification authority.
Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42
U.S.C. 3535(d) and 3601-3619.
Subpart A--General
Sec. 81.1 Scope of part.
(a) Authority. The Secretary has general regulatory power
respecting the Federal National Mortgage Association (``Fannie Mae'')
and the Federal Home Loan Mortgage Corporation (``Freddie Mac'')
(referred to collectively as Government-sponsored enterprises
(``GSEs'')) and is required to make such rules and regulations as are
necessary and proper to ensure that the provisions of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992
(``FHEFSSA''), codified generally at 12 U.S.C. 4501-4641; the Fannie
Mae Charter Act, 12 U.S.C. 1716-1723h; and the Freddie Mac Act, 12
U.S.C. 1451-59, are accomplished.
(b) Relation between this part and the authorities of OFHEO. The
Director of the Office of Federal Housing Enterprise Oversight
(``OFHEO'') will issue separate regulations implementing the Director's
authority respecting the GSEs. In this part, OFHEO and the Director are
only referenced when the Director's responsibilities are connected with
the Secretary's responsibilities.
Sec. 81.2 Definitions.
(a) Statutory terms. All terms defined in FHEFSSA (12 U.S.C. 4502)
are used in accordance with their statutory meaning unless otherwise
defined in paragraph (b) of this section.
(b) Other terms. As used in this part, the term--
AHAR means the Annual Housing Activities Report that a GSE submits
to the Secretary under sections 309(n) of the Fannie Mae Charter Act or
307(f) of the Freddie Mac Act.
AHAR information means data or information contained in the AHAR.
AHS means the American Housing Survey published by HUD and the
Department of Commerce.
Balloon mortgage means a mortgage providing for payments at regular
intervals, with a final payment (``balloon payment'') that is at least
5 percent more than the periodic payments. The periodic payments may
cover some or all of the periodic principal or interest. Typically, the
periodic payments are level monthly payments that would fully amortize
the mortgage over a stated term and the balloon payment is a single
payment due after a specified period (but before the mortgage would
fully amortize) and pays off or satisfies the outstanding balance of
the mortgage.
Central city means the underserved areas located in any political
subdivision designated as a central city by the Office of Management
and Budget of the Executive Office of the President.
Charter Act means the Federal National Mortgage Association Charter
Act (12 U.S.C. 1716 et seq.) or the Federal Home Loan Mortgage
Corporation Act (12 U.S.C. 1451 et seq.).
Contract rent means the total rent that is, or is anticipated to
be, specified in the rental contract as payable by the tenant to the
owner for rental of a dwelling unit, including fees or charges for
management and maintenance services and those utility charges that are
included in the rental contract. In determining contract rent, rent
concessions shall not be considered, i.e., contract rent is not
decreased by any
[[Page 61889]]
rent concessions. Contract rent is rent net of rental subsidies.
Conventional mortgage means a mortgage other than a mortgage as to
which a GSE has the benefit of any guaranty, insurance or other
obligation by the United States or any of its agencies or
instrumentalities.
Day means a calendar day.
Director means the Director of OFHEO.
Dwelling unit means a room or unified combination of rooms intended
for use, in whole or in part, as a dwelling by one or more persons, and
includes a dwelling unit in a single-family property, multifamily
property, or other residential or mixed-use property.
ECOA means the Equal Credit Opportunity Act (15 U.S.C. 1691 et
seq.).
Familial status has the same definition as is set forth at 24 CFR
100.20.
Family means one or more individuals who occupy the same dwelling
unit.
Fannie Mae means the Federal National Mortgage Association and any
affiliate thereof.
FHEFSSA means the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, codified generally at 12 U.S.C. 4501-4651.
FOIA means the Freedom of Information Act (5 U.S.C. 552).
Freddie Mac means the Federal Home Loan Mortgage Corporation and
any affiliate thereof.
Freddie Mac Act means the Federal Home Loan Mortgage Corporation
Act (12 U.S.C. 1451 et seq.).
Government-sponsored enterprise or GSE means Fannie Mae or Freddie
Mac.
Handicap has the same definition as is set forth at 24 CFR 100.201.
HUD means the United States Department of Housing and Urban
Development.
Lender means any entity that makes, originates, sells, or services
mortgages, and includes the secured creditors named in the debt
obligation and document creating the mortgage.
Low-income area means a census tract or block numbering area in
which the median income does not exceed 80 percent of the area median
income.
Median income means, with respect to an area, the unadjusted median
family income for the area, as most recently determined and published
by the Secretary.
Metropolitan area means a metropolitan statistical area (``MSA''),
primary metropolitan statistical area (``PMSA''), or consolidated
metropolitan statistical area (``CMSA''), designated by the Office of
Management and Budget of the Executive Office of the President.
Minority means any individual who is included within any one of the
following racial and ethnic categories:
(1) American Indian or Alaskan Native--a person having origins in
any of the original peoples of North America, and who maintains
cultural identification through tribal affiliation or community
recognition;
(2) Asian or Pacific Islander--a person having origins in any of
the original peoples of the Far East, Southeast Asia, the Indian
subcontinent, or the Pacific Islands;
(3) African-American--a person having origins in any of the black
racial groups of Africa; and
(4) Hispanic--a person of Mexican, Puerto Rican, Cuban, Central or
South American, or other Spanish culture or origin, regardless of race.
Mortgage means a member of such classes of liens, including
subordinate liens, as are commonly given or are legally effective to
secure advances on, or the unpaid purchase price of, real estate under
the laws of the State in which the real estate is located, or a
manufactured home that is personal property under the laws of the State
in which the manufactured home is located, together with the credit
instruments, if any, secured thereby, and includes interests in
mortgages. ``Mortgage'' includes a mortgage, lien, including a
subordinate lien, or other security interest on the stock or membership
certificate issued to a tenant-stockholder or resident-member by a
cooperative housing corporation, as defined in section 216 of the
Internal Revenue Code of 1986, and on the proprietary lease, occupancy
agreement, or right of tenancy in the dwelling unit of the tenant-
stockholder or resident-member in such cooperative housing corporation.
Mortgage data means data obtained by the Secretary from the GSEs
under subsection 309(m) of the Fannie Mae Charter Act and subsection
307(e) of the Freddie Mac Act.
Mortgage purchase means a transaction in which a GSE bought or
otherwise acquired with cash or other thing of value, a mortgage for
its portfolio or for securitization.
Multifamily housing means a residence consisting of more than 4
dwelling units. The term includes cooperative buildings and condominium
projects.
New England means Connecticut, Maine, Massachusetts, New Hampshire,
Rhode Island, and Vermont.
OFHEO means the Office of Federal Housing Enterprise Oversight.
Ongoing program means a program that is expected to continue for
the foreseeable future.
Other underserved area means any underserved area that is in a
metropolitan area, but not in a central city.
Owner-occupied unit means a dwelling unit in single-family housing
in which a mortgagor of the unit resides.
Participation means a fractional interest in the principal amount
of a mortgage.
Portfolio of loans means 10 or more loans.
Proprietary information means all mortgage data and all AHAR
information that the GSEs submit to the Secretary in the AHARs that
contain trade secrets or privileged or confidential, commercial, or
financial information that, if released, would be likely to cause
substantial competitive harm.
Public data means all mortgage data and all AHAR information that
the GSEs submit to the Secretary in the AHARs, that the Secretary
determines are not proprietary and may appropriately be disclosed
consistent with other applicable laws and regulations.
Real estate mortgage investment conduit (REMIC) means multi-class
mortgage securities issued by a tax-exempt entity.
Refinancing means a transaction in which an existing mortgage is
satisfied or replaced by a new mortgage undertaken by the same
borrower. The term does not include:
(1) A renewal of a single payment obligation with no change in the
original terms;
(2) A reduction in the annual percentage rate of the mortgage as
computed under the Truth in Lending Act, with a corresponding change in
the payment schedule;
(3) An agreement involving a court proceeding;
(4) A workout agreement, in which a change in the payment schedule
or collateral requirements is agreed to as a result of the mortgagor's
default or delinquency, unless the rate is increased or the new amount
financed exceeds the unpaid balance plus earned finance charges and
premiums for the continuation of insurance;
(5) The renewal of optional insurance purchased by the mortgagor
and added to an existing mortgage; and
(6) A renegotiated balloon mortgage on a multifamily property where
the balloon payment was due within 1 year after the date of the closing
of the renegotiated mortgage.
Rent means, for a dwelling unit:
(1) When the contract rent includes all utilities, the contract
rent; or
[[Page 61890]]
(2) When the contract rent does not include all utilities, the
contract rent plus:
(i) The actual cost of utilities not included in the contract rent;
or
(ii) A utility allowance.
Rental housing means dwelling units in multifamily housing and
dwelling units that are not owner occupied in single-family housing.
Rental unit means a dwelling unit that is not owner-occupied and is
rented or available to rent.
Residence means a property where one or more families reside.
Residential mortgage means a mortgage on single-family or
multifamily housing.
Rural area means any underserved area located outside of any
metropolitan area.
Seasoned mortgage means a mortgage on which the date of the
mortgage note is more than 1 year before the GSE purchased the
mortgage.
Second mortgage means any mortgage that has a lien position
subordinate only to the lien of the first mortgage.
Secondary residence means a dwelling where the mortgagor maintains
(or will maintain) a part-time place of abode and typically spends (or
will spend) less than the majority of the calendar year. A person may
have more than one secondary residence at a time.
Secretary means the Secretary of Housing and Urban Development and,
where appropriate, any person designated by the Secretary to perform a
particular function for the Secretary, including any HUD officer,
employee, or agent.
Single-family housing means a residence consisting of one to four
dwelling units. Single-family housing includes condominium dwelling
units and dwelling units in cooperative housing projects.
Underserved area means:
(1) For purposes of the definitions of ``central city'' and ``other
underserved area,'' a census tract having:
(i) A median income at or below 120 percent of the median income of
the metropolitan area and a minority population of 30 percent or
greater; or
(ii) A median income at or below 90 percent of median income of the
metropolitan area.
(2) For purposes of the definition of ``rural area'':
(i) In areas other than New England, a county having:
(A) A median income at or below 120 percent of the State
nonmetropolitan median income and a minority population of 30 percent
or greater; or
(B) A median income at or below 95 percent of the greater of the:
(1) State non-metropolitan median income; or
(2) Nationwide non-metropolitan median income; and
(ii) In New England, an entire county having the characteristics in
paragraph (2)(i)(A) or (B) of this definition or the remainder of a
county, where a portion of the county is in a metropolitan area and the
remainder of the county has the characteristics in paragraph (2)(i)(A)
or (B) of this definition.
Utilities means charges for electricity, piped or bottled gas,
water, sewage disposal, fuel (oil, coal, kerosene, wood, solar energy,
or other), and garbage and trash collection. Utilities do not include
charges for telephone service.
Utility allowance means either:
(1) The amount to be added to contract rent when utilities are not
included in contract rent (also referred to as the ``AHS-derived
utility allowance''), as issued annually by the Secretary; or
(2) The utility allowance established under the HUD Section 8
Program (42 U.S.C. 1437f) for the area where the property is located.
Very-low-income has the same definition as ``very low-income'' has
in FHEFSSA.
Wholesale exchange means a transaction in which a GSE buys or
otherwise acquires mortgages held in portfolio or securitized by the
other GSE, or where both GSEs swap such mortgages.
Working day means a day when HUD is officially open for business.
Subpart B--Housing Goals
Sec. 81.11 General.
This subpart establishes: three housing goals, as required by
FHEFSSA; requirements for measuring performance under the goals; and
procedures for monitoring and enforcing the goals.
Sec. 81.12 Low- and Moderate-Income Housing Goal.
(a) Purpose of goal. This annual goal for the purchase by each GSE
of mortgages on housing for low- and moderate-income families (``the
Low- and Moderate-Income Housing Goal'') is intended to achieve
increased purchases by the GSEs of such mortgages.
(b) Factors. In establishing the Low- and Moderate-Income Housing
Goals, the Secretary considered the factors in 12 U.S.C. 4562(b). A
statement documenting the Secretary's considerations and findings with
respect to these factors, entitled ``Secretarial Considerations to
Establish the Low- and Moderate-Income Housing Goal,'' was published in
the Federal Register on December 1, 1995.
(c) Goals. The annual goals for each GSE's purchases of mortgages
on housing for low- and moderate-income families are:
(1) For 1996, 40 percent of the total number of dwelling units
financed by that GSE's mortgage purchases in 1996;
(2) For each of the years 1997-99, 42 percent of the total number
of dwelling units financed by that GSE's mortgage purchases in each of
those years; and
(3) For 2000 and thereafter the Secretary shall establish annual
goals; pending establishment of goals for 2000 and thereafter, the
annual goal for each of those years shall be 42 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
each of those years.
Sec. 81.13 Central Cities, Rural Areas, and Other Underserved Areas
Housing Goal.
(a) Purpose of the goal. This annual goal for the purchase by each
GSE of mortgages on housing located in central cities, rural areas, and
other underserved areas is intended to achieve increased purchases by
the GSEs of mortgages financing housing in areas that are underserved
in terms of mortgage credit.
(b) Factors. In establishing the Central Cities, Rural Areas, and
Other Underserved Areas Goals, the Secretary considered the factors in
12 U.S.C. 4564(b). A statement documenting the Secretary's
considerations and findings with respect to these factors, entitled
``Secretarial Considerations to Establish the Central Cities, Rural
Areas, and Other Underserved Areas Housing Goal,'' was published in the
Federal Register on December 1, 1995.
(c) Goals. The annual goals for each GSE's purchases of mortgages
on housing located in central cities, rural areas, and other
underserved areas are:
(1) For 1996, 21 percent of the total number of dwelling units
financed by that GSE's mortgage purchases in 1996;
(2) For each of the years 1997-99, 24 percent of the total number
of dwelling units financed by that GSE's mortgage purchases in each of
those years; and
(3) For 2000 and thereafter the Secretary shall establish annual
goals; pending establishment of goals for 2000 and thereafter, the
annual goal for each of those years shall be 24 percent of the total
number of dwelling units financed by that GSE's mortgage purchases in
each of those years.
(d) Measuring performance. The GSEs shall determine on a mortgage-
by-mortgage basis, through geocoding or any similarly accurate and
reliable method, whether a mortgage finances
[[Page 61891]]
one or more dwelling units located in a central city, rural area, or
other underserved area.
Sec. 81.14 Special Affordable Housing Goal.
(a) Purpose of the goal. This goal is intended to achieve increased
purchases by the GSEs of mortgages on rental and owner-occupied housing
meeting the then-existing unaddressed needs of, and affordable to, low-
income families in low-income areas and very-low-income families.
(b) Factors. In establishing the Special Affordable Housing Goals,
the Secretary considered the factors in 12 U.S.C. 4563(a)(2). A
statement documenting the Secretary's considerations and findings with
respect to these factors, entitled ``Secretarial Considerations to
Establish the Special Affordable Housing Goal,'' was published in the
Federal Register on December 1, 1995.
(c) Goals. The annual goals for each GSE's purchases of mortgages
on rental and owner-occupied housing meeting the then-existing,
unaddressed needs of and affordable to low-income families in low-
income areas and very-low-income families are:
(1) For 1996, 12 percent of the total number of dwelling units
financed by each GSE's mortgage purchases in 1996. The goal shall
include mortgage purchases financing dwelling units in multifamily
housing totalling not less than 0.8 percent of the dollar volume of
mortgages purchased by the respective GSE in 1994;
(2) For each of the years 1997-99, 14 percent of the total number
of dwelling units financed by each GSE's mortgage purchases in each of
those years. The goal for each year shall include mortgage purchases
financing dwelling units in multifamily housing totalling not less than
0.8 percent of the dollar volume of mortgages purchased by the
respective GSE in 1994; and
(3) For 2000 and thereafter the Secretary shall establish annual
goals. Pending establishment of goals for 2000 and thereafter, the
annual goal for each of those years shall be 14 percent of the total
number of dwelling units financed by each GSE's mortgages purchases in
each of those years; the goal for each such year shall include mortgage
purchases financing dwelling units in multifamily housing totalling not
less than 0.8 percent of the dollar volume of mortgages purchased by
the respective GSE in 1994.
(d) Counting of multifamily units. (1) Dwelling units affordable to
low-income families and financed by a particular purchase of a mortgage
on multifamily housing shall count toward achievement of the Special
Affordable Housing Goal where at least:
(i) 20 percent of the dwelling units in the particular multifamily
property are affordable to families whose incomes do not exceed 50
percent of the area median income; or
(ii) 40 percent of the dwelling units in the particular multifamily
property are affordable to very-low-income families.
(2) Where only some of the units financed by a purchase of a
mortgage on multifamily housing count under the multifamily component
of the goal, only a portion of the unpaid principal balance of the
mortgage attributable to such units shall count toward the multifamily
component. The portion of the mortgage counted under the multifamily
requirement shall be equal to the ratio of the total units that count
to the total number of units in the mortgaged property.
(e) Full Credit Activities. (1) For purposes of 12 U.S.C.
4563(b)(1) and this paragraph (e), full credit means that each unit
financed by a mortgage purchased by a GSE and meeting the requirements
of this section shall count toward achievement of the Special
Affordable Housing Goal for that GSE.
(2) Consistent with Sec. 81.16(b)(3)(ii), the Secretary will give
full credit toward achievement of the Special Affordable Housing Goals
for the activities in 12 U.S.C. 4563(b)(1).
(3) Mortgages under HUD's Home Equity Conversion Mortgage
(``HECM'') Insurance Demonstration Program, 12 U.S.C. 1715z-20, and the
Farmers Home Administration's Guaranteed Rural Housing Loan Program, 7
U.S.C. 1933, meet the requirements of 12 U.S.C. 4563(b)(1)(A)(i) and
(ii).
(4) (i) For purposes of determining whether a seller meets the
requirement in 12 U.S.C. 4563(b)(1)(B), a seller must currently operate
on its own or actively participate in an ongoing program that will
result in originating additional loans that meet the goal. Actively
participating in such a program includes actively participating with a
qualified housing group that operates a program resulting in the
origination of loans that meet the requirements of the goal.
(ii) To determine whether a seller meets the requirement in
paragraph (e)(4)(i) of this section, the GSE shall verify and monitor
that the seller meets the requirement and develop any necessary
mechanisms to ensure compliance with this requirement.
(iii) Where a seller's primary business is originating mortgages on
housing that qualifies under this Special Affordable Housing Goal, such
seller is presumed to meet the requirements in paragraph (e)(4)(i) of
this section.
(f) No credit activities. Neither the purchase nor the
securitization of mortgages associated with the refinancing of a GSE's
existing mortgage or mortgage-backed securities portfolios shall
receive credit toward the achievement of the Special Affordable Housing
Goal. Refinancings that result from the wholesale exchange of mortgages
between the two GSEs shall not count toward the achievement of this
goal. Refinancings of individual mortgages shall count toward
achievement of this goal when the refinancing is an arms-length
transaction that is borrower-driven and the mortgage otherwise counts
toward achievement of this goal. For purposes of this paragraph (f),
``mortgage or mortgage-backed securities portfolios'' includes
mortgages retained by Fannie Mae or Freddie Mac and mortgages utilized
to back mortgage-backed securities.
Sec. 81.15 General requirements.
(a) Calculating the numerator and denominator. Performance under
each of the housing goals shall be measured using a fraction that is
converted into a percentage. The numerator of each fraction is the
number of dwelling units financed by a GSE's mortgage purchases in a
particular year that count toward achievement of the housing goal. The
denominator of each fraction is, for all mortgages purchased, the
number of dwelling units that could count toward achievement of the
goal under appropriate circumstances. The denominators shall not
include GSE transactions or activities that are not mortgages or
mortgage purchases. When a GSE lacks sufficient information to
determine whether the purchase of a mortgage originated after 1992
counts toward achievement of a particular housing goal, that mortgage
purchase shall be included in the denominator for that housing goal.
(b) Properties with multiple dwelling units. For the purposes of
counting toward the achievement of the goals, whenever the property
securing a mortgage contains more than one dwelling unit, each such
dwelling unit shall be counted as a separate dwelling unit financed by
a mortgage purchase.
(c) Credit toward multiple goals. A mortgage purchase (or dwelling
unit financed by such purchase) by a GSE in a particular year shall
count toward the achievement of each housing goal for which such
purchase (or dwelling unit) qualifies in that year.
(d) Counting owner-occupied units. For purposes of counting owner-
occupied units toward achievement of the Low- and Moderate-Income
Housing
[[Page 61892]]
Goal or the Special Affordable Housing Goal, mortgage purchases
financing such units shall be evaluated based on the income of the
mortgagors and the area median income at the time of origination of the
mortgage. To determine whether mortgagors may be counted under a
particular family income level, i.e., very-low-, low-, or moderate-
income, the income of the mortgagors is compared to the median income
for the area at the time of mortgage origination, using the appropriate
percentage factor provided under Sec. 81.17.
(e) Counting rental units. (1) Use of income, rent. (i) Generally.
For purposes of counting rental units toward achievement of the Low-
and Moderate-Income Housing Goal or the Special Affordable Housing
Goal, mortgage purchases financing such units shall be evaluated based
on the income of actual or prospective tenants where such data is
available, i.e., known to a lender.
(ii) Availability of income information. (A) Each GSE shall require
lenders to provide to the GSE tenant income information under
paragraphs (e)(3) and (4) of this section, but only when such
information is known to the lender.
(B) When such tenant income information is available for all
occupied units, the GSE's performance shall be based on the income of
the tenants in the occupied units. For unoccupied units that are vacant
and available for rent and for unoccupied units that are under repair
or renovation and not available for rent, the GSE shall use the income
of prospective tenants, if paragraph (e)(4) of this section is
applicable. If paragraph (e)(4) of this section is not applicable, the
GSE shall use rent levels for comparable units in the property to
determine affordability.
(2) Model units and rental offices. A model unit or rental office
in a multifamily property may count toward achievement of the housing
goals only if a GSE determines that:
(i) It is reasonably expected that the units will be occupied by a
family within one year;
(ii) The number of such units is reasonable and minimal considering
the size of the multifamily property; and
(iii) Such unit otherwise meets the requirements for the goal.
(3) Income of actual tenants. When the income of actual tenants is
available, to determine whether a tenant is very-low-, low-, or
moderate-income, the income of the tenant shall be compared to the
median income for the area, adjusted for family size as provided in
Sec. 81.17.
(4) Income of prospective tenants. When income for tenants is
available to a lender because a project is subject to a Federal housing
program that establishes the maximum income for a tenant or a
prospective tenant in rental units, the income of prospective tenants
may be counted at the maximum income level established under such
housing program for that unit. In determining the income of prospective
tenants, the income shall be projected based on the types of units and
market area involved. Where the income of prospective tenants is
projected, each GSE must determine that the income figures are
reasonable considering the rents (if any) on the same units in the past
and considering current rents on comparable units in the same market
area.
(5) Use of rent. When the income of the prospective or actual
tenants of a dwelling unit is not available, performance under these
goals will be evaluated based on rent and whether the rent is
affordable to the income group targeted by the housing goal. A rent is
affordable if the rent does not exceed 30 percent of the maximum income
level of very-low-, low-, or moderate-income families as provided in
Sec. 81.19. In determining contract rent for a dwelling unit, the
actual rent or average rent by unit type shall be used.
(6) Timeliness of information. In determining performance under the
housing goals, each GSE shall use tenant and rental information as of
the time of mortgage:
(i) Acquisition for mortgages on multifamily housing; and
(ii) Origination for mortgages on single-family housing.
(f) Application of Median income. (1) For purposes of determining
an area's median income under Secs. 81.17 through 81.19 and for the
definition of ``low-income area,'' the area is:
(i) The metropolitan area, if the property which is the subject of
the mortgage is in a metropolitan area; and
(ii) In all other areas, the county in which the property is
located, except that where the State nonmetropolitan median income is
higher than the county's median income, the area is the State
nonmetropolitan area.
(2) When a GSE cannot precisely determine whether a mortgage is on
dwelling unit(s) located in one area, the GSE shall determine the
median income for the split area in the manner prescribed by the
Federal Financial Institutions Examination Council for reporting under
the Home Mortgage Disclosure Act, if the GSE can determine that the
mortgage is on dwelling unit(s) located in:
(i) A census tract;
(ii) A census place code;
(iii) A block-group enumeration district;
(iv) A nine-digit zip code; or
(v) Another appropriate geographic segment that is partially
located in more than one area (``split area'').
(g) Sampling not permitted. Performance under the housing goals for
each year shall be based on a complete tabulation of mortgage purchases
for that year; a sampling of such purchases is not acceptable.
(h) Newly available data. When a GSE uses data to determine whether
a mortgage purchase counts toward achievement of any goal and new data
is released after the start of a calendar quarter, the GSE need not use
the new data until the start of the following quarter.
Sec. 81.16 Special counting requirements.
(a) General. In determining whether a GSE shall receive full credit
for a transaction or activity toward achievement of any of the housing
goals, the Secretary shall consider whether a transaction or activity
of the GSE is substantially equivalent to a mortgage purchase and
either creates a new market or adds liquidity to an existing market.
(b) Not counted. The following transactions or activities shall not
count toward achievement of any of the housing goals and shall not be
included in the denominator in calculating either GSE's performance
under the housing goals:
(1) Equity investments in housing development projects;
(2) Purchases of State and local government housing bonds except as
provided in 81.16(c)(8);
(3) Purchases of non-conventional mortgages except:
(i) Where such mortgages are acquired under a risk-sharing
arrangement with a Federal agency; or
(ii) As provided in Sec. 81.14(e)(2);
(4) Commitments to buy mortgages at a later date or time;
(5) Options to acquire mortgages;
(6) Rights of first refusal to acquire mortgages;
(7) Any interests in mortgages that the Secretary determines, in
writing, shall not be treated as interests in mortgages;
(8) Mortgage purchases to the extent they finance any dwelling
units that are secondary residences; and
(9) Any combination of (1) through (8) above.
(c) Other special rules--(1) Credit enhancements. (i) Dwelling
units financed under a credit enhancement entered into by a GSE shall
be treated
[[Page 61893]]
as mortgage purchases and count toward achievement of the housing goals
when:
(A) The GSE provides a specific contractual obligation to ensure
timely payment of amounts due under a mortgage or mortgages financed by
the issuance of housing bonds (such bonds may be issued by any entity,
including a State or local housing finance agency);
(B) The GSE assumes a credit risk in the transaction substantially
equivalent to the risk that would have been assumed by the GSE if it
had securitized the mortgages financed by such bonds; and
(C) Such dwelling units otherwise qualify under this part.
(ii) When a GSE provides a specific contractual obligation to
ensure timely payment of amounts due under any mortgage originally
insured by a public purpose mortgage insurance entity or fund, the GSE
may, on a case-by-case basis, seek approval from the Secretary for such
activities to count toward achievement of the housing goals.
(2) Real estate mortgage investment conduits (``REMICs''). (i) A
GSE's purchase or guarantee of all or a portion of a REMIC shall be
treated as a mortgage purchase and receive credit toward the
achievement of the housing goals provided:
(A) The underlying mortgages or mortgage-backed securities for the
REMIC were not:
(1) Guaranteed by the Government National Mortgage Association; or
(2) Previously counted toward any housing goal by the GSE; and
(B) The GSE has the information necessary to support counting the
dwelling units financed by the REMIC, or that part of the REMIC
purchased or guaranteed by the GSE, toward the achievement of a
particular housing goal.
(ii) For REMICs that meet the requirements in paragraph (c)(2)(i)
of this section and for which the GSE purchased or guaranteed:
(A) The whole REMIC, all of the units financed by the REMIC shall
be treated as a mortgage purchase and count toward achievement of the
housing goals; or
(B) A portion of the REMIC, the GSE shall receive partial credit
toward achievement of the housing goals. This credit shall be equal to
the percentage of the REMIC purchased or guaranteed by the GSE (the
dollar amount of the purchase or guarantee divided by the total dollar
amount of the REMIC) multiplied by the number of dwelling units that
would have counted toward the goal(s) if the GSE had purchased or
guaranteed the whole REMIC. In calculating performance under the
housing goals, the denominator shall include the number of dwelling
units included in the whole REMIC multiplied by the percentage of the
REMIC purchased or guaranteed by the GSE.
(3) Risk-sharing. Mortgage purchases under risk-sharing
arrangements between the GSEs and any Federal agency where the units
would otherwise count toward achievement of the housing goal under
which the GSE is responsible for a substantial amount (50 percent or
more) of the risk shall be treated as mortgage purchases and count
toward achievement of the housing goal or goals.
(4) Participations. Participations purchased by a GSE shall be
treated as mortgage purchases and count toward the achievement of the
housing goals, if the GSE's participation in the mortgage is 50 percent
or more.
(5) Cooperative housing and condominium projects. (i) The purchase
of a mortgage on a cooperative housing unit (``a share loan'') or a
condominium unit is a mortgage purchase. Such a purchase is counted
toward achievement of a housing goal in the same manner as a mortgage
purchase of single-family owner-occupied units, i.e., affordability is
based on the income of the owner(s).
(ii) The purchase of a mortgage on a cooperative building (``a
blanket loan'') or a condominium project is a mortgage purchase and
shall count toward achievement of the housing goals. Where a GSE
purchases both ``a blanket loan'' and mortgages for units in the same
building (``share loans''), both the blanket loan and the share loan(s)
are mortgage purchases and shall count toward achievement of the
housing goals. Where a GSE purchases both a condominium project
mortgage and mortgages on condominium dwelling units in the same
project, both the condominium project mortgages and the mortgages on
condominium dwelling units are mortgage purchases and shall count
toward achievement of the housing goals.
(6) Seasoned mortgages. A GSE's purchase of a seasoned mortgage
shall be treated as a mortgage purchase for purposes of these goals
except:
(i) Where the GSE has already counted the mortgages under a housing
goal applicable to 1993 or any subsequent year; or
(ii) As provided in 12 U.S.C. 4563(b)(1)(B).
(7) Purchase of refinanced mortgages. Except as provided in
Sec. 81.14(f), the purchase of a refinanced mortgage by a GSE is a
mortgage purchase and shall count toward achievement of the housing
goals to the extent the mortgage qualifies.
(8) Mortgage revenue bonds. (i) The purchase of a state or local
mortgage revenue bond shall be treated as a mortgage purchase and units
financed under such MRB shall count toward achievement of the goals
where:
(A) the MRB is to be repaid only from the principal and interest of
the underlying mortgages originated with funds made available by the
MRB; and
(B) the MRB is not a general obligation of a state or local
government or agency or is not credit enchanced by any government or
agency, third party guarantor or surety.
(ii) Dwelling units financed by a mortgage revenue bond meeting the
requirements of paragraph (c)(8)(i) of this section shall count toward
a housing goal to the extent such dwelling units otherwise qualify
under this part.
Sec. 81.17 Affordability--Income level definitions--family size and
income known (owner-occupied units, actual tenants, and prospective
tenants).
In determining whether a dwelling unit is affordable to very-low-,
low-, or moderate-income families, where the unit is owner-occupied or,
for rental housing, family size and income information for the dwelling
unit is known to the GSE, the affordability of the unit shall be
determined as follows:
(a) Moderate-income means:
(1) In the case of owner-occupied units, income not in excess of
100 percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of area median income corresponding to the following family
sizes:
------------------------------------------------------------------------
Percentage
of area
Number of persons in family median
income
------------------------------------------------------------------------
1......................................................... 70
2......................................................... 80
3......................................................... 90
4......................................................... 100
5 or more................................................. (*)
------------------------------------------------------------------------
*100% plus (8% multiplied by the number of persons in excess of 4).
(b) Low-income means:
(1) In the case of owner-occupied units, income not in excess of 80
percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of area median income corresponding to the following family
sizes:
[[Page 61894]]
------------------------------------------------------------------------
Percentage
of area
Number of persons in family median
income
------------------------------------------------------------------------
1......................................................... 56
2......................................................... 64
3......................................................... 72
4......................................................... 80
5 or more................................................. (*)
------------------------------------------------------------------------
*80% plus (6.4% multiplied by the number of persons in excess of 4).
(c) Very-low-income means:
(1) In the case of owner-occupied units, income not in excess of 60
percent of area median income; and
(2) In the case of rental units, where the income of actual or
prospective tenants is available, income not in excess of the following
percentages of area median income corresponding to the following family
sizes:
------------------------------------------------------------------------
Percentage
of area
Number of persons in family median
income
------------------------------------------------------------------------
1......................................................... 42
2......................................................... 48
3......................................................... 54
4......................................................... 60
5 or more................................................. (*)
------------------------------------------------------------------------
*60% plus (4.8% multiplied by the number of persons in excess of 4).
Sec. 81.18 Affordability--Income level definitions--family size not
known (actual or prospective tenants).
In determining whether a rental unit is affordable to very-low,
low-, or moderate-income families where family size is not known to the
GSE, income will be adjusted using unit size, and affordability
determined as follows:
(a) For moderate-income, the income of prospective tenants shall
not exceed the following percentages of area median income with
adjustments, depending on unit size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 70
1 bedroom................................................. 75
2 bedrooms................................................ 90
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*104% plus (12% multiplied by the number of bedrooms in excess of 3).
(b) For low-income, income of prospective tenants shall not exceed
the following percentages of area median income with adjustments,
depending on unit size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 56
1 bedroom................................................. 60
2 bedrooms................................................ 72
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*83.2% plus (9.6% multiplied by the number of bedrooms in excess of 3).
(c) For very-low-income, income of prospective tenants shall not
exceed the following percentages of area median income with
adjustments, depending on unit size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 42
1 bedroom................................................. 45
2 bedrooms................................................ 54
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*62.4% plus (7.2% multiplied by the number of bedrooms in excess of 3).
Sec. 81.19 Affordability--Rent level definitions--tenant income is
not known.
For purposes of determining whether a rental unit is affordable to
very-low-, low-, or moderate-income families where the income of the
family in the dwelling unit is not known to the GSE, the affordability
of the unit is determined based on unit size as follows:
(a) For moderate-income, maximum affordable rents to count as
housing for moderate-income families shall not exceed the following
percentages of area median income with adjustments, depending on unit
size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 21
1 bedroom................................................. 22.5
2 bedrooms................................................ 27
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*31.2% plus (3.6% multiplied by the number of bedrooms in excess of 3);
(b) For low-income, maximum affordable rents to count as housing
for low-income families shall not exceed the following percentages of
area median income with adjustments, depending on unit size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 16.8
1 bedroom................................................. 18
2 bedrooms................................................ 21.6
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*24.96% plus (2.88% multiplied by the number of bedrooms in excess of
3); and
(c) For very-low-income, maximum affordable rents to count as
housing for very-low-income families shall not exceed the following
percentages of area median income with adjustments, depending on unit
size:
------------------------------------------------------------------------
Percentage
of area
Unit size median
income
------------------------------------------------------------------------
Efficiency................................................ 12.6
1 bedroom................................................. 13.5
2 bedrooms................................................ 16.2
3 bedrooms or more........................................ (*)
------------------------------------------------------------------------
*18.72% plus (2.16% multiplied by the number of bedrooms in excess of
3).
(d) Missing Information. Each GSE shall make every effort to obtain
the information necessary to make the calculations in this section. If
a GSE makes such efforts but cannot obtain data on the number of
bedrooms in particular units, in making the calculations on such units,
the units shall be assumed to be efficiencies.
Sec. 81.20 Actions to be taken to meet the goals.
To meet the goals under this rule, each GSE shall operate in
accordance with 12 U.S.C. 4565.
Sec. 81.21 Notice and determination of failure to meet goals.
If the Secretary determines that a GSE has failed or there is a
substantial probability that a GSE will fail to meet any housing goal,
the Secretary shall follow the procedures at 12 U.S.C. 4566(b).
Sec. 81.22 Housing plans.
(a) If the Secretary determines, under Sec. 81.21, that a GSE has
failed or there is a substantial probability that a GSE will fail to
meet any housing goal and that the achievement of the housing goal was
or is feasible, the Secretary shall require the GSE to submit a housing
plan for approval by the Secretary.
(b) Nature of plan. Each housing plan shall:
(1) Be feasible;
(2) Be sufficiently specific to enable the Secretary to monitor
compliance periodically;
(3) Describe the specific actions that the GSE will take:
(i) To achieve the goal for the next calendar year; or
(ii) If the Secretary determines that there is substantial
probability that the GSE will fail to meet a housing goal in the
current year, to make such improvements as are reasonable in the
remainder of the year; and
(4) Address any additional matters relevant to the plan as
required, in writing, by the Secretary.
[[Page 61895]]
(c) Deadline for submission. The GSE shall submit a housing plan to
the Secretary within 30 days after issuance of a notice under
Sec. 81.21 requiring the GSE to submit a housing plan. The Secretary
may extend the deadline for submission of a plan, in writing and for a
time certain, to the extent the Secretary determines an extension is
necessary.
(d) Review of housing plans. The Secretary shall review and approve
or disapprove housing plans in accordance with 12 U.S.C. 4566(c)(4) and
(5).
(e) Resubmission. If the Secretary disapproves an initial housing
plan submitted by a GSE, the GSE shall submit an amended plan
acceptable to the Secretary within 30 days of the Secretary
disapproving the initial plan; the Secretary may extend the deadline if
the Secretary determines an extension is in the public interest. If the
amended plan is not acceptable to the Secretary, the Secretary may
afford the GSE 15 days to submit a new plan.
Subpart C--Fair Housing
Sec. 81.41 General.
In this subpart, the Secretary: prohibits discrimination by the
GSEs in their mortgage purchases because of race, color, religion, sex,
handicap, familial status, age, or national origin, including any
consideration of the age or location of a dwelling or age of the
neighborhood or census tract where the dwelling is located in a manner
that has a discriminatory effect; requires that the GSEs submit
information to the Secretary to assist Fair Housing Act and ECOA
investigations; provides for advising the GSEs of Fair Housing Act and
ECOA violations; provides for reviewing the GSEs' underwriting and
appraisal guidelines to ensure compliance with the Fair Housing Act;
and requires that the GSEs take actions as directed by the Secretary
following Fair Housing Act and ECOA adjudications. Because FHEFSSA
provides, generally, that the Director of OFHEO shall enforce
violations by the GSEs of FHEFSSA and regulations in this subpart, this
subpart also provides for referral of such cases to the Director.
Sec. 81.42 Prohibitions against discrimination.
Neither GSE shall discriminate in any manner in making any mortgage
purchases because of race, color, religion, sex, handicap, familial
status, age, or national origin, including any consideration of the age
or location of the dwelling or the age of the neighborhood or census
tract where the dwelling is located in a manner that has a
discriminatory effect.
Sec. 81.43 Reports; underwriting and appraisal guideline review.
(a) Reports. Each GSE, in the AHAR required under Sec. 81.63, shall
assess underwriting standards, business practices, repurchase
requirements, pricing, fees, and procedures that affect the purchase of
mortgages for low- and moderate-income families, or that may yield
disparate results based on the race, color, religion, sex, handicap,
familial status, age, or national origin of the borrower, including
revisions thereto to promote affordable housing or fair lending.
(b) Review of Underwriting and Appraisal Guidelines. The Secretary
shall periodically review and comment on the underwriting and appraisal
guidelines of each enterprise to ensure that such guidelines are
consistent with the Fair Housing Act and 12 U.S.C. 4545.
Sec. 81.44 Submission of information to the Secretary.
(a) General. Upon request from the Secretary, the GSEs shall submit
information and data to the Secretary to assist in investigating
whether any mortgage lender with which the GSE does business has failed
to comply with the Fair Housing Act or ECOA.
(b) Information requests and submissions. (1) Information requests
by the Secretary. The Secretary may require the GSEs to submit
information to assist in Fair Housing Act or ECOA investigations of
lenders. Under FHEFSSA, other Federal agencies responsible for the
enforcement of ECOA must submit requests for information from the GSEs
through the Secretary. For matters involving only ECOA, the Secretary
will only issue requests for information upon request from the
appropriate Federal agency responsible for ECOA.
(2) Information from established data systems. The Secretary may
request that a GSE generate information or reports from its data
system(s) to assist a Fair Housing Act or ECOA investigation.
(3) GSE replies. A GSE receiving any request(s) for information
under this section shall reply in a complete and timely manner with any
and all information that it is privy to and collects that is responsive
to the request.
(c) Submission to ECOA enforcers. The Secretary shall submit any
information received under paragraph (b) of this section concerning
compliance with ECOA to appropriate Federal agencies responsible for
ECOA enforcement, as provided in section 704 of ECOA.
Sec. 81.45 Obtaining and disseminating information.
(a) The Secretary shall obtain information from other regulatory
and enforcement agencies of the Federal Government and State and local
governments regarding violations by lenders of the Fair Housing Act,
ECOA, and/or State or local fair housing/lending laws, and shall make
such information available to the GSEs as the Secretary deems
appropriate in accordance with applicable law regarding the
confidentiality of supervisory information and the right to financial
privacy, and subject to the terms of memoranda of understanding and
other arrangements between the Secretary and Federal financial
regulators and other agencies. In addition, the Secretary shall make
information that the Secretary possesses regarding violations of the
Fair Housing Act available to the GSEs.
(b) As contemplated in paragraph (a) of this section, the Secretary
shall obtain information regarding violations by lenders of the Fair
Housing Act or ECOA involving discrimination with respect to the
availability of credit in a residential real-estate-related transaction
from other Federal regulatory or enforcement agencies. The Secretary
will obtain information from regulators regarding violations of ECOA by
lenders only in circumstances in which there is either more than a
single ECOA violation, or the ECOA violation could also be a violation
of the Fair Housing Act.
Sec. 81.46 Remedial actions.
(a) General. The Secretary shall direct the GSEs to take one or
more remedial actions, including suspension, probation, reprimand or
settlement, against lenders found to have engaged in discriminatory
lending practices in violation of the Fair Housing Act or ECOA,
pursuant to a final adjudication on the record and an opportunity for a
hearing under subchapter II of chapter 5 of title 5, United States
Code.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
Indefinite suspension means that, until directed to do otherwise by
the Secretary, the GSEs will refrain from purchasing mortgages from a
lender.
Probation means that, for a fixed period of time specified by the
Secretary, a lender that has been found to have violated the Fair
Housing Act or ECOA will be subject automatically to more severe
sanctions than probation,
[[Page 61896]]
e.g., suspension, if further violations are found.
Remedial action includes a reprimand, probation, temporary
suspension, indefinite suspension, or settlement.
Reprimand means a written letter to a lender from a GSE, which has
been directed to be sent by the Secretary, stating that the lender has
violated the Fair Housing Act or ECOA and warning of the possibility
that the Secretary may impose more severe remedial actions than
reprimand if any further violation occurs.
Temporary Suspension means that, for a fixed period of time
specified by the Secretary, the GSEs will not purchase mortgages from a
lender.
(c) Institution of remedial actions. (1) The Secretary shall direct
the GSE to take remedial action(s) against a lender charged with
violating ECOA only after a final determination on the charge has been
made by an appropriate United States District Court or any other court
of competent jurisdiction. The Secretary shall direct the GSE to take
remedial action(s) against a lender charged with violating the Fair
Housing Act only after a final determination on the matter has been
made by a United States Court, a HUD Administrative Law Judge, or the
Secretary.
(2) Following a final determination sustaining a charge against a
lender for violating the Fair Housing Act or ECOA, in accordance with
paragraph (c)(1) of this section, the Secretary shall determine the
remedial action(s) that the GSE is to be directed to take for such
violation.
(3) In determining the appropriate remedial action(s), the
Secretary shall solicit and fully consider the views of the Federal
financial regulator responsible for the subject lender concerning the
action(s) that are contemplated to be directed against such lender,
prior to directing any such action(s). If such responsible Federal
financial regulator makes a written determination that a particular
remedial action would threaten the financial safety and soundness of a
Federally-insured lender, the Secretary shall consider other remedial
actions. Where warranted, the Secretary also shall solicit and fully
consider the views of the Director regarding the effect of the
action(s) that are contemplated on the safety and soundness of the GSE.
In determining what action(s) to direct, the Secretary will also,
without limitation, consider the following:
(i) The gravity of the violation;
(ii) The extent to which other action has been taken against the
lender for discriminatory activities;
(iii) Whether the lender's actions demonstrate a discriminatory
pattern or practice or an individual instance of discrimination;
(iv) The impact or seriousness of the harm;
(v) The number of people affected by the discriminatory act(s);
(vi) Whether the lender operates an effective program of self
assessment and correction;
(vii) The extent of any actions or programs by the lender designed
to compensate victims and prevent future fair lending violations;
(viii) The extent that a finding of liability against a lender is
based on a lender's use of a facially-neutral underwriting guideline of
a secondary mortgage market entity applied appropriately by the lender
in order to sell loans to that secondary mortgage market entity; and
(ix) Any other information deemed relevant by the Secretary.
(d) Notice of remedial action(s). (1) Following the Secretary's
decision concerning the appropriate remedial action(s) that the GSE is
to be directed to take, the Secretary shall prepare and issue to the
GSE and the lender a written notice setting forth the remedial
action(s) to be taken and the date such remedial action(s) are to
commence. The Notice shall inform the lender of its right to request a
hearing on the appropriateness of the proposed remedial action(s),
within 20 days of service of the Notice, by filing a request with the
Docket Clerk, HUD Office of Administrative Law Judges.
(2) Where a lender does not timely request a hearing on a remedial
action, the GSE shall take the action in accordance with the Notice.
(e) Review and decision on remedial action(s). (1) Where a lender
timely requests a hearing on a remedial action, a hearing shall be
conducted before a HUD Administrative Law Judge (ALJ) and a final
decision rendered in accordance with the procedures set forth in 24 CFR
30.10, 30.15, and subpart E of part 30 of this title, to the extent
such provisions are not inconsistent with this subpart or FHEFSSA. The
lender and the Secretary, but not the GSE, shall be parties to the
action. At such hearing, the appropriateness of the remedial action for
the violation(s) will be the sole matter for review. The validity or
appropriateness of the underlying determination on the violation(s)
shall not be subject to review at such hearing.
(2) The Secretary shall transmit to the GSEs each final decision by
HUD on a remedial action and any dispositive settlement of a proceeding
on such action.
(3) The GSE shall take the action(s) set forth in a final decision
by HUD on remedial action(s) or any dispositive settlement of such a
proceeding setting forth remedial action(s) in accordance with such
decision or settlement.
Sec. 81.47 Violations of provisions by the GSEs.
(a) FHEFSSA empowers the Director of OFHEO to initiate enforcement
actions for GSE violations of the provisions of section 1325 of FHEFSSA
and these regulations. The Secretary shall refer violations and
potential violations of 12 U.S.C. 4545 and this subpart C to the
Director.
(b) Where a private complainant or the Secretary is also proceeding
against a GSE under the Fair Housing Act, the Assistant Secretary for
Fair Housing and Equal Opportunity shall conduct the investigation of
the complaint and make the reasonable cause/no reasonable cause
determination required by section 810(g) of the Fair Housing Act. Where
reasonable cause is found, a charge shall be issued and the matter will
proceed to enforcement pursuant to sections 812(b) and (o) of the Fair
Housing Act.
Subpart D--New Program Approval
Sec. 81.51 General.
This subpart details the requirements and procedures for review of
requests for new program approval by the Secretary.
Sec. 81.52 Requirement for program requests.
(a) Before implementing a new program, a GSE shall submit a request
for new program approval (``program request'') to the Secretary for the
Secretary's review. Submission of a program request is not required
where the program that the GSE proposes to implement is not
significantly different from:
(1) A program that has already been approved in writing by the
Secretary; or
(2) A program that was engaged in by the GSE prior to October 28,
1992.
(b) If a GSE does not submit a program request for a program, the
Secretary may request information about the program and require that
the GSE submit a program request. The GSE shall comply with the request
and may indicate in such response its views respecting whether the
program is subject to the Secretary's review.
Sec. 81.53 Processing of program requests.
(a) Each program request submitted to the Secretary by a GSE shall
be in writing and shall be submitted to the Secretary and the Director,
Office of
[[Page 61897]]
Government-Sponsored Enterprises, Department of Housing and Urban
Development, Washington, D.C. For those requests submitted before 1
year after the effective date of the regulations issued by the Director
of OFHEO under 12 U.S.C. 4611(e), the GSE shall simultaneously submit
the program request to the Director.
(b) Each program request shall include:
(1) An opinion from counsel stating the statutory authority for the
new program (Freddie Mac Act section 305(a) (1), (4), or (5), or Fannie
Mae Charter Act section 302(b)(2)-(5) or 304);
(2) A good-faith estimate of the anticipated dollar volume of the
program over the short- and long-term;
(3) A full description of: (i) The purpose and operation of the
proposed program;
(ii) The market targeted by the program;
(iii) The delivery system for the program;
(iv) The effect of the program on the mortgage market; and
(v) Material relevant to the public interest.
(c) Following receipt of a program request, the Secretary and,
where a program request is submitted to the Director pursuant to
paragraph (a) of this section, the Director shall review the program
request.
(d) Transition standard for approval. Program requests submitted by
the GSEs before the date occurring 1 year after the effective date of
the regulations issued by the Director under 12 U.S.C. 4611(e) shall be
approved or disapproved by the Secretary as provided in 12 U.S.C.
4542(b)(2).
(e) Permanent standard for approval by the Secretary. Program
requests submitted after the date occurring one year after the
effective date of the regulations issued by the Director under 12
U.S.C. 4611(e) establishing the risk-based capital test shall be
approved by the Secretary in accordance with 12 U.S.C. 4542(b)(1).
(f) Time for review. Unless the Secretary and, where appropriate,
the Director of OFHEO, need additional information, a program request
shall be approved or disapproved within 45 days from the date it is
received by the Director, Office of Government-Sponsored Enterprises,
and, where applicable, the Director of OFHEO. If within 45 days after
receiving a request, the Secretary or the Director of OFHEO determine
that additional information is necessary to review the matter and
request such information from the GSE, the Secretary may extend the
time period for consideration for an additional 15 days.
(1) Where additional information is requested, the GSE must provide
the requested information to the Secretary and, where appropriate, the
Director, within 10 days after the request for additional information.
(2) If the GSE fails to furnish requested information within 10
days after the request for information, the Secretary may deny the
GSE's request for approval based on such failure and so report to the
Committees of Congress in accordance with paragraph (g) of this
section.
(g) Approval or report. Within 45 days or, if the period is
extended, 60 days following receipt of a program request, the Secretary
shall approve the request, in writing, or submit a report to the
Committee on Banking and Financial Services of the House of
Representatives and the Committee on Banking, Housing, and Urban
Affairs of the Senate, explaining the reasons for not approving the
request. If the Secretary does not act within this time period, the
GSE's program request will be deemed approved.
Sec. 81.54 Review of disapproval.
(a) Programs disapproved as unauthorized. (1) Where the Secretary
disapproves a program request on the grounds that the new program is
not authorized, as defined in Sec. 81.53(d) or (e), the GSE may, within
30 days of the date of receipt of the decision on disapproval, request
an opportunity to review and supplement the administrative record for
the decision, in accordance with paragraphs (a) (2) and (3) of this
section.
(2) Supplementing in writing. A GSE supplementing the record in
writing must submit written materials within 30 days after the date of
receipt of the decision on disapproval, but no later than the date of a
meeting, if requested, under paragraph (a)(3) of this section.
(3) Meeting. Within 10 days of the date of receipt of the decision
of disapproval, the GSE may request a meeting. If the request for the
meeting is timely, the Secretary shall arrange such a meeting, which
shall be conducted by the Secretary or the Secretary's designee within
10 working days after receipt of the request. The GSE may be
represented by counsel and may submit relevant written materials to
supplement the record.
(4) Determination. The Secretary shall:
(i) In writing and within 10 days after submission of any materials
under paragraph (a)(2) of this section or the conclusion of any meeting
under paragraph (a)(3) of this section, whichever is later, withdraw,
modify, or affirm the program disapproval; and
(ii) Provide the GSE with that decision.
(b) Programs disapproved under public interest determination. When
a program request is disapproved because the Secretary determines that
the program is not in the public interest or the Director makes the
determination in 12 U.S.C. 4542(b)(2)(B), the Secretary shall provide
the GSE with notice of, and opportunity for, a hearing on the record
regarding such disapproval. A request for a hearing must be submitted
by a GSE within 30 days of the Secretary's submission of a report under
Sec. 81.53(g) disapproving a program request or the provision of the
notice under this paragraph (b), whichever is later. The procedures for
such hearings are provided in subpart G of this part.
Subpart E--Reporting Requirements
Sec. 81.61 General.
This subpart establishes data submission and reporting requirements
to carry out the requirements of the GSEs' Charter Acts and FHEFSSA.
Sec. 81.62 Mortgage reports.
(a) Loan-level data elements. To implement the data collection and
submission requirements for mortgage data and to assist the Secretary
in monitoring the GSEs' housing goal activities, each GSE shall collect
and compile computerized loan-level data on each mortgage purchased in
accordance with 12 U.S.C. 1456(e) and 1723a(m). The Secretary may, from
time-to-time, issue a list entitled ``Required Loan-level Data
Elements'' specifying the loan-level data elements to be collected and
maintained by the GSEs and provided to the Secretary. The Secretary may
revise the list by written notice to the GSEs.
(b) Quarterly Mortgage reports. Each GSE shall submit to the
Secretary quarterly a Mortgage Report. The fourth quarter report shall
serve as the Annual Mortgage Report and shall be designated as such.
(1) Each Mortgage Report shall include:
(i) Aggregations of the loan-level mortgage data compiled by the
GSE under paragraph (a) of this section for year-to-date mortgage
purchases, in the format specified in writing by the Secretary; and
(ii) Year-to-date dollar volume, number of units, and number of
mortgages on owner-occupied and rental properties purchased by the GSE
that do and do not qualify under each housing goal as set forth in this
part.
[[Page 61898]]
(2) To facilitate the Secretary's monitoring of the GSE's housing
goal activities, the Mortgage Report for the second quarter shall
include year-to-date computerized loan-level data consisting of the
data elements required under paragraph (a) of this section.
(3) To implement the data collection and submission requirements
for mortgage data and to assist the Secretary in monitoring the GSE's
housing goal activities, each Annual Mortgage Report shall include
year-to-date computerized loan-level data consisting of the data
elements required by under paragraph (a) of this section.
(c) Timing of Reports. The GSEs shall submit the Mortgage Report
for each of the first 3 quarters of each year within 60 days of the end
of the quarter. Each GSE shall submit its Annual Mortgage Report within
75 days after the end of the calendar year.
(d) Revisions to Reports. At any time before submission of its
Annual Mortgage Report, a GSE may revise any of its quarterly reports
for that year.
(e) Format. The GSEs shall submit to the Secretary computerized
loan-level data with the Mortgage Report, in the format specified in
writing by the Secretary.
Sec. 81.63 Annual Housing Activities Report.
To comply with the requirements in sections 309(n) of the Fannie
Mae Charter Act and 307(f) of the Freddie Mac Act and assist the
Secretary in preparing the Secretary's Annual Report to Congress, each
GSE shall submit to the Secretary an AHAR including the information
listed in those sections of the Charter Acts and as provided in
Sec. 81.43(a) of this part. Each GSE shall submit such report within 75
days after the end of each calendar year, to the Secretary the
Committee on Banking and Financial Services of the House of
Representatives, and the Committee on Banking, Housing, and Urban
Affairs of the Senate. Each GSE shall make its AHAR available to the
public at its principal and regional offices. Before making any such
report available to the public, the GSE may exclude from the report any
information that the Secretary has deemed proprietary under subpart F
of this part.
Sec. 81.64 Periodic reports.
Each GSE shall provide to the Secretary all:
(a) Material distributed to the GSE's Housing Advisory Council;
(b) Press releases;
(c) Investor reports;
(d) Proxy statements;
(e) Seller-servicer guides; and
(f) Other information disclosed by the GSE to entities outside of
the GSE, but only where the GSE determines that such information is
relevant to the Secretary's regulatory responsibilities.
Sec. 81.65 Other information and analyses.
When deemed appropriate and requested in writing, on a case by-case
basis, by the Secretary, a GSE shall furnish the data underlying any of
the reports required under this part and shall conduct additional
analyses concerning any such report. A GSE shall submit additional
reports or other information concerning its activities when deemed
appropriate to carry out the Secretary's responsibilities under FHEFSSA
or the Charter Acts and requested in writing by the Secretary.
Sec. 81.66 Submission of reports.
Each GSE shall submit all hard copy reports or other written
information required under this subpart to the Secretary and the
Director, Office of Government-Sponsored Enterprises. Each GSE shall
submit computerized data required under this subpart to the Director,
Financial Institutions Regulations, Office of Policy Development and
Research. The address for both of these offices is Department of
Housing and Urban Development, 451 7th Street, S.W. Washington, D.C.
20410.
Subpart F--Access to Information
Sec. 81.71 General.
This subpart:
(a) Provides for the establishment of a public-use database to make
available to the public mortgage data that the GSEs submit to the
Secretary under subsection 309(m) of the Fannie Mae Charter Act and
subsection 307(e) of the Freddie Mac Act, and AHAR information that the
GSEs submit to the Secretary in the AHAR under subsection 309(n) of the
Fannie Mae Charter Act and subsection 307(f) of the Freddie Mac Act;
(b) Establishes mechanisms for the GSEs to designate mortgage data
or AHAR information as proprietary information and for the Secretary to
determine whether such mortgage data or AHAR information is proprietary
information which should be withheld from disclosure;
(c) Addresses the availability of HUD procedures to protect from
public disclosure proprietary information and other types of
confidential business information submitted by or relating to the GSEs;
(d) Addresses protections from disclosure when there is a request
from Congress for information and sets forth protections for treatment
of data or information submitted by or relating to the GSEs by HUD
officers, employees, and contractors; and
(e) Provides that data or information submitted by or relating to
the GSEs that would constitute a clearly unwarranted invasion of
personal privacy shall not be disclosed to the public.
Sec. 81.72 Public-use database and public information.
(a) General. Except as provided in paragraph (c) of this section,
the Secretary shall establish and make available for public use, a
public-use database containing public data as defined in Sec. 81.2.
(b) Examination of submissions. Following receipt of mortgage data
and AHAR information from the GSEs, the Secretary shall, as
expeditiously as possible, examine the submissions for mortgage data
and AHAR information that:
(1) Has been deemed to be proprietary information under this part
by a temporary order, final order, or regulation in effect at the time
of submission;
(2) Has been designated as proprietary information by the GSE in
accordance with Sec. 81.73;
(3) Would constitute a clearly unwarranted invasion of personal
privacy if such data or information were released to the public; or
(4) Is required to be withheld or, in the determination of the
Secretary, is not appropriate for public disclosure under other
applicable laws and regulations, including the Trade Secrets Act (18
U.S.C. 1905) and Executive Order 12600.
(c) Public data and proprietary data. The Secretary shall place
public data in the public-use database. The Secretary shall exclude
from the public-use database and from public disclosure:
(1) All mortgage data and AHAR information within the scope of
paragraphs (b)(1), (b)(3), and (b)(4) of this section;
(2) Any other mortgage data and AHAR information under (b)(2) when
determined by the Secretary under Sec. 81.74 to be proprietary
information; and
(3) Mortgage data that is not year-end data.
(d) Access. The Secretary shall provide such means as the Secretary
determines are reasonable for the public to gain access to the public-
use database. To obtain access to the public-use database, the public
should contact the Director, Office of Government-Sponsored
Enterprises, Department of Housing and Urban Development, 451 Seventh
Street, S.W., Washington, D.C.
[[Page 61899]]
20410, telephone (202) 708-2224 (this is not a toll-free number).
(e) Fees. The Secretary may charge reasonable fees to cover the
cost of providing access to the public-use database. These fees will
include the costs of system access, computer use, copying fees, and
other costs.
Sec. 81.73 GSE request for proprietary treatment.
(a) General. A GSE may request proprietary treatment of any
mortgage data or AHAR information that the GSE submits to the
Secretary. Such a request does not affect the GSE's responsibility to
provide data or information required by the Secretary. Where the
Secretary grants a request for proprietary treatment, HUD will not
include the data or information in the public-use database or publicly
disclose the data or information, except as otherwise provided in
accordance with this subpart.
(b) Request for proprietary treatment of mortgage data and AHAR
information. Except as provided in paragraph (c) of this section, a GSE
requesting proprietary treatment of mortgage data or AHAR information
shall:
(1) Clearly designate those portions of the mortgage data or AHAR
information to be treated as proprietary, with a prominent stamp, typed
legend, or other suitable form of notice, stating ``Proprietary
Information--Confidential Treatment Requested by [name of GSE]'' on
each page or portion of page to which the request applies. If such
marking is impractical, the GSE shall attach to the mortgage data or
information for which confidential treatment is requested a cover sheet
prominently marked ``Proprietary Information--Confidential Treatment
Requested by [name of GSE];''
(2) Accompany its request with a certification by an officer or
authorized representative of the GSE that the mortgage data or
information is proprietary; and
(3) Submit any additional statements in support of proprietary
designation that the GSE chooses to provide.
(c) Alternative procedure available for mortgage data or AHAR
information subject to a temporary order, final order, or regulation in
effect. When the request for proprietary treatment pertains to mortgage
data or AHAR information that has been deemed proprietary by the
Secretary under a temporary order, final order, or regulation in
effect, the GSE may reference such temporary order, final order, or
regulation in lieu of complying with paragraphs (b)(2) and (3) of this
section.
(d) Nondisclosure during pendency. Except as may otherwise be
required by law, during the time any Request for Proprietary Treatment
under Sec. 81.73 is pending determination by the Secretary, the data or
information submitted by the GSE that is the subject of the request
shall not be disclosed to, or be subject to examination by, the public
or any person or representative of any person or agency outside of HUD.
Sec. 81.74 Secretarial determination on GSE request.
(a) General. The Secretary shall review all Requests for
Proprietary Treatment from the GSEs, along with any other information
that the Secretary may elicit from other sources regarding the Request.
(b) Factors for proprietary treatment. Except as provided in
paragraph (c) of this section, in making the determination of whether
to accord proprietary treatment to mortgage data or AHAR information,
the Secretary's considerations shall include, but are not limited to:
(1) The type of data or information involved and the nature of the
adverse consequences to the GSE, financial or otherwise, that would
result from disclosure, including any adverse effect on the GSE's
competitive position;
(2) The existence and applicability of any prior determinations by
HUD, any other Federal agency, or a court, concerning similar data or
information;
(3) The measures taken by the GSE to protect the confidentiality of
the mortgage data or AHAR information in question, and similar data or
information, before and after its submission to the Secretary;
(4) The extent to which the mortgage data or AHAR information is
publicly available including whether the data or information is
available from other entities, from local government offices or
records, including deeds, recorded mortgages, and similar documents, or
from publicly available data bases;
(5) The difficulty that a competitor, including a seller/servicer,
would face in obtaining or compiling the mortgage data or AHAR
information; and
(6) Such additional facts and legal and other authorities as the
Secretary may consider appropriate, including the extent to which
particular mortgage data or AHAR information, when considered together
with other information, could reveal proprietary information.
(c) Alternative criterion for mortgage data or AHAR information
subject to a temporary order, final order, or regulation in effect.
Where the request for proprietary treatment pertains to mortgage data
or AHAR information that has been deemed proprietary by the Secretary
under a temporary order, final order, or regulation in effect, the
Secretary shall grant the request with respect to any mortgage data or
AHAR information which comes within the order or regulation.
(d) Determination of proprietary treatment. The Secretary shall
determine, as expeditiously as possible, whether mortgage data or AHAR
information designated as proprietary by a GSE is proprietary
information, or whether it is not proprietary and subject to inclusion
in the public-use database and public release notwithstanding the GSE's
request.
(e) Action when according proprietary treatment to mortgage data
and AHAR information. (1) When the Secretary determines that mortgage
data or AHAR information designated as proprietary by a GSE is
proprietary, and the mortgage data or AHAR information is not subject
to a temporary order, a final order, or a regulation in effect
providing that the mortgage data or AHAR information is not subject to
public disclosure, the Secretary shall notify the GSE that the request
has been granted. In such cases, the Secretary shall issue either a
temporary order, a final order, or a regulation providing that the
mortgage data or information is not subject to public disclosure. Such
a temporary order, final order, or regulation shall:
(i) Document the reasons for the determination; and
(ii) Be provided to the GSE, made available to members of the
public, and published in the Federal Register, except that any portions
of such order or regulation that would reveal the proprietary
information shall be withheld from public disclosure. Publications of
temporary orders shall invite public comments when feasible.
(2) Where the Secretary determines that such mortgage data or
information is proprietary, the Secretary shall not make it publicly
available, except as otherwise provided in accordance with this
subpart.
(f) Determination not to accord proprietary treatment to mortgage
data and AHAR information or to seek further information. When the
Secretary determines that such mortgage data or AHAR information
designated as proprietary by a GSE may not be proprietary, that the
request may be granted only in part, or that questions exist concerning
the request, the following procedure shall apply:
(1) The Secretary shall provide the GSE with an opportunity for a
meeting with HUD to discuss the matter, for the
[[Page 61900]]
purpose of gaining additional information concerning the request.
(2) Following the meeting, based on the Secretary's review of the
mortgage data or AHAR information that is the subject of a request and
the GSE's objections, if any, to disclosure of such mortgage data or
AHAR information, the Secretary shall make a determination:
(i) If the Secretary determines to withhold from the public-use
database as proprietary the mortgage data or AHAR information that is
the subject of a request, the procedures in paragraph (e) of this
section shall apply; or
(ii) If the Secretary determines that any mortgage data or AHAR
information that is the subject of a request is not proprietary, the
Secretary shall provide notice in writing to the GSE of the reasons for
this determination, and such notice shall provide that the Secretary
shall not release the mortgage data or AHAR information to the public
for 10 working days.
Sec. 81.75 Proprietary information withheld by order or regulation.
Following a determination by the Secretary that mortgage data or
AHAR information is proprietary information under FHEFSSA, the
Secretary shall expeditiously issue a temporary order, final order, or
regulation withholding the mortgage data or AHAR information from the
public-use database and from public disclosure by HUD in accordance
with 12 U.S.C. 4546. The Secretary may, from time-to-time, by
regulation or order, issue a list entitled ``GSE Mortgage Data and AHAR
Information: Proprietary Information/Public-Use Data'' providing that
certain information shall be treated as proprietary information. The
Secretary may modify the list by regulation or order.
Sec. 81.76 FOIA requests and protection of GSE information.
(a) General. HUD shall process FOIA requests for information
submitted to the Secretary by the GSEs in accordance with:
(1) HUD's FOIA and Privacy Act regulations, 24 CFR parts 15 and 16;
(2) 12 U.S.C. 4525, 4543, and 4546 and this subpart; and
(3) Other applicable statutes, regulations, and guidelines,
including the Trade Secrets Act, 18 U.S.C. 1905, and Executive Order
12600. In responding to requests for data or information submitted by
or relating to the GSEs, the Secretary may invoke provisions of these
authorities to protect data or information from disclosure.
(b) Protection of confidential business information other than
mortgage data and AHAR information. When a GSE seeks to protect from
disclosure confidential business information, the GSE may seek
protection of such confidential business information pursuant to the
provisions of HUD's FOIA regulations at 24 CFR part 15, without regard
to whether or not it is mortgage data or AHAR information.
(c) Processing of FOIA requests--(1) FOIA Exemption (b)(4). HUD
will process FOIA requests for confidential business information of the
GSEs to which FOIA exemption 4 may apply in accordance with 24 CFR part
15, and the predisclosure notification procedures of Executive Order
12,600.
(2) FOIA Exemption (b)(8). Under section 1319F of FHEFSSA, the
Secretary may invoke FOIA exemption (b)(8) to withhold from the public
any GSE data or information contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of HUD. HUD may make data or information available for the
confidential use of other government agencies in their official duties
or functions, but all data or information remains the property of HUD
and any unauthorized use or disclosure of such data or information may
be subject to the penalties of 18 U.S.C. 641.
(3) Other FOIA exemptions. Under 24 CFR part 15, the Secretary may
invoke other exemptions including, without limitation, exemption (b)(6)
(5 U.S.C. 552(b)(6)), to protect data and information that would
constitute a clearly unwarranted invasion of personal privacy.
(d) Protection of information by HUD officers and employees. The
Secretary will institute all reasonable safeguards to protect data or
information submitted by or relating to either GSE, including, but not
limited to, advising all HUD officers and employees having access to
data or information submitted by or relating to either GSE of the legal
restrictions against unauthorized disclosure of such data or
information under HUD Standards of Conduct regulations, 24 CFR part O;
the Government-wide Standards of Ethical Conduct, 5 CFR part 2635; and
the Trade Secrets Act, 18 U.S.C. 1905. Officers and employees shall be
advised of the penalties for unauthorized disclosure, ranging from
disciplinary action under 24 CFR part O and 5 CFR part 2635 to criminal
prosecution.
(e) Protection of information by contractors. (1) In contracts and
agreements entered into by HUD where contractors have access to data or
information submitted by or relating to either GSE, HUD shall include
detailed provisions specifying that:
(i) Neither the contractor nor any of its officers, employees,
agents, or subcontractors may release data submitted by or relating to
either GSE without HUD's authorization; and
(ii) Unauthorized disclosure may be a basis for:
(A) Terminating the contract for default;
(B) Suspending or debarring the contractor; and
(C) Criminal prosecution of the contractor, its officers,
employees, agents, or subcontractors under the Federal Criminal Code.
(2) Contract provisions shall require safeguards against
unauthorized disclosure, including training of contractor and
subcontractor agents and employees, and provide that the contractor
will indemnify and hold HUD harmless against unauthorized disclosure of
data or information belonging to the GSEs or HUD.
Sec. 81.77 Requests for GSE information on behalf of Congress, the
Comptroller General, a subpoena, or other legal process.
(a) General. With respect to information submitted by or relating
to the GSEs, nothing in this subpart F may be construed to grant
authority to the Secretary under FHEFSSA to withhold any information
from or to prohibit the disclosure of any information to the following
persons or entities:
(1) Either House of Congress or, to the extent of matters within
its jurisdiction, any committee or subcommittee thereof, or any joint
committee of Congress or subcommittee of any such joint committee;
(2) The Comptroller General, or any of the Comptroller General's
authorized representatives, in the course of the performance of the
duties of the General Accounting Office;
(3) A court of competent jurisdiction pursuant to a subpoena; or
(4) As otherwise compelled by law.
(b) Notice of proprietary or confidential nature of GSE
information. (1) In releasing data or information in response to a
request as set out in paragraph (a) of this section, the Secretary
will, where applicable, include a statement with the data or
information to the effect that:
(i) The GSE regards the data or information as proprietary
information and/or confidential business information;
(ii) Public disclosure of the data or information may cause
competitive harm to the GSE; and
(iii) The Secretary has determined that the data or information is
proprietary information and/or confidential business information.
[[Page 61901]]
(2) To the extent practicable, the Secretary will provide notice to
the GSE after a request from the persons or entities described in
paragraphs (a)(1)-(4) of this section for proprietary information or
confidential business information is received and before the data or
information is provided in response to the request.
(c) Procedures for requests pursuant to subpoena or other legal
process. The procedures in 24 CFR 15.71-15.74 shall be followed when a
subpoena, order, or other demand of a court or other authority is
issued for the production or disclosure of any GSE data or information
that:
(1) Is contained in HUD's files;
(2) Relates to material contained in HUD's files; or
(3) Was acquired by any person while such person was an employee of
HUD, as a part of the performance of the employee's official duties or
because of the employee's official status.
(d) Requests pursuant to subpoena or other legal process not served
on HUD. If an individual who is not a HUD employee or an entity other
than HUD is served with a subpoena, order, or other demand of a court
or authority for the production or disclosure of HUD data or
information relating to a GSE and such data or information may not be
disclosed to the public under this subpart or 24 CFR part 15, such
individual or entity shall comply with 24 CFR 15.71-15.74 as if the
individual or entity is a HUD employee, including immediately notifying
HUD in accordance with the procedures set forth in 24 CFR 15.73(a).
(e) Reservation of additional actions. Nothing in this section
precludes further action by the Secretary, in his or her discretion, to
protect data or information submitted by a GSE from unwarranted
disclosure in appropriate circumstances.
Subpart G--Procedures for Actions and Review of Actions
Sec. 81.81 General.
This subpart sets forth procedures for:
(a) The Secretary to issue cease-and-desist orders and impose civil
money penalties to enforce the housing goal provisions implemented in
subpart B of this part and the information submission and reporting
requirements implemented in subpart E of this part; and
(b) Hearings, in accordance with 12 U.S.C. 4542(c)(4)(B), on the
Secretary's disapproval of new programs that the Secretary determines
are not in the public interest.
Sec. 81.82. Cease-and-desist proceedings.
(a) Issuance. The Secretary may issue and serve upon a GSE a
written notice of charges justifying issuance of a cease-and-desist
order, if the Secretary determines the GSE:
(1) Has failed to submit, within the time prescribed in Sec. 81.22,
a housing plan that substantially complies with 12 U.S.C. 4566(c), as
implemented by Sec. 81.22;
(2) Is failing or has failed, or there is reasonable cause to
believe that the GSE is about to fail, to make a good-faith effort to
comply with a housing plan submitted to and approved by the Secretary;
or
(3) Has failed to submit any of the information required under
sections 309(m) or (n) of the Fannie Mae Charter Act, sections 307(e)
or (f) of the Freddie Mac Act, or subpart E of this part.
(b) Procedures--(1) Content of notice. The notice of charges shall
provide:
(i) A concise statement of the facts constituting the alleged
misconduct and the violations with which the GSE is charged;
(ii) Notice of the GSE's right to a hearing on the record;
(iii) A time and date for a hearing on the record;
(iv) A statement of the consequences of failing to contest the
matter; and
(v) The effective date of the order if the GSE does not contest the
matter.
(2) Administrative Law Judge. A HUD Administrative Law Judge (ALJ)
shall preside over any hearing conducted under this section. The
hearing shall be conducted in accordance with Sec. 81.84 and, to the
extent the provisions are not inconsistent with any of the procedures
in this part or FHEFSSA, with Secs. 30.10 and 30.15 and subpart E of
part 30 of this title.
(3) Issuance of order. If the GSE consents to the issuance of the
order or the ALJ finds, based on the hearing record, that a
preponderance of the evidence established the conduct specified in the
notice of charges, the ALJ may issue and serve upon the GSE an order
requiring the GSE to:
(i) Submit a housing plan that substantially complies with 12
U.S.C. 4566(c), as implemented by Sec. 81.22;
(ii) Comply with a housing plan; or
(iii) Provide the information required under subpart E of this
part.
(4) Effective date. An order under this section shall be effective
as provided in 12 U.S.C. 4581(c) and Sec. 81.84(m).
Sec. 81.83 Civil money penalties.
(a) Imposition. The Secretary may impose a civil money penalty on a
GSE that has failed:
(1) To submit, within the time prescribed in Sec. 81.22, a housing
plan that substantially complies with 12 U.S.C. 4566(c), as implemented
by Sec. 81.22;
(2) To make a good-faith effort to comply with a housing plan
submitted and approved by the Secretary; or
(3) To submit any of the information required under sections 309(m)
or (n) of the Fannie Mae Charter Act, sections 307(e) or (f) of the
Freddie Mac Act, or subpart E of this part.
(b) Amount of penalty. The amount of the penalty shall not exceed:
(1) For any failure described in paragraph (a)(1) of this section,
$25,000 for each day that the failure occurs; and
(2) For any failure described in paragraphs (a)(2) or (a)(3) of
this section, $10,000 for each day that the failure occurs.
(c) Factors in determining amount of penalty. In determining the
amount of a penalty under this section, the Secretary shall consider
the factors in 12 U.S.C. 4585(c)(2) including the public interest.
(d) Procedures--(1) Notice of Intent. The Secretary shall notify
the GSE in writing of the Secretary's determination to impose a civil
money penalty by issuing a Notice of Intent to Impose Civil Money
Penalties (``Notice of Intent''). The Notice of Intent shall provide:
(i) A concise statement of the facts constituting the alleged
misconduct;
(ii) The amount of the civil money penalty;
(iii) Notice of the GSE's right to a hearing on the record;
(iv) The procedures to follow to obtain a hearing;
(v) A statement of the consequences of failing to request a
hearing; and
(vi) The date the penalty shall be due unless the GSE contests the
matter.
(2) To appeal the Secretary's decision to impose a civil money
penalty, the GSE shall, within 20 days of service of the Notice of
Intent, file a written Answer with the Chief Docket Clerk, Office of
Administrative Law Judges, Department of Housing and Urban Development,
at the address provided in the Notice of Intent.
(3) Administrative Law Judge. A HUD ALJ shall preside over any
hearing conducted under this section, in accordance with Sec. 81.84
and, to the extent the provisions are not inconsistent with any of the
procedures in this part, FHEFSSA, or Secs. 30.10 and 30.15 and subpart
E of part 30 of this title.
(4) Issuance of order. If the GSE consents to the issuance of the
order or the ALJ finds, on the hearing record, that a preponderance of
the evidence establishes the conduct specified in the notice of
charges, the ALJ may issue an order imposing a civil money penalty.
[[Page 61902]]
(5) Consultation with the Director. In the Secretary's discretion,
the Director of OFHEO may be requested to review any Notice of Intent,
determination, order, or interlocutory ruling arising from a hearing.
(e) Action to collect penalty. The Secretary may request the
Attorney General of the United States to bring an action to collect the
penalty, in accordance with 12 U.S.C. 4585(d). Interest on, and other
charges for, any unpaid penalty may be assessed in accordance with 31
U.S.C. 3717.
(f) Settlement by Secretary. The Secretary may compromise, modify,
or remit any civil money penalty that may be, or has been, imposed
under this section.
Sec. 81.84 Hearings.
(a) Applicability. The hearing procedures in this section apply to
hearings on the record to review cease-and-desist orders, civil money
penalties, and new programs disapproved based upon a determination by
the Secretary that such programs are not in the public interest, in
accordance with 12 U.S.C. 4542(c)(4)(B).
(b) Hearing requirements. (1) Hearings shall be held in the
District of Columbia.
(2) Hearings shall be conducted by a HUD ALJ authorized to conduct
proceedings under 24 CFR part 30.
(c) Timing. Unless an earlier or later date is requested by a GSE
and the request is granted by the ALJ, a hearing shall be fixed for a
date not earlier than 30 days, nor later than 60 days, after:
(1) Service of the notice of charges under Sec. 81.82;
(2) Service of the Notice of Intent to Impose Civil Money
Penalty(ies) under Sec. 81.83; or
(3) Filing of a request for a hearing under Sec. 81.54(b).
(d) Procedure. Hearings shall be conducted in accordance with the
procedures set forth in 24 CFR 30.10, 30.15, and subpart E of part 30
of this title to the extent that such provisions are not inconsistent
with any of the procedures in this part or FHEFSSA.
(e) Service. (1) To GSE. Any service required or authorized to be
made by the Secretary under this subpart G may be made to the Chief
Executive Officer of a GSE or any other representative as the GSE may
designate in writing to the Secretary.
(2) How service may be made. A serving party shall use one or more
of the following methods of service:
(i) Personal service;
(ii) Delivering the papers to a reliable commercial courier
service, overnight delivery service, or the U.S. Post Office for
Express Mail Delivery; or
(iii) Transmission by electronic media, only if the parties
mutually agree. The serving party shall mail an original of the filing
after any proper service using electronic media.
(f) Subpoena authority--(1) General. In the course of or in
connection with any hearing, the Secretary and the ALJ shall have the
authority to:
(i) Administer oaths and affirmations;
(ii) Take and preserve testimony under oath;
(iii) Issue subpoenas and subpoenas duces tecum; and
(iv) Revoke, quash, or modify subpoenas and subpoenas duces tecum
issued under this paragraph (f).
(2) Witnesses and documents. The attendance of witnesses and the
production of documents provided for in this section may be required
from any place in any State. A witness may be required to appear, and a
document may be required to be produced, at:
(i) The hearing; and
(ii) Any place that is designated for attendance at a deposition or
production of a document under this section.
(3) Enforcement. In accordance with 12 U.S.C. 4588(c), the
Secretary may request the Attorney General of the United States to
enforce any subpoena or subpoena duces tecum issued pursuant to this
section. If a subpoenaed person fails to comply with all or any portion
of a subpoena issued pursuant to this paragraph (f), the subpoenaing
party or any other aggrieved person may petition the Secretary to seek
enforcement of the subpoena. A party's petition to the Secretary for
enforcement of a subpoena in no way limits the sanctions that may be
imposed by the ALJ on a party who fails to comply with a subpoena
issued under this paragraph (f).
(4) Fees and expenses. Witnesses subpoenaed under this section
shall be paid the same fees and mileage that are paid witnesses in the
district courts of the United States and may seek reasonable expenses
and attorneys fees in any court having jurisdiction of any proceeding
instituted under this section. Such expenses and fees shall be paid by
the GSE or from its assets.
(g) Failure to appear. If a GSE fails to appear at a hearing
through a duly authorized representative, the GSE shall be deemed to
have consented to the issuance of the cease-and-desist order, the
imposition of the penalty, or the disapproval of the new program,
whichever is applicable.
(h) Public hearings. (1) All hearings shall be open to the public,
unless the ALJ determines that an open hearing would be contrary to the
public interest. Where a party makes a timely motion to close a hearing
and the ALJ denies the motion, such party may file with the Secretary
within 5 working days a request for a closed hearing, and any party may
file a reply to such a request within 5 working days of service of such
a motion. Such motions, requests, and replies are governed by
Sec. 30.515 of this title. When a request for a closed hearing has been
filed with the Secretary under this paragraph (h)(1), the hearing shall
be stayed until the Secretary has advised the parties and the ALJ, in
writing, of the Secretary's decision on whether the hearing should be
closed.
(2) Failure to file a timely motion, request or reply is deemed a
waiver of any objection regarding whether the hearing will be public or
closed. A party must file any motion for a closed hearing within 10
days after:
(i) Service of the notice of charges under Sec. 81.82;
(ii) Service of the Notice of Intent to Impose Civil Money
Penalt(ies) under Sec. 81.83; or
(iii) Filing of a request for a hearing under Sec. 81.54(b).
(i) Decision of ALJ. After each hearing, the ALJ shall issue an
initial decision and serve the initial decision on the GSE, the
Secretary, any other parties, and the HUD General Counsel. This service
will constitute notification that the case has been submitted to the
Secretary.
(j) Review of initial decision--(1) Secretary's discretion. The
Secretary, in the Secretary's discretion, may review any initial
decision.
(2) Requested by a party. Any party may file a notice of appeal of
an initial decision to the Secretary in accordance with Sec. 30.910 of
this title. Any waiver of the limitations contained in Sec. 30.910(c)
and (d) of this title on the number of pages for notices of appeal and
responses, of the time limitation in Sec. 30.910 of this title for
filing a notice of appeal of the initial decision, or any other waivers
under this subpart shall not be subject to the publication requirements
in 42 U.S.C. 3535(q).
(k) Final decision. (1) The initial decision will become the final
decision unless the Secretary issues a final decision within 90 days
after the initial decision is served on the Secretary.
(2) Issuance of final decision by Secretary. The Secretary may
review any finding of fact, conclusion of law, or order contained in
the initial decision of the ALJ and may issue a final decision in the
proceeding. Any decision shall include findings of fact upon which the
decision is predicated. The Secretary may affirm, modify, or set aside,
in whole or in part, the initial
[[Page 61903]]
decision or may remand the initial decision for further proceedings.
The final decision shall be served on all parties and the ALJ.
(l) Decisions on remand. If the initial decision is remanded for
further proceedings, the ALJ shall issue an initial decision on remand
within 60 days of the date of issuance of the decision to remand,
unless it is impractical to do so.
(m) Modification. The Secretary may modify, terminate, or set aside
any order in accordance with 12 U.S.C. 4582(b)(2).
Sec. 81.85 Public disclosure of final orders and agreements.
(a) Disclosure. Except as provided in paragraph (b) of this
section, the Secretary shall make available to the public final orders;
written agreements and statements; and modifications and terminations
of those orders, agreements, and statements, as set forth in 12 U.S.C.
4586(a) and the implementing regulations in this subpart G. The
retention of records of these orders, agreements, and statements, and
their modifications and terminations, are governed by 12 U.S.C.
4586(e).
(b) Exceptions to disclosure. Exceptions to disclosure will be
determined in accordance with 12 U.S.C. 4586 (c), (d), and (f) and
paragraph (c) of this section.
(c) Filing documents under seal--(1) Request by party. Upon the
denial by the ALJ of a motion for a protective order, any party may
request the Secretary to file any document or part of a document under
seal if the party believes that disclosure of the document would be
contrary to the public interest. Any other party may file with the
Secretary a reply to such a request within 5 working days after a
request is made or some other time to be determined by the Secretary.
Such requests and replies are governed by Sec. 30.515 of this title.
(2) Effect of request. A document or part of a document that is the
subject of a timely request to the Secretary to file under seal will
not be disclosed under this section until the Secretary has advised the
parties and the ALJ, in writing, of the Secretary's decision on whether
the document or part of a document should be filed under seal. The ALJ
shall take all appropriate steps to preserve the confidentiality of
such documents or parts of documents, including closing portions of the
hearing to the public.
(3) Time of request. Failure to file with the Secretary a timely
request or a reply is deemed a waiver of any objection regarding the
decision on whether a document is to be disclosed. A party must make
its request to file a document under seal at least 10 days before the
commencement of the hearing. A request may be filed at any other time
before or during the course of the hearing, but the requesting party's
obligation to produce the document or parts of the document will not be
affected by the party's pending request to the Secretary, unless the
Secretary expressly directs the ALJ to treat the document as protected
from disclosure until the Secretary makes a final written decision on
whether the document should be filed under seal. If the Secretary's
direction to the ALJ is made orally, that direction must be reduced to
writing and filed with the ALJ within 3 working days of the making of
the oral order or the document will then be subject to disclosure
pending the Secretary's final written decision on disclosure.
Sec. 81.86 Enforcement and jurisdiction.
If a GSE fails to comply with a final decision, the Secretary may
request the Attorney General of the United States to bring an action in
the United States District Court for the District of Columbia for the
enforcement of the notice or order. Such request may be made:
(a) For a cease-and-desist order:
(1) Upon expiration of the 30-day period beginning on the service
of the order on the GSE; or
(2) Upon the effective time specified in an order issued upon
consent; and
(b) For a civil money penalty, when the order imposing the penalty
is no longer subject to review under 12 U.S.C. 4582 and 4583 and the
implementing regulations at Secs. 81.84 and 81.87.
Sec. 81.87 Judicial review.
(a) Commencement. In a proceeding under 12 U.S.C. 4581 or 4585, as
implemented by Secs. 81.82 or 81.83, a GSE that is a party to the
proceeding may obtain review of any final order issued under Sec. 81.84
by filing in the United States Court of Appeals for the District of
Columbia Circuit, within 30 days after the date of service of such
order, a written petition praying that the order of the Secretary be
modified, terminated, or set aside.
(b) Filing of record. Upon receiving a copy of a petition, the
Chief Docket Clerk, Office of Administrative Law Judges, shall file in
the court the record in the proceeding, as provided in 28 U.S.C. 2112.
(c) No automatic stay. The commencement of proceedings for judicial
review under this section shall not, unless specifically ordered by the
court, operate as a stay of any order issued by the Secretary.
Subpart H--Book-Entry Procedures
Sec. 81.91 Definitions.
As used in this subpart H, the term--
(a) Reserve bank means a Federal Reserve bank and its branches
acting as Fiscal Agent of Fannie Mae and, when indicated, acting in its
individual capacity or as Fiscal Agent of the United States.
(b) Fannie Mae security means any obligation of Fannie Mae (except
short-term discount notes and obligations convertible into shares of
common stock) issued under 12 U.S.C. 1719 (b), (d), and (e) in the form
of a definitive Fannie Mae security or a book-entry Fannie Mae
security.
(c) Definitive Fannie Mae security means a Fannie Mae security in
engraved or printed form.
(d) Book-entry Fannie Mae security means a Fannie Mae security in
the form of an entry made as prescribed in this part on the records of
a Reserve bank.
(e) Pledge includes a pledge of, or any other security interest in,
Fannie Mae securities as collateral for loans or advances or to secure
deposits of public moneys or the performance of an obligation.
(f) Date of call is, with respect to Fannie Mae securities issued
under 12 U.S.C. 1719 (d) and (e), the date fixed in the authorizing
resolution of the Board of Directors of Fannie Mae on which the obligor
will make payment of the security before maturity in accordance with
its terms, and, with respect to Fannie Mae securities issued under 12
U.S.C. 1719(b), the date fixed in the offering notice issued by Fannie
Mae.
(g) Member bank means any National bank, State bank, or bank or
trust company which is a member of a Reserve bank.
Sec. 81.92 Authority of Reserve Bank.
Each Reserve bank is hereby authorized, in accordance with the
provisions of this part, to:
(a) Issue book-entry Fannie Mae securities by means of entries on
its records which shall include the name of the depositor, the amount,
the loan title (or series) and maturity date;
(b) Effect conversions between book-entry Fannie Mae securities and
definitive Fannie Mae securities;
(c) Otherwise service and maintain book-entry Fannie Mae
securities; and
(d) Issue a confirmation of transaction in the form of a written
advice (serially numbered or otherwise) which specifies
[[Page 61904]]
the amount and description of any securities, that is, loan title (or
series) and maturity date, sold or transferred, and the date of the
transaction.
Sec. 81.93 Scope and effect of book-entry procedure.
(a) (1) A Reserve bank as Fiscal Agent of Fannie Mae may apply the
book-entry procedure provided for in this part to any Fannie Mae
securities which have been or are hereafter deposited for any purpose
in accounts with it in its individual capacity under terms and
conditions which indicate that the Reserve bank will continue to
maintain such deposit accounts in its individual capacity,
notwithstanding application of the book-entry procedure to such
securities. This paragraph (a) is applicable, but not limited, to
securities deposited:
(i) As collateral pledged to a Reserve bank (in its individual
capacity) for advances by it;
(ii) By a member bank for its sole account;
(iii) By a member bank held for the account of its customers;
(iv) In connection with deposits in a member bank of funds of
States, municipalities, or other political subdivisions; or
(v) In connection with the performance of an obligation or duty
under Federal, State, municipal, or local law, or judgments or decrees
of courts.
(2) The application of the book-entry procedure under this
paragraph (a) shall not derogate from or adversely affect the
relationships that would otherwise exist between a Reserve bank in its
individual capacity and its depositors concerning any deposits under
this section. Whenever the book-entry procedure is applied to such
Fannie Mae securities, the Reserve bank is authorized to take all
action necessary in respect of the book-entry procedure to enable such
Reserve bank in its individual capacity to perform its obligations as
depositary with respect to such Fannie Mae securities.
(b) A Reserve bank as Fiscal Agent of the corporation may apply the
book-entry procedure to Fannie Mae securities deposited as collateral
pledged to the United States under Treasury Department Circulars Nos.
92 and 176, both as revised and amended, and may apply the book-entry
procedure, with the approval of the Secretary of the Treasury, to any
other Fannie Mae securities deposited with a Reserve bank, as Fiscal
Agent of the United States.
(c) Any person having an interest in Fannie Mae securities which
are deposited with a Reserve bank (in either its individual capacity or
as Fiscal Agent of the United States) for any purpose shall be deemed
to have consented to their conversion to book-entry Fannie Mae
securities pursuant to the provisions of this part, and in the manner
and under the procedures prescribed by the Reserve bank.
(d) No deposits shall be accepted under this section on or after
the date of maturity or call of the securities.
Sec. 81.94 Transfer or pledge.
(a) A transfer or pledge of book-entry Fannie Mae securities to a
Reserve bank (in its individual capacity or as Fiscal Agent of the
United States), or to the United States, or to any transferee or
pledgee eligible to maintain an appropriate book-entry account in its
name with a Reserve bank under Secs. 81.91 through 81.98 is effected
and perfected, notwithstanding any provision of law to the contrary, by
a Reserve bank making an appropriate entry in its records of the
securities transferred or pledged. The making of such an entry in the
records of a Reserve bank shall:
(1) Have the effect of a delivery in bearer form of definitive
Fannie Mae securities;
(2) Have the effect of a taking of delivery by the transferee or
pledgee;
(3) Constitute the transferee or pledgee a holder; and
(4) If a pledge, effect a perfected security interest therein in
favor of the pledgee. A transfer or pledge of book-entry Fannie Mae
securities effected under this paragraph (a) shall have priority over
any transfer, pledge, or other interest, theretofore or thereafter
effected or perfected under paragraph (b) of this section or in any
other manner.
(b) A transfer or a pledge of transferable Fannie Mae securities,
or any interest therein, which is maintained by a Reserve bank (in its
individual capacity or as Fiscal Agent of the United States) in a book-
entry account under Secs. 81.91 through 81.98, including securities in
book-entry form under Sec. 81.93(a)(3), is effected, and a pledge is
perfected, by any means that would be effective under applicable law to
effect a transfer or to effect and perfect a pledge of the Fannie Mae
securities, or any interest therein, if the securities were maintained
by the Reserve bank in bearer definitive form. For purposes of transfer
or pledge hereunder, book-entry Fannie Mae securities maintained by a
Reserve bank shall, notwithstanding any provision of law to the
contrary, be deemed to be maintained in bearer definitive form. A
Reserve bank maintaining book-entry Fannie Mae securities either in its
individual capacity or as Fiscal Agent of the United States is not a
bailee for purposes of notification of pledges of those securities
under this section, or a third person in possession for purposes of
acknowledgment of transfer thereof under this section. Where
transferable Fannie Mae securities are recorded on the books of a
depositary (a bank, banking institution, financial firm, or similar
party, which regularly accepts in the course of its business Fannie Mae
securities as a custodial service for customers, and maintains accounts
in the names of such customers reflecting ownership of or interest in
such securities) or account of the pledgor or transferor thereof and
such securities are on deposit with a Reserve bank in a book-entry
account, hereunder, such depositary shall, for purposes of perfecting a
pledge of such securities or affecting delivery of such securities to a
purchaser under applicable provisions of law, be the bailee to which
notification of the pledge of the securities may be given or the third
person in possession from which acknowledgment of the holding of the
securities for the purchaser may be obtained. A Reserve bank will not
accept notice or advice of a transfer or pledge effected or perfected
under this section, and any such notice or advice shall have no effect.
A Reserve bank may continue to deal with its depositor in accordance
with the provisions of this part, notwithstanding any transfer or
pledge effected or perfected under this paragraph (b).
(c) No filing or recording with a public recording office or
officer shall be necessary or effective with respect to any transfer or
pledge of book-entry Fannie Mae securities or any interest therein.
(d) A Reserve bank shall, upon receipt of appropriate instructions,
convert book-entry Fannie Mae securities and deliver them in accordance
with such instructions; no such conversion shall affect existing
interest in such Fannie Mae securities.
(e) A transfer of book-entry Fannie Mae securities within a Reserve
bank shall be made, in accordance with procedures established by the
Reserve bank not inconsistent with this part. The transfer of book-
entry Fannie Mae securities by a Reserve bank may be made through a
telegraphic transfer procedure.
(f) All requests for transfer or withdrawal must be made prior to
the maturity or date of call of the securities.
[[Page 61905]]
Sec. 81.95 Withdrawal of Fannie Mae securities.
For all book-entry Fannie Mae securities issued prior to March 10,
1978:
(a) A depositor of book-entry Fannie Mae securities may withdraw
them from a Reserve bank by requesting delivery of like definitive
Fannie Mae securities to itself or on its order to a transferee.
(b) Fannie Mae securities which are actually to be delivered upon
withdrawal may be issued either in registered or in bearer form.
Sec. 81.96 Delivery of Fannie Mae securities.
A Reserve bank which has received Fannie Mae securities and
effected pledges, made entries regarding them, or transferred or
delivered them according to the instructions of its depositor is not
liable for conversion or for participation in breach of fiduciary duty
even though the depositor had no right to dispose of or take other
action in respect of the securities. Customers of a member bank or
other depositary (other than a Reserve bank) may obtain Fannie Mae
securities only by causing the depositor of the Reserve bank to order
the withdrawal thereof from the Reserve bank under the conditions set
forth in Sec. 81.95.
Sec. 81.97 Registered bonds and notes.
No formal assignment shall be required for the conversion to book-
entry Fannie Mae securities of registered Fannie Mae securities held by
a Reserve bank (in either its individual capacity or as Fiscal Agent of
the United States) on the effective date of this part for any purpose
specified in Sec. 81.93(a). Registered Fannie Mae securities deposited
thereafter with a Reserve bank for any purpose specified in Sec. 81.93
shall be assigned for conversion to book-entry Fannie Mae securities.
The assignment, which shall be executed in accordance with the
provisions of subpart F of 31 CFR part 306, so far as applicable, shall
be to ``Federal Reserve Bank of ______________, as Fiscal Agent of the
Federal National Mortgage Association, for conversion to book-entry
Fannie Mae securities.''
Sec. 81.98 Servicing book-entry Fannie Mae securities; payment of
interest; payment at maturity or upon call.
Interest becoming due on book-entry Fannie Mae securities shall be
charged to Fannie Mae's account at the New York Federal Reserve Bank on
the interest due date and remitted or credited in accordance with the
depositor's instructions. Such securities shall be redeemed and charged
to Fannie Mae's account at the New York Federal Reserve Bank on the
date of maturity, call or advance refunding, and the redemption
proceeds, principal and interest, shall dispose of in accordance with
the depositor's instructions.
Sec. 81.99 Treasury Department regulations; applicability to Fannie
Mae.
The provisions of Treasury Department Circular No. 300, 31 CFR part
306 (other than subpart O), as amended from time to time, shall apply,
insofar as appropriate, to obligations of Fannie Mae for which a
Reserve bank shall act as Fiscal Agent of Fannie Mae and to the extent
that such provisions are consistent with agreements between Fannie Mae
and the Reserve banks acting as Fiscal Agents of Fannie Mae.
Definitions and terms used in Treasury Department Circular No. 300
should read as though modified to effectuate the application of the
regulations to Fannie Mae.
Subpart I--Other Provisions
Sec. 81.101 Equal employment opportunity.
Fannie Mae and Freddie Mac shall comply with sections 1 and 2 of
Executive Order 11478 (3 CFR, 1966-1970 Compilation, p. 803), as
amended by Executive Order 12106, (3 CFR, 1978, Compilation, p. 263),
providing for the adoption and implementation of equal employment
opportunity, as required by section 1216 of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1833e).
Sec. 81.102 Independent verification authority.
The Secretary may independently verify the accuracy and
completeness of the data, information, and reports provided by each
GSE, including conducting on-site verification, when such steps are
reasonably related to determining whether a GSE is complying with 12
U.S.C. 4541-4589 and the GSE's Charter Act.
Dated: November 21, 1995.
Henry G. Cisneros,
Secretary.
2. The following Appendices A through F will not appear in the Code
of Federal Regulations.
Appendix A--Secretarial Considerations to Establish the Low- and
Moderate-Income Housing Goal
A. Introduction
1. Establishment of Goal
In establishing the annual Low- and Moderate-Income Housing Goal,
the Federal Housing Enterprises Financial Safety and Soundness Act of
1992 requires the Secretary to consider:
1. National housing needs;
2. Economic, housing, and demographic conditions;
3. The performance and effort of the enterprises toward achieving
the Low- and Moderate-Income Housing Goal in previous years;
4. The size of the conventional mortgage market serving low- and
moderate-income families relative to the size of the overall
conventional mortgage market; 1
\1\ ``Conventional'' mortgages are those which do not carry any
government insurance, guarantee, or other obligation. That is,
conventional mortgages exclude Federal Housing Administration (FHA),
Farmers Home Administration (FmHA), and Veterans Administration (VA)
loans.
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5. The ability of the enterprises to lead the industry in making
mortgage credit available for low- and moderate-income families; and
6. The need to maintain the sound financial condition of the
enterprises.
2. Underlying Data
In considering the statutory factors in establishing these goals,
HUD relied upon data from the American Housing Survey, the 1990 Census
of Population and Housing, the 1991 Residential Finance Survey, other
government reports, the Home Mortgage Disclosure Act (HMDA) reports,
and the GSEs. HUD used data provided by the GSEs to determine their
financial condition and their prior performance in meeting the needs of
low- and moderate-income families. These data included loan-level
information on all mortgages purchased by the GSEs in 1993 and 1994.
Section B responds to comments from the GSEs and other commenters
on Appendix A in the proposed rule and Section C presents an updated
discussion of each of the factors listed above. Section D summarizes
the Secretary's rationale for selecting the levels of the Low- and
Moderate-Income Housing Goals for 1996 and 1997-99 and thereafter.
B. Summary and Response to Public Comments
The GSEs and several other commenters furnished comments on
Appendix A as it appeared in the proposed rule. Because the GSEs'
comments covered all of the points made by other commenters, this
appendix refers exclusively to the GSEs' comments. The GSEs took issue
with HUD's application of the factors identified in Section A above and
the analysis by which HUD determined the levels of the goals. The GSEs
commented that Appendix A: (1) confused general housing needs with
those for which the GSEs have an
[[Page 61906]]
appropriate responsibility; (2) failed to identify the broad range of
economic conditions which might be relevant over the coming years; (3)
incorrectly assessed the past performance of the GSEs and postulated a
very narrow concept of market leadership; (4) minimized the potential
economic impact of higher-risk multifamily mortgage purchases and
assumed the GSEs should have equal penetration of single-family and
multifamily markets; and (5) used flawed data estimates for calculating
the size of the conventional market for the Low- and Moderate-Income
Housing Goal.2
\2\ The credit risk criticism is addressed in the Economic
Analysis that accompanies this rule and the market share criticism
is addressed in Appendix D.
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1. ``Linking'' Housing Needs to GSEs
The GSEs expressed concern that HUD did not distinguish between
general housing needs of low- and moderate-income households and those
needs that the GSEs could reasonably be expected to address. HUD
conducted an analysis of general housing needs to comply with FHEFSSA,
which requires the Secretary to consider such needs when establishing
the housing goals. HUD's examination of national housing needs does not
suggest that the GSEs can or should meet all of those needs. Rather,
the analysis was intended to provide background on the evolution and
current state of the housing markets for low- and moderate-income
households. HUD recognizes that the GSEs can do little to mitigate the
more extreme problems, such as homelessness, identified in this
analysis (Section C.1 below).
With focused effort the GSEs can assist in addressing problems
discussed in the Appendix with regard to single-family and multifamily
housing. On the single-family side, the GSEs support of more customized
mortgage products and underwriting with greater outreach will likely
have mutually beneficial effects for both investors and low- and
moderate-income borrowers who have not been served with traditional
products, underwriting, and marketing. The GSEs have already embarked
on this path and continued efforts are encouraged.
On the multifamily side, with new product development and
partnerships the GSEs can reduce the credit gaps in the current market
for affordable rental housing--specifically small existing properties,
redevelopment projects, housing for the elderly, and new construction
in some markets. By sustaining a secondary market in units that meet
the low- and moderate-income goal, the GSEs will bring increased
liquidity, added stability, and ultimately lower rents for lower-income
families in these segments of the market.
Moreover, the GSEs can work to improve overall efficiency and
stability of the market for financing multifamily housing by promoting
increased standardization, which would allow more direct links to
capital markets independent of specific financial intermediaries or
investors. The GSEs have been immensely successful in this area with
regard to the financing of single-family housing. While HUD recognizes
that multifamily finance is different from single-family finance,
improvements may well be possible through, for example, creative
partnerships and risk-sharing with local institutions.
2. Mortgage Market Volatility
Both GSEs expressed concern that establishing the levels of the
housing goals on the basis of experience under the recent unusually
favorable mortgage market conditions for financing homeownership could
place unreasonable expectations on the GSEs. The GSEs commented that
the market for home purchase and finance is very dynamic and
susceptible to significant changes in conditions that affect whether
home purchase is feasible or accessible to low- and moderate-income
households. The current levels of interest rates, home prices, borrower
incomes, alternative rental costs, and consumer confidence, as well as
expectations about their future levels, play a role in determining
whether homeownership is feasible or desirable for any particular
household. HUD agrees that forecasting all these factors for upcoming
years to obtain a picture of the future climate for home purchase and
finance is difficult.
However, setting goals so that they can be met even under the worst
of circumstances is unreasonable. If macroeconomic conditions change
dramatically, then the levels of the goals can be revised to reflect
the changed conditions. FHEFSSA and HUD recognize that conditions could
change in ways that would require revised expectations. Thus, HUD is
given the statutory discretion: (1) to revise the goals if the need
arises and (2) if a GSE fails to meet a housing goal, to determine that
the goal was not feasible, and not take further action. Furthermore, as
discussed in Appendix D, HUD conducted detailed sensitivity analysis
for each of the housing goals to reflect economic conditions that are
less conducive to homeownership than those that existed during 1993 and
1994.
3. GSEs Already Innovate and Serve Low- and Moderate-Income Borrowers
The GSEs commented that Appendix A and the proposed rule failed to
recognize that the GSEs already make a sizable contribution toward
serving the housing needs of a wide range of American families,
including low- and moderate-income households, in diverse geographic
areas, through their overall operations. Congress chartered the GSEs to
carry out four public purposes: (a) provide stability; (b) respond
appropriately to the private capital market; (c) provide assistance to
the residential mortgage market, including serving low- and moderate-
income families; and (d) promote access to mortgage credit throughout
the nation. In FHEFSSA, Congress developed a mechanism to ensure that
the GSEs finance housing for and provide services to low- and moderate-
income families and housing in underserved areas. Congress
acknowledged, as does HUD, the substantial contributions the GSEs have
made and continue to make in creating liquidity and stability in the
overall mortgage market. No additional measures were thought necessary
to ensure that such contributions continue to take place. However, in
FHEFSSA, Congress focused on enhancing the GSEs' efforts to carry out
their other Charter purposes. HUD, through its focus on the goals, is
carrying out that Congressional intent.
4. Multifamily Market Is Different
The GSEs commented that the origination and purchase of multifamily
mortgages is fundamentally different from the origination and purchase
of single-family mortgages. Both GSEs commented that the GSEs do not
dominate the multifamily market to the same extent as the single-family
market and that they should not be required to obtain the same
multifamily market share that they have in the single-family market.
Freddie Mac argued that the purchase of creditworthy multifamily loans
is far more difficult than for single-family loans.
HUD agrees that the multifamily mortgage business is a different
business from single-family finance, posing a different level of risk.
Underwriting multifamily mortgages is more like underwriting business
loans than underwriting many small and relatively uniform single-family
mortgages. However, with regard to the argument that multifamily
lending is much more difficult, the evidence is not convincing.
[[Page 61907]]
Much of the difficulty with multifamily mortgages in recent years
was related to the aftermath of wide swings in the tax treatment of
multifamily housing. The tax-driven rather than market-driven
overbuilding of the early and mid-1980s was followed by the subsequent
withdrawal of tax support and the resulting credit crunch in the late
1980s and the early 1990s. During the early 1990s, underwriting of
creditworthy multifamily loans may have been difficult. These
conditions have now improved markedly.
Currently, multifamily properties offer less risk of loss than most
commercial property classes, according to Moody's Investors
Service.3 In overbuilt markets, vacancies have declined due to
depressed construction levels in the early 1990s. Accordingly,
competition for multifamily loans has increased and securitization has
increased in 1993 and again in 1994. Credit risk remains a concern to
investors, but new techniques in multi-class securitization have helped
mitigate credit risk on multifamily mortgage pools.
\3\ ``Moody's: Multifamily Offers Less Loss Risk,'' National
Mortgage News, May 1, 1995.
---------------------------------------------------------------------------
HUD realizes that achievement of the housing goals may require
deeper penetration of the multifamily mortgage market than the GSEs
have heretofore achieved. As discussed in Section C.2 below, Fannie Mae
purchased a large portion (nearly half) of the large multifamily loans
(those with balances of $1.0 million or more) that were originated in
1993 and reported in the HMDA data. An alternative to very deep
penetration of the large loan market would be for the GSEs to broaden
their penetration by shifting their focus toward purchase of smaller
multifamily loans. There is no evidence that smaller loans represent
higher credit risks. Such a shift may require the GSEs to develop
additional capabilities to underwrite smaller loans, such as forming
new partnerships with community lenders. This may pose some initial
difficulty, but the suggestion that there are long-term fundamental
difficulties in the purchase of smaller (less than $1 million)
multifamily loans is not consistent with the current market trends
toward higher multifamily lending activity and new techniques of credit
risk management.
5. HUD's Market Methodology
In establishing the goals, the Secretary is required to assess,
among a number of factors, the size of the conventional market for each
goal. HUD developed a straightforward technique for estimating the size
of the conventional conforming market for each of the goals. This
technique draws on the existing major sources of data on mortgage
market activity.
Both GSEs expressed strong criticism of HUD's use of specific data
elements in constructing its estimates of market size, for example,
estimates of the proportion of 1- to 4-unit rental properties or the
level of multifamily originations. Although both GSEs criticized how
data had been interpreted in HUD's market-share models, neither GSE,
nor any other commenter, objected to HUD's basic model for calculating
the size of the markets relevant to each of the housing goals. However,
Freddie Mac provided a detailed set of objections to the use of certain
data sources or assumptions, concluding that HUD's market estimates
were ``fatally flawed.'' Fannie Mae argued that market estimates
employed by HUD ``created an artificial market description based on
interpretations of the data available to [HUD], which are not
consistent.'' Fannie Mae commented that the Secretary deliberately
selected existing data interpretations to yield higher goals.
Freddie Mac maintained that the flaws in HUD's estimation process
would result in goals that were too high, because HUD had overestimated
the size of the rental market. Freddie Mac presented a comparison of
available market-share estimates, explained deficiencies it believed
were present in the data employed by HUD, and claimed that HUD had
chosen the least-favorable of the data bases that could have been
employed in establishing appropriate goals for the GSEs.
Both GSEs argued that the role of multifamily financing in the
mortgage market was consistently overstated in the proposed rule.
Freddie Mac provided data to support its assertion that the rule's
estimates of multifamily originations overstated both the total amount
of originations to be expected and the degree to which multifamily
originations are available to the secondary market.
In considering the levels of the goals, HUD examined carefully the
comments on the methodology used to establish the market share for each
of the goals. HUD contracted with the Urban Institute to conduct an
independent review that drew upon its resources of well-respected
academics and others in evaluating HUD's methodology. Based on that
thorough evaluation, as well as HUD's additional analysis, the basic
methodology employed by HUD is a reasonable and valid approach to
estimating market share, and Freddie Mac's claim that the methodology
is ``fatally flawed'' is without merit.
HUD agrees that a comprehensive source of information on mortgage
markets is not available. HUD considered and analyzed a number of data
sources for the purpose of estimating market size, because no single
source could provide all the data elements needed. In the appendices,
HUD has carefully defined the range of uncertainty associated with each
of these data sources and has conducted sensitivity analyses to show
the effects of various assumptions. Technical papers prepared by the
Urban Institute and other academics support HUD's analysis.
A number of technical changes have been made in response to the
comments and the evaluation by outside experts and HUD, but the
approach for determining market size has not been substantially
modified. The detailed evaluations show that the methodology, as
modified, produces reasonable estimates of the market share for each
goal.
Criticism of the methodology focused, in part, on the estimated
size of the multifamily market. The GSEs proposed that HUD use the
volume of originations as reported in the Home Mortgage Disclosure Act
(HMDA) data base--$15 billion in 1994--as the accurate number of
multifamily originations, as opposed to HUD's $30 billion estimate
derived from other data sources. Four of the studies HUD commissioned
from the Urban Institute considered various aspects of the multifamily
market. HUD also consulted with experts at the Federal Reserve Board,
the Bureau of the Census, and in industry trade groups to assist HUD in
carefully evaluating the GSEs' claim that HMDA data provide an accurate
number of total multifamily originations.
HUD found consensus that HMDA data underreport multifamily
originations. HMDA, alone, is not an accurate survey of the total
market; it was not designed to be one. It includes only information
reported by a subset of institutions that originate multifamily loans:
large commercial banks, thrifts, and mortgage bankers in metropolitan
areas. In addition, HMDA underestimates multifamily lending by both
mortgage bankers and commercial banks. The additional analyses
conducted in response to the comments support the $30 billion
multifamily estimate used by HUD.
c. Consideration of the Factors
Overview of Sections C.1 and C.2. These sections cover a range of
topics on housing needs and economic and
[[Page 61908]]
demographic trends that are important for understanding mortgage
markets. Most of the information, such as trends in refinancing
activity, is provided because it describes the market environment in
which the GSEs must operate and is therefore useful for gauging the
reasonableness of specific levels of the Low- and Moderate-Income
Housing Goal. In addition, the severe housing problems faced by lower-
income families are discussed.
This information has led the Secretary to the following
conclusions:
The volume of mortgage originations fell from its 1993
record level of one trillion dollars to $773 billion in 1994 and is
expected to be about $650 and $700 billion in 1995 and 1996,
respectively. Purchase mortgages, including those for first-time
homebuyers, have replaced refinance mortgages as the dominant mortgage
type.
The increase in interest rates from the 25-year lows of
1993 could make it more difficult for marginal borrowers to afford
homeownership. However, interest rates continue to remain lower and
housing more affordable than any previous extended period since 1977.
Borrowers also have been helped by the rising incomes that accompany
economic growth, which helped to boost the GSEs' purchases of low- and
moderate-income mortgages in 1994, beyond levels recorded in 1993.
Purchasing a home became increasingly difficult for lower-
income and younger families during the 1980s. Low-income families with
children, who could most benefit from the advantages of ownership, bore
the brunt of the decline in ownership rates. The share of the nation's
children living in owner-occupied homes fell from 71 percent to 63
percent between 1980 and 1991.
Very-low-income renters often must pay an unduly high
share of their income for rent.
Several demographic changes will affect the demand for
housing over the next few years. The continued influx of immigrants
will increase the demand for both rental and owner-occupied housing and
help to offset declines due to the aging of the baby-boom generation.
Non-traditional households will become more important as overall
household formation rates have slowed. With later marriage, divorce,
and other non-traditional living arrangements, the fastest-growing
household groups will be single-parent and single-person households.
The multifamily mortgage market is far less integrated
into the broader capital markets than the single-family market.
Increased liquidity will bring more capital, at lower cost, to fill
current and future credit gaps for maintenance of existing affordable
stock and construction of affordable units in higher growth markets.
1. National Housing Needs
This section reviews the general housing problems of both low- and
moderate-income homeowners and then discusses past and current economic
conditions affecting the single-family and multifamily housing markets.
HUD recognizes that the GSEs can do little to mitigate many of the more
extreme problems discussed in the next sections. These sections are
meant to portray the general state of the housing markets for low- and
moderate-income households as they exist today and are expected to
continue in the near future.
a. Housing Problems Among Low- and Moderate-Income Owners and Renters
Under the income definitions in FHEFSSA, almost three-fifths of
U.S. households in 1993 qualified as low- or moderate-income families.
Almost half of all homeowners (48 percent) had incomes below their
(unadjusted) area median family income, while 76 percent of renters had
income below their area's HUD-adjusted median family income.4
\4\ HUD is required by statute to adjust median family income in
developing its official income cutoffs for each Metropolitan
Statistical Area (MSA) and non-metropolitan county. Income limits
based on HUD-Adjusted Area Median Family Incomes (HAMFI) are
adjusted 1) with upper and lower caps for areas with low or high
ratios of housing costs to income; 2) by setting state
nonmetropolitan average income as a floor for nonmetropolitan
counties; and 3) by household size. The adjusted annual estimates of
area median family income provide the base for the ``50 percent''
and ``80 percent'' of HAMFI cutoffs that are assigned to a household
of four. Household size adjustments then range from 70 percent of
the base for a 1-person household to 132 percent of the base for an
8-person household.
---------------------------------------------------------------------------
Housing needs vary with income. In 1993, roughly 21 percent of
owners with moderate incomes (income 80 to 100 percent of area median)
and 24 percent of moderate-income renters had a housing problem,
compared to 25 percent of low-income owners and 36 percent of low-
income renters (with income 60 to 80 percent of area median). Moreover,
two-thirds of the 14 million households with incomes below 30 percent
of median paid more than 30 percent of income for housing or lived in
inadequate or crowded housing.5
\5\ Tabulations of U.S. Departments of Housing and Urban
Development and Commerce, American Housing Survey for the United
States in 1993 (April 1995) performed by HUD Office of Policy
Development and Research.
---------------------------------------------------------------------------
b. Unmet Demands for Homeownership
Homeownership is a key aspiration for most Americans and a basic
concern of government. Homeownership fosters family responsibility and
self-sufficiency, expands housing choice and economic opportunity, and
promotes community stability. Ownership also improves access to the
larger homes and better neighborhoods particularly needed by families
with children. Children of homeowners are more likely to graduate from
high school, less likely to commit crime, and less likely to bear
children as teenagers than children of renters.6 Recent surveys
indicate that lower-income and minority families who do not own their
homes will make considerable sacrifices to attain this goal.
\6\ These tendencies are especially strong for lower-income
households. Children of low-income homeowners are 15 percent more
likely to stay in school than children of non-homeowners. Michelle
White and Richard Green, ``Measuring the Benefits of Homeowning:
Effects on Children,'' University of Chicago, unpublished paper,
February 1994.
---------------------------------------------------------------------------
Ownership rates rose dramatically in the late 1940s and 1950s,
increasing from 43.6 percent to 61.9 percent between 1940 and 1960.
During the 1960s, homeownership rates rose more slowly, reaching 62.9
percent by 1970, and--after several years of high house price
appreciation--an all-time high of 65.6 percent in 1980. In the early
1980s, historically high interest rates, low price appreciation, and a
series of deep regional recessions caused the homeownership rate to
decline to 63.9 percent by 1985. The rate increased only slightly
between 1985 and 1994.7
\7\ The stability in ownership after 1985 resulted from
increases among elderly households and single individuals, offset by
further declines among families with children.
---------------------------------------------------------------------------
During the 1980s, the goal of homeownership became more elusive for
low- and moderate-income families. Declines in ownership rates during
the 1980s were most pronounced for younger, lower-income households,
particularly those with children:
Between 1980 and 1992, homeownership among younger households
dropped roughly 10 percentage points, from 43.3 percent to 33.1
percent for households with the head aged 25 to 29, and from 61.1
percent to 50.0 percent for households with the head aged 30 to 34.
These declines were concentrated among single-parent households and
married couples with children.8
\8\ Joint Center for Housing Studies of Harvard University, The
State of the Nation's Housing, 1993, Table A-4.
---------------------------------------------------------------------------
Homeownership rates fell by 4 percentage points each for
moderate-income households and low-income households during the
1980s, and by 3 percentage points for households below 50 percent of
area median, adjusted for family size. At each income
[[Page 61909]]
level, declines were greatest for families with children. Among very
low-income families with children, homeownership rates dropped by
---------------------------------------------------------------------------
nearly a fourth.9
\9\ Kathryn Nelson and Jill Khadduri, ``To Whom Should Limited
Housing Resources Be Directed?'' Housing Policy Debate, Vol. 3,
1992, pp. 1-55, Table 3.
---------------------------------------------------------------------------
In sum, the families with children who could most benefit from
ownership were most adversely affected by declines in ownership.
Between 1980 and 1991, the dip in the total ownership rate from 65.6 to
64.2 percent included a fall of seven percentage points among families
with children, from 70.4 percent to 63.4 percent.
c. Obstacles to Homeownership
Insufficient income, high debt burdens, and limited savings are
obstacles to homeownership for younger families. As home prices
skyrocketed during the late 1970s and early 1980s, real incomes
stagnated, with earnings growth particularly slow for blue collar and
less educated workers. Through most of the 1980s, the combination of
slow income growth and increasing rents made saving for home purchase
more difficult and relatively high interest rates required larger
fractions of family income for homeowner mortgage payments. Thus, fewer
households had the financial resources to meet down payment
requirements, closing costs, and monthly mortgage payments. One-fifth
of first-time homeowners had to rely on their relatives for most of
their down payment.10 One-third of recent first-time homeowners
relied on gifts and loans from parents.11
\10\ National Association of Home Builders, Profile of the New
Home Buyer Survey, 1991.
\11\ National Association of Realtors, Survey of Homeowners and
Renters, 1991.
---------------------------------------------------------------------------
In addition to low income, high debts are a primary reason
households cannot afford to purchase a home. Nearly 53 percent of
renter families have both insufficient income and excessive debt
problems that may cause difficulty in financing a home purchase.12
High debt-to-income ratios frequently make potential borrowers
ineligible for mortgages based on the underwriting criteria established
in the conventional mortgage market.
\12\ Howard Savage and Peter Fronczek, Who Can Afford to Buy A
House in 1991?, U.S. Bureau of the Census, Current Housing Reports
H121/93-3, July 1993, p. ix.
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d. Affordability Problems and Worst Case Housing Needs
Finding affordable housing is by far the most common housing
problem for American families nationwide.13 Between 1979 and 1991,
shares of households paying more than 30 percent of their income for
housing fluctuated around 42 percent among renters and rose from 17
percent to 20 percent among owners.14 Over this period, the number
of low-income renter households spending 50 percent or more of their
income on housing rose from 4.3 million in 1978 to 6.0 million in
1991.15 Poor homeowners also paid high proportions of their income
for housing costs. Between 1978 and 1989, the share of poor homeowners
spending over 60 percent of income on housing rose from 30.6 percent to
33.1 percent.16
\13\ ``Affordable housing'' is generally interpreted as housing
for which the homeowner or renter pays no more than 30 percent of
family income for housing costs, including utilities.
\14\ U.S. Departments of Housing and Urban Development and
Commerce, American Housing Survey for the United States in 1991,
April 1993.
\15\ 1974-1979 figures from Nelson and Khadduri, ``To Whom
Should Limited Housing Resources Be Directed,'' 3 Housing Policy
Debate 1, 16, 1992. 1991 figure from Worst Case Needs for Housing
Assistance in the United States in 1990 and 1991. HUD-1481-PDR, June
1994.
\16\ Center on Budget and Policy Priorities and Low Income
Housing Service, A Place to Call Home, April 1989; and U.S.
Departments of Housing and Urban Development and Commerce, American
Housing Survey for the United States in 1989, July 1991.
---------------------------------------------------------------------------
Although affordability problems affect two-fifths of low-income
renters and one-eighth of low-income owners, they are most frequent and
severe among the very lowest income owners and renters. In 1991, when
the average gross rent/income ratio for renters with incomes above area
median income was 23 percent, this ratio was 72 percent for renters
with incomes below 30 percent of area median income and 41 percent for
renters with incomes between 30 and 49 percent of median.17
\17\ Tabulations of U.S. Departments of Housing and Urban
Development and Commerce, American Housing Survey for the United
States in 1991, April 1993, performed by HUD Office of Policy
Development and Research.
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Priority problems--defined as paying more than half of income for
rent and utilities, being displaced, or living in severely inadequate
housing--were heavily concentrated among renters with incomes below 50
percent of area median. Half of renters with incomes below 30 percent
of median, and one-fourth of those with incomes 31-50 percent of
median, had these severe ``worst case'' housing needs.18
\18\ Congress defines ``worst case needs'' for housing
assistance as unassisted renters with incomes below 50 percent of
area median income who have priority problems.
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According to HUD's third Congressionally-mandated study of worst
case needs, severe affordability problems were not only the
overwhelming cause of worst case needs but often a family's only
housing problem.19 Fully 94 percent of the 5.3 million households
with worst case needs reported severe rent burden as a problem, and for
almost three-fourths, severe rent burden was their only problem.
\19\ Worst Case Needs for Housing Assistance in the United
States in 1990 and 1991, HUD-1481-PDR, June 1994.
---------------------------------------------------------------------------
The number of households with worst case needs increased by nearly
400,000 between 1989 and 1991, rising most rapidly among families with
children. Large families were more likely than smaller ones to have
priority problems and to need to move to another housing unit because
of crowding or excessive rent burden. Between 1989 and 1991, worst case
needs among very-low-income families with three or more children
increased from 34.7 percent to 40.2 percent. Elderly households were
the least likely to have worst case needs.
2. Economic, Housing, and Demographic Conditions
A number of economic, housing, and demographic considerations have
influenced the Secretary's establishment of the Low- and Moderate-
Income Housing Goals. Increasing income inequality and changes in
household composition suggest that needs for housing affordable to
very-low-income families will continue to be most acute, placing
additional pressure on the inadequate stock of rental housing
affordable to families with incomes below 30 percent of median income.
Although volatile interest rates strongly influence both single-family
starts and mortgage market activity, rates that are relatively low by
historical standards have improved affordability for first-time
homebuyers.
a. Underlying Demographic Conditions
(1) Household Formations. The demand for housing and mortgages
depends heavily on household formations. During the 1970s, as the
leading edge of the baby boom generation (born between 1946 and 1964)
entered adulthood, household formation surged to an annual average of
1.7 million. Aided by rising incomes and low real interest rates,
household heads aged 25-34 purchased homes in record numbers. During
the 1980s, annual household growth fell slightly to an average of 1.5
million. Many in the ``housing upgrade'' group (aged 35-44) had
benefitted from substantial increases in the prices of their first
homes, and were able to afford bigger and higher quality homes during
the 1980s. Household formation is expected to drop sharply during the
1990s. The
[[Page 61910]]
Census Bureau projects that the older baby boomers (aged 45 to 54) will
be the fastest growing population group during this decade.
The effects of these demographic trends on housing demand have been
debated in the economics literature for several years. In 1989, Gregory
Mankiw and David Weil predicted that the aging of the baby boomers and
the small size of the following ``baby bust'' generation would
substantially reduce housing demand and cause housing prices to
collapse during the 1990s.20 Other researchers disagree.
Reductions in housing demand due to aging of the baby boom generation
could be offset by many factors, including rising incomes, pent-up
demand for homeownership by those priced out of the housing market
during the 1980s, and high levels of immigration.21
\20\ W. Gregory Mankiw and David N. Weil, ``The Baby Boom, the
Baby Bust, and the Housing Market,'' Regional Science and Urban
Economics, May 1989.
\21\ See, for example, Joint Center for Housing Studies of
Harvard University, The State of the Nation's Housing 1994, 1994.
---------------------------------------------------------------------------
(2) Immigration. The continued increase in immigration during the
1990s will help offset declines in the demand for housing caused by the
aging of the baby boom generation. During the 1980s, 6 million legal
immigrants entered the United States, up from 4.2 million during the
1970s and 3.2 million during the 1960s. The Hispanic population
residing in the U.S. increased by 50 percent during the 1980s, while
the Asian population doubled. About one-quarter of the Hispanics living
in the U.S. in 1990 had immigrated during the 1980s. Immigration is
projected to add even more new Americans in the 1990s than it did
during the 1980s. Asians and Pacific Islanders are expected to be the
fastest growing group, with annual growth rates that may exceed 4
percent in the 1990s. Total population is now projected to rise by 25
million in each of the decades from 1991 to 2020. The tendency of
immigrants, particularly Hispanics, to locate in certain ``gateway''
cities (e.g., Los Angeles and Miami) will place increased demands on
the housing stock in some major urban areas.
(3) Non-traditional Households. While overall growth in new
households has slowed, non-traditional households have become more
important. With later marriages, divorce, and other non-traditional
living arrangements, household growth has been fastest among single-
parent and single-person households. The number of single parents with
one or more children under 18 was 10.5 million in 1992; the vast
majority of those single parents were women.22 About 62 percent of
African-American families with children were single-parent families in
1992, compared with 34 percent for Hispanics and 24 percent for Whites.
Since only 35 percent of single-parent households are homeowners
compared to 74 percent of married couples, their increase should spur
demand for rental housing and for affordable ownership opportunities.
In addition, HUD's analysis of the nation's worst case housing needs
shows that female-headed households suffer some of the most severe
housing problems.
\22\ U.S. Department of Commerce, Bureau of the Census, How
We're Changing: Demographic State of the Nation: 1993. Special
Studies Series, P-23, No. 184, February 1993.
---------------------------------------------------------------------------
(4) Single Person Households are playing an increasingly important
role in the housing market. Singles accounted for one-fourth of all
households in 1990. While one-half owned their own home, many of these
were elderly people with little or no mortgage debt and probably no
intention of entering the housing market. Never-married singles, on the
other hand, have been a significant factor in the homebuying market in
large urban areas. Never-married singles rose as a proportion of first-
time homebuyers from just over one-quarter in 1990 and 1991 to roughly
a third in 1992 and 1993 before declining to about a 30 percent share
in 1994.23 As discussed above, ownership rates among non-elderly
single individuals rose steadily during the 1980s. Low interest rates
during the past two years apparently enticed even more single renters
to become homeowners.
\23\ Chicago Title and Trust Family of Insurers, Who's Buying
Homes in America, 1992, 1993, 1994, and 1995.
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(5) Growing Income Inequality in the distribution of income over
the last 20 years has made it more difficult for those at the bottom of
the income distribution to purchase adequate shelter. The share of the
nation's income received by the richest 5 percent of American families
rose from 18.6 percent in 1977 to 24.5 percent in 1990, while the share
received by the poorest 20 percent fell from 5.7 percent to 4.3
percent. This widening income inequality was due in large part to a
widening disparity in earned incomes; as the economy has moved away
from manufacturing to more service industry jobs and more advanced
computer and technologically-intensive industry jobs, the wages of
unskilled, entry-level, and blue collar workers have fallen relative to
the wages of professional and technical workers. The result has been an
increase in the working poor and a decrease in the middle class.
In addition, higher real interest rates and declining inflation
through the 1980s increased the return to capital, raising nonwage
incomes of upper and upper middle income families. This too contributed
to the increasing inequality in the distribution of income.
b. Economic and Housing Conditions--Single-Family Market
(1) Interest Rate Trends. As the 1980s began, mortgage interest
rates were above 12 percent and rose quickly to over 15 percent. After
1982, they drifted slowly downward to the 9 percent range in 1987
before rising to over 10 percent in the 1989-1990 period. Rates
returned to 9.3 percent in 1991 and then fell further to 8.2 percent in
1992 and 7.2 percent in 1993. The October 1993 rate of 6.80 percent was
the lowest level in more than twenty years.24 Rates rose nearly a
full percentage point in 1994, and peaked at 8.3 percent in early 1995,
but have since fallen by about 50 basis points.
\24\ Council of Economic Advisers, Economic Indicators, August
1995 and Economic Report of the President, February 1995.
---------------------------------------------------------------------------
Volatile interest rates were a principal cause of the housing
market volatility of the 1980s and they continue to be a major
determinant of housing and mortgage market activity. During 1992 and
1993, homeowners responded to the record low rates by refinancing
existing mortgages. While refinancing accounted for less than 25
percent of mortgage originations in 1989-90 when interest rates
exceeded 10 percent, the sharp decline in interest rates led
refinancings to account for over 50 percent of all mortgage
originations in 1992 and 1993.25 Because of the heavy refinancing
activity, single-family mortgage originations surged from less than
$500 billion in 1990 to record levels of $894 billion in 1992 and over
$1 trillion in 1993. As mortgage rates rebounded from the 1993 lows,
refinancing subsided and home purchase returned as the predominant
component of mortgage originations. Origination volume totalled $773
billion in 1994 and is projected to be about $650 and $700 billion in
1995 and 1996, respectively.
\25\ Monthly average refinancing data obtained from Freddie
Mac's Primary Mortgage Market Survey.
---------------------------------------------------------------------------
Single-family housing starts have also responded to interest rates,
with record low volumes in 1981 and 1982, peaks in 1986 and 1987, and
less severe lows in 1990 and 1991. Low interest rates and economic
recovery in 1992 and 1993 made homeownership more affordable
[[Page 61911]]
and helped to turn the housing market around. Single-family starts
increased from less than 900,000 during the recessionary years of 1990
and 1991 to 1.03 million in 1992, 1.13 million in 1993, and 1.20
million in 1994. Volume in 1994 was 43 percent higher than 1991's
recessionary low of 840,000.
(2) First-time Homebuyers have been the driving force in the
recovery of the nation's housing market over the past several years.
First-time homebuyers are typically people in the 25-34 year-old age
group that purchase modestly priced houses. As the post-World War II
baby boom generation ages, the percentage of Americans in this age
group has shrunk, from 28.3 percent in 1980 to 25.4 percent in
1992.\26\ Nonetheless, first-time homebuyers have bucked these
demographic trends to increase their share of home sales. During the
1980s, first-time buyers accounted for about 40 percent of home sales;
this figure rose to 45 percent in 1991, 48 percent in 1992, receding to
46 percent in 1993, and rebounding to 47 percent in 1994.\27\ The 1992
figure was the highest percentage for first-time buyers since the
annual Home Buyers Survey was initiated in 1976.
\26\ U.S. Department of Commerce, Bureau of the Census, Money
Income of Households, Families, and Persons in the United States:
1992, Special Studies Series P-60, No. 184, Table B-25, October
1993.
\27\ Chicago Title and Trust Family of Insurers, Who's Buying
Homes in America, 1992, 1993, 1994, and 1995.
---------------------------------------------------------------------------
Among the first-time buyers was a record number of single-
individual households. The 1992 and 1993 Home Buyers Surveys found that
approximately 30 percent of first-time buyers in these years were
single, compared to 21 percent in 1991. The more affluent, move-up home
buyers, on the other hand, have recently played a smaller role. A
sluggish economy, uncertain outlooks for many white-collar jobs, and
slow house price appreciation have kept many trade-up buyers out of the
housing market.
Reflecting these trends, the average income for recent home buyers
has fallen. In 1991, one of every three buyers had a family income of
$50,000 or less; in 1993, those earning less than $50,000 accounted for
44 percent of all home buyers. Apparently, two years of low interest
rates induced many renters who had previously been priced out of the
market to become homeowners. A strong pent-up demand to own a home is
not surprising given the large reductions in homeownership rates
experienced by several groups during the 1980s (see Section C.1.d
above). A recent survey of renters by the National Association of
Realtors (NAR) indicated that only one-third prefer to remain renters
for the foreseeable future.\28\ Thus there are many potential home
buyers among the 34 million households that are currently renting.
\28\ National Association of Realtors, Survey of Homeowners and
Renters, 1991.
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(3) Potential Homebuyers. As noted above, immigration is expected
to be a major source of future homebuyers. Fannie Mae's 1995 National
Housing Survey revealed that immigrant renter households are almost 3
times as likely as renter households in general to list home purchase
as their ``number-one priority.'' Immigrants as a group are currently
more than one-and-two-thirds times as likely to be renters although
they appear as financially capable as the population at large.\29\ The
Joint Center for Housing Studies estimates that if the homebuying
potential of immigrant households were realized--i.e., they purchased
with the same propensity as non-immigrants with similar
characteristics--that the number of homeowners in the largest 40
metropolitan areas would increase by about 900,000. In addition, the
Joint Center estimates that another 950,000 native-born minority
households in the same metropolitan areas would become homeowners if
their rate of homeownership matched that of their native-born white
counterparts with similar income and demographic characteristics.\30\
\29\ Fannie Mae National Housing Survey 1995, pp. 3 and 5.
\30\ State of the Nation's Housing, 1995, Joint Center for
Housing Studies of Harvard University, p. 30, Table A-8.
---------------------------------------------------------------------------
As part of the process of revising the GSE rule, HUD sought
information on two key questions: how large is the underserved
potential homebuyer market and what are the default risks associated
with expanded homeownership among lower-income, underserved households?
To help answer these questions, the Urban Institute and HUD developed a
logit-based analysis of households in the 1990 Survey of Income and
Program Participation (SIPP). The probability of a renter making the
transition to homeownership was then estimated directly by applying a
logit regression to the mid-1992 sub-sample of white suburban renters
and recently-transitioned homeowners. These probabilities were then
linked to all the remaining renter SIPP households to identify renters
having relatively good prospects for transitioning to homeownership. Of
the 20.3 million remaining renter households (i.e., 84 percent of all
remaining renters) having low or moderate incomes, roughly 16 percent
had a probability of transitioning into homeownership which was greater
than that for half of the renter households who actually did become
homeowners over the sample period. When one also took into account
their likelihood of defaulting relative to the average expected for
those actually transitioned to homeownership, 13.4 percent of all
remaining low- and moderate-income renters had better-than-median
probability of transitioning to homeownership and lower than average
probability of default, assuming the purchase of a lower-cost home
priced at the 10th percentile of area home prices. The proportion of
high-probability, low-risk potential low- and moderate-income
homebuyers declines to 10.6 percent if the purchase of homes priced at
the median price for the area is assumed for these households.\31\
These results indicate the existence of a significant population of
lower-risk, potential homebuyer households that might be reached with
more aggressive outreach.
\31\ George Galster and others, ``Estimating the Size,
Characteristics, and Risk Profile of Potential Homebuyers,'' (The
Urban Institute, September 1995) mimeo.
---------------------------------------------------------------------------
(4) Affordability. Potential homebuyers in 1992-1994 enjoyed the
most affordable market in almost twenty years. The National Association
of Realtors (NAR) tracks housing affordability by measuring the degree
to which an average family can afford monthly mortgage payments on a
typical house, assuming that the family has enough cash for a 20
percent down payment. Specifically, NAR's composite affordability index
measures the ratio of median family income to the income required to
qualify for a conventional loan on a median-priced house. After
averaging slightly over 110 between 1986 and 1991, the index jumped to
125 in 1992 and 133 in 1993, before slipping to 130 in 1994. The 1994
figure indicates that the U.S median family income was 30 percent more
than was needed to qualify for a mortgage on the nation's median priced
house.\32\
\32\ The South and North Central census regions were the most
affordable for homebuyers, with affordability indexes of 141 and
176, respectively, in 1993. Affordability remained much more of a
problem in the Northeast and West, where NAR's indexes were 110-117.
---------------------------------------------------------------------------
In addition to its overall affordability index, NAR also estimates
the ability of first-time home buyers to purchase modestly-priced
homes. When this index equals 100, the typical first-time buyer can
afford the typical starter home under existing financial conditions
with a 10 percent down payment; a score
[[Page 61912]]
below 100 indicates that the monthly mortgage payment places a
significant burden on first-time home buyers, even during a period of
record low interest rates. NAR's first-time home buyer index ranged
from 75 to 86 between 1991 and 1993 (84 in 1994).
(5) Increased Interest Rates. The 1994 jump in interest rates
reduced housing affordability. According to Freddie Mac's primary
market survey, interest rates for conventional, 30-year, fixed rate
mortgages increased from a 25-year low of 7.05 percent in the fourth
quarter of 1993 to 9.10 percent in the fourth quarter of 1994, with a
subsequent decline to 7.95 percent in the second quarter of 1995. The
1994 increase made it more difficult for potential first-time home
buyers to qualify for conventional mortgages, as reflected in the
decline in NAR's composite affordability index from 142 in the fourth
quarter of 1993 to 127 in the fourth quarter of 1994. The first-time
home buyer's index dropped from 92.3 to 82.4 during this period. Both
indexes would have fallen further if incomes had not risen to partially
offset the effects of increased interest rates.\33\ However, interest
rates continue to remain lower and housing more affordable than was
true for any previous extended period since 1977. Moreover, as the
economic recovery continues, rising incomes should continue to offset
the effects of higher interest rates.
\33\ The qualifying payment-to-income ratio depends essentially
on three elements: The interest rate, loan amount, and borrower's
income. It can be shown that for every 100 basis point increase in
interest rates (one percentage point), payment-to-income ratios rise
by approximate 8 percent. However, this effect can be offset with
either an 8 percent increase in income or an 8 percent reduction in
the loan amount.
---------------------------------------------------------------------------
While all of the factors identified above are subject to change,
interest rates are perhaps the most volatile. HUD assessed the impact
on Fannie Mae's and Freddie Mac's business from a 100- or 200-basis-
point increase above actual 1993 and 1994 interest rates, that averaged
7.33 and 8.35 percent, respectively.\34\ Table A.1. shows the resulting
changes in purchases, assuming no offsetting increases in income or
reductions in loan amounts for households with less than median
incomes.
\34\ The GSE data were limited to long-term, fixed-rate loans
for one-unit, owner-occupied properties in metropolitan areas. A
payment ratio was estimated for each loan using the Freddie Mac
coupon rate prevailing 2 months prior to the origination date, an
assumed annual tax and insurance rate of 1.8 percent, acquisition
unpaid principal balance, and borrower's income. Estimated payment
ratios would be biased upward to the extent the associated monthly
Freddie Mac coupon rate or tax and insurance percentages exceed
actual loan-specific rates. Because the monthly average of interest
rates varied by less than one-half percentage point over any two-
month period in 1993 or 1994, the potential bias is likely to be
less than 1 percentage point in either direction.
---------------------------------------------------------------------------
Holding everything else constant, a 100-basis-point increase in
mortgage interest rates would result in a 2-3 percentage point drop in
the GSEs' purchases of lower-income mortgages.\35\ While the percentage
of business in the lower-income category changes by less than 2 to 3
percentage points, the proportional change relative to its small base
is far greater than that on the GSEs' share of higher-income business.
This is because the lower the income classification, the greater the
concentration of households near the 28 percent limit on the qualifying
payment-to-income ratio. As Table A.1 shows, the pattern becomes more
exaggerated with a 200 basis point change.
\35\ It was assumed that the lower-income, i.e., below-median-
income, households whose payment-to-income ratios rose above 28
percent would leave the GSE distribution and either pursue non-GSE
conventional or FHA mortgages to maintain their loan amount or defer
their home purchase. Above-median-income households whose payment-
to-income ratios rose above 28 percent were retained in the
subsequent distributions under the expectation that they would
either lower their loan amounts, raise their down payments, or
switch to an ARM.
BILLING CODE 4210-32-P
[[Page 61913]]
[GRAPHIC][TIFF OMITTED]TR01DE95.003
BILLING CODE 4210-32-C
[[Page 61914]]
c. Economic and Housing Conditions: Multifamily Market
(1) The Secondary Mortgage Markets: Multifamily Differs from
Single-Family. Over the past two decades, the single-family mortgage
market has evolved from a fragmented set of local markets to an
efficient, national market that is well integrated into the broader
capital markets. In particular, the development of the secondary market
for single-family mortgages has increased the flow of capital available
to homeowners and lowered its cost.
The same cannot be said of multifamily rental housing. The
secondary market has increased its purchase volume for multifamily
mortgages in recent years, but remains much less of a factor in
providing capital for multifamily housing than it does for single-
family housing. About one-third of multifamily mortgage originations
are sold to the secondary market, compared to about three-fourths of
single-family mortgages in some years. The GSEs do not dominate the
multifamily mortgage market like they dominate the single-family
market--the GSE's purchases of multifamily mortgages in 1994 were $5.7
billion out of a total market estimated to be in excess of $30 billion.
(2) Multifamily Continues to Rely on Portfolio Lenders. As a
result, debt financing for multifamily mortgages remains very dependent
on portfolio lenders, many of whom are depository institutions (banks
and thrifts). Yet several institutional changes in the past two decades
have made it increasingly difficult for depository institutions to
originate and hold multifamily mortgages.
These changes include a significant downsizing of the thrift
industry after the savings and loan (S&L) debacle of the 1980s, and the
enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) of 1989 which imposed new risk standards for
depository institutions to prevent a recurrence of the S&L scandal.\36\
\36\ Two specific changes instituted by FIRREA that affect
multifamily mortgages are risk-based capital requirements under
which most multifamily mortgages are assigned 100 percent risk
weights (compared to 50 percent risk weights for single-family loans
which are not backed by a federal credit agency), and a lending
limitation to a single borrower of 15 percent of an institution's
unimpaired capital.
---------------------------------------------------------------------------
(3) A Role for the GSEs in Multifamily Housing. In addition to
institutional changes, the difficulty with multifamily lending in
recent years was also related to market conditions. The tax-driven
overbuilding of the early 1980s was followed by a credit crunch due to
the Tax Reform Act of 1986, FIRREA, and the soft market conditions for
all properties (both new and existing properties) caused by the
overbuilding. As a result, underwriting creditworthy multifamily deals
was difficult in the early 1990s, especially for portfolio lenders.
These conditions have now improved markedly.
Currently, multifamily properties offer less risk of loss than most
other commercial property classes according to Moody's Investors
Service.\37\ In overbuilt markets, vacancies have declined due to
depressed construction levels in the early 1990s. Accordingly,
competition for multifamily loans has increased and spreads over
Treasury rates of these loans have declined in the past year.
\37\ ``Moody's: Multifamily Offers Less Loss Risk,'' National
Mortgage News, May 1, 1995.
---------------------------------------------------------------------------
Credit risk remains a concern of investors, but new techniques in
multiclass securitization have helped mitigate credit risk on
multifamily mortgage pools.\38\
\38\ For example, Fannie Mae ``swap transactions'' in which
Fannie Mae swaps its securities for the top 85 percent, or the ``A''
piece, of a multifamily mortgage pool, leaves the riskier ``B''
piece, which absorbs the first credit losses from the pool, to be
sold at discount on the market. Recently there has been considerable
investor interest in these higher yielding B pieces.
---------------------------------------------------------------------------
Much of the benefit of increased competition for multifamily
mortgages results from reduced spreads on these mortgages, which lower
capital costs for owners, and ultimately reduce rents for borrowers. As
discussed in background section (7) below, the recent market upturn has
not been equally beneficial to multifamily properties affordable to
lower-income households. Among these are smaller, inner-city
properties, which comprise a significant portion of the existing
affordable stock, as well as larger redevelopment projects, seniors'
housing, and affordable new construction in faster-growing markets.
By sustaining a secondary market for multifamily mortgages, the
GSEs can extend the benefits that come from increased mortgage
liquidity to many more lower-income families while helping private
owners to maintain the quality of the existing affordable housing
stock. That is, greater liquidity and stability in the secondary market
due to a significant presence by the GSEs will benefit lower-income
renters without the need for subsidy--much as the GSEs now provide
benefits to homebuyers without subsidies. Providing liquidity and
stability is the main role for the GSEs in the multifamily market, just
as in the single-family market.
(4) The Current Availability of Credit is not the Key Issue
Regarding the Role of the GSEs. As described above, an important
consideration in determining the appropriate role for the GSEs in the
multifamily housing market is the potential benefit from increased
liquidity in the long term. The current ``snapshot'' of market
conditions and recent trends in the availability of mortgage credit are
temporary features of the mortgage market.
Today's ample supply of credit for certain multifamily properties
and credit gaps for other classes of properties (see part vi of Section
7 below) are temporary features of a changeable market. For example,
the current return to multifamily lending by banks and thrifts may be
driven in part by a desire by these institutions to maintain loan
volume and fee income following the single-family refinance boom of
1993-1994, and in part by Community Reinvestment Act considerations.
Portfolio lenders may eventually feel the burden of FIRREA
standards or other portfolio management pressures and seek to reduce
their holdings of multifamily mortgages. This could rather rapidly
reverse many of the private investment decisions that have contributed
to current market conditions. In such circumstances, the liquidity of
an efficient secondary market for multifamily mortgages would help
these lenders and other lenders maintain a presence in the primary
market during such shifts in investment strategy.
(5) The Importance of Increased Liquidity. Anecdotal information
available to HUD indicates that lack of liquidity, rather than credit
risk, is a major obstacle preventing lenders from holding more
affordable housing investments in portfolio. HUD examined the current
sources of multifamily capital to determine if mortgages originated
were available for purchase by the GSEs, including institutional
mortgage originators and holders such as life insurance companies and
pension funds.
Investors in multifamily mortgages make their investment decisions
based on how well the characteristics of an asset matches their
portfolio objectives. Increasing the liquidity of an asset like
multifamily mortgages would increase the interest of all investors in
holding these assets.
Life insurance companies report, for example, that it is generally
true that they buy mortgages with the original intent of holding them.
However, life insurance companies do sell multifamily mortgages from
time to
[[Page 61915]]
time, particularly when they need to make adjustments in the
composition of their portfolios. These companies would increase their
sales of multifamily mortgages if these investments were more liquid.
In the current market, absent a highly liquid and efficient secondary
market for multifamily mortgages, life companies that wish to sell a
mortgage must pay the high transaction costs for a private placement.
These companies might even buy and hold more multifamily mortgages,
including mortgages on affordable units, in portfolio if there were a
more active secondary market for these assets that made them more
liquid.
(6) Increased Liquidity Will Make More Multifamily Mortgages
Available for GSE Purchase. The GSEs have the ability to expand the
multifamily secondary market and to bring increased liquidity to
multifamily mortgages. The increases in liquidity that their sustained
presence in this market would bring would make investments in
multifamily mortgages more attractive for all investors. As noted
above, even traditional portfolio investors can be a source of
mortgages for GSE purchase through sales of existing, seasoned
mortgages.\39\
\39\ A potential new source of existing multifamily mortgages
that may be available for GSE purchase in 1996 and well into the
next decade could come from the Department's proposed ``mark-to-
market'' solution to reducing the long-term costs of Section 8
project-based assistance programs. If Congress enacts the
Department's proposal, several billion dollars of existing mortgages
on privately-owned low-income multifamily properties could be sold
as current Section 8 assistance contracts expire and are not
renewed.
---------------------------------------------------------------------------
Existing multifamily mortgages currently lack standardization with
regard to loan-to-value, debt coverage, and other underwriting ratios,
as well as with regard to loan terms, property use restrictions, and
other factors. Not all existing mortgages would be suitable for GSE
purchase. However, the GSEs can play an important role in bringing
basic standards to this market, much as they have done with the single-
family market, increasing the supply of seasoned mortgages available
for purchase in the future.
(7) Background on Multifamily Market Conditions. The following
discussion provides a more detailed overview of multifamily market
conditions and trends.
(i) Historical Trend: Decline in Debt Financing. As mentioned
above, the downsizing of the thrift industry in the late 1980s and the
FIRREA changes contributed to a credit crunch for multifamily lending.
Debt financing for multifamily housing became difficult to obtain in
the early 1990s. Conventional multifamily mortgage originations peaked
at $41 billion in 1986, and then declined every year to a trough of
about $25 billion in 1992. In 1993 the level rose to almost $29
billion, and rose again in 1994 when originations were estimated to be
about $33 billion. The recent increases in originations suggest that
the credit crunch is effectively over.
The thrift industry's problems played a major role in the decline
of the multifamily market. In 1985, thrift institutions originated 42
percent of multifamily mortgages. The thrifts' share of multifamily
originations declined every year since that peak. Their holdings have
decreased by $41 billion since 1988, due to defaults and write-offs,
failure of institutions and refinancing of thrift-held mortgages.
Multifamily mortgages remained close to 8.5 percent of total thrift
assets from 1985 to 1992, but the high failure rate of these
institutions has reduced their total assets. After passage of FIRREA in
1989, multifamily mortgage holdings by thrifts continued to
decline.\40\
\40\ Thrift holdings of multifamily mortgages fell by over one-
third between 1989 and 1994, reducing their share of holdings among
financial institutions from 34.5 percent to 23.3 percent according
to the Federal Reserve Board.
---------------------------------------------------------------------------
(ii) Historical Trend: Decline in New Construction. Multifamily
mortgage construction activity has paralleled the decline in
multifamily mortgage originations. Along with the decline in debt
financing, the value of new multifamily construction declined for seven
consecutive years until it edged up again in 1994 to $12.1 billion.\41\
However, peaks and troughs have always characterized multifamily
construction starts. The most recent peak year was 1985, in which
576,000 multifamily units were started.\42\ The downturn from this peak
was particularly severe. Over the next 3 years, multifamily housing
production reached the lowest levels recorded since the Government
began collecting these data 35 years ago. In 1993, the number of new
multifamily units started fell to a low of 132,600. Multifamily starts
rose to 223,500 in 1994, but even this level was far below the annual
average of 435,000 units from 1964 through 1992.
\41\ Joint Center for Housing of Harvard University, State of
the Nation's Housing, 1995.
\42\ The record high was 906,200 multifamily units started in
1972.
---------------------------------------------------------------------------
Much of the current production of affordable multifamily housing is
due to Low-Income Housing Tax Credits \43\--about 100,000 units per
year since 1992.\44\ An increasing share of affordable housing is being
produced by non-traditional developers, particularly community-based,
nonprofit developers. Although current production levels do not meet
the demand for low-cost rental housing, housing affordable to lower-
income families is a significant share of the multifamily units that
are being produced.
\43\ The Low Income Housing Tax Credit (LIHTC) program was
introduced by the Tax Reform Act of 1986.
\44\ Exact figures for the LIHTC program are not yet available.
The estimate in the text includes existing units under
rehabilitation as well as new construction, although the majority
are estimated to be new construction. Not all of these units have
actually started construction or rehabilitation.
---------------------------------------------------------------------------
(iii) Supply and Demand Considerations. Other market forces besides
the thrift industry downsizing and FIRREA contributed to the decline in
multifamily lending and construction in the early 1990s. For example,
the generous tax treatment allowed by the Economic Recovery Tax Act of
1981 resulted in overbuilding of multifamily housing in many markets.
When the Tax Reform Act of 1986 reduced the favorable tax treatment,
investment decisions on multifamily mortgages appropriately returned to
sound market fundamentals of supply and demand at the local market
level. Accordingly, an excess supply of multifamily units in many
markets kept the demand for both new construction and debt financing
low for many years.
The 1994 upturn in multifamily construction is evidence that local
rental markets are now stabilizing. Multifamily production has resumed
in these markets, but it has been generally limited to higher-rent
luxury units. HUD has anecdotal evidence of this happening throughout
the Southeast, for example, and elsewhere.45
\45\ HUD, Office of Policy Development and Research. May 1995.
``U.S. Housing Market Conditions,'' pp. 27-47.
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(iv) Outlook for New Construction and Debt Financing. Despite the
upturn in starts, the demand for new multifamily construction, but not
multifamily mortgage credit, is likely to be weak for the remainder of
the decade. The aging of the baby-boom generation means that single-
family tradeup homes will dominate the new-construction market, while
declines in households under age 35 will limit the demand for new
rental housing, except in very fast-growing areas in which migration
from other parts of the nation and foreign immigration will offset the
decline.46
\46\ Joint Center for Housing of Harvard University, 1995.
---------------------------------------------------------------------------
HUD believes that the weak demand for new multifamily construction
for the remainder of the decade will not result in a reduction in the
overall demand for multifamily mortgage credit. The new
[[Page 61916]]
construction weakness will be offset by a growing demand associated
with the existing stock. Specifically, mortgage demand in the remainder
of the decade will include refinancings of long-term loans to reduce
interest rates, rollover of shorter-term balloon loans coming due,
refinancings to rehabilitate buildings, and existing property sales.
Some observers expect that the $33 billion origination volume in 1994
to increase to over $35-$40 billion in 1996 and 1997.47
\47\ Robert Dunsky, James Follain, and Jan Ondrich, ``An
Alternative Methodology to Estimate the Volume of Multifamily
Mortgage Originations,'' Report prepared for the Department of
Housing and Urban Development, September 1995.
---------------------------------------------------------------------------
(v) Interpreting the Trends. These trends have been interpreted by
some as evidence that the private capital markets in the mid-1990s are
capable of providing the necessary liquidity to the multifamily market.
However, there are other considerations to be weighed.
Despite the upturn in lending for new construction and the
increased participation by banks, private conduits and REITs, there are
indications that the private credit markets may not be meeting the full
range of multifamily credit needs. The loans most likely to be
originated by banks or sold to private conduits and real estate
investment trusts (REITs) are not secured by affordable rental units.
One market observer noted, ``* * * while Wall Street has recently
sought to fill multifamily lending gaps through conduits, these
conduits barely nick the surface of affordable housing, concentrating
primarily on market-rate multifamily properties.'' 48
\48\ Stuart J. Boesky, ``Tax Credits at Work,'' Mortgage
Banking, September 1995.
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There are several reasons for the continued gap in multifamily
finance. First, multifamily mortgages, like small business loans, lack
standardization. This is particularly true for affordable housing loans
because the developments often require a mix of financing sources in
order to make the project affordable to low-income households. Second,
multifamily loans are also relatively large, making multifamily
mortgage pools more difficult to diversify than single-family pools.
Third, there is far less information about the performance of
multifamily mortgages than there is for single-family mortgages,
particularly those secured by affordable developments.
(vi) Current Credit Gaps: Property Types. HUD has anecdotal
evidence that credit shortages exist currently for certain classes of
existing affordable properties: smaller multifamily properties (i.e., 5
to 20 unit properties) in older urban areas, and properties of all
sizes in inner cities in need of rehabilitation.49 While some may
consider these to be market ``niches,'' they are not insignificant
markets. For example, small multifamily properties actually comprise a
major component of the nation's affordable housing stock: the 1991
Residential Finance Survey shows that there were about 470,000
properties in the U.S. with between 5 and 19 units, but only 150,000
with 20 or more units.
\49\ Participants at numerous industry forums and working group
meetings sponsored by the Department have attested to the existence
of these credit gaps.
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Affordable housing for seniors is another class of properties that
the conventional market has had difficulty financing. The primary
reason for this difficulty appears to be uncertainty by the market over
the nature of seniors' housing.50 Compared to other multifamily
rental housing, seniors' housing is more specialized and non-
homogeneous. It is a currently evolving product, and investors are
especially uncertain of its financial performance.
\50\ Campbell, W. Donald. 1995. ``Seniors Housing Finance.''
Paper prepared for AARP/White House Mini-Conference ``Expanding
Housing Choices for Older People,'' January 26-27, 1995, in
Washington, D.C.
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Finally, there is inadequate capital to finance construction of new
affordable units, which usually involve low-income housing tax credits,
in higher-growth markets.
(vii) Current Credit Gaps: Lending Terms. Terms of conventional
financing can also restrict access to credit for units intended for
lower-income families. For example, an obstacle to the financing of new
construction or substantial rehabilitation of housing for lower-income
families is the inability to lock-in an interest rate (without payment
of an exorbitant fee) for the permanent loan. Over 60 percent of
outstanding multifamily debt either carries a variable interest rate,
or will have a balloon payment due in less than 10 years.
The construction financing for most new construction or substantial
rehabilitation projects covers both the actual construction and the
initial rent-up periods, while the interest rate usually floats until
the project has reached the required occupancy level and is ready for
permanent loan takeout and possible securitization. The inability to
lock-in permanent rates without paying prohibitive lock-in fees, makes
it much more difficult to finance affordable housing because a rate
increase during construction and rent-up can make an affordable project
infeasible.51 If the GSEs are able to provide new financial
instruments that include forward rate commitments at reasonable cost,
for example, the credit gaps for affordable units can be reduced.
\51\ Another example of the terms of conventional financing that
restricts access to credit for affordable units is the lack of long-
term fixed rate loans. About 60 percent of conventional multifamily
loans are adjustable rates or fixed rate balloon loans with terms of
10 years or less. The rollover of a balloon loan generally resets
the interest rate. In either case, if the rate increases at a
scheduled adjustment period, the higher debt service expense may be
more difficult for an affordable property to absorb.
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(viii) The Impact of Credit Gaps. A major problem facing low-income
households is that low-cost housing units continue to disappear from
the existing stock.52 The ability of the nation to maintain the
quality of the affordable housing stock and to stabilize inner city
neighborhoods depends on the availability of adequate capital for small
existing properties, redevelopment projects, and senior housing.
\52\ The Joint Center's State of the Nation's Housing for 1995
finds that the number of unsubsidized low-cost units in the
Northeast has fallen by half since 1974. In the Midwest the addition
of new subsidized units has offset the loss of unsubsidized low-cost
units, but in every other region the total low-cost stock
(subsidized and unsubsidized) is below 1974 levels.
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The current availability of multifamily credit for certain types of
multifamily mortgages is not a valid argument that the GSEs are
unneeded in the multifamily credit markets. Rather, the current
competition for multifamily mortgages on amenity-rich apartments and
the tightening spreads between the yields of privately issued
multifamily MBS and comparable maturity Treasury bonds demonstrate the
benefits that increased liquidity in multifamily markets could provide
to the affordable rental housing market. That is, the GSEs'
participation in the market can reduce the cost of capital and
ultimately improve housing quality and/or decrease rents paid by low-
income families.
(ix) Rentals in 1- to 4-Unit Buildings. HUD is also aware that a
significant portion of the demand for rental housing is satisfied by
rental units in properties containing 1 to 4 units. In 1993, about 57
percent of the rental housing in the nation was in buildings with fewer
than 5 units. However, there is considerable variation across local
markets in the portion of the rental stock that is contained in 1- to
4-unit properties. The New York area, for example, has only 30 percent
of its rental units in 1- to 4-unit properties, while Chicago has 46
percent and
[[Page 61917]]
Boston has 56 percent of its rental stock in 1- to 4-unit buildings.
The market-specific variations suggest that rental housing in 1- to 4-
unit properties is not a perfect substitute for multifamily rental
housing. The need for multifamily housing is relatively greater in some
cities.
The financing of 1- to 4-unit properties is provided by the
standard single-family primary and secondary mortgage markets if one of
the units is owner-occupied. This segment is relatively well-served by
the existing capital-delivery system. If the 1- to 4-unit property is
investor-owned, the single-family market is still used, but with
greater restrictions such as tighter underwriting ratios. These
restrictions are generally in response to the greater credit risk posed
by investor-owned 1- to 4-unit properties. The investor-owned side of
the 1- to 4-unit rental market also has access to the liquidity of the
single-family secondary market, albeit with restrictions.
(x) Credit Risk of Affordable Housing. Credit risk is an important
factor to be considered by the GSEs in their participation in the
multifamily mortgage markets. Does credit risk pose a major obstacle to
the development of an efficient and highly liquid secondary market for
multifamily mortgages that addresses the full range of multifamily
credit needs? If the GSEs broaden their penetration of the multifamily
market to purchase more small (under $1 million) mortgages, will the
GSEs be taking on additional risk? Unfortunately, the academic
literature is deficient in addressing these questions. However,
numerous sources suggest that credit risk is not an insurmountable
obstacle.
On a whole loan basis, risk levels of multifamily lending are often
higher than for single family. There are four major reasons for this.
First, multifamily loans, like small business loans, lack
standardization. This is particularly true for affordable housing
because the financial package often involves tax credits or local
subsidy which complicates the loans. Second, multifamily loans are also
relatively large, making multifamily portfolios more difficult to
diversify than single-family portfolios. Third, there is far less
information about the performance of multifamily mortgages than there
is for single-family mortgages, particularly those secured by
affordable units. And finally, private mortgage insurance is not
generally available for multifamily loans as it is for single-family
loans.
However, multifamily investments in today's market often involve
mortgage pools rather than whole loans. Credit risk remains a concern
of investors, but new techniques in multiclass securitization have
helped mitigate credit risk on multifamily mortgage pools. For example,
Fannie Mae ``swap transactions'' in which Fannie Mae swaps its
securities for the top 85 to 90 percent, or the ``A'' piece, of a
multifamily mortgage pool, leaves the riskier ``B'' piece, which
absorbs the first credit losses from the pool, to be sold at discount
in the market.
The B-piece that absorbs all credit losses up to 15 percent of the
total unpaid balance on a typical multiclass multifamily pool provides
considerable loss protection. This makes the A-piece highly marketable.
Recently there has been considerable investor interest in these higher
yielding B-pieces as well.
A source of anecdotal information on the credit risk involved with
affordable multifamily housing comes from participants in the low-
income housing tax credit (LIHTC) program which was created by the 1986
Tax Reform Act. Tax credits are the only major Federal assistance
program for new or rehabilitated low-income housing that is currently
active. Detailed data on the composition and performance of tax credit
projects are not yet available. However, both academic and industry
experts have been observing the tax credit program since its inception,
and a number of them have shared their observations with HUD.
These market observers tell HUD that tax credit deals typically are
financed with 30 to 40 percent equity obtained from investors receiving
the tax credits, first mortgage debt of about 40 to 60 percent, and the
remaining amount up to 30 percent comes from local subsidies often in
the form of ``soft'' second mortgages. Market observers tell us that
the trend in tax credit deals is toward increased equity as a share of
the total development cost due to increased competition among tax
credit syndicators.
The lenders who provide first mortgage financing for tax credit
deals consider their loans on these affordable units to be less risky
than loans for market-rate multifamily projects. There are several
reasons for this conclusion. First, the loan-to-value ratio on these
deals is at most 60 percent, which gives lenders substantial protection
from credit risk. If the lender must foreclose, the tax credits stay
with the property, giving the lender the ability to attract equity from
new investors. Other reasons that first mortgage financing on
affordable tax credit deals is considered less risky are the low
turnover rates of affordable units which keeps project vacancies low,
the high potential for future appreciation of the property, and the
close scrutiny to initial underwriting by the equity provider or
syndicator.53 This anecdotal experience suggests that not all
mortgages on affordable multifamily loans need be high-credit-risk
lending.
\53\ See Stuart J. Boesky, ``Tax Credits at Work,'' Mortgage
Banking, September 1995.
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Continued achievement of the housing goals in this rule may require
the GSEs to develop additional capabilities to underwrite classes of
multifamily loans such as smaller existing properties, redevelopment
projects, seniors' housing, and tax credit deals. This may pose some
initial administrative difficulty for the GSEs, but there are no
apparent fundamental difficulties in multifamily mortgage origination
and purchase activities, such as unmanageable risks. If there were,
such risks would be difficult to explain, given the current market
trends toward higher multifamily lending activity and new techniques of
risk management.
3. Performance and Effort of the GSEs toward Achieving the Low- and
Moderate-Income Goal in Previous Years
Each GSE has submitted data on its 1993 and 1994 performance to the
Secretary. This is the first time that such detailed information has
been made available on the GSEs' activities, which in 1993 involved the
purchase of 2.97 million mortgages on 3.24 million dwelling units by
Fannie Mae and the purchase of 2.32 million mortgages on 2.38 million
dwelling units by Freddie Mac. In 1994, due to rising interest rates
and the decline in mortgage refinancings, aggregate purchase volume (in
dwelling units) fell by 43 percent, with Fannie Mae purchasing 1.66
million mortgages on 1.97 million units, and Freddie Mac purchasing
1.25 million mortgages on 1.34 million units.
Each GSE also has submitted detailed loan-level data on each loan
it purchased in 1993 and 1994. HUD has done extensive analyses to
verify the GSEs' stated performance and to measure aspects of their
mortgage purchase activities in 1993-94 not contained in tables
submitted to HUD in which the GSEs' aggregate data in various
ways.54
\54\ In the following discussion, the GSEs' performance is
measured using the counting rules which will be in effect under the
final rule, not those under the Interim Notice, which have been used
by the GSEs in reporting performance to HUD. For this reason, in
some cases the following data differ slightly from the data reported
by the GSEs.
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Fannie Mae's data for 1993 show that 34.3 percent of total units
financed by its mortgage purchases were affordable to low- and
moderate-income families.
[[Page 61918]]
This represented a significant increase in the low- and moderate-income
percentage from an estimated 28 percent in 1992, and Fannie Mae's
performance substantially exceeded the 30 percent goal established for
Fannie Mae by the Secretary.55 A further gain was recorded in
1994, as 45.4 percent of Fannie Mae's purchases qualified for the Low-
and Moderate-Income Housing Goal, which was also 30 percent in
1994.56
\55\ Some mortgage purchases are not eligible for inclusion
under the low- and moderate-income goal, such as federally
guaranteed mortgages, mortgages on second homes, and mortgages
originated prior to January 1, 1993 that were missing relevant
borrower income or rent data. Such mortgages were excluded from both
the numerator and the denominator in calculating the performance
under this goal. These exclusions amounted to 14 percent of Fannie
Mae's purchases and 9 percent of Freddie Mac's purchases.
\56\ A portion of the increase from 1993 reflects a decline in
the share of refinancings, which have been less common among low-
and moderate-income families.
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Freddie Mac's data for 1993 show that 30.0 percent of total units
financed by its mortgage purchases were affordable to low- and
moderate-income families. There was a significant increase from an
estimated 24 percent in 1992, and Freddie Mac's performance exceeded
the 28 percent goal established for Freddie Mac by the Secretary. A
further gain was also recorded in 1994, when 38.0 percent of total
units financed by Freddie Mac's mortgage purchases qualified for the
low- and moderate-income goal, which was raised from 28 percent in 1993
to 30 percent in 1994 for Freddie Mac.
Although the GSEs surpassed the low- and moderate-income goals in
1993 and 1994, approximately 50 percent of their one-unit single-family
owner-occupied purchases, the bulk of their business, were secured by
housing for families with incomes in excess of 120 percent of area
median income, as indicated in Table A.2.57 These results indicate
that achievement of the Low- and Moderate-Income Goal in 1993 and 1994
did not impede the GSEs from buying many mortgages on properties
purchased by higher-income families.
\57\ Cases with missing data have been excluded from the table.
Table A.2.--Distribution of Dwelling Units in GSE Single-family Owner-
Occupied 1-Unit Purchases by Income Class of Mortgagor, 1993-1994
------------------------------------------------------------------------
Income of mortgagor(s) Fannie Fannie Freddie Freddie
relative to area median Mae, 1993 Mae, 1994 Mac, 1993 Mac, 1994
income (%) (%) (%) (%) (%)
------------------------------------------------------------------------
0-60........................ 6.8 8.8 6.2 6.8
60-80....................... 11.3 13.2 10.8 11.3
80-100...................... 15.0 16.5 14.9 15.2
100-120..................... 15.4 15.8 15.6 16.0
> 120....................... 51.5 45.7 52.5 50.7
-------------------------------------------
Total................... 100.0 100.0 100.0 100.0
------------------------------------------------------------------------
4. Size of the Conventional Conforming Mortgage Market Serving Low- and
Moderate-Income Families Relative to the Overall Conventional
Conforming Market
The low- and moderate-income share of the mortgage market is
estimated to be 48-52 percent. Appendix D presents in detail the
underlying analysis for this estimate.
5. GSEs' Ability to Lead the Industry
FHEFSSA requires the Secretary to consider the GSEs' ability to
lead the market in determining the level of the Low- and Moderate-
Income Goal. The GSEs' ability to lead the industry depends on their
dominant role in the mortgage market, their ability--through their
underwriting standards and new programs and products--to influence the
types of loans that private lenders are willing to make, their
utilization of cutting edge technology, their highly competent and
well-trained staffs, and their financial resources.
a. Dominant Role in Market
The GSEs purchased 71 percent of all conventional conforming
single-family mortgages in 1993--up from 15 percent in 1980, 34 percent
in 1985, 50 percent in 1991, and 64 percent in 1992.63 The GSEs'
share of the relevant market fell to 55 percent in 1994. This was due
in part to the increase in the adjustable rate mortgage (ARM) share of
the mortgage market, from 20 percent in 1993 to 39 percent in
1994.64 However, the GSEs' market share in 1994 exceeded that in
all years except 1992 and 1993.
\63\ Estimates provided by Fannie Mae's Economics Department.
\64\ Federal Housing Finance Board, ``Rates & Terms on
Conventional Home Mortgages,'' Annual Summary, 1994, Table 3. ARMs
present less interest rate risk to lenders than fixed-rate
mortgages, and therefore are more likely to be retained in
portfolio.
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Most of the mortgages purchased by the GSEs are securitized, but
sizable amounts are held in portfolio--in fact Fannie Mae and Freddie
Mac have the first- and fourth-largest mortgage portfolios,
respectively, of all mortgage holders in the United States. The GSEs
now hold or securitize about 30 percent of the total dollar volume of
mortgages outstanding, compared to about 7 percent in 1980, and they
have accounted for over 40 percent of the net increase in mortgages
outstanding between 1980 and 1992 and over 70 percent of the net
increase between 1989 and 1992.65
\65\ John C. Weicher, ``The New Structure of the Housing Finance
System,'' Federal Reserve Bank of St, Louis Review, July/August
1994, pp. 51-52.
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The dominant position of the GSEs is reinforced by their
relationship to other market institutions. Banks and savings and loans
are both their competitors and their customers--they compete as
portfolio lenders, but at the same time they sell mortgages to the GSEs
and buy mortgage securities from them, and also buy the debt securities
that the GSEs use to finance their portfolios.
b. Set Underwriting Standards for Market
The GSEs' underwriting guidelines are followed by virtually all
mortgage originators, including lenders who do not sell many of their
mortgages to Fannie Mae or Freddie Mac.66 The guidelines are also
commonly followed in underwriting ``jumbo'' mortgages, which exceed the
maximum principal amount which can be purchased by the GSEs (the
conforming loan limit), because such mortgages eventually
[[Page 61919]]
might be sold to the GSEs as the principal balance is amortized or the
conforming loan limit is increased. By setting the credit standards
against which the mortgage applications of lower-income families will
be judged, the GSEs influence the rate at which mortgage funds flow to
low-income borrowers and underserved neighborhoods. Congress realized
the crucial role played by the GSEs' underwriting guidelines when it
required each enterprise to submit a study on its guidelines to the
Secretary and to Congress.
\66\ The underwriting guidelines published by the two GSEs are
not identical, but they are very similar in most aspects. And since
November 30, 1992, Fannie Mae and Freddie Mac have provided lenders
the same Uniform Underwriting and Transmittal Summary (Fannie Mae
Form 1008/Freddie Mac Form 1077), which is used by originators to
collect certain mortgage information that they need for data entry
when mortgages are sold to either GSE.
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c. Leading Edge Technology
Both GSEs are in the forefront of new developments in mortgage
industry technology. For example, Fannie Mae has developed
FannieMaps, a computerized mapping service offered to
lenders, nonprofit organizations, and state and local governments to
help them implement community lending programs. Both GSEs released
automated underwriting systems in 1995. The Freddie Mac system is based
on credit scoring, which allows explicit consideration of compensating
factors, while the Fannie Mae system automates current underwriting
standards. Such systems have the potential to reduce the cost of loan
origination, particularly for low-risk loans.
d. Staff Resources
Both GSEs are well-known throughout the mortgage industry for the
expertise of their staffs in carrying out their current programs,
researching and developing improvements in the mortgage market in
general, developing innovative new programs, and conducting research
that may lead to new programs in the future. Their key executives
frequently testify before Congressional committees on a wide range of
housing issues, and both GSEs have developed extensive working
relationships with a broad spectrum of mortgage market participants,
including various nonprofit groups and government housing authorities.
e. Financial Strength
The benefits that accrue to the GSEs because of their GSE status
and solid management have made them two of the nation's most profitable
businesses. Fannie Mae's net income has increased steadily from $807
million in 1989 to $2.1 billion in 1994, and for the first two quarters
of 1995 net income was accruing at an annual rate of $2.3 billion,
despite a 46 percent drop in mortgage purchases and a 60 percent drop
in MBS issued in comparison with the first half of 1994. Through the
second quarter of 1995, Fannie Mae has recorded 30 consecutive quarters
of increased net income. Fannie Mae's return on equity averaged 27.5
percent over the 1990-94 period--far above the rates achieved by most
financial corporations. In addition, Fannie Mae's dividends per share
more than tripled over this period, rising from $0.72 in 1990 to $2.40
in 1994.
Freddie Mac has shown similar trends. Freddie Mac's net income has
increased steadily from $414 million in 1990 to $983 million in 1994,
and for the first two quarters of 1995 net income was accruing at an
annual rate of $1.04 billion, despite declines in business volume
similar to those experienced by Fannie Mae. Freddie Mac's return on
equity averaged 20.9 percent over the 1990-94 period--also well above
the rates achieved by most financial corporations. Freddie Mac's
dividends per share nearly doubled over this period, rising from $0.53
in 1990 to $1.04 in 1994.
One measure of the strength of the GSEs was provided by a recent
ranking of American corporations. This survey found that Fannie Mae was
first of all companies in total assets and Freddie Mac ranked 17th;
with regard to total profits, Fannie Mae ranked 20th and Freddie Mac
ranked 52nd.67
\67\ Business Week, March 27, 1995, p. 154.
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Under FHEFSSA, beginning with the second quarter of 1994, the GSEs
must meet fully phased-in minimum core capital requirements of 2.5
percent of on-balance sheet assets and 0.45 percent of outstanding
mortgage-backed securities and other off-balance sheet obligations,
except as adjusted by the Director of OFHEO.68 For the transition
period from June 30, 1993 through March 31, 1994, the corresponding
percentages were 2.25 percent and 0.40 percent respectively. Based on
the relation between actual core capital and minimum core capital, a
GSE is classified as adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized.
\68\ Core capital is defined as the sum of the par or stated
value of outstanding common or perpetual, noncumulative preferred
stock, paid-in capital, and retained earnings.
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The Director has found both GSEs adequately capitalized for all
nine quarters ending June 30, 1993 through June 30, 1995. At the end of
the second quarter of 1995, Fannie Mae's core capital of $10.323
billion exceeded its minimum capital requirement of $9.684 billion by
$639 million, and Freddie Mac's core capital of $5.538 billion exceeded
its minimum capital requirement of $5.256 billion by $282 million.
f. Conclusion About Leading the Market
In light of these factors, the Secretary has determined that the
GSEs have the ability to lead the industry in making mortgage credit
available for low- and moderate-income families.
6. The Need to Maintain the Sound Financial Condition of the GSEs
HUD has undertaken a separate, detailed economic analysis of this
rule, which includes consideration of the financial safety and
soundness implications of the housing goals. The analysis considered
the likely mortgage default implications of the goals and implications
for the profitability of the GSEs under various alternative economic
assumptions. Among the conclusions are: that the goals will have, at
most, only limited impacts on credit risk, which the GSEs should be
able to handle without significant lowering of underwriting standards;
that risks associated with increased multifamily mortgage purchase
volumes under the goals are manageable, considering the scope of the
increases implied by the goals; and that the goals imply no meaningful
increase in risk to the sound financial condition of the GSEs'
operations. Based on this analysis, HUD concludes that the goals raise
minimal, if any, safety and soundness concerns.
D. Determination of the Low- and Moderate-Income Housing Goals
The annual goal for 1996 for each GSE's purchases of mortgages
financing housing for low- and moderate-income families is established
at 40 percent of the total number of dwelling units financed by each
GSE's mortgage purchases. The goal for 1997 and thereafter, unless
changed, is 42 percent. These goals represent an increase over the
statutorily-mandated 1994 goal of 30 percent, but they are conservative
relative to the market share estimates in Appendix D, below Fannie
Mae's low-mod performance in 1994, and only slightly above Freddie
Mac's performance in 1994. The Secretary's considerations of the six
statutory factors led to the choice of these goals.
1. Housing Need
Almost three-fifths of American households qualify as low- and
moderate-income under FHEFSSA's definitions--half of owners and 70
percent of renters. Data from the Census and from the American Housing
Surveys demonstrate that housing problems and needs for affordable
housing are indeed substantial among
[[Page 61920]]
low- and moderate-income families. These households, particularly those
with very-low-incomes, are burdened by high rent payments and will
likely continue to face serious housing problems, given the dim
prospects for earnings growth in entry-level occupations.
With respect to homeownership, many younger, minority, and lower-
income families did not become homeowners during the 1980s due to the
slow growth of earnings, high real interest rates, and continued house
price increases. Recently, low interest rates and low inflation have
improved affordability conditions and first-time homeowners have become
a major driving force in the home purchase market. A large pent-up
demand for homeownership exists on the part of low-income families
closed out of the market during the 1980s, particularly families with
children in need of larger units and better neighborhoods.
Several demographic changes will strain the housing finance system
during the 1990s. The continued influx of immigrants will increase
demand for both rental and owner-occupied housing. Non-traditional
households have become more important as overall household formation
rates have slowed. With later marriages, divorce, and non-traditional
living arrangements, the fastest growing household groups are single-
parent and single-person households.
The multifamily mortgage market is far less integrated into the
broader capital markets than is the single-family market. The GSEs do
not dominate the multifamily secondary mortgage market as they do the
single-family market, and they may never dominate the multifamily
market to this extent--multifamily loans are more complex than single-
family mortgages, and because of the large size of the component loans,
multifamily mortgage pools are more difficult to diversify. Portfolio
lending may remain a greater factor in multifamily markets.
Current market conditions indicate that the supply of multifamily
mortgage credit is adequate for amenity-rich, suburban garden style
apartments. However, credit gaps do exist, particularly with regard to
the maintenance of the existing affordable stock and construction of
affordable units in higher growth markets. Increased liquidity can make
investments in affordable multifamily housing more attractive to all
investors, including portfolio lenders, which would bring more capital
at lower cost to fill current and future multifamily credit gaps. The
GSEs' active participation in the market can lead to this needed
increase in liquidity.
2. Past Performance and Ability to Lead the Industry
The GSEs have been assisting the overall secondary market,
increasing their share of purchases of conventional conforming single-
family mortgage origination from 42 percent in 1989 to 70 percent in
1993 before dropping to 55 percent in 1994. In fact, most industry
observers would agree that the recent growth in the secondary market
was the reason the decline of the thrift industry had only minor
effects on the nation's housing finance system.
The GSEs' performance on the low- and moderate-income goal has also
been improving. Fannie Mae's performance increased from 34.3 percent in
1993 to 45.4 percent in 1994. Freddie Mac's performance also increased
from 30.0 to 38.0 percent during this period.
Single-family Market. The Secretary is concerned about the GSEs'
assistance to the lower-income end of the market. Figure A.1 presents
the distribution of the GSEs' single-family mortgage purchases by
income category. In 1994, homeowners with incomes less than 60 percent
of median represented roughly 7 percent of GSE purchases, and those
with incomes less than 80 percent of median represented no more than 19
percent of GSE purchases. Families with incomes over 120 percent of
median, on the other hand, accounted for approximately 50 percent of
single-family mortgages purchased by the GSEs.
While the GSEs have improved their performance, they continue to
purchase a smaller proportion of mortgages for very-low-income
homebuyers than do portfolio lenders operating in the conforming
market. According to the AHS, about 10 percent of conforming loans were
originated for very-low-income homebuyers in 1993, compared to about 5
percent of GSE purchases in 1993. Figure A.2 uses HMDA data to compare
the GSEs with the non-GSE portion of the conforming market. In 1993 and
1994, very-low-income loans accounted for a higher percentage of the
business of portfolio (non-GSE) lenders than they did of GSE business.
The 1993 and 1994 HMDA data suggest that there is room for the GSEs to
improve their performance in purchasing loans at the lower-income end
of the market.
Moreover, there is evidence that there is a significant population
of potential homebuyers who might well respond to aggressive outreach.
As mentioned above, both Fannie Mae and the Joint Center expect
immigration to be a major source of future homebuyers. Furthermore,
analysis by The Urban Institute indicates the existence of a large
untapped potential. Indeed, the GSE's recent experience with new
outreach and affordable housing initiatives is important confirmation
of this potential.
Multifamily Market. The Secretary is particularly concerned about
the level of Freddie Mac's activity in the multifamily area. In 1994,
Freddie Mac purchased $913 million in multifamily mortgages, which was
an increase over its purchase of $191 million in 1993. Given the
affordability problems faced by renters and the need for a well-
functioning secondary market for multifamily loans, it is imperative
that Freddie Mac's multifamily business be increased. By sustaining a
secondary market in units that meet the special affordable goal, the
GSEs will bring increased liquidity, added stability, and ultimately
lower rents for lower-income families in these segments of the market.
In addition, their promotion of increased standardization in
multifamily finance would allow for more direct links to capital
markets and improve overall market efficiency and stability. The 1996
and 1997-99 goals are intended to encourage a minimum level of
multifamily activity by Freddie Mac.
3. Market Feasibility and Changing Market Conditions
As detailed in Appendix D, the low- and moderate-income mortgage
market is quite large, accounting for 48 to 52 percent of dwelling
units financed by conventional conforming mortgages. Figure A.3
compares recent GSE performance, the 1996 and 1997-1999 goals, and the
size of the low- and moderate-income market. Having considered the
projected market and economic and demographic conditions for 1996-1999
and the GSEs' recent performance, HUD has determined that goals for
low- and moderate-income purchases of 40 percent for 1996, 42 percent
for 1997-1999, and 42 percent thereafter pending establishment of a new
goal, are feasible.
In estimating the size of the market, HUD also used assumptions
about future economic and market conditions that were less favorable
than those that existed over the last two years. HUD is well aware of
the volatility of mortgage markets and the possible impacts on the
GSE's ability to meet the housing goals. Should conditions change such
that the goals are no longer reasonable or feasible, the Secretary has
the authority to revise the goals.
[[Page 61921]]
4. Parity Between the GSEs
The Secretary is establishing identical goals for both Fannie Mae
and Freddie Mac. Freddie Mac consistently lags behind Fannie Mae on the
housing goals. In part, this is due to Freddie Mac's limited
multifamily activity--their 1994 multifamily mortgage purchases
accounted for only 8.9 percent of their overall performance under this
housing goal (versus 23.8 percent for Fannie Mae). Freddie Mac has used
the past four years to rebuild its multifamily operations and has
recently brought on new staff, developed new systems, and is pursuing
an aggressive acquisition strategy. On the single-family side, Freddie
Mac serves the same lenders and offers the same products as Fannie Mae.
Therefore, Freddie Mac should be able to match Fannie Mae's performance
in achieving the single-family goals. Moreover, the legislative history
supports the idea of parity after the transition period, noting that
``because the enterprises have essentially equal opportunities, their
respective annual goals should generally be set at comparable levels.''
69
\69\ Senate Report 102-282, p. 36.
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5. Conclusions
The Secretary has determined that the 1996 and 1997-1999 goals set
forth above address national housing needs and current economic,
housing, and demographic conditions, and that they take into account
the GSEs' performance in the past in purchasing low- and moderate-
income mortgages, as well as the size of the conventional mortgage
market serving low- and moderate-income families. Moreover, the
Secretary has considered the GSEs' ability to lead the industry as well
as the GSEs' financial condition. The Secretary has determined that the
goals are necessary and achievable.
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Appendix B--Secretarial Considerations to Establish the Central Cities,
Rural Areas, and Other Underserved Areas Goal
A. Establishment of Goal
1. Introduction
The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 (FHEFSSA) requires the Secretary to establish an annual goal
for the purchase of mortgages on housing located in central cities,
rural areas, and other underserved areas (the ``Geographically Targeted
Goal'').
In establishing this annual housing goal, FHEFSSA requires the
Secretary to consider:
1. Urban and rural housing needs and the housing needs of
underserved areas;
2. Economic, housing, and demographic conditions;
3. The performance and effort of the GSEs toward achieving the
Geographically Targeted Goal in previous years;
4. The size of the conventional mortgage market for central cities,
rural areas, and other underserved areas relative to the size of the
overall conventional mortgage market;
5. The ability of the GSEs to lead the industry in making mortgage
credit available throughout the United States, including central
cities, rural areas, and other underserved areas; and
6. The need to maintain the sound financial condition of the GSEs.
Organization of Appendix. Section A defines the goal and summarizes
HUD's assessment of other proposed definitions of the Geographically
Targeted Goal. Section B reports findings on access to mortgage credit
and Section C addresses the factors listed above. Section D summarizes
the Secretary's rationale for setting the level for the Geographically
Targeted Goal.
2. HUD's Geographically Targeted Goal
As required by FHEFSSA, during 1993-1995 only mortgages located in
central cities, as designated by the Office of Management and Budget
(OMB), counted toward the Geographically Targeted Goal. FHEFSSA
directed the Secretary to expand the Geographically Targeted Goal to
include rural areas and other underserved areas.
HUD's definition of the Geographically Targeted Goal is based on
studies of mortgage lending and mortgage credit flows conducted by
academic researchers, community groups, the GSEs, HUD and other
government agencies. While more research must be done before mortgage
access for different types of people and neighborhoods is fully
understood, one finding from the existing research literature stands
out--minority and low-income neighborhoods have higher mortgage denial
rates and lower mortgage origination rates than other neighborhoods. A
neighborhood's minority composition and its level of income are useful
proxies for measuring access to mortgage credit.
Metropolitan Areas. The rule provides that within metropolitan
areas, mortgage purchases will count toward the goal when those
mortgage purchases finance properties that are located in census tracts
where either the median income of families in the tract does not exceed
90 percent of the area median income, or minorities comprise 30 percent
or more of the residents and the median income of families in the tract
does not exceed 120 percent of the area median income.
The final rule's definition includes 20,326 of the 43,232 census
tracts (47 percent) in metropolitan areas and accounts for 44 percent
of the metropolitan population.1 The tracts included in this
definition suffer from poor mortgage access and depressed socioeconomic
conditions. The average mortgage denial rate in these tracts is 21
percent, almost twice the denial rate in non-included tracts.
\1\ Tracts are excluded from the analysis if median income is
suppressed or there are no population or owner-occupied 1-4 unit
properties. There are 2,033 of these tracts. When reporting denial,
origination, and application rates, tracts are excluded from the
analysis if there are no purchase or refinance applications. Tracts
are also excluded from the analysis if: (1) group quarters
constitute more than 50 percent of housing units or (2) there are
less than 15 home purchase applications in the tract and the tract
denial rates equal 0 or 100 percent. Excluded tracts account for a
small percentage of mortgage applications (1.4 percent). These
tracts are not excluded from HUD's underserved areas if they meet
the income and minority thresholds. Rather, the tracts are excluded
to remove the effects of outliers from the analysis.
---------------------------------------------------------------------------
The definition in the final rule adds 3,657 additional tracts to
the definition in the proposed rule. These tracts have significant
problems with access to credit, as evidenced by relatively high
mortgage denial rates and low origination rates.
Nonmetropolitan Areas. The final rule provides that in non-
metropolitan areas, mortgage purchases that finance properties that are
located in counties will count toward the Geographically Targeted Goal
where: minorities comprise 30 percent or more of the residents and the
median income of families does not exceed 120 percent of the state
nonmetropolitan median income; or the median income of families does
not exceed 95 percent of the greater of the state nonmetropolitan
median income or the nationwide nonmetropolitan median income.
Two important factors influenced HUD's definition of
nonmetropolitan underserved areas--lack of available data for measuring
mortgage availability in rural areas and the difficulty in operating
mortgage programs at the census-tract level in rural areas. Because of
these factors, the final rule uses a more inclusive, county-based
definition of underservedness in rural areas. HUD's definition includes
1,511 of the 2,305 counties (66 percent) in nonmetropolitan areas and
accounts for 54 percent of the nonmetropolitan population.
Goal Levels. The Geographically Targeted Goal is 21 percent in 1996
and 24 percent in 1997 and thereafter. HUD estimates that the mortgage
market in areas included in the Geographically Targeted Goal accounts
for 25-28 percent of the total number of newly-mortgaged dwelling
units. In 1994, 29 percent of Fannie Mae's purchases financed dwelling
units located in these areas, compared with 24 percent of Freddie Mac's
purchases.
3. Alternative Definitions
Fannie Mae and Freddie Mac each proposed alternative definitions of
underserved areas. Several other commenters suggested alternative
definitions similar to those proposed by the GSEs. Fannie Mae would
define all central city and nonmetropolitan census tracts as
underserved; a suburban or non-central city tract would be considered
underserved if minorities comprise 50 percent or more of the residents;
or if the median income of families does not exceed 80 percent of the
area median income. Freddie Mac would define a tract as underserved if
minorities comprise 20 percent or more of the residents; or if the
median income of families does not exceed 100 percent of the area
median income.
HUD conducted extensive analysis of these and other alternative
definitions of underserved areas. HUD also contracted with the Urban
Institute to evaluate the alternative definitions of underserved
areas.2 That analysis, which is reported in Section B of this
appendix, concluded that HUD's definitions in both the proposed rule
and this final rule provide much better measures of mortgage access
problems.
\2\ George Galster, ``Comments on Defining `Underserved' Areas
in Metropolitan Regions,'' Urban Institute, prepared for the U.S.
Department of Housing and Urban Development, August 15, 1995.
---------------------------------------------------------------------------
Fannie Mae Definition. The research conducted by the GSEs, other
mortgage
[[Page 61926]]
market economists, and HUD supports the premise that the location of a
census tract--whether within a central city or a suburb--has minimal
relationship to whether the tract is underserved. Instead, these
studies have found that mortgage flows in a census tract are strongly
correlated with the minority concentration or median income of that
tract. The Urban Institute criticized the continued use of OMB-
designated central cities in the goal because it treats all areas in
central cities as if they have access problems. However, substantial
evidence shows that mortgage access problems are not the same across
central city neighborhoods.
Use of the definition advanced by Fannie Mae would add 8,833
central-city tracts to 13,554 central city tracts under this rule's
definition. Credit access is not a problem in these added tracts--their
average mortgage denial rate is 11 percent, which is one-half of the 22
percent denial rate for central city tracts covered by this final rule.
Freddie Mac Definition. Use of the definition proposed by Freddie
Mac would add substantially more tracts and tracts that have lower
denial rates than the definition in the final rule. Credit access does
not appear to be a problem in the 5,367 tracts added by the Freddie Mac
definition. The denial rate for the added tracts is 15 percent, which
is only slightly above the 13 percent denial rate for all metropolitan
tracts and significantly less than the 21 percent denial rate for
metropolitan area tracts covered by this final rule.
B. Underlying Data and Identifying Underserved Areas
1. Introduction and Overview
Data on mortgage credit flows are far from perfect, and issues
regarding the identification of areas with inadequate access to credit
are both complex and controversial. For this reason, before considering
housing needs and past GSE performance, it is essential to define
``underserved areas'' as accurately as possible from existing data. To
provide essential background for understanding the final rule's
definition of underserved areas for this goal, this section carefully
reviews the literature investigating access to credit and reports
findings from HUD's analysis of 1993 and 1994 HMDA and Census data
bases. The first part of this section discusses research and data
analysis in urban areas; the latter part discusses rural areas.
Three main points are made in this section:
The existence of substantial geographic disparities in
mortgage credit is well documented for metropolitan areas. Research has
demonstrated that areas with lower incomes and higher shares of
minority population consistently have poorer access to mortgage credit,
with higher mortgage denial rates and lower origination rates for
mortgages. Thus, the income and minority composition of an area is a
good method of determining whether that area is being underserved by
the mortgage market.
The research supports a targeted definition. Studies
conclude that characteristics of the applicant and the neighborhood
where the property is located are the major determinants of mortgage
denials and origination rates. Once these characteristics are accounted
for, other influences such as location in an OMB-designated central
city play only a minor role in explaining disparities in mortgage
lending.3
\3\ For the sake of brevity, in the remainder of this appendix,
the term ``central city'' is used to mean ``OMB-designated central
city.''
---------------------------------------------------------------------------
Research on mortgage credit needs in rural areas is not
extensive because of the lack of mortgage data. The available research
does suggest that income and minority composition identify rural areas
that experience housing and mortgage access problems. The lack of
mortgage data, however, suggests the use of a broader underserved
definition than in metropolitan areas.
2. Evidence About Access to Credit in Urban Areas
The viability of neighborhoods--whether urban, rural, or suburban--
depends on the access of their residents to mortgage capital to
purchase and improve their homes. While neighborhood problems are
caused by a wide range of factors, including substantial inequalities
in the distribution of the nation's income and wealth, there is
increasing agreement that imperfections in the nation's housing and
mortgage markets are hastening the decline of distressed neighborhoods.
Disparate denial of credit based on geographic criteria can lead to
disinvestment and neighborhood decline. Discrimination and other
factors, such as inflexible and restrictive underwriting guidelines,
limit access to mortgage credit and leave potential borrowers in
certain areas underserved.
a. Early Credit Flow Studies
Most studies of geographical disparities have used Home Mortgage
Disclosure Act (HMDA) data. A number of studies using the early HMDA
data sought to test for the existence of geographical redlining, which
is the refusal of lenders to make loans in certain neighborhoods
regardless of the creditworthiness of the individual applicant.4
Consistent with the redlining hypothesis, these studies found lower
volumes of loans going to low-income and high-minority
neighborhoods.5 However, such analyses were criticized because
they did not distinguish between demand and supply effects 6--that
is, whether loan volume was low because people in high-minority and
low-income areas were unable to afford home ownership and therefore
were not applying for mortgage loans, or because lenders refused to
make loans in these areas. Moreover, the early HMDA data were
incomplete because non-depository lenders (e.g., mortgage bankers, who
originate most FHA loans) were not included.
\4\ Prior to 1990, HMDA data showed only the total number and
aggregate dollar volume of loans made in each census tract for
depository institutions; no information was reported on individual
borrowers or on applications denied.
\5\ These studies, which were conducted at the census tract
level, typically involved regressing the number of mortgage
originations (relative to the number of properties in the census
tract) on characteristics of the census tract including its minority
composition. A negative coefficient estimate for the minority
composition variable was often interpreted as suggesting redlining.
For a discussion of these models, see Eugene Perle, Kathryn Lynch,
and Jeffrey Horner, ``Model Specification and Local Mortgage Market
Behavior,'' Journal of Housing Research, Volume 4, Issue 2, 1993,
pp. 225-243.
\6\ For critiques of the early HMDA studies, see Andrew Holmes
and Paul Horvitz, ``Mortgage Redlining: Race, Risk, and Demand,''
The Journal of Finance, Volume 49, No. 1, March 1994, pp. 81-99; and
Michael H. Schill and Susan M. Wachter, ``A Tale of Two Cities:
Racial and Ethnic Geographic Disparities in Home Mortgage Lending in
Boston and Philadelphia,'' Journal of Housing Research, Volume 4,
Issue 2, 1993, pp. 245-276.
---------------------------------------------------------------------------
Like early HMDA studies, an analysis of deed transfer data in
Boston found lower rates of mortgage activity in minority
neighborhoods.7 The discrepancies held even after controlling for
income, house values and other economic and non-racial factors that
might explain differences in demand and housing market activity.8
[[Page 61927]]
In addition, a larger percentage of transactions in such neighborhoods
were financed by the seller or other non-traditional institutional
lenders (e.g., credit unions, governments, universities, business
leaders, real estate trusts, and pension funds). Greater seller
financing may suggest unmet demand for mortgages, since it is not
likely that minority sellers prefer, more than whites, to finance the
sale of their homes rather than being paid in cash.9 The study
concluded that ``the housing market and the credit market together are
functioning in a way that has hurt African American neighborhoods in
the city of Boston.''
\7\ Katherine L. Bradbury, Karl E. Case, and Constance R.
Dunham, ``Geographic Patterns of Mortgage Lending in Boston, 1982-
1987,'' New England Economic Review, September/October 1989, pp. 3-
30.
\8\ Using an analytical approach similar to that of Bradbury,
Case, and Dunham, Anne Shlay found evidence of fewer mortgage loans
originated in black census tracts in Chicago and Baltimore. See Anne
Shlay, ``Not in That Neighborhood: The Effects of Population and
Housing on the Distribution of Mortgage Finance within the Chicago
SMSA,'' Social Science Research, Volume 17, No. 2, 1988, pp. 137-
163; and ``Financing Community: Methods for Assessing Residential
Credit Disparities, Market Barriers, and Institutional Reinvestment
Performance in the Metropolis,'' Journal of Urban Affairs, Volume
11, No. 3, 1989, pp. 201-223.
\9\ Analysis of 1985 American Housing Survey data also showed a
greater reliance on non-institutional financing by low- and
moderate-income owners in both metropolitan and rural areas. See the
Urban Institute, ``The Availability and Use of Mortgage Credit in
Rural Areas,'' 1990.
---------------------------------------------------------------------------
b. Improved HMDA Data--Wider Coverage and Mortgage Denial Rates
HMDA reporting was expanded in 1990 to provide information on the
disposition of loan applications (originated, approved but not accepted
by the borrower, denied, withdrawn, or not completed), to include the
activity of large independent mortgage companies, and to provide
information on the race and income of individual loan applicants. An
additional expansion in 1993 covered mortgage companies that originated
100 or more home purchase loans in the preceding calendar year. HUD's
analysis using the expanded HMDA data for 1993 and 1994 shows that
high-minority and low-income census tracts have both higher loan
application denial rates and lower loan origination rates.10
\10\ HUD's previous analysis of 1992 HMDA produced comparable
results. For a similar analysis based on 1992 HMDA data, see Glenn
B. Canner, Wayne Passmore, and Dolores S. Smith, ``Residential
Lending to Low-Income and Minority Families: Evidence from the 1992
HMDA Data,'' Federal Reserve Bulletin, Volume 80, February 1994, pp.
79-108.
---------------------------------------------------------------------------
Table B.1 presents mortgage denial and origination rates by the
minority composition and median income of census tracts for
metropolitan areas. Two patterns are clear:
Census tracts with higher percentages of minority
residents have higher mortgage denial rates and lower mortgage
origination rates than all-white or substantially-white tracts. For
example, the denial rate for census tracts that are over 90 percent
minority is over two-and-a-half times that for census tracts with less
than 10 percent minority.
Census tracts with lower incomes have higher denial rates
and lower origination rates than higher income tracts. The average
number of 1993 mortgage originations in the highest-income census
tracts (i.e., tracts with a median income over 150 percent of area
median) was 20.0 per 100 owner-occupants; this compares with a range of
4.4 to 9.0 originations for the census tract deciles with income less
than 90 percent of area median.11
\11\ Origination rates in 1994 are lower than origination rates
in 1993 for all income and minority levels because of the lower
number of refinance mortgages.
---------------------------------------------------------------------------
Denial rates in 1993 increased from 10.7 to 29.3 percent as
minority concentration changes from low-minority to 90-percent-minority
tracts.12 They declined from 24.2 to 7.8 percent as tract income
increases from 60 percent of area median to over 150 percent of area
median. Similar patterns arose in 1994.
\12\ The denial rates in Table B.1 are for purchase mortgages.
Denial rates are several percentage points lower for refinance loans
than for purchase loans, but denial rates follow the same pattern
for both types of loans: rising with minority concentration and
falling with increasing income.
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Table B.2 aggregates the data in Table B.1 into six minority and
income combinations that exhibit very different credit flows. The low-
minority (less than 30 percent minority), high-income (over 120 percent
of area median) group has a denial rate of 8 percent and an origination
rate of 19 per 100 owner occupants. The high-minority (over 50
percent), low-income (under 90 percent of area median) group has a
denial rate of 27 percent and an origination rate of only 6 per 100
owner occupants. The other groupings fall between these two extremes.
The advantages of HUD's underserved area definition can be seen by
examining the minority-income combinations highlighted in Table B.2.
The sharp differences in denial rates and origination rates between the
underserved and remaining served categories illustrate that HUD's
definition delineates areas that have significantly less success in
receiving mortgage credit. Underserved areas have almost twice the
average denial rate of served areas (21 percent versus 11 percent) and
half the average origination rate per 100 owner occupants (8 versus
16). HUD's definition does not include high-income (over 120 percent of
area median) census tracts even if they meet the minority threshold.
The mortgage origination rate per 100 owner occupants (15) for high-
income tracts with a minority share of population over 30 percent is
about the same as the average (16) for all served areas.
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[[Page 61931]]
c. Recent HMDA Studies--Controlling for Applicant Credit Risk
An important question is whether variations in denial rates reflect
lender bias against certain kinds of neighborhoods and borrowers, or
simply the credit quality of the potential borrower (as indicated by
the applicant's available assets, credit rating, employment history,
etc.). The technical improvements offered by recent studies of credit
disparities have attempted to control for credit risk factors that
might influence a lender's decision to approve a loan. Without fully
accounting for the creditworthiness of the borrower, racial differences
in denial rates cannot be attributed to lender bias. The best example
of accounting for credit risk is the study by researchers at the
Federal Reserve Bank of Boston, which analyzed mortgage denial
rates.13 To control for credit risk, the Boston Fed researchers
included 38 borrower and loan variables indicated by lenders to be
critical to loan decisions. The study found that minorities' higher
denial rates could not be explained fully by income and credit risk
factors. African Americans and Hispanics were about 60 percent more
likely to be denied credit than Whites, even after controlling for
credit risk characteristics such as credit history, employment
stability, liquid assets, self-employment, age, and family status and
composition. Although almost all highly-qualified applicants of all
races were approved, differential treatment was observed among
borrowers with lesser qualifications.14
\13\ Alicia H. Munnell, Lynn E. Browne, James McEneaney, and
Geoffrey M. B. Tootell, ``Mortgage Lending in Boston: Interpreting
HMDA Data,'' Federal Reserve Bank of Boston, Working Paper Series,
No. 92-7, October 1992.
\14\ This study was the subject of substantial criticism with
regard to data quality and model specification, but even after
accounting for these problems, the race conclusions were found to
persist in a re-estimation of the model by Fannie Mae. See James H.
Carr and Isaac F. Megbolugbe, ``The Federal Reserve Bank of Boston
Study on Mortgage Lending Revisited,'' Journal of Housing Research,
Volume 4, Issue 2, 1993, pp. 277-313. Other criticisms, however,
have also been mentioned. For instance, the fact that the credit
risk variables included in the model are correlated with the
minority variable suggests that the latter may be picking up the
effects of still other credit risk variables omitted from the model.
See John Straka, ``Boston Federal Reserve Study of Mortgage
Discrimination,'' Secondary Mortgage Markets, Volume 10, No. 1,
Winter 1993, pp. 8-9, for a useful discussion of other aspects of
the Boston Fed study.
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A recent HUD study also found mortgage denial rates for minorities
to be higher in ten metropolitan areas, even after controlling for
credit risk.15 In addition, the higher denial rates observed in
minority neighborhoods were not purely a reflection of the higher
denial rates experienced by minorities. Whites experienced higher
denial rates in some minority neighborhoods than in some predominantly
white neighborhoods.
\15\ Ann B. Schnare and Stuart A. Gabriel, ``The Role of FHA in
the Provision of Credit to Minorities,'' ICF Incorporated, prepared
for the U.S. Department of Housing and Urban Development, April 25,
1994.
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A more recent reassessment and refinement of the data used by the
Federal Reserve Bank of Boston has confirmed the findings of that
study.16 William C. Hunter of the Federal Reserve Bank of Chicago
also found that race was a factor in denial rates of marginal
applicants. While denial rates were comparable for borrowers of all
races with ``good'' credit ratings, among those with ``bad'' credit
ratings or high debt ratios, minorities were significantly more likely
to be denied than similarly-situated whites. The study concludes that
the racial differences in denial rates are due to a cultural gap
between white loan officers and minority applicants, and conversely, a
cultural affinity with white applicants.
\16\ William C. Hunter, ``The Cultural Affinity Hypothesis and
Mortgage Lending Decisions,'' WP-95-8, Federal Reserve Bank of
Chicago, 1995.
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The two Fed studies and the HUD study concluded that the effect of
borrower race on mortgage rejections persists even after controlling
for legitimate determinants of lenders' credit decisions. Thus, they
give some legitimacy to denial rate comparisons such as those in Tables
B.1 and B.2. However, the independent race effect identified in these
studies is still difficult to interpret. In addition to lender bias,
access to credit can be limited by loan characteristics that reduce
profitability 17 and by underwriting standards that have disparate
effects on minority and lower income borrowers and
neighborhoods.18
\17\ Lenders are discouraged from making smaller loans in older
neighborhoods. Since upfront loan fees are frequently determined as
a percentage of the loan amount, such loans generate lower revenue
and thus are less profitable to lenders.
\18\ Standard underwriting practices may exclude lower income
families that are, in fact, creditworthy. Such families tend to pay
cash, leaving them without a credit history. In addition, the usual
front-end and back-end ratios applied to applicants' housing
expenditures and other on-going costs may be too stringent for lower
income households, who typically pay higher shares of their income
for housing than higher income households.
---------------------------------------------------------------------------
d. Recent HMDA Studies--Controlling for Neighborhood Risk and Demand
and Tests of the Redlining Hypothesis
Two recent statistical studies sought to test the redlining
hypothesis by more completely controlling for differences in
neighborhood risk and demand. These studies do not support claims of
racially induced mortgage redlining--the explanatory power of
neighborhood race is reduced to the extent that the effects of
neighborhood risk and demand are accounted for. However, these studies
cannot reach definitive conclusions about redlining because of the
correlation of neighborhood race with other explanatory variables
included in their models.
First, Andrew Holmes and Paul Horvitz used 1988-1991 HMDA data to
examine the flow of conventional mortgage originations across census
tracts in Houston.19 Their regression model included as
explanatory variables the economic viability of the loan and
characteristics of residents of the tract (e.g., house value, income,
age distribution and education level), measures of demand (e.g., recent
movers and change in owner-occupied units between 1980 and 1990), and
measures of credit risk (defaults on government-insured loans and
change in tract house values between 1980 and 1990). To determine the
existence of racial redlining, the model also included as explanatory
variables the percentages of African American and Hispanic residents in
the tract and the increase in the tract's minority percentage between
1980 and 1990. Most of the neighborhood risk and demand variables were
significant determinants of the flow of conventional loans in Houston.
The coefficients of the racial composition variables were insignificant
which, led Holmes and Horvitz to conclude that allegations of redlining
could not be supported, at least in the Houston market.
\19\ Holmes and Horvitz also analyzed the flow of government-
insured loans and obtained what are now standard results in the
literature--compared with conventional loans, government-insured
loans are more targeted to lower income and risky neighborhoods.
---------------------------------------------------------------------------
One of their more interesting findings, however, was that the
racial composition variables became significant and negative, thus
suggesting the existence of redlining, when they re-estimated their
model twice, once without the credit risk variables and once without
the demand variables. This finding is consistent with earlier credit
flow studies that concluded that redlining exists. Holmes and Horvitz
caution against relying on findings from these earlier studies because
they did not adequately account for differences in neighborhood risk
and demand. The authors conclude that ``a claim of racially based
geographic discrimination in mortgage lending must be based on a
consideration of race after taking
[[Page 61932]]
account of variables that are rationally connected with the economics
of the mortgage lending process.'' 20
\20\ Holmes and Horvitz, page 97 (emphasis added). The authors
recognize that many of the risk and demand variables in their model
are rather highly correlated with the racial composition variables
also included in their model. Thus, one could argue that their risk
and demand variables are serving, to a certain extent, as proxies
for race, which would mean that their results suggest a high degree
of redlining in the Houston market. Holmes and Horvitz dismiss this
argument by stating that several of their non-racial variables are
reasonable proxies for other prudent lending variables such as
wealth and job stability for which they did not have direct data.
---------------------------------------------------------------------------
In the second study, Michael Schill and Susan Wachter attempt to
improve on earlier studies of redlining by examining whether mortgage
denials are related to neighborhood racial composition.21 Schill
and Wachter argue that HMDA data on mortgage rejections, first released
in 1990, allow researchers to address perhaps the major shortcoming of
earlier credit flow studies--the inability to separate demand
influences from supply influences. Analyzing information on whether
lenders accept or reject individual loan applicants permits Schill and
Wachter to study the determinants of the supply decision
separately.22
\21\ Schill and Wachter. Although their methodology and findings
are similar to those of studies discussed in the next section, it is
informative to review Schill and Wachter's study in detail because
it illustrates issues that must be dealt with before definitive
conclusions can be reached about redlining.
\22\ Perle also agrees that micro-based models of mortgage
denial rates are more appropriate for studying redlining than macro-
based credit flow models that fail to separate demand and supply
effects.
---------------------------------------------------------------------------
In their empirical work, Schill and Wachter focused on loan
acceptances rather than denials. Their model posits that the
probability that a lender will accept a specific mortgage application
depends on characteristics of the individual loan application 23
and characteristics of the neighborhood where the property
collateralizing the loan is located. Because they rely on public data,
Schill and Wachter did not have information on several loan and
property risk variables, such as loan-to-value ratio, that are known to
affect the mortgage decision. To compensate for the lack of these
variables, the study includes neighborhood risk proxies that are likely
to affect the future value of the properties.24 Finally, to test
for the existence of racially-induced lending patterns across census
tracts, Schill and Wachter included the percentage of persons in the
census tract that were African American and Hispanic.
\23\ Individual loan characteristics include loan size
(economies of scale cause lenders to prefer large loans to small
loans) and all individual borrower variables included in the HMDA
data (the applicant's income, sex, and race).
\24\ Their neighborhood risk proxies include median income and
house value (inverse indicators of risk), percent of households
receiving welfare, median age of houses, homeownership rate (an
inverse indicator), vacancy rate, and the rent-to-value ratio (an
inverse indicator). A high rent-to-value ratio suggests lower
expectations of capital gains on properties in the neighborhood.
---------------------------------------------------------------------------
The authors tested their model for conventional mortgages in
Philadelphia and Boston. They first estimated their model including as
explanatory variables only the individual loan and racial composition
variables. The applicant race variables--whether the applicant was
African American or Hispanic--showed significant negative effects on
the probability that a loan would be accepted. Schill and Wachter
stated that this finding does not provide evidence of individual race
discrimination because applicant race is most likely serving as a proxy
for credit risk variables omitted from their model (e.g., credit
history, wealth and liquid assets). In this first analysis, the
percentage of the census tract that was African American also showed a
significant and negative coefficient, a result that is consistent with
redlining. However, when the neighborhood risk proxies were included in
the model along with the individual loan variables, the percentage of
the census tract that was African American becomes insignificant. Thus,
similar to Holmes and Horvitz, Schill and Wachter stated that ``once
the set of independent variables is expanded to include measures that
act as proxies for neighborhood risk, the results do not reveal a
pattern of redlining.'' 25
\25\ Schill and Wachter, page 271. Munnell, et al. reached
similar conclusions in their study of Boston. They found that the
race of the individual mattered, but that once individual
characteristics were controlled, racial composition of the
neighborhood was insignificant.
---------------------------------------------------------------------------
In their conclusion, however, Schill and Wachter stated that while
their results did not support the hypothesis of redlining, they could
not say definitively that neighborhood race is unrelated to lenders'
decisions to accept or reject loan applications. One reason for their
hesitancy is that many of their individual loan variables (as well as
their neighborhood risk variables) are correlated with the racial
composition of the census tract. For instance, the applicant's race
variable (i.e., whether the applicant is African American or Hispanic)
remained highly significant and negative in all their estimations.
Because of the high degree of racial segregation that exists in urban
areas, the applicant race variable was positively correlated with the
census tract race variable. It may be that the applicant race variable
was picking up effects that should properly be attributed to the census
tract race variable.26 If this were the case, Schill and Wachter's
conclusions about the existence of racially induced redlining would
necessarily change.
\26\ In their study of individual loan denial rates, Avery,
Beeson, and Sniderman obtain significant and positive coefficients
for the individual applicant's race. Unlike Schill and Wachter, they
found that denial rates were higher in low-income tracts even after
controlling for the effects of the applicant's race and income.
Although denial rates were not higher overall for purchase and
refinance loans in minority tracts after controlling for the race of
the applicant, denial rates were higher in minority tracts for white
applicants. In other words, minorities have higher denial rates
wherever they attempt to borrow, but whites face higher denials when
they attempt to borrow in areas dominated by minorities. In
addition, denial rates were higher in minority areas for home-
improvement loans. See Robert B. Avery, Patricia E. Beeson, and Mark
S. Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA
Data,'' Working Paper Series 94-16, Federal Reserve Bank of
Cleveland, October 18, 1994.
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e. Geographic Dimensions of Underserved Areas--Targeted versus Broad
Approaches
An important issue for the GSE regulations is whether geographic
areas under this goal should be broadly or narrowly defined. Is central
city location an adequate proxy for lack of access to mortgage credit?
What is gained by more targeted neighborhood-based definitions? This
section reports findings from three studies that address these
questions. All three support defining underserved areas in terms of the
minority and/or income characteristics of census tracts, rather than in
terms of a broad definition such as all areas of all central cities.
HUD's Analysis. Tables B.1 and B.2 documented the relatively high
denial rates and low mortgage origination rates in underserved areas as
defined by HUD. This section extends that analysis by comparing
underserved and served areas within central cities and suburbs. Figure
B.1 shows that HUD's definition targets central city neighborhoods that
are experiencing problems obtaining mortgage credit. The 22 percent
denial rate in these neighborhoods is twice the 11 percent denial rate
in the remaining areas of central cities. Similarly, the average
mortgage origination rate (per 100 owner occupants) in HUD-defined
underserved areas of central cities is 7, much lower than the average
of 15 for the remaining areas of central cities.
A broad, inclusive definition of ``central city'' that includes all
areas of all OMB-designated central cities would include the
``remaining'' portions of these cities. Figure B.1 shows that these
[[Page 61933]]
areas, which account for approximately 42 percent of the population in
OMB-designated central cities, appear to be well served by the mortgage
market. They are not experiencing problems obtaining access to mortgage
credit.27
\27\ The Preamble to this rule provides additional reasons why
central city location should not be used as a proxy for underserved
areas.
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HUD's definition also targets in the suburbs as well as in central
cities--for example, the average denial rate in underserved suburban
areas is almost twice that in the remaining served areas of the
suburbs. Low-income and high-minority suburban tracts appear to have
credit problems similar to their central city counterparts. These
suburban tracts, which account for 31 percent of the suburban
population, are encompassed by the definition of other underserved
areas. Thus, the advantage of HUD's targeted definition of underserved
areas is illustrated by sharp differences in measures of mortgage
access between served and underserved areas within both central cities
and suburbs.
William Shear, James Berkovec, Ann Dougherty, and Frank Nothaft,
economists at Freddie Mac, recently completed an analysis of mortgage
flows and application acceptance rates in 32 metropolitan areas that
also supported a targeted definition of underserved areas.28 These
researchers regressed the number of mortgage originations per 100
properties in the census tract on several independent variables that
are intended to account for some, but admittedly not all, of the demand
and supply (i.e., credit risk) influences at the census tract level.
Examples of the demand and supply variables at the census tract level
include: tract income relative to the area median income, the increase
in house values between 1980 and 1990, the percentage of units boarded
up, and the age distributions of households and housing units. The
tract's minority composition and central city location were included to
test if these characteristics are associated with underserved
neighborhoods after controlling for the demand and supply variables.
Several of their findings relate to the issue of defining underserved
areas:
\28\ William Shear, James Berkovec, Ann Dougherty, and Frank
Nothaft, ``Unmet Housing Needs: The Role of Mortgage Markets,''
presented at mid-year meeting of the American Real Estate and Urban
Economics Association, June 1, 1994. See also Susan Wharton Gates,
``Defining the Underserved,'' Secondary Mortgage Markets, 1994
Mortgage Market Review Issue, pp. 34-48.
---------------------------------------------------------------------------
Census tracts with high concentrations of African American
and Hispanic families have lower rates of applications, originations,
and acceptance rates. For instance, the regression estimates suggest
that all-White census tracts would have an average 10.5 originations
per 100 properties, while all-African American and all-Hispanic census
tracts would have about 7 originations per 100 properties.
Tract income influences mortgage flows--tracts at 80
percent of median income are estimated to have 8.6 originations per 100
owners as compared with 10.8 originations for tracts over 120 percent
of median income.
Once census tract influences are accounted for, central
city location has only a minimal effect on credit flows.
Shear, Berkovec, Dougherty, and Nothaft recognized that it is
difficult to interpret their estimated minority effects--the effects
may indicate lender discrimination, supply and demand effects not
included in their model but correlated with minority status, or some
combination of these factors. They explain the implications of their
results for measuring underserved areas as follows:
* * * While it is not at all clear how we might rigorously
define, let alone measure, what it means to be underserved, it is
clear that there are important housing-related problems associated
with certain location characteristics, and it is possible that, in
the second or third best world in which we live, mortgage markets
might be useful in helping to solve some of these problems. We then
might use these data to help single out important areas or at least
eliminate some bad choices. * * * The regression results indicate
that income and minority status are better indicators of areas with
special needs than central city location.29
\29\ Shear et al., p. 18.
HUD Analysis. HUD used 1993 HMDA data to update the analysis of
Shear et al. HUD focused on denial and origination rates for conforming
conventional applications and included all metropolitan areas in the
analysis.30 HUD's analysis also supports a targeted underserved
definition. Lower-income census tracts and census tracts with
concentrations of African American and Hispanic families have lower
origination rates and higher denial rates. For example, the regression
estimates suggest that all-White census tracts would have an average
13.7 percent denial rate and 13.4 originations per 100 properties,
while census tracts that are 50 percent African American (Hispanic)
would have an average 22.3 (19.7) percent denial rate and 9.8 (12.0)
originations per 100 properties. Furthermore, the regression analysis
indicates central-city location has a minimal effect on denial and
origination rates, after controlling for census tract effects.31
\30\ Including FHA applications in the analysis--as in Shear et
al.--does not significantly change the results reported in this
section.
\31\ Central city location had no significant effect on
origination rates. For denial rates, the difference between the
average central city denial rate and the average suburban denial
rate was .56 percent.
---------------------------------------------------------------------------
Robert Avery, Patricia Beeson, and Mark Sniderman of the Federal
Reserve Bank of Cleveland recently presented a paper specifically
addressing the issue of underserved areas in the context of the GSE
legislation.32 Their study examines variations in application
rates and denial rates for all individuals and census tracts included
in the 1990 and 1991 HMDA data base. They seek to isolate the
differences that stem from the characteristics of the neighborhood
itself rather than the characteristics of the individuals that apply
for loans in the neighborhood or lenders that happen to serve them.
Similar to the two studies of redlining reviewed in the previous
section, Avery, Beeson and Sniderman hypothesize that variations in
mortgage application and denial rates will be a function of several
risk variables such as the income of the applicant and changes in
neighborhood house values; they test for independent racial effects by
adding to their model the applicant's race and the racial composition
of the census tract. Econometrics are used to separate individual
applicant effects from neighborhood effects.
\32\ See Avery, et al.
---------------------------------------------------------------------------
Based on their empirical work, Avery, Beeson and Sniderman reach
the following conclusions:
The individual applicant's race exerts a strong influence
on mortgage application and denial rates. African American applicants,
in particular, have unexplainably high denial rates.
Once individual applicant and other neighborhood
characteristics are controlled for, overall denial rates for purchase
and refinance loans were only slightly higher in minority census tracts
than non-minority census tracts.33 For white applicants, on the
other hand, denial rates were significantly higher in minority
tracts.34 That is, minorities
[[Page 61936]]
have higher denial rates wherever they attempt to borrow but whites
face higher denials when they attempt to borrow in minority
neighborhoods. In addition, Avery et al. found that home improvement
loans had significantly higher denial rates in minority neighborhoods.
Given the very strong effect of the individual applicant's race on
denial rates, Avery et al. note that since minorities tend to live in
segregated communities, a policy of targeting minority neighborhoods
may be warranted.
\33\ Avery et al. find very large unadjusted differences in
denial rates between white and minority neighborhoods, and although
the gap is greatly reduced by controlling for applicant
characteristics (such as race and income) and other census tract
characteristics (such as house price and income level), a
significant difference between white and minority tracts remains
(for purchase loans, the denial rate difference falls from an
unadjusted level of 16.7 percent to 4.4 percent after controlling
for applicant and other census tract characteristics, and for
refinance loans, the denial rate difference falls from 21.3 percent
to 6.4 percent). However, when between-MSA differences are removed,
the gap drops to 1.5 percent and 1.6 percent for purchase and
refinance loans, respectively. See Avery, et al., p. 16.
\34\ Avery, et al., page 19, note that, other things equal, a
black applicant for a home purchase loan is 3.7 percent more likely
to have his/her application denied in an all-minority tract than in
an all-white tract, while a white applicant from an all-minority
tract would be 11.5 percent more likely to be denied.
---------------------------------------------------------------------------
The median income of the census tract had strong effects
on both application and denial rates of purchase and refinance loans,
even after other variables were accounted for.
There is little difference in overall denial rates between
central cities and suburbs, once individual applicant and census tract
characteristics are controlled for.
Avery, Beeson and Sniderman conclude that a tract-level definition
would be a more effective way to define underserved areas in the GSE
regulation than using the list of OMB-designated central cities as a
proxy.
The next section will also document that there are equally
widespread and pervasive differences in socioeconomic conditions across
neighborhoods.
f. Conclusions From HUD's Analysis and the Economics Literature About
Urban Underserved Areas
The implications of studies by HUD and others for defining
underserved areas can be summarized briefly. First, the existence of
large geographic disparities in mortgage credit is well documented.
HUD's analysis of 1993 and 1994 HMDA data shows that low-income and
high minority neighborhoods receive substantially less credit than
other neighborhoods and, by most reasonable criteria, fit the
definition of being underserved by the nation's credit markets.
Second, researchers are testing models that more fully account for
the various risk, demand, and supply factors that determine the flow of
credit to urban neighborhoods. The studies by Holmes and Horvitz and
Schill and Wachter are good examples of this recent research. Their
attempts to test the redlining hypothesis show the analytical insights
that can be gained by more rigorous modeling of this issue. However, as
those two studies show, the fact that our urban areas are highly
segregated means that the various loan, applicant, and neighborhood
characteristics currently being used to explain credit flows are often
highly correlated with each other which makes it difficult to reach
definitive conclusions about the relative importance of any single
variable such as neighborhood racial composition. Thus, the need
continues for further research on the underlying determinants of
geographic disparities in mortgage lending.35
\35\ Methodological and econometric challenges that researchers
will have to deal with are discussed in Mitchell Rachlis and Anthony
Yezer, ``Serious Flaws in Statistical Tests for Discrimination in
Mortgage Markets,'' Journal of Housing Research, Volume 4, 1993, pp.
315-336.
---------------------------------------------------------------------------
Finally, much research strongly supports a targeted definition of
underserved areas. Studies by Shear, et al. and Avery, Beeson, and
Sniderman conclude that characteristics of both the applicant and the
neighborhood where the property is located are the major determinants
of mortgage denials and origination rates--once these characteristics
are controlled for, other influences such as central city location play
only a minor role in explaining disparities in mortgage lending. HUD's
analysis shows that both credit and socioeconomic problems are highly
concentrated in underserved areas within central cities and suburbs.
The remaining, high-income portions of central cities and suburbs
appear to be well served by the mortgage market.
HUD recognizes that the mortgage origination and denial rates
forming the basis for the research mentioned in the preceding
paragraph, as well as for HUD's definition of underserved areas, are
the result of the interaction of individual risk, demand and supply
factors that analysts have yet to disentangle and interpret. The need
continues for further research addressing this problem. HUD believes,
however, that the economics literature is consistent with a targeted
rather than a broad approach for defining underserved areas.
3. Alternative Underserved Area Definitions for Urban Areas 36
This section compares the final rule's underserved definition to
the alternative definitions advanced by Freddie Mac and Fannie Mae.
Other comments were essentially variations on the two distinct
approaches suggested by the GSEs. Therefore, rather than analyzing all
variants, this section analyzes the two major alternative definitions--
using all central cities and all rural areas, or expanding on the
proposed rule's tract-based approach. The tracts added by these two
alternative definitions have lower denial rates and higher origination
rates than the tracts covered by the final rule. A study by the Urban
Institute, summarized below, criticized both alternative definitions
for being too broad in coverage.
\36\ The analysis in this section relies on 1993 HMDA data.
---------------------------------------------------------------------------
a. The Fannie Mae Definition
Fannie Mae urged that HUD use the following definition for the
geographically targeted goal: All central cities as defined by OMB, all
non-metropolitan areas, and all other metropolitan census tracts that
are more than 50 percent minority or that have an income less than 80
percent of area median income. The alternative definition proposed by
Fannie Mae includes central city tracts that are substantially better
off and have fewer problems accessing credit than underserved tracts
covered by the final rule's definition. In suburban areas, the Fannie
Mae definition excludes suburban tracts that appear to have mortgage
access problems.
Table B.3 reports mortgage denial and origination rates and
socioeconomic characteristics of served and underserved census tracts
under the Fannie Mae definition. Credit access does not appear to be a
problem in the added tracts--mortgage denial rates are one-half of
mortgage denial rates in central city tracts covered by HUD's
underserved definition. Moreover, the added central city census tracts
appear substantially better off than the central-city census tracts
covered by HUD's definition. The 7 percent poverty rate for the central
city tracts added by Fannie Mae's underserved definition is only about
one-third the 22 poverty rate for tracts included in central cities
under the final rule.
The suburban tracts excluded from Fannie Mae's definition do not
appear as distressed as other suburban underserved tracts covered by
the final rule. For example, the 10 percent poverty rate in the
excluded tracts is lower than the 14 percent poverty rate in all HUD
suburban underserved tracts. But these tracts do appear to have
problems accessing mortgage credit as evidenced by their high denial
rates. The denial rate in the excluded tracts is 18 percent compared to
the 20 percent denial rate in all underserved suburban tracts covered
by the final rule.
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b. The Freddie Mac Definition
A tract is underserved, according to Freddie Mac, if minorities
comprise 20 percent or more of the residents or the median income of
families does not exceed 100 percent of area median income. Freddie
Mac's definition includes areas covered by the Geographically Targeted
Goal as well as 5,367 additional tracts where median family income is
between 90 and 100 percent of area median income or minorities comprise
20-30 percent of tract population.
Table B.4 reports characteristics of the census tracts added by
Freddie Mac's underserved area definition. Mortgage credit access does
not appear to be a major problem in these added tracts. Their 15
percent mortgage denial rate is only slightly above average and much
lower than the 21 percent denial rate for tracts included in the
Geographically Targeted Goal. Mortgage origination patterns in these
tracts show a similar disparity.
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c. The Urban Institute Study.
HUD commissioned the Urban Institute to evaluate the Department's
effort to define underserved metropolitan areas. The Urban Institute
analysis examined how HUD's, Fannie Mae's, and Freddie Mac's
underserved definitions are related to a measure of credit flow
problems. An underserved definition can be judged on how accurately it
predicts the ``credit flow measure.'' In its analysis, the Urban
Institute used mortgage denial rates as the credit flow measure.
The Urban Institute tested each of the definitions using a denial
rate threshold of 22 percent.37 The proposed rule's definitions
correctly predict the credit flow measure for 71 percent of the tracts,
while the Freddie Mac definition correctly predicts only 63 percent of
the tracts, and the Fannie Mae definition only 58 percent of the
tracts. Moreover, the HUD definition is not sensitive to changes in the
threshold that defines credit flow problems. The Urban Institute also
concluded that the final rule's definition is superior to the Freddie
Mac and Fannie Mae definitions when the tract denial rate threshold is
reduced to 17 percent.
\37\ The unweighted average of denial rates across metropolitan
census tracts is 17 percent. The weighted average, which takes into
account the number of applications in a tract, is 13 percent.
---------------------------------------------------------------------------
4. Identifying Underserved Locations in Rural Areas 38
\38\ In this Appendix definition, ``rural'' is used synonymously
with ``nonmetropolitan,'' which differs from the terminology
employed by the Census Bureau.
---------------------------------------------------------------------------
This section discusses the final rule's definition of rural
underserved areas, reviews the existing literature on rural housing
needs and rural mortgage credit problems, and summarizes discussions
held with rural lenders, rural housing developers, public interest
groups, and the GSEs at forums on rural lending sponsored by
HUD.39 In addition, this section explains why defining
underservedness in rural areas is more difficult than in metropolitan
areas.
\39\ Records of these forums are part of the public docket for
this rule, and are available for public inspection at the HUD
Headquarters Building, Room 10276.
---------------------------------------------------------------------------
a. Basic Characteristics of Rural Areas
Identifying underserved rural areas is more difficult than
identifying underserved metropolitan areas. In part, this difficulty
results from the use of multiple definitions of ``rural'' by
researchers, policy makers, and Federal agencies. The Census Bureau
defines rural as communities with fewer than 2,500 residents. The
Department of Agriculture's Rural Housing and Community Development
Service (formerly the Farmers Home Administration) uses several
definitions of rural, each specific to one of its housing programs.
Maps outlining the areas covered by the various RHCDS programs are
available only at local agriculture field offices.40
\40\ For example, the Rural Housing and Community Development
Service (RHCDS) defines rural for its Rural Guaranteed Housing
Program as any community with less than 10,000 people in a
metropolitan area and less than 20,000 outside an MSA.
---------------------------------------------------------------------------
For the purposes of the final rule, HUD defines rural to be any
area that lies outside of metropolitan boundaries established by OMB.
The OMB nonmetropolitan definition is easily understood by lenders and
the GSEs. Approximately 21 percent of the United States population
lives in nonmetropolitan areas, with 75 percent of the nonmetropolitan
population concentrated in the South and Midwest.
Proportionately more poor people and fewer minorities live in
nonmetropolitan areas than in metropolitan areas. The poverty rate in
nonmetropolitan areas is 17 percent, compared to 12 percent in
metropolitan areas; minorities make up 15 percent of the population in
nonmetropolitan areas compared to 27 percent in metropolitan areas. The
South and West nonmetropolitan regions have the highest poverty rates
and minority percentages. The South, for example, has a 21 percent
poverty rate and a 23 percent minority concentration. Poverty rates are
highest in remote counties that are not adjacent to a metropolitan area
and have less than 2,500 in urban areas. These remote counties account
for 12 percent of nonmetropolitan population.
b. Data Issues and Previous Research
Defining rural underserved areas requires a different approach than
in metropolitan areas because of the lack of mortgage flow data,
differences in housing needs between urban and rural areas, and the
difficulty of implementing mortgage programs at the census tract level
in rural areas. Evaluating which rural areas are underserved in terms
of access to mortgage credit cannot be done with HMDA data, the source
used for most studies of credit needs, because HMDA does not provide
geographic identifiers on mortgage activity outside of metropolitan
statistical areas.41
\41\ Lenders are not required to report under HMDA the location
of those mortgage applications for properties outside MSA
boundaries. Moreover, a large portion of the data compiled by
banking regulators does not distinguish between mortgage activity of
rural branches of large regional banks and mortgage activity of the
bank's metropolitan headquarters.
---------------------------------------------------------------------------
There are few conclusive studies on access to mortgage credit in
rural areas because of the lack of adequate data.42 The studies
that do exist only suggest broad conclusions about credit flows in
rural areas. Recognizing this lack of research on credit flows in rural
areas, the Department consulted with researchers from academia, the
Department of Agriculture, the Census Bureau, the Housing Assistance
Council, and the Congressional Budget Office. The Department also
conducted a series of forums to solicit information on rural mortgage
markets from lenders, rural housing groups, and the GSEs. The following
section summarizes the existing research on rural credit flows and
describes further analysis conducted by HUD.
\42\ Studies include: ``Analysis of Underserved Rural Areas,''
Housing Assistance Council, 1995; ``Effect of Federal Home Loan Bank
System District Banks on the Housing Finance System in Rural
Areas,'' ICF Incorporated, 1993; ``The Availability and Use of
Mortgage Credit in Rural Areas,'' The Urban Institute, 1990; and
``Location, Location, Location: Report on Residential Mortgage
Credit Availability in Rural Areas,'' The Center for Community
Change, 1990.
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The Urban Institute Study (``The Availability and Use of Mortgage
Credit in Rural Areas'' 1990) concludes that while little data on
mortgage credit in rural areas is available, evidence suggests that
there is no rural credit shortage that would warrant changes in federal
mortgage credit policy. Symptoms of credit shortage identified by the
Urban Institute include low homeownership rates, limited borrowing to
finance home purchase, adverse credit terms for qualified borrowers,
and larger portions of income spent on housing. Because these symptoms
do not exist in the majority of rural areas, the Urban Institute
concluded that most rural areas suffering from inactive local mortgage
markets have weak economies in which demand for home mortgages is low.
The Urban Institute's indicators of a credit shortage and their
focus on fixed-rate conventional mortgages could have led to the wrong
conclusions about mortgage credit availability in rural areas. Higher
homeownership rates in rural areas, for example, are not necessarily
indicative of the lack of a credit shortage. Although nonmetropolitan
households are more likely to own their homes than metropolitan
households--the homeownership rate is 73 and 62 percent, respectively,
in nonmetropolitan and metropolitan areas--the higher homeownership
rate likely reflects the lack of rental
[[Page 61941]]
opportunities and the high percentage of mobile homes in rural areas.
Mobile homes account for 15 percent of owner-occupied units in
nonmetropolitan areas, compared with only 6 percent in metropolitan
areas. Mobile homes are starter homes for many rural households because
of their affordability and the availability of dealer financing. The
homeownership rate, exclusive of mobile homes, is approximately equal
in metropolitan and nonmetropolitan areas indicating that
nonmetropolitan households who buy mobile homes are the counterparts of
metropolitan households who live in rental housing.
Furthermore, it is not surprising that studies that focus on fixed-
rate home purchase mortgages lead to the conclusion that credit terms
in rural areas do not differ significantly from credit terms in urban
areas.43 Properties that meet the underwriting criteria for fixed-
rate mortgages are similar to urban properties that meet these
criteria. Many rural properties, however, do not satisfy the criteria
designed for mortgages underwritten in urban areas.
\43\ The ICF study also concludes that credit terms do not
differ significantly between metropolitan and nonmetropolitan
mortgages but their focus is only on fixed-rate and adjustable rate
conventional mortgages.
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The Center for Community Change Study (``Location, Location,
Location'', 1990) suggests that financing of housing in rural areas is
made difficult by underwriting standards designed for urban areas:
``Interviews with bankers and realtors indicate that federal mortgage
assistance programs and secondary market underwriting criteria continue
to be geared to an urban market with a fire hydrant on every block and
hard surface roads throughout.'' Moreover, the Center for Community
Change reports that in many remote areas and areas with high
concentrations of minorities and low-income households, a number of
barriers prevent borrowers from accessing mortgage credit. These
barriers include lower lender participation in federal mortgage
assistance programs, lack of financial expertise among rural lenders,
lack of private mortgage insurance, and a decreasing number of lending
institutions located in rural communities as a result of the savings
and loan crisis of the 1980s.
Housing Assistance Council Study. The connection between high-
minority, low-income populations and poor access to mortgage credit was
examined in a 1995 study conducted by the Housing Assistance Council
(HAC) for HUD. HAC focused on the impact of alternative combinations of
HUD's proxies of underserved areas--minority concentration and median
income. The HAC study reiterated the difficulty of establishing an
underserved areas definition that balances the priority of targeting
those areas with the most severe credit problems with the priority of
including enough areas so that the GSEs could build an infrastructure
to facilitate and stimulate mortgage lending in rural areas. HAC
suggested that the income criteria be high enough to include persistent
poverty areas with low minority concentrations.
USDA's Economic Research Service. ``Rural Conditions and Trends'',
a periodic research publication, shows that urban proximity is
important: Economic conditions and housing problems tend to be worse in
counties most remote from metropolitan areas or smaller cities.44
In particular, counties with ``persistent low-income,'' which are
disproportionately more rural and remote, have had little recent
economic activity, stagnation in real family income during the 1980s,
and continue to have the highest incidence of housing lacking complete
plumbing. These high poverty counties are concentrated in Appalachia
and in areas with high proportions of minority residents.
\44\ Rural Conditions and Trends, Volume 4, No. 3, Fall 1993, a
special 1990 census issue, documents differences among counties in
population, education, employment, income, poverty, and housing.
---------------------------------------------------------------------------
The ICF Study. Prepared for the Federal Housing Finance Board, this
1993 study examines the effect of the Federal Home Loan Bank System
(FHLBS) District Banks on the housing financing system in rural areas.
The study concluded that nonmetropolitan commercial banks and savings
and loans are more likely than their metropolitan counterparts to hold
loans in portfolio than to participate in the secondary market. Banks
and savings and loans are the largest holders of fixed-rate mortgages
in nonmetropolitan communities. In metropolitan areas, however,
conventional mortgages are more often held or securitized by GSEs.
Membership in the FHLBS is beneficial to commercial banks, savings and
loans, and thrifts because the Bank System can provide them with
capital, in the form of advances secured by the portfolio loans, to
originate additional mortgage loans.\45\ The importance of the FHLBS to
rural lenders suggests that increased access to the secondary market
would also be important for rural lenders.
\45\ ICF Incorporated, ``Effect of Federal Home Loan Bank System
District Banks on the Housing Finance System in Rural Areas,'' p.30.
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RFS Analysis. HUD's analysis of the Residential Finance Survey
shows that 17 percent of all mortgages originated between 1989 and 1991
were in nonmetropolitan areas. This percentage is consistent with the
overall percentage of owner-occupied units in nonmetropolitan areas,
especially after taking into account the lower mobility of
nonmetropolitan residents and the fact that more households use cash
and other non-bank sources to finance home purchases.\46\
\46\ Using 1989 AHS data, ICF reports that the mobility rate of
nonmetropolitan owners is 18 percent lower than the mobility rate of
metropolitan owners. Data from the Residential Finance Survey show
that 10 percent of metropolitan households and 18 percent of
nonmetropolitan households use cash to acquire their homes.
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Nonmetropolitan households are less likely to hold FHA mortgages
than their metropolitan counterparts. According to RFS data, FHA's
share of mortgages originated in nonmetropolitan areas is approximately
half its share of mortgages in metropolitan areas. In part, the lower
FHA share is attributable to the presence of the Rural Housing and
Community Development Service (formerly the Farmers Home
Administration) in nonmetropolitan areas. According to RFS data, the
RHCDS 502 Direct Loan Program accounted for 5 percent of rural home
purchase mortgages between 1989 and 1991.\47\ The funds for this
program, however, have been dwindling from $1.8 billion dollars in 1994
to $900 million in 1995. In 1991, the RHCDS created the 502 Guaranteed
Rural Housing Loan Program, which guarantees losses up to 90 percent of
the loan amount on 100-percent loan-to-value loans. The borrower's
income cannot exceed 115% of county median income to qualify for these
loans. Having to hold a 30-year fixed-rate mortgage in portfolio and
being subject to recourse on the loan prevents many lenders from
participating in the program.
\47\ This Program offers 100-percent loan-to-value (including
closing costs) fixed-rate mortgages for 30 years at subsidized
interest rates; it is targeted to rural households at 80 percent of
area median income or less. To make Program funds go further, the
RHCDS created the Rural Direct Leveraging Program where the lender
and the RHCDS each make a 50-percent loan-to-value loan.
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According to the RFS, conventional mortgages held by financial
institutions differ in metropolitan and nonmetropolitan areas. First,
fewer nonmetropolitan mortgages are privately insured--16 percent of
mortgages in nonmetropolitan areas are insured compared to 22 percent
of mortgages in metropolitan areas.\48\ Second,
[[Page 61942]]
nonmetropolitan households rely more on short-term loans with balloon
payments than their metropolitan counterparts.\49\ Finally, the
mortgage term for conventional fixed-rate mortgages is shorter for
nonmetropolitan households.\50\
\48\ According to the Center for Community Change study, the
higher percentage of uninsured conventional mortgages could imply
that nonmetropolitan residents make higher down payments than metro
residents because private market insurance is unavailable.
\49\ In nonmetropolitan areas with fewer than 10,000 people, for
example, 63 percent of conventional mortgages are fixed-rate, 16
percent are short-term with balloon payments, and 21 percent are
adjustable rate mortgages. In nonmetropolitan areas with more than
10,000 people, 68 percent of conventional mortgages are fixed rate,
11 percent are short-term with balloon payments, and 20 percent are
adjustable rate. In metro areas, however, 75 percent are fixed-rate,
5 percent are short-term balloons, and 19 percent are adjustable
rate.
\50\ In metro areas, 72 percent of fixed-rate mortgages have
mortgage terms greater than 20 years, compared with only 33 percent
in nonmetropolitan communities with less than 10,000 population and
59 percent in nonmetropolitan communities with more than 10,000
population. A similar story can be told for adjustable rate
mortgages although the differential in percentages between metro and
nonmetropolitan is not as pronounced. In particular, nonmetropolitan
areas with more than 10,000 people have similar terms as metro
areas. Nonmetropolitan areas with fewer than 10,000 people have
shorter mortgage terms than other in nonmetropolitan and
metropolitan areas.
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Rural Forums. In addition to examining available research, HUD
convened three forums on rural housing issues with rural lenders, rural
housing groups, housing industry organizations, the Department of
Agriculture's Economic Research Service and Rural Housing and Community
Development Service, the Congressional Budget Office, and the GSEs,
which focused on the unique nature of mortgage lending and the role of
the secondary market in rural areas. Participants agreed that some of
the difficulty associated with financing housing in rural areas results
from inappropriate underwriting and appraisal standards, inadequate
resources, and the lack of access to government programs and secondary
mortgage funds.
Participants emphasized that mortgage lending in rural areas is
very different from lending in urban areas. The heterogeneity of
housing types, nontraditional and often seasonal incomes of rural
borrowers, and lack of credit history for many rural borrowers make
underwriting in rural areas difficult for urban-oriented lenders.
Appraisers may lack comparable sales or must rely on comparables over
one year old or in a nearby town in order to determine a property's
value.
Participation of rural lenders in the secondary market is limited.
The low volume of loans originated by rural lenders serving smaller
nonmetropolitan communities makes this business less profitable, and
thus less attractive, to the secondary marketing firms.\51\ Rural
lenders are more likely to make short-term loans, 3-to-5 year balloons
or adjustable rate mortgages, and hold them in portfolio. Many rural
lenders do not participate in federal housing programs because they do
not want to deal with the ``red tape'' of government or they are
unaware of how the programs work and do not have the resources
necessary to train staff. Moreover, some small rural banks may not be
equipped to do the kind of labor-intensive loans that are required to
qualify low-income borrowers.
\51\ Twenty-nine percent of commercial banks (including the
branches of banks headquartered elsewhere) are community banks.
Fifty percent of these banks are in towns with 2,500 or fewer
residents. The average community bank has only $50 million in
assets.
---------------------------------------------------------------------------
Larger financial institutions, which do have experience with
government programs and the secondary market, target more urbanized
nonmetropolitan communities because of the higher demand for loans and
lower costs of business. These lenders concentrate on loans with larger
loan amounts and lower servicing costs, focus less on remote areas, and
originate loans that are more easily sold to the secondary market.
[[Page 61943]]
Efforts have been made to overcome housing finance difficulties in
rural areas. For example, the Farm Credit System, Farmer Mac, and
Fannie Mae recently created a conduit to provide affordable loans to
residents of rural communities with populations under 2,500.\52\ The
underwriting provisions of the program accommodate the unique features
of rural housing, such as large lot sizes and few comparable sales for
appraisal. In 1994, Fannie Mae established new, more flexible,
underwriting guidelines for rural areas. These changes in the industry
could contribute to increased secondary market activity and account for
the increase in the proportion of Fannie Mae's business in rural areas.
In 1994, Fannie Mae's purchases in rural areas increased to 9.3 percent
of its total business, compared to 8.3 percent in 1993. Rural areas
accounted for about 12.5 percent of Freddie Mac's business in both 1993
and 1994.
\52\ Conduits provide assistance to smaller lenders so that they
have access to secondary market funds. Moreover, conduits can
provide guarantees and recourse to secondary market investors that
low volume lenders cannot provide.
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c. HUD's Definition of Underserved Counties
The Secretary has determined that in nonmetropolitan areas
``underserved areas'' are defined as counties where: minorities
comprise 30 percent or more of the residents and the median income of
families does not exceed 120 percent of the state nonmetropolitan
median income; or the median income of families does not exceed 95
percent of the greater of the state nonmetropolitan median income or
the nationwide nonmetropolitan median income. Comparing county median
income to state nonmetropolitan median income ensures that poor
counties in high-income states are included as underserved rural areas
and comparing county median income to national nonmetropolitan median
income ensures that poor counties in poor states are included as
underserved rural areas.
Table B.5 compares the final rule's definition with Freddie Mac's
and Fannie Mae's definitions of rural underserved areas as well as with
a 90/30 definition that is analogous to HUD's metropolitan underserved
areas definition.\53\ HUD, however, chose the broader 95/30 definition
for rural areas because the 90/30 definition did not include a
significant number of persistent poverty counties.\54\
\53\ Freddie Mac's definition includes counties as underserved
if county median income does not exceed state nonmetropolitan median
income or minority composition exceeds 20 percent. Fannie Mae's
underserved definition includes all nonmetropolitan counties.
\54\ A county experiences persistent poverty if its poverty rate
is at least 20 percent over the last 3 decades.
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The final rule's definition of rural underserved areas balances the
competing priorities of a targeted definition that provides greater
mortgage opportunities to counties experiencing the worst problems and
of a broad definition that encourages the GSEs to provide a secondary
market infrastructure that encourages mortgage lending in all
nonmetropolitan areas. The final rule's definition covers 54 percent of
the nonmetropolitan population, 67 percent of poor persons, and 75
percent of the minority population.\55\ The counties included have
poverty rates (21 percent) and minority percentages (21 percent) well
above the average poverty rate (17 percent) and minority percentage (15
percent) for all nonmetropolitan areas. Thus, HUD's definition
encompasses 66 percent of all nonmetropolitan counties, including the
most distressed nonmetropolitan counties.
\55\ The 54 percent coverage rate in nonmetropolitan areas is
similar to the 58 percent coverage rate in central cities.
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Counties not included under the final rule's definition but
included by the broader Freddie Mac or Fannie Mae definitions have
relatively low poverty rates and low minority percentages. The Freddie
Mac definition includes an additional 221 counties and approximately 6
million additional people. These additional counties have a 14 percent
poverty rate and minorities comprise 9 percent of the population. The
Fannie Mae definition includes an additional 794 counties and
approximately 23 million people. These additional counties have a 12
percent poverty rate and minorities comprise 8 percent of the
population.
The HUD definition also targets specific geographic areas with high
poverty and minority concentrations. For example, 71 percent of the
nonmetropolitan population in the South is covered by HUD's definition.
Similarly, HUD's definition includes 84 percent of the population that
reside in remote counties that are not adjacent to metropolitan areas
and have fewer than 2,500 residents in towns.
d. Tract Versus County Definition
A number of commenters, including the GSEs, argued that a
definition based on rural census tracts was ill-advised because lenders
in rural areas do not understand or lend on the basis of census tracts.
Fannie Mae commented that use of census tract data was inappropriate
because census tracts have ``no practical meaning'' in rural areas from
a marketing standpoint; that geographic measurements used in the rule
should be ``widely understood, easily measured, and practical from a
marketing point of view;'' and that census tracts in rural areas ``fail
these tests.''
In contrast, some commenters, such as HAC, noted that a county-
based definition is not as targeted as a tract definition since it
excludes tracts which could be considered underserved in served
counties and includes tracts which could be considered adequately
served in underserved counties.
The final rule uses the county designation, as opposed to a census
tract-based definition. Counties are easy to identify and geocode,
which will simplify the reporting process for the GSEs and for the
lenders who provide the GSEs with loan level data. County boundaries
are commonly recognized by housing industry representatives involved in
the loan and marketing process, including lenders and appraisers.
Under this county-based definition, the GSEs may have an incentive
to buy mortgages in the parts of underserved counties that have higher
incomes. Although 21 percent of the homeowners that live in underserved
rural areas reside in served tracts, these tracts accounted for 39
percent of GSE purchases. Even though HUD recognizes that a census
tract definition better targets underserved areas, HUD decided to use a
county-based definition because the operational difficulties associated
with census tract and Block Numbering Area (BNA) boundaries outweigh
the benefits of improved targeting of underserved areas.
C. Consideration of the Housing, Economic, and Demographic Factors
As Section B shows, the most thorough studies available provide
strong evidence that in metropolitan areas low income and minority
composition identify neighborhoods that are underserved by the mortgage
market. As this section discusses, geographical differentials in
housing, social, and economic problems and past discrimination against
minorities confirm that problems are greater throughout the nation in
the areas covered by the Geographically Targeted Goal. Section C.1.
briefly describes housing, social, and economic problems of distressed
neighborhoods. Section C.2. discusses discrimination and other housing
problems faced by minorities. Although few studies have yet analyzed
the specific geographic areas targeted by the final rule, the
segregation of minorities within the nation's inner cities and poorer
rural counties makes this information pertinent to analysis of
underserved areas and to the goal set by the Secretary.
1. Urban and Rural Housing Needs and the Housing Needs of Underserved
Areas
Over the past three decades evidence of growing poverty
concentrations has increased concern about poor living conditions in
the nation's distressed neighborhoods. John Kasarda has focused on
trends in the neighborhood concentration of poverty and measures of the
``underclass'' population such as school dropouts, unemployed and
underemployed adult males, single-parent families, and families
dependent upon welfare.56 Kasarda has not only documented the
extreme deprivation that exists in minority and low-income
neighborhoods throughout our major urban areas, but he has also shown
that neighborhood distress and concentrations of lower-income residents
in tracts with high poverty worsened during the 1980s.
\56\ ``Inner-City Concentrated Poverty and Neighborhood
Distress: 1970 to 1990.'' Housing Policy Debate, 4(3): 253-302.
---------------------------------------------------------------------------
Analysis within 44 major metropolitan areas showed that in the late
1980s renters were most likely to have worst case needs in the poorest
neighborhoods.57 Although only one-tenth of households lived in
neighborhoods with poverty rates above 20 percent, those poorest
neighborhoods housed almost one-fourth of worst case renters. These
poorest zones closely resemble tracts identified as poor ghettos or
underclass areas. They contained older, smaller units that were more
often physically inadequate and crowded than other housing in the
metropolitan areas studied.58 Additional discussion of housing
needs is contained in Appendix A.
\57\ U.S. Dept. of Housing and Urban Development, 1992. The
Location of Worst Case Needs in the Late 1980s: A Report to
Congress. HUD-1387-PDR.
\58\ Kathryn P. Nelson, 1993. ``Intra-urban Mobility and
Location Choice in the 1980s,'' pp. 53-95 in Thomas Kingsley and
Margery Turner, eds., Housing Markets and Residential Mobility,
Washington, DC: The Urban Institute Press.
---------------------------------------------------------------------------
2. Economic, Housing, and Demographic Conditions
Appendix A includes detailed discussion of economic, housing, and
demographic conditions. That discussion was considered in establishing
the Geographically Targeted Goal. This section discusses other
conditions.
a. Discrimination in the Housing Market
In addition to discrimination in the lending market, substantial
evidence exists of discrimination in the housing market. The 1989
Housing Discrimination Study sponsored by HUD found that minority home
buyers encounter some form of discrimination about half the time when
they visit a rental or sales agent to ask about advertised
housing.59 The incidence of discrimination was higher for African
Americans than for Hispanics and for homebuyers than for renters. For
renters, the incidence of discrimination was 46 percent for Hispanics
and 53 percent for African Americans. The incidence among buyers was 56
percent for Hispanics and 59 percent for African Americans.
\59\ Margery A. Turner, Raymond J. Struyk, and John Yinger.
Housing Discrimination Study: Synthesis, Washington, D.C., U.S.
Department of Housing and Urban Development: 1991.
---------------------------------------------------------------------------
While discrimination is rarely overt, minorities are more often
told the unit of interest is unavailable, shown fewer properties,
offered less attractive terms, offered less financing assistance, or
provided less information than similarly situated non-minority
homeseekers.
[[Page 61946]]
Some evidence indicates that properties in minority and racially-
diverse neighborhoods are marketed differently from those in White
neighborhoods. Houses for sale in non-White neighborhoods are rarely
advertised in metropolitan newspapers, open houses are rarely held, and
listing real estate agents are less often associated with a multiple
listing service.60
\60\ Margery A. Turner, ``Discrimination in Urban Housing
Markets: Lessons from Fair Housing Audits,'' Housing Policy Debate,
Vol. 3, Issue 2, 1992, pp. 185-215.
---------------------------------------------------------------------------
b. Housing Problems of Minorities and their Neighborhoods
Because they face discrimination in access to housing or lending,
minorities and their neighborhoods face severe housing problems:
Discrimination in the housing and lending markets is
evidenced by racial disparities in homeownership. In 1991, the
homeownership rate was 68 percent for Whites, 43 percent for African
Americans, and 39 percent for Hispanics. Although differences in
income, wealth, and family structure explain much of the differences,
racial disparities persist after accounting for these factors.61
\61\ Susan M. Wachter and Isaac F. Megbolugbe, ``Racial and
Ethnic Disparities in Homeownership,'' Housing Policy Debate, Vol.
3, Issue 2, 1992, pp. 333-370.
---------------------------------------------------------------------------
Discrimination, while not the only cause, contributes to
the pervasive level of segregation that persists between African
Americans and Whites in our urban areas.
Hispanics are the group most likely to have worst case
needs for housing assistance, but least likely to receive assistance;
in 1991, only 21 percent of very low-income Hispanics lived in public
or assisted housing. The 1989 to 1991 increase in worst case needs was
the largest for Hispanic households, rising from 39.2 to 44.4 percent
of very low-income Hispanic renters.
Homeownership rates vary consistently by neighborhood
characteristics. As Table B.6 shows, on average homeownership rates
decrease as the minority concentration in census tracts increases, and
as income falls relative to the area median. These patterns are
consistent with the demographic patterns described earlier, that
minorities and low-income households have lower homeownership rates. An
exception to this pattern occurs in tracts with incomes below 50
percent of the area median, in which homeownership rates rise with
minority concentration in some cases. However, only a very small
proportion of households live in these tracts.
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3. Previous Performance and Effort of the GSEs In Connection With the
Central Cities, Rural Areas and Other Underserved Areas Goal
Table B.7 summarizes GSE acquisitions in underserved areas during
1993 and 1994. Fannie Mae's performance in underserved metropolitan
areas increased from 23 percent in 1993 to 29 percent in 1994, and
Freddie Mac's performance increased from 21 percent to 24 percent.
Table B.7 also shows the level of the GSEs' purchases in rural
underserved areas. Slightly more than 25 percent of their 1994
purchases in rural areas were in underserved areas.
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4. Size of the Conventional Conforming Mortgage Market for Underserved
Areas
HUD estimates that underserved areas account for 25-28 percent of
the conventional conforming mortgage market. The analysis underlying
this estimate is detailed in Appendix D.
5. Ability to Lead the Industry
This factor is the same as the fifth factor considered under the
goal for mortgage purchases on housing for low- and moderate-income
families. Accordingly, see Section C.5 of Appendix A for discussion of
this factor.
6. Need to Maintain the Sound Financial Condition of the Enterprises
HUD has undertaken a separate, detailed economic analysis of this
rule, which includes consideration of the financial safety and
soundness implications of the housing goals. The analysis considered
the likely mortgage default implications of the goals and implications
for the profitability of the GSEs under various alternative economic
assumptions. Among the conclusions are: that the goals will have, at
most, only limited impacts on credit risk, which the GSEs should be
able to handle without significant lowering of underwriting standards;
that risks associated with increased multifamily mortgage purchase
volumes under the goals are manageable, considering the scope of the
increases implied by the goals; and that the goals imply no meaningful
increase in risk to the sound financial condition of the GSEs'
operations. Based on this analysis, HUD concludes that the goals raise
minimal, if any, safety and soundness concerns.
D. Determination of the 1995 and 1996 Central Cities, Rural Areas, and
Other Underserved Areas Goal
This section summarizes the Secretary's rationale for choosing
targeted definitions of central cities, rural areas, and other
underserved areas, compares the characteristics of served and
underserved areas, and addresses other issues related to determining
the goal. The section draws heavily from earlier sections which have
reported findings from HUD's analyses of mortgage credit needs as well
as findings from other research studies investigating access to
mortgage credit.
1. Market Failure
The nation's housing finance market is a highly efficient system
where most homebuyers can put down relatively small amounts of cash and
obtain long-term funding at relatively small spreads above the lender's
borrowing costs. Indeed, the growth of the secondary mortgage market
during the 1980s integrated a previously thrift-dominated mortgage
market with the nation's capital markets so that mortgage funds are
more readily available and mortgage costs are more closely tied to
movements in Treasury interest rates.
Unfortunately, this highly efficient financing system does not work
everywhere or for everyone. Access to credit often depends on improper
evaluation of characteristics of the mortgage applicant and the
neighborhood in which the applicant wishes to buy. HUD's analysis of
1993 and 1994 HMDA data shows that mortgage credit flows are
substantially lower in minority and low-income neighborhoods and
mortgage denial rates are much higher for minority applicants.
Admittedly, disagreement exists in the economics literature
regarding the underlying causes of these disparities in access to
mortgage credit, particularly as related to the roles of
discrimination, ``redlining'' of specific neighborhoods, and the
barriers posed by underwriting guidelines to potential minority and
low-income borrowers. Because the mortgage system is quite complex and
involves numerous participants, it will take more data and research to
gain a fuller understanding of why these disparities exist. Still,
studies reviewed in Section B of this Appendix found that the
individual's race and the racial and income composition of
neighborhoods influence mortgage access even after accounting for
demand and risk factors that may influence borrowers' decisions to
apply for loans and lenders' decisions to make those loans. Therefore,
the Secretary concludes that minority and low-income communities are
underserved by the mortgage system.
2. Identifying Urban Underserved Areas
To identify areas underserved by the mortgage market, HUD focused
on two traditional measures used in a number of HMDA studies: 62
application denial rates and mortgage origination rates per 100 owner-
occupied units. 63 Tables B.1 and B.2 in Section B presented
detailed data on denial and origination rates by the racial composition
and median income of census tracts for metropolitan areas.64
Aggregating those data is useful for examining denial and origination
rates for broader groupings of census tracts:
\62\ HMDA data have been expanded in 1993 to cover independent
mortgage companies that originated 100 or more home purchase loans
in the preceding calendar year. HMDA provides no useful information
on rural areas. In addition, although HMDA data now include
applications to provide some measure of overall loan demand, pre-
screening discrimination can discourage would-be homebuyers from
applying for a mortgage, leading to an underestimation of demand.
Nevertheless, the HMDA data, while not necessarily definitive, are
still useful in helping to define underserved areas.
\63\ Analysis of application rates are not reported here.
Although application rates are sometimes used as a measure of
mortgage demand, they provide no additional information beyond that
provided by looking at both denial and origination rates. The
patterns observed for application rates are still very similar to
those observed for origination rates.
\64\ As shown in Table B.1, no sharp breaks occur in the denial
and origination rates across the minority and income deciles--
mostly, the increments are somewhat similar as one moves across the
various deciles that account for the major portions of mortgage
activity. .........................................................
[[Page 61951]]
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Denial rate Origination Denial rate Origination
Minority composition (percent) (percent) rate Tract income (percent) (percent) rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-30........................................... 11.8 14.1 Less than 90....................................... 21.3 7.5
30-50.......................................... 19.1 10.7 90--120............................................ 13.5 12.6
50-100......................................... 24.4 7.2 Greater than 120................................... 8.9 18.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Two points stand out from these data. First, census tracts with higher
percentages of minority residents have higher denial and lower
origination rates. Tracts that are over 50 percent minority have twice
the denial rate and half the origination rate of tracts that are under
30 percent minority.65 Second, census tracts with lower incomes
have higher denial rates and lower origination rates than higher income
tracts. Tracts with income less than or equal to 90 percent of area
median have more than two times the denial rate and less than one-half
the origination rate of tracts with income over 120 percent of area
median.
\65\ The differentials in denial rates are due, in part, to
differing risk characteristics of the prospective borrowers in
different areas. However, use of denial rates is supported by the
findings in the Boston Fed study which found that denial rate
differentials persist, even after controlling for risk of the
borrower. See Section B for a review of that study.
---------------------------------------------------------------------------
HUD chose over 30-percent minority and under 90-percent of area
median income as the thresholds for defining metropolitan underserved
areas. There are two advantages to HUD's definition. First, the cutoffs
produce sharp differentials in denial and origination rates between
served and underserved areas. For instance, the overall denial rate (21
percent) in underserved areas is almost double that (11 percent) in
served areas. Thus, an advantage of a targeted definition of
underserved areas is illustrated by sharp differences in mortgage
access between served and underserved areas.66
\66\ The Final Rule changed the income threshold from 80 percent
to 90 percent. This added 3,645 tracts with a denial rate of 18
percent.
---------------------------------------------------------------------------
A second advantage is that the minority and income cutoffs are
useful for defining mortgage problems in the suburbs as well as in OMB-
defined central cities. Underserved areas account for 31 percent of the
suburban population, compared with 58 percent of the central city
population. The average denial rate in underserved suburban areas is
almost twice that in the remaining areas of the suburbs. (See Figure
B.1 in Section B.) Thus, the minority and income thresholds in HUD's
definition identify those suburban tracts that seem to be experiencing
mortgage credit problems.
3. Characteristics of Urban Underserved Areas
The final rule's definition of metropolitan underserved areas
includes 20,326 of the 43,232 census tracts in metropolitan areas,
covering 44 percent of the metropolitan population, 58 percent of the
OMB-defined central city population, and 31 percent of the suburban
population. As shown in Table B.8, the final rule's definition covers
most of the population of the nation's most distressed OMB-defined
central cities: Newark (99 percent), Detroit (96 percent), Hartford (97
percent), Baltimore (90 percent), and Cleveland (90 percent). The
nation's five largest cities also contain large concentrations of
underserved areas: New York (62 percent), Los Angeles (69 percent),
Chicago (77 percent), Houston (67 percent), and Philadelphia (80
percent).
High-Income-Minority Tracts. It should be noted that the final
rule's definition of underserved areas excludes high minority tracts
with median income above 120 percent of area median income. As shown in
Table B.9, these tracts, which represent about two percent of
metropolitan area population, appear to be relatively well off: they
have low levels of poverty (7 percent), and high relative house values
(122 percent). The high-income-minority tracts are concentrated in a
few metropolitan areas: 7 percent of Los Angeles' population lives in
them; the corresponding figures are 7 percent for New York, 5 percent
for Miami, 25 percent for Honolulu, and 12 percent for San Antonio. By
contrast, most relatively distressed metropolitan areas have few
households in such areas--for example, Cleveland (1 percent), Detroit
(2 percent), Memphis (1 percent), Milwaukee (0 percent), and
Philadelphia (1 percent).
Income Threshold. Among other issues considered in setting the
underserved definition for metropolitan areas included raising the area
income threshold, to include more moderate-income census tracts. This
alternative would add tracts with incomes between 90 and 100 percent of
the area median. However, it should be noted that high-minority tracts
(over 30 percent minority) at this income level are already included in
HUD's underserved areas definition, and that raising the income limit
to 100 percent would add only tracts with low-minority concentration
(below 30 percent). These areas represent 4,486 census tracts, and
comprise 11 percent of metropolitan population.\67\
\67\ In addition to including tracts with income between 90 and
100 percent of area median as underserved, the Freddie Mac
definition includes tracts between 20 and 30 percent minority
concentration; this would add an additional 881 tracts. Table B.4
compares the HUD and Freddie Mac definitions.
---------------------------------------------------------------------------
These low-minority moderate-income tracts have denial rates almost
30 percent below the tracts that meet HUD's underserved definition (15
versus 21 percent). By contrast, high-minority moderate-income tracts
have a denial rate almost identical to the overall underserved denial
rate. The origination rate in moderate-income low-minority tracts (11
per 100 owner occupants) is noticeably higher than that in underserved
tracts (8 per 100 owner occupants).
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4. Rural Underserved Areas
Recognizing both the difficulty of defining rural underserved areas
and the need to encourage GSE activity in such areas, HUD has chosen a
rather broad, county-based definition of underservedness in rural
areas. Its definition includes 1,511 of the 2,305 counties in
nonmetropolitan areas and covers 54 percent of the nonmetropolitan
population. Still, HUD's definition targets the most disadvantaged
rural counties. It covers 67 percent of the nonmetropolitan poor and 75
percent of nonmetropolitan minorities. The average poverty rate of
underserved counties is 21 percent, significantly greater than the 12
percent poverty rate in counties designated as ``served''.
The HUD definition also targets specific geographic areas with high
poverty and minority concentrations. For example, HUD's definition
includes 84 percent of the population that reside in remote counties
that are not adjacent to metropolitan areas and have fewer than 2,500
residents in towns.
5. GSE Activity in Underserved Areas
Figure B.2 uses 1993 and 1994 HMDA data for single-family mortgages
to compare GSE and non-GSE funding in underserved areas. The non-GSE
part of the conventional conforming market consists mainly of bank and
thrift portfolio lenders. The share of funding going to underserved
areas increased between 1993 and 1994 for both GSEs and non-GSEs. A
larger proportion of non-GSE mortgages finance properties in
underserved areas than do mortgages purchased by the GSEs. This was
particularly the case for Freddie Mac in 1994--22 percent of Freddie
Mac's single-family business was in underserved areas, compared with 27
percent of non-GSE business.68
\68\ The HMDA data has been adjusted for 100,000 mobile homes
along the lines discussed in Appendix D.
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In terms of overall business, 29 percent of Fannie Mae's 1994
business was in underserved areas as was 24 percent of Freddie Mac's.
The fact that underserved areas have much lower incomes than other
areas does not mean that GSE purchase activity in underserved areas
derives totally from lower income families. In 1993, above-median
income households accounted for 48 percent of the mortgages that the
GSEs purchased in underserved areas and in 1994, they accounted for 37
percent. This suggests these areas are quite diverse.
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6. Market Feasibility and Changing Market Conditions
As detailed in Appendix D, the market for mortgages in underserved
areas accounts for 25 to 28 percent of dwelling units financed by
conventional conforming mortgages. Figure B.3 compares recent GSE
performance, the 1996 and 1997-1999 goals, and the size of the market.
Having considered the projected market and economic and demographic
conditions for 1996-1999 and the GSEs' recent performance, HUD has
determined that goals for mortgage purchases in central cities, rural
areas, and other underserved areas 21 percent for 1996, 24 percent for
1997-1999, and 24 percent thereafter pending establishment of a new
goal, are feasible.
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7. Conclusion
The Secretary has determined that the goals of 21 percent in 1996
and 24 percent in 1997 and thereafter are necessary and feasible.
Appendix C--Secretarial Considerations To Establish the Special
Affordable Housing Goal
A. Introduction
1. Establishment of the Goal
The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 (FHEFSSA) requires the Secretary to establish a special annual
goal designed to adjust the purchase by each GSE of mortgages on rental
and owner-occupied housing to meet the unaddressed needs of, and
affordable to, low-income families in low-income areas and very-low-
income families (the Special Affordable Housing Goal).
In establishing the Special Affordable Housing Goal, FHEFSSA
requires the Secretary to consider:
(1) Data submitted to the Secretary in connection with the Special
Affordable Housing Goal for previous years;
(2) The performance and efforts of the GSEs toward achieving the
Special Affordable Housing Goal in previous years;
(3) National housing needs of targeted families;
(4) The ability of the GSEs to lead the industry in making mortgage
credit available for low-income and very-low-income families; and
(5) The need to maintain the sound financial condition of the
enterprises.
2. The Goal
The final rule provides that the Special Affordable Housing Goal
for 1996 is 12 percent of the total number of dwelling units financed
by each GSE's mortgage purchases. The goal for 1997 and subsequent
years is 14 percent. Of the total Special Affordable Housing Goal for
each year, each GSE must purchase multifamily mortgages in an amount at
least equal to 0.8 percent of the total dollar volume of mortgages
purchased by the GSE in 1994.
Approximately 20-23 percent of the conventional conforming mortgage
market would qualify under the Special Affordable Housing Goal as
defined in the final rule. Using the final rule's conventions for what
will count toward the goal, 16.7 percent of Fannie Mae's 1994 business
and 11.4 percent of Freddie Mac's would have qualified toward the goal.
Units that count toward the goal: Subject to further provisions
specified below, units that count toward the Special Affordable Housing
Goal include units occupied by low-income owners and renters in low-
income areas, and very-low-income owners and renters. Low-income rental
units in multifamily properties where at least 20 percent of the units
are affordable to families whose incomes are 50 percent of area median
income or less or where at least 40 percent of the units are affordable
to families whose incomes are 60 percent or less of area median income
count toward the goal.
B. Underlying Data
In considering the factors under FHEFSSA to establish the Special
Affordable Housing Goal, HUD relied upon data gathered from the
American Housing Survey, the Census Bureau's 1991 Residential Finance
Survey, the 1990 Census of Population and Housing, other government
reports, Home Mortgage Disclosure Act (HMDA) data and reports, and the
GSEs. Among other new data resources, full-year 1994 data from the
GSEs, as well as HMDA data for 1994, became available to HUD since
publication of the proposed rule. Appendix D discusses in detail how
these data resources were used and how the size of the conventional
conforming market for this goal was estimated.
Section C discusses the factors listed above, and Section D
provides the Secretary's rationale for establishing the special
affordable goal.
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C. Consideration of the Factors
1 and 2. Data Submitted to the Secretary in Connection With the Special
Affordable Housing Goal for Previous Years, and the Performance and
Efforts of the Enterprises Toward Achieving the Special Affordable
Housing Goal in Previous Years
The discussions of these two factors have been combined because
they overlap to a significant degree.
a. GSE Performance Relative to the 1993-94 Goals
For the 1993-94 transition period the Special Affordable Housing
Goal was established in dollar terms. FHEFSSA called for special
affordable purchases of $2.0 billion by Fannie Mae and $1.5 billion by
Freddie Mac, and the legislative history made it clear that such
purchases should be ``above and beyond their existing performance and
commitments.'' 1 The specified amounts of the goals were evenly
divided between multifamily and single family housing.
\1\ Senate Report, p. 36.
---------------------------------------------------------------------------
The Special Affordable Housing Goals for 1993-94 were $12.7 billion
single family and $3.6 billion multifamily for Fannie Mae, and $11.1
billion single family and $0.8 billion multifamily for Freddie
Mac.2
\2\ The 1993-94 dollar-based goals were extended on a pro-rated
basis for 1995.
---------------------------------------------------------------------------
Fannie Mae's qualifying mortgage purchases in 1993 and 1994
together amounted to $16.7 billion single-family and $4.5 billion
multifamily. Thus Fannie Mae surpassed the 1993-94 single-family and
multifamily portions of the goal by 32 percent and 26 percent,
respectively.
Freddie Mac's qualifying mortgage purchases in 1993 and 1994
together amounted to $12.2 billion single-family and $495 million
multifamily. Thus Freddie Mac surpassed the 1993-94 single-family goal
by 10 percent but fell short on the multifamily portion of the goal by
38 percent.
b. 1993-94 GSE Performance Relative to Final Rule Special Affordable
Housing Goals for 1996-1999
Owner-occupied housing. Between 1993 and 1994, both GSEs increased
significantly the purchase of mortgages on owner-occupied housing that
would qualify under this goal. (See Table C.1.)
Rental housing. As in the case of owner-occupied housing, between
1993 and 1994 both GSEs increased significantly the purchase of
mortgages financing rental units affordable to very-low-income
families. (See Table C.2.)
In this final rule, the Special Affordable Housing Goal has been
broadened relative to the proposed rule, to include low-income renters
in low-income areas. This change increases the number of qualifying
mortgages by 8.5 percent for Fannie Mae in 1993 and 10.2 percent in
1994, and 6.1 percent for Freddie Mac in 1993 and 6.5 percent in 1994.
(See Table C.3.)
This final rule also includes as eligible all rental units
affordable to low-income families in properties where at least 40
percent of the units qualify as very-low-income, or where at least 20
percent of the units qualify as especially-low-income. (Especially-low-
income means no more than 50 percent of area median.) This provision
makes a difference of approximately 5,100 units in Fannie Mae's 1993
performance, and 11,600 in 1994. For Freddie Mac, there is no effect
for 1993, and approximately 1,300 units for 1994. (See Table C.4.)
Summary. Table C.5 summarizes the GSEs' purchases in 1993 and 1994
that would qualify under the final rule's Special Affordable Housing
Goal: Fannie Mae's and Freddie Mac's qualifying purchases in 1994 were
16.7 percent and 11.4 percent of total eligible purchases,
respectively. Thus Fannie Mae would have achieved both the 1996 goal
and the goal for 1997 and thereafter, and Freddie Mac would nearly have
achieved the 1996 goal.
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3. National Housing Needs of Low-Income Families in Low-Income Areas
and Very-Low-Income Families
The following discussion closely follows HUD's analysis of national
housing needs in Appendix C of the proposed rule, which has been
updated in various respects. As in the proposed rule, this discussion
concentrates on very-low-income families with the greatest needs,
because Section C of Appendix A presents detailed analyses of housing
problems and demographic trends for lower-income families.
a. Housing Problems Among Very-low-income Families
Data from the 1990 Census and from the 1989, 1991, and 1993
American Housing Surveys demonstrate that housing problems and needs
for affordable housing are more pressing in the lowest-income
categories than among moderate-income families. Analyses of special
tabulations of the 1990 Census prepared for use in developing
Comprehensive Housing Affordability Strategies (the CHAS database),
which have been updated to 1993 using American Housing Survey Data,
show clearly that sharp differentials by income characterized all
regions of the nation as well as their city, suburban, and
nonmetropolitan portions. Nationally, approximately one-fourth of
moderate-income renters and owners experienced one or more housing
problems, compared to nearly three-fourths of very-low-income renters
and nearly half of very-low-income owners.\3\ Severe cost burdens--
paying more than half of income for housing and utilities--varied even
more markedly by income, involving less than 2 percent of moderate-
income households, but nearly two-fifths of the 10.5 million owners
with incomes below 30 percent of area median income.
\3\ The problems covered by the Census include paying over 30
percent of income for housing, lacking complete kitchen or plumbing,
and overcrowding. See Appendix Tables 18A and 19A of Amy Bogdon,
Joshua Silver, and Margery A. Turner, National Analysis of Housing
Affordability, Adequacy, and Availability: A Framework for Local
Housing Strategies, HUD-1448-PDR, 1994.
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The CHAS tabulations are based on HUD-adjusted median income for
both owners and renters, rather than on unadjusted median income for
owners, as FHEFSSA specifies for mortgages counted toward the housing
goals.\4\ But tabulations of the 1993 AHS using the GSE income
definitions reveal the same pattern of problems for lower-income
families. As the following table details, for both owners and renters,
housing problems are much more frequent for the lowest-income
groups.\5\ Priority problems of severe cost burden or severely
inadequate housing are noticeably concentrated among renters and owners
with incomes below 35 percent of area median income.
\4\ To determine eligibility for Section 8 and other HUD
programs, HUD adjusts income limits derived from the median family
income for household size. The ``very low'' and ``low'' income
limits at 50 percent and 80 percent of median apply to 4-person
households. Relative to the income limits for a 4-person household,
the limit is 70 percent for a 1-person household, 80 percent for a
2-person household, 90 percent for a 3-person household, 108 percent
for a 5-person household, 116 percent for a 6-person household, etc.
\5\ Tabulations of the 1993 American Housing Survey by HUD's
Office of Policy Development and Research. The results in the table
categorize renters reporting housing assistance as having no housing
problems. Almost one-third of renters with incomes 0-30 percent of
median and one-fifth of those with incomes 30-50 percent of median
are assisted.
------------------------------------------------------------------------
Renters Owners
-------------------------------------------
Income as % of area median Any Priority Any Priority
income (percent) problems problems problems problems
(percent) (percent) (percent) (percent)
------------------------------------------------------------------------
Less than 35................ 89 44 62 36
36-50....................... 78 17 40 13
51-80....................... 48 5 29 7
81-100...................... 24 1 21 4
------------------------------------------------------------------------
Comparisons by income reveal that owners and renters (with incomes
between 50 and 80 percent of area median) resemble moderate-income
households in seldom having priority problems. Priority problems are
heavily concentrated among households with incomes below 50 percent of
median.6 In 1991, 5.3 million unassisted renter households with
incomes below 50 percent of area median income had ``worst case''
housing needs.7 This total does not include homeless persons and
families, although they also qualify for preference. For three-fourths
of the renter families with worst case problems, the only problem was
affordabilitythey do not have problems with housing adequacy or
crowding.
\6\ For all housing programs of HUD (other than the GSE goals)
and the Department of Agriculture, ``very-low-income'' is defined as
not exceeding 50 percent of area median income.
\7\ ``Worst case housing needs'' for housing assistance are
defined as unassisted renters with income below 50 percent of area
median income who meet a Federal preference for admission to rental
assistance because they pay more than half of income for rent and
utilities, have been displaced, or live in severely substandard
housing (which includes being homeless).
---------------------------------------------------------------------------
b. Needs for Housing Affordable to Very-Low-Income Families
The existing housing stock satisfies the physical needs of most
very-low-income renters. In most cases families are able to find
adequate housing. The problem is that much of this housing is not
affordable to very-low-income familiesi.e., these families must pay
more than 30 percent of their income for housing. The main exception to
this generalization occurs among extremely-low-income families (defined
as families below 30 percent of area median income) with three or more
children. The 1993 American Housing Survey shows that 47 percent of
these families live in crowded housing. A certain amount of variation
in need exists, by region and degree of urbanization. Although 22
percent of worst case renters experience crowding or severe inadequacy,
this figure varies from 11 percent in the Northeastern suburbs to 35
percent in the South's nonmetropolitan areas. Shortages of affordable
housing units continued to be greatest and vacancy rates lowest in
California.
The relative decline in inexpensive dwelling units has been
concentrated among the least expensive rental unitsthose with rents
affordable to families with incomes below 30 percent of area median
income. In 1979, the number of units in this rent range was 28 percent
less than the number of renters with incomes below 30 percent of area
median income; by 1989, the gap had widened to 39 percent, a shortage
of 2.7 million units.8 This shortage is a problem particularly at
the extremely low end of the rent distribution. Both nationally and in
most states, there are surpluses of rental housing affordable to
families with incomes between 30 and 50 percent of area median income
and to those in the 50-80 percent range.9 Furthermore, in most
states, vacancy rates were high in 1990 among units with rents
affordable to families with incomes at or below 50 percent of
median.10 Thus, like housing problems, unmet needs for affordable
housing are heavily concentrated in rent ranges affordable to renters
with incomes below 30 percent of area median income.
\8\ Tabulations by HUD's Office of Policy Development and
Research, based on U.S. Departments of Housing and Urban Development
and Commerce, American Housing Survey for the United States in 1989,
July 1991.
\9\ HUD's Office of Policy Development and Research, Worst Case
Needs for Housing Assistance in the United States in 1990 and 1991,
1994, Table 8.
\10\ Id., Table 6.
[[Page 61965]]
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4. The Ability of the Enterprises to Lead the Industry in Making
Mortgage Credit Available for Low-Income and Very-Low-Income Families
The discussion of the ability of Fannie Mae and Freddie Mac to lead
the industry in Section C.5 of Appendix A is relevant to this
factorthe GSEs' dominant role in the market, their role in
establishing widely-applied underwriting standards, their role in the
development of new technology for mortgage origination, their strong
staff resources, and their financial strength. Additional analysis on
the potential ability of the enterprises to lead the industry in the
low- and very-low-income market appears belowin Section D.2 generally,
and in Section D.3 with respect to multifamily housing.
The ability of the GSEs to lead the industry in the special
affordable market is best demonstrated by the significant gains both
enterprises have made in this market. As a percentage of total units in
the properties whose mortgages they purchased, the special affordable
share for the GSEs combined rose from 7.7 percent in 1993 to 13.9
percent in 1994 and 16.4 percent for the first half of 1995. The 1994
increase was truly impressive, as special affordable units rose by 6
percent while total units declined by 41 percent.
5. The Need to Maintain the Sound Financial Condition of the GSEs
HUD has undertaken a separate, detailed economic analysis of this
rule, which includes consideration of the financial safety and
soundness implications of the housing goals. The analysis considered
the likely mortgage default implications of the goals and implications
for the profitability of the GSEs under various alternative economic
assumptions. Among the conclusions are: that the goals will have, at
most, only limited impacts on credit risk, which the GSEs should be
able to handle without significant lowering of underwriting standards;
that risks associated with increased multifamily mortgage purchase
volumes under the goals are manageable, considering the scope of the
increases implied by the goals; and that the goals imply no meaningful
increase in risk to the sound financial condition of the GSEs'
operations. Based on this analysis, HUD concludes that the goals raise
minimal, if any, safety and soundness concerns.
D. Determination of the Goal
Several considerations, many of which have been reviewed in earlier
sections of this Appendix, led to the determination of the Special
Affordable Housing Goal.
1. Severe Housing Problems
The data presented in Section C.3 demonstrate that housing problems
and needs for affordable housing are much more pressing in the lowest-
income categories than among moderate-income families. The high
incidence of severe problems among the lowest-income renters reflects
severe shortages of units affordable to those renters. At incomes below
30 percent of median, two-thirds of owners and 70 percent of renters
pay more than 30 percent of their income for housing, live in
inadequate housing, or are crowded. As the analysis presented above
shows, priority problemspaying more than half of income for housing or
living in severely inadequate housingare heavily concentrated among
renters with incomes below 50 percent of median. Housing and
affordability problems are particularly acute for renters with income
below 30 percent of area median income.
2. GSE Performance and the Market
The Special Affordable Housing Goal is designed, in part, to ensure
that the GSEs maintain a consistent focus on serving the very-low-
income portion of the housing market where housing needs are greatest.
The bulk of the GSEs' low- and moderate-income mortgage purchases are
for the higher-income portion of the low- and moderate-income category.
The lowest-income borrowers accounted for a very small percentage of
each GSEs' purchases. Five percent of the GSEs' 1993 mortgage purchases
financed homes for single-family homeowners with incomes below 60
percent of area median, and 7 percent in 1994. (See Figure A.1 in
Appendix A.)
Specification of the goal. The Special Affordable Housing Goal is
established as percentages of the GSEs' total business for the 1996-99
period. This kind of specification is preferable to a fixed, dollar-
based specification because: (1) The size of the market for housing
eligible to count toward the Special Affordable Housing Goal fluctuates
with the size of the overall market rather than remaining at any fixed
dollar level (as shown by analysis of HMDA data); and (2) fixed-dollar
goals, if based on a high-volume year, could be unattainable in a low-
volume year; if based on a low-volume year, could represent
insufficient support by the GSEs for the special affordable market in a
high-volume year; and if based on an average-volume year, could
alternate between being unattainable in some years and insufficient in
other years.
GSEs' Performance Relative to the Market. Analysis of American
Housing Survey and HMDA data shows that the GSEs are purchasing a
smaller proportion of loans for very-low-income homebuyers than are
portfolio lenders operating in the conforming market (see the
discussion of Figure A.2 in Appendix A). That analysis suggests that
there is room in the very-low-income end of the homebuyer market for
the GSEs to improve their performance.
A reasonable estimate of the size of the market for both single
family and multifamily mortgages that would be eligible to count toward
the Special Affordable Housing Goal is 20-23 percent of the overall
conventional conforming market, as explained in Section H.2 of Appendix
D.
Under the final rule's counting conventions 16.7 percent (7.9
percent owner-occupied and 8.8 percent rental) of units covered by
Fannie Mae's mortgage purchases in 1994 would have been eligible to
count toward this goal, and 11.4 percent (7.1 percent owner-occupied
and 4.3 percent rental) of units covered by Freddie Mac's mortgage
purchases would have been eligible to count toward this goal. Figure
C.1 compares recent GSE performance, the 1996 and 1997-99 Special
Affordable Housing Goals, and the size of the market.
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3. Multifamily Purchases
The GSEs can bring an important benefit to the multifamily market
in the form of long-term liquidity. In the multifamily arena, however,
a secondary market is only in its infancy (see Section C.2.c in
Appendix A). Given the GSEs' overall experience and financial strength,
it is reasonable to expect that they would play major roles in this
development.
Recent tightening of interest rate spreads for ``better''
multifamily mortgage originations demonstrates that increased liquidity
can lower spreads. This suggests that participation by the GSEs can
lower financing costs and ultimately rents across the broad range of
multifamily properties, including properties occupied by low- and very-
low-income tenants. (Section C.2.c of Appendix A elaborates on these
themes.)
A minimum multifamily special affordable volume of 0.8 percent of
total 1994 volume of business is reasonable, both relative to the size
of the market and relative to the GSEs' recent volume of qualifying
multifamily purchases. The implied volumes are $950 million for Freddie
Mac (relative to $118.8 billion total volume) and $1.22 billion for
Fannie Mae (relative to $153.0 billion total volume). Their 1994
volumes of multifamily business that would have qualified as special
affordable under this final rule were $425 million for Freddie Mac
(0.36 percent of 1994 business), or half of the necessary volume for
1996, and $1.91 billion for Fannie Mae (1.25 percent of 1994 business),
or $690 million more than necessary for 1996. The size of the total
multifamily market that would qualify under the Special Affordable
Housing Goal is approximately $10 billion annually.
Expressing the multifamily subgoals for every year covered by this
rule as percentages of total 1994 purchases is a reasonable approach,
since multifamily subgoals expressed as percentages of current-year
total business could be difficult to achieve in some years. Total
volume is driven by the single-family business, which is subject to
wide swings due to refinancing waves, as in 1992-93, and to changes in
the ARM share of the market.
The Secretary selected 0.8 percent of total 1994 business volume
after careful review of the GSEs' past performance and consideration of
the need to maintain a minimum level of attention to multifamily
housing. This percentage may seem small, but that is because the
multifamily market (measured in dollar terms) comprises only a fraction
of the total mortgage market, and the special affordable share of the
GSEs' multifamily purchases in 1994 was just above 50 percent.11
For this same reason, changes in this subgoal of even 0.1 percent are
significant.
\11\ Multifamily properties account for a much higher
percentage of dwelling units financed by mortgages than their
percentage of total dollar mortgage volume.
---------------------------------------------------------------------------
These subgoals are below recent levels of special affordable
multifamily purchases by Fannie Mae, but above recent levels of such
purchases by Freddie Mac. It should be emphasized that these are
minimum purchase amounts; thus HUD in no way is encouraging Fannie Mae
to reduce its volume of multifamily business, which is important in its
overall efforts to meet the Special Affordable Housing Goal and Low-
and Moderate-Income Housing Goals. HUD very much supports Freddie Mac's
actions to rebuild its multifamily business, and encourages further
efforts in this area. To date Freddie Mac has had no delinquencies on
its multifamily business since it reentered this market, and the GSE's
multifamily business has been creditworthy and profitable.12
\12\ American Banker, October 12, 1995, p. 12.
---------------------------------------------------------------------------
4. Conclusion
HUD has determined that the Special Affordable Housing Goal
established in the final rule addresses national housing needs within
the income categories specified for this goal, while accounting for the
GSEs' performance in the past in purchasing mortgages meeting the needs
of very-low-income families and low-income families in low-income
areas. HUD has also considered the size of the conventional mortgage
market serving very-low-income families and low-income families in low-
income areas. Moreover, HUD has considered the GSEs' ability to lead
the industry as well as their financial condition. HUD has determined
that goals of 12 percent in 1996, 14 percent in 1997-1999, and 14
percent thereafter pending establishment of a new goal, with fixed
multifamily subgoals of 0.8 percent of 1994 volumes of business, are
both necessary and achievable.
Appendix D--Estimating the Size of the Conventional Conforming Market
for Each Housing Goal
In establishing the three housing goals, the Secretary is required
to assess, among a number of factors, the size of the conventional
market for each goal. This Appendix explains HUD's methodology for
estimating the size of the conventional market for each of the three
housing goals. Section A provides an overview of public comments on the
methodology described in the proposed rule. Section B describes the
main components of HUD's market-share model and identifies those
parameters that have a large effect on the relative market shares.
Sections C and D discuss two particularly important market parameters--
the size of the multifamily market and the share of the single-family
mortgage market accounted for by rental properties. With this as
background, Section E provides a more systematic presentation of the
model's equations and main assumptions. Sections F, G, and H report
HUD's estimates for the Low- and Moderate-Income Goal, the Central
Cities, Rural Areas, and other Underserved Areas Goal, and the Special
Affordable Housing Goal, respectively.
A. Overview of Comments on Market Methodology
1. Overall Issue
Both GSEs expressed strong criticism of HUD's use of specific data
elements in constructing its estimates of market size. Although both
GSEs criticized how data had been interpreted in the proposed rule's
market share model, neither GSE, nor any commenter, objected to HUD's
basic model for calculating the size of the markets relevant to each of
the goals. However, Freddie Mac presented a detailed set of objections
to the use of certain data sources or assumptions, concluding that
HUD's market estimates were ``fatally flawed.'' Freddie Mac commented
that ``the Proposed Rule uses a combination of data sources and a set
of arbitrary assumptions in order to estimate the size of the current
conforming, conventional market,'' adding that ``in nearly every case,
HUD has chosen an estimate at the highest end of calculable
estimates.''
Freddie Mac proposed a number of revisions to the assumptions or
data sets used in the proposed rule, for example--using HMDA data to
estimate the size of the multifamily and single-family rental markets,
using American Housing Survey rent data on recently-completed
properties to estimate the affordability of the newly-mortgaged rental
properties, using discount factors to reduce the size of the rental and
low-income owner markets, etc. HUD has carefully considered these
comments in revising the market estimates for each of the goals.
However, HUD disagrees with Freddie Mac's overarching comment that
because data are not always available in the form and format desired,
HUD should use minimal estimates of market activity. Such an
[[Page 61968]]
approach does not take advantage of the wealth of information currently
available on mortgage activity.
In revising the rule, HUD has carefully reviewed existing
information on mortgage activity in order to understand the weakness of
various data sources, has conducted sensitivity analyses to show the
effects of alternative parameter assumptions, and has hired independent
researchers to assist in determining best estimates for the more
important determinants of the housing goal market shares. HUD is well
aware of uncertainties with some of the data and much of this Appendix
is spent discussing the effects of these uncertainties on the market
estimates.
The remainder of this section responds to several major comments
about the market share methodology made by Freddie Mac and others. But
with respect to Freddie Mac's statements that HUD's methodology is
``fatally flawed'' and based on ``arbitrary assumptions,'' HUD has
three specific comments here:
(A) HUD contracted with Urban Institute researchers to
independently evaluate its methodology for estimating market shares for
the various goals. They concluded that HUD's conceptual approach is ``a
reasonable approach to determining the size of the low- and moderate-
income, underserved areas, and special affordable markets relative to
the size of the overall conventional, conforming mortgage market.''
1 They also concluded that Freddie Mac's approach for measuring
mortgage market property shares was the wrong approach (see discussion
below).
\1\ Dixie M. Blackley and James R. Follain, ``A Critique of the
Methodology Used to Determine Affordable Housing Goals for the
Government-Sponsored Housing Enterprises,'' October 1995, p. 21.
---------------------------------------------------------------------------
(B) Freddie Mac commissioned Abt Associates to evaluate HUD's
methodology for the proposed rule. Abt Associates concluded that ``the
point is not that HUD misused the data. On the contrary, HUD made
reasonable attempts to arrive at plausible estimates.'' 2
(Emphasis added.)
\2\ Abt Associates, ``Evaluation of HUD-Proposed Housing Goals
for the GSEs,'' February 6, 1995, p. 12.
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(C) HUD has set conservative goals. For example, the Low- and
Moderate-Income Goal is 40 percent for 1996 and 42 percent for 1997 and
subsequent years. These goals are well below the market shares
projected by HUD and the Urban Institute. In addition, the Abt study
estimated that the low- and moderate-income market was 41-57 percent,
placing the Low- and Moderate-Income Goal for 1997 and subsequent years
at the bottom of Abt's range of estimates of market size. It should
further be noted that Abt's estimates were made based on the proposed
rule. A number of liberalizations in the counting rules have been made
in the final rule, which mean that market estimates should be revised
upward in light of these changes.
It also should be emphasized that neither GSE objected to HUD's
basic model for calculating the size of the markets relevant to each of
the housing goals, which involves estimating (1) the share of the
market (in dwelling units) by type of property (single-family-owner,
single-family-rental, and multifamily), (2) the proportion of dwelling
units financed by mortgages for each type of property meeting each
goal, and (3) projecting the size of the market by weighting each such
goal share by the corresponding market share. The GSEs' comments
focused on how the underlying estimates were derived and the resulting
impacts on the size of the market for each goal. As noted above, HUD
recognizes the uncertainty regarding some of these estimates, which led
the Department to undertake a number of sensitivity analyses and to
contract with Urban Institute researchers to reduce some of this
uncertainty.
2. Major Issues
(1) Market volatility. Freddie Mac commented that HUD's analysis
ignores the impact that changes in national economic conditions can
have on the size of the market, stating that its recent efforts to
expand the reach of the secondary market in support of low- and
moderate-income people ``were aided by very favorable interest rates
and macroeconomic conditions that made housing extraordinarily
affordable.'' However, Freddie Mac observed, fluctuations of interest
rates of approximately 250 basis points in the past year have
demonstrated that housing can become much less affordable in a short
period, but ``HUD's market estimates assume that the favorable
conditions of 1993 and 1994 will continue indefinitely.''
HUD response. HUD has addressed the concerns about market
volatility in two major ways:
(A) HUD has conducted detailed sensitivity analyses for each of the
housing goals. These analyses present different estimates of market
size by varying key assumptions: the size of the multifamily market;
the low- and moderate-income shares of single-family owner-occupied
homes 3, single-family rental homes, and multifamily units; the
breakdown of the single-family market between owner-occupied units and
rental units; and the multifamily loan amount per unit. These analyses
support the feasibility of the goals under a wide range of conditions.
\3\ The GSEs have generally advocated use of the HMDA data. In a
number of the sensitivity analyses, the percentages of single-family
owner-occupied homes which qualify for the low-mod goal have been
reduced below the levels reported by the 1993 and 1994 HMDA data.
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(B) With regard to volatility in the multifamily market, Freddie
Mac stated the HUD's use of Residential Finance Survey (RFS) data is
inappropriate, because they draw on a period when multifamily lending
was unusually high. HUD did not use the RFS data in its baseline model.
As the proposed rule noted, the RFS, based on a period with a high
level of multifamily originations, overstates the probable level of
multifamily originations in the 1996-97 period.
HUD recognizes that there is volatility in the multifamily market,
and for this reason contracted with Urban Institute researchers to
develop a ``steady-state'' multifamily originations model which
abstracts from the volatility of interest rates, refinancings, and
waves of maturing balloon mortgages.