[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]]

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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 

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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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

``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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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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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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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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BILLING CODE 4210-32-C

[[Page 61935]]

    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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[[Page 61938]]

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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[[Page 61940]]

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.  .........................................................

                                                                        

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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.
---------------------------------------------------------------------------

    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.

[[Page 61959]]


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.
---------------------------------------------------------------------------

    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 
affordabilitythey 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 familiesi.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 unitsthose 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]]

---------------------------------------------------------------------------

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 
factorthe 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 belowin 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 problemspaying more than half of income for housing or 
living in severely inadequate housingare 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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    (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.4 This model generated 
projections of multifamily activity no less than, and in some cases 
substantially greater than, those used by HUD in this rule.

    \4\ Robert Dunsky, James R. Follain, and Jan Ondrich, ``An 
Alternative Methodology to Estimate the Volume of Multifamily 
Mortgage Originations,'' September 1995.
---------------------------------------------------------------------------

    (2) Size of the multifamily market. Both GSEs commented that in the 
proposed rule the role of multifamily financing is consistently 
overstated. In particular, both GSEs advocated the use of data from the 
Home Mortgage Disclosure Act (HMDA) reports, rather than the Survey of 
Mortgage Lending Activity (SMLA), used by HUD in the proposed rule.
    HUD response. HUD addressed this comment in two ways:
    (A) HUD commissioned four papers on the multifamily market by Urban 
Institute researchers 5 and held two seminars on this topic with a 
wide range of participants, including the GSEs. These papers compared 
and evaluated 

[[Page 61969]]
information about the size of the multifamily market in detail. They 
supported HUD's projections of the size of the market, and at least one 
of their analyses suggested that higher estimates were reasonable. They 
concluded that the HMDA data base underreports multifamily 
originations. Details are presented in section C.2, below.

    \5\ These are: The previously cited papers by Blackely and 
Follain (1995) and Dunsky, Follain, and Ondrich (1995); ``Estimating 
the Volume of Multifamily Mortgage Originations by Commercial Banks 
Using the Survey of Mortgage Lending Activity and Home Mortgage 
Disclosure Act data,'' by Amy D. Crews, Robert Dunsky, and James 
Follain (October 1995); and ``What We Know About Multifamily 
Mortgage Originations,'' by Amy D. Crews, Robert M. Dunsky, and 
James R. Follain (October 1995).
---------------------------------------------------------------------------

    (B) In its sensitivity analyses, HUD has used lower estimates of 
the size of the multifamily market than the base case in the proposed 
rule.
    Section C below provides a more detailed response to the GSEs' 
comments about the size of the multifamily market.
    (3) Size of the single-family rental market. Freddie Mac stated 
that HUD's use of the Survey of Mortgage Lending Activity (SMLA) caused 
it to overstate the size of the single-family rental market, arguing 
that a more accurate estimate is derived from HMDA.
    HUD response. HUD did not use the SMLA to estimate the rental share 
of the single-family market--rather, it closely analyzed data from the 
Residential Finance Survey (RFS) and the HMDA reports. In its base case 
HUD projected the investor share of the single-family market at 10.0 
percent, well below the 17.3 percent reported by the RFS, but slightly 
above the 8.0 percent reported by the 1994 HMDA data. Again, the Urban 
Institute researchers concluded that the HMDA estimate was too low and 
a 10-12 percent estimate was reasonable. At the same time, HUD has 
acknowledged that there is some uncertainty about the rental share of 
the single-family market, and has reflected this in its sensitivity 
analyses (Table D.3).
    (4) Multifamily market penetration. Fannie Mae stated that the 
multifamily lending industry is fundamentally different from the 
single-family industry and that the GSEs do not dominate the 
multifamily market to the degree that they dominate the single-family 
market. Fannie Mae concluded that ``origination volumes in multifamily 
lending are not a reliable indicator of what is available to either 
Fannie Mae or Freddie Mac in the secondary market.'' Freddie Mac 
concurred with this view.
    HUD response. The GSEs are able to purchase loans from any 
multifamily lender. Explicitly considering only multifamily loans 
originated by certain lenders in the estimate of market size would 
implicitly amount to intervention in the GSEs' mortgage purchase 
decisions, and be tantamount to ``micromanagement'' of the GSEs' 
operations, which both HUD and the GSEs wish to avoid. (Appendix A 
discusses HUD's response to this issue in more detail.)
    At the same time, HUD realizes that the GSEs have been and are 
likely to continue to be less active in the multifamily market than in 
the single-family market. It is also true that multifamily originations 
play a significant role in estimating the size of the Low- and 
Moderate-Income and Special Affordable Housing Goals. For these 
reasons, both of these goals have been conservatively set in relation 
to HUD's estimates of the size of these markets, including all 
multifamily originations.

Other Issues

    (5) Distortions caused by mobile home loans in the HMDA data. 
Fannie Mae commented that the HMDA data used in HUD's analysis included 
mobile home loans, which ``are an important source of affordable 
housing for low- and moderate-income families, but which are not a 
significant product line for either Fannie Mae or Freddie Mac,'' adding 
that if mobile home originations are eliminated, ``the amount of 
mortgages meeting this [low- and moderate-income] goal available to 
Fannie Mae and Freddie Mac is significantly reduced.'' Freddie Mac was 
in general agreement with this view.
    HUD response. HUD has undertaken discussions with industry 
representatives and mobile home lenders and has examined the effects of 
adjusting the HMDA data for mobile homes.6 However, as Section F 
discusses in detail, it is not clear how many mobile home loans are 
included in the HMDA data. Thus, HUD also uses American Housing Survey 
data that does not include mobile homes. To a certain extent, HUD had 
anticipated this issue in its proposed rule by excluding small loans 
from its analysis of HMDA data.

    \6\ These adjustments involved identifying all loans originated 
by four mobile home lenders, examining borrower income data for 
these loans, extrapolating from this data to estimate the size of 
the total mobile home market by income level in the HMDA data, and 
deducting the resulting estimates from the HMDA data.
---------------------------------------------------------------------------

    (6) American Housing Survey (AHS) data on housing affordability. 
Freddie Mac stated that HUD's use of the AHS led to an overstatement of 
housing affordability, because ``it is well known that income reported 
in the AHS [is] lower than other independent estimates of income.''
    HUD response. This issue requires distinguishing between owner-
occupied and rental units using special 1990 Census tabulations. HUD 
compared data on household income to official HUD estimates of area 
median income for each location in the country. These Census 
tabulations should be more accurate than the AHS in two ways--because 
the Census income data are better, and because the Census income data 
were compared to accurate median family income data for each metro area 
or nonmetro county in the country. The AHS estimates of the income of 
very-low-, low-, and moderate-income homeowners are about two 
percentage points higher than the corresponding Census data. However, 
these comparisons fail to take into account the changes which were made 
in the AHS in 1993, which has reduced income underreporting by the AHS. 
(See Section F.1.c below.) Thus, it appears that income underreporting 
is not a serious problem with the recent AHS data. As noted above, one 
advantage of the AHS data is that it excludes mobile home loans.
    The Census tabulations show that the AHS and the Census data are 
remarkably similar with regard to renters' incomes. But the Department 
used rent data, not income data, in measuring affordability of rental 
units. The AHS asks more questions about rent components than any other 
survey and it is the only source of information on gross rent (contract 
rent plus the cost of utilities), thus it is the best source of 
information about rents.
    (7) Use of rent levels inflates rental housing importance. Freddie 
Mac stated that the proposed rule uses rent levels to qualify rental 
units as serving low- or moderate-income levels. They added that ``This 
is reasonable, but has the effect of increasing the importance of 
rental housing in meeting goals,'' because ``many higher income 
households live in lower cost rental units.''
    HUD response. It is true that many higher-income households live in 
lower-rent units, but this is irrelevant. If the GSEs undertook a 
concerted effort to gather comprehensive data on renter income, as 
allowed (but not required) by the FHEFSSA, HUD would base its low- and 
moderate-income rental share on renters' income data. But in fact both 
GSEs have repeatedly said that data on tenant income is not generally 
available, and HUD has therefore allowed the GSEs to use data on rents 
in determining affordability. To be consistent with this practice, HUD 
has used rents in estimating the size of the market related to the 
various goals. This procedure does not inflate the importance of rental 
housing relative to what is available for purchase by the GSEs. 

[[Page 61970]]


B. Overview of HUD's Market Share Methodology

1. Definition

    The size of the market for each housing goal is one of the factors 
that the Secretary is required to consider when setting the level of 
each housing goal.7 Using the Low- and Moderate-Income Housing 
Goal as an example, the market share in a particular year is defined as 
follows:

    \7\ Sections 1332(b)(4), 1333(a)(2), and 1334(b)(4).
---------------------------------------------------------------------------

    Low- and Moderate-Income Share of Market: The number of dwelling 
units financed by the primary mortgage market in a particular 
calendar year that are occupied by (or affordable to, in the case of 
rental units) families with incomes less than the area median income 
divided by the total number of dwelling units financed in the 
conforming conventional primary mortgage market.

    There are three important aspects to this definition. First, the 
market is defined in terms of ``dwelling units'' rather than, for 
example, ``value of mortgages'' or ``number of properties.'' Second, 
the units are ``financed'' units rather than the entire stock of all 
mortgaged dwelling units; that is, the market-share concept is based on 
the mortgage flow in a particular year, which will be smaller than 
total outstanding mortgage debt. Third, the low- and moderate-income 
market is expressed relative to the overall conforming conventional 
market, which is the relevant market for the GSEs.8 The low- and 
moderate-income market is defined as a percentage of the conforming 
market; this percentage approach maintains consistency with the method 
for computing each GSE's performance under the low- and moderate-income 
goal (that is, the number of low- and moderate-income dwelling units 
financed by GSE mortgage purchases relative to the overall number of 
dwelling units financed by GSE mortgage purchases).

    \8\ So-called ``jumbo'' mortgages, greater than $203,150 for 1-
unit properties, are excluded in defining the conforming market. 
There is some overlap of loans eligible for purchase by the GSEs 
with loans insured by the FHA and guaranteed by the Veterans 
Administration.
---------------------------------------------------------------------------

2. Three-Step Procedure

    Ideally, computing the low- and moderate-income market share would 
be straightforward, consisting of three steps:
    (Step 1) Projecting the market shares of the four major property 
types included in the conventional conforming mortgage market:
    (a) Single-family owner-occupied dwelling units (SF-O units);
    (b) Rental units in 2-4 unit properties where the owner occupies 
one unit (SF 2-4 units); 9

    \9\ The owner of the SF 2-4 property is counted in (a).
---------------------------------------------------------------------------

    (c) Rental units in one-to-four unit investor-owned properties (SF 
investor units); and,
    (d) Rental units in multifamily (5 or more units) properties (MF 
units).10

    \10\ Property types (b), (c), and (d) consist of rental units. 
Property types (b) and (c) must sometimes be combined due to data 
limitations; in this case, they are referred to as ``single-family 
rental units'' (SF-R units).
---------------------------------------------------------------------------

    (Step 2) Projecting the ``goal percentage'' for each of the above 
four property types (for example, the ``low- and moderate-income goal 
percentage for single-family owner-occupied properties'' is the 
percentage of those dwelling units financed by mortgages in a 
particular year that are occupied by households with incomes below the 
area median).
    (Step 3) Multiplying the four percentages in (2) by their 
corresponding market shares in (1), and summing the results to arrive 
at an estimate (weighted average) of the overall share of dwelling 
units financed by mortgages that are occupied by low- and moderate-
income families.
    The four property types are analyzed separately because of their 
differences in low- and moderate-income occupancy. Rental properties 
have substantially higher percentages of low- and moderate-income 
occupants than owner-occupied properties. This can be seen by the 
following illustration of Step 3's basic formula for calculating the 
size of the low- and moderate-income market: 11

    \11\ The property shares and low-mod percentages reported here 
are based on one set of model assumptions; other sets of assumptions 
are discussed in Section E.

------------------------------------------------------------------------
                                          (Step 1)   (Step 2)   (Step 3)
                                          share of   low-mod    multiply
             Property type                 market     share    (1) x (2)
                                         (percent)  (percent)  (percent)
------------------------------------------------------------------------
(a) SF-O...............................      71.0         36       25.6 
(b) SF 2-4.............................       2.0         85        1.7 
(c) SF Investor........................      10.6         85        9.1 
(d) MF.................................      16.4         90       14.8 
                                        --------------------------------
      Total Market.....................     100.0   .........      51.2 
------------------------------------------------------------------------

In this example, low- and moderate-income dwelling units are estimated 
to account for slightly over 51 percent of the total number of dwelling 
units financed in the conforming mortgage market. To examine the other 
housing goals, the ``goal percentages'' in Step 2 would be changed and 
the new ``goal percentages'' would be multiplied by Step 1's property 
distribution, which remains constant.

3. Data Issues

    Unfortunately, complete and consistent mortgage data are not 
readily available for carrying out the above three steps. A single data 
set for calculating either the property shares or the housing goal 
percentages does not exist. However, there are several major data bases 
that provide a wealth of useful information on the mortgage market. HUD 
combined information from the following sources: the Home Mortgage 
Disclosure Act (HMDA) reports, the American Housing Survey (AHS), HUD's 
Survey of Mortgage Lending Activity (SMLA), and the Census Bureau's 
Residential Finance Survey (RFS).
    Property Shares. To derive the property shares, HUD started with 
forecasts of single-family mortgage originations. These forecasts, 
which are readily available from industry groups and the GSEs, are 
based on HUD's SMLA. The SMLA does not provide information on 
conforming mortgages, on owner versus renter mortgages, or on the 
number of units financed. Thus, to estimate the number of single-family 
units financed in the conforming conventional market, HUD had to 
project certain market parameters based on its judgment about the 
reliability of different data sources. Sections D and E report HUD's 
findings related to the single-family market.
    Total market originations are obtained by adding multifamily 
originations to the single-family estimate. Because of the wide range 
of estimates available, the size of the multifamily mortgage market 
turned out to be one of the most controversial issues raised in the 
public comments. In 1994, HMDA reported about $15 billion in 
conventional multifamily originations while the SMLA reported double 
that amount ($30 billion). Because most renters qualify under the low- 
and moderate-income goal, the chosen market size for multifamily can 
have a substantial effect on the overall estimate of the low- and 
moderate-income market (as well as on the estimate of the special 
affordable market). Thus, it is important to have a reliable estimate 
of the size of the multifamily market. Section C discusses this issue 
in detail.
    Goal Percentages. To derive the goal percentages for each property 
type, HUD relied heavily on HMDA and AHS data. For single-family owner 
originations, HMDA provides comprehensive information on borrower 
incomes and 

[[Page 61971]]
census tract locations for metropolitan areas. Unfortunately, it 
provides no information on the incomes of renters living in mortgaged 
properties (either single-family or multifamily) or on the 
affordability of rental units in mortgaged properties. The AHS, 
however, does provide a wealth of information on the affordability of 
rental properties. Thus, an important issue here concerns whether 
affordability data from rental properties can serve as a proxy for the 
affordability of newly-mortgaged rental properties. This issue as well 
as other technical issues related to the goal percentages (such as the 
need to exclude mobile homes from HMDA data) are discussed in Sections 
F, G, and H.

4. Conclusions

    HUD has attempted to reduce the range of uncertainty around its 
market estimates by carefully reviewing all known major mortgage data 
sources and by conducting numerous sensitivity analyses to show the 
effects of alternative assumptions. The remainder of this Appendix 
reports findings from the additional analyses that HUD has conducted in 
response to public comments received. Sections C, D, and E report 
findings related to the property share distributions called for in Step 
1, while Sections F, G, and H report findings related to the goal-
specific market parameters called for in Step 2. These latter sections 
also report the overall market estimates for each housing goal 
calculated in Step 3.
    HUD contracted with the Urban Institute to comment on the 
reasonableness of its market share approach and to conduct analyses 
related to specific comments received from the public about its market 
share methodology. Findings from several Urban Institute reports will 
be discussed throughout this Appendix.

C. Size of the Multifamily Mortgage Market

    This section derives projections of multifamily mortgage 
originations, in dollars and in numbers of units in mortgaged 
properties.
    The multifamily sector is especially important in the establishment 
of housing goals for Fannie Mae and Freddie Mac because multifamily 
properties are overwhelmingly occupied by low- and moderate-income 
families. For example, in 1994 11 percent of units financed by Fannie 
Mae were multifamily, but 93 percent of those units were low- and 
moderate-income units, accounting for 23 percent of all of Fannie Mae's 
low- and moderate-income purchases for that year.
    This discussion is organized as follows: Section 1 reviews the 
proposed rule's approach to multifamily market estimation, the public 
comments on the methodology, and HUD's approach to resolve various 
questions raised. Section 2 identifies and evaluates available 
historical data resources. Section 3 undertakes an analysis of 
projected aggregate origination volume for 1996 and 1997 for the entire 
multifamily market and then considers the portion of the market 
relevant as a basis for establishing housing goals for Fannie Mae and 
Freddie Mac.

1. The Proposed Rule, Public Comments, and HUD's Approach to Resolving 
Issues Raised

    Proposed rule. The proposed rule presented two projections of the 
size of the multifamily market. The first, based on the Bureau of the 
Census's 1991 Survey of Residential Finance (RFS), was $35 billion of 
conventional multifamily originations, which was projected to be 7 
percent of the total dollar volume of conventional originations. The 
second, based on HUD's Survey of Mortgage Lending Activity (SMLA), was 
$33 billion of conventional multifamily originations, which was 
projected to be 5 percent of the total dollar volume of conventional 
originations.
    Public comments. Both GSEs maintained that in deriving market-share 
estimates for all three of the statutory goals, HUD had made 
projections of the size of the multifamily market that were 
unreasonably high. They claimed that HUD had chosen the poorest and 
least-favorable of the data bases that could have been employed for 
this purpose.
    The following points were made by the GSEs in support of this 
general criticism:
    a. HUD's reliance on the Survey of Mortgage Lending Activity 
(SMLA): The GSEs commented that this survey's estimates of multifamily 
lending volumes in the early 1990s are based on data for a sample of 
commercial banks that is known to be out-of-date and too small, yet 
this survey is the one on which HUD relied most heavily.
    b. HUD's use of the Residential Finance Survey (RFS): The GSEs 
commented that HUD used mortgage assumptions data that should have been 
excluded in estimating mortgage origination volumes; that HUD 
improperly ignored the nature of RFS as a survey of outstanding 
mortgages still outstanding after a period of time had passed since 
their origination and did not adequately allow for differential 
prepayment rates between multifamily and single-family mortgages over 
that passage of time; that HUD had relied on RFS data for mortgages 
originated over a longer-than-necessary time interval (1987-1991, when 
1989-91 could have been used); that HUD had not recognized the decline 
in origination rates that occurred in the early 1990s, after the end of 
the period reflected in RFS and after a period of turmoil in the market 
in 1990-91; that HUD had failed to recognize that originations in 1990-
91 included significant numbers of multifamily loan restructurings that 
would have been reported as new loans in RFS (as well as SMLA) but 
would not have been available for GSE purchase.
    c. HUD's neglect of evidence on the multifamily market in the Home 
Mortgage Disclosure Act (HMDA) data base: The GSEs stated their belief 
that HMDA covers nearly 100 percent of the relevant lender base; and 
that commercial banks are known to file HMDA reports reliably, making 
this a better source of information on banks than SMLA. As a general 
matter, Fannie Mae and Freddie Mac contended that the HMDA figure for 
1993 mortgage originations is the more accurate one, based on what they 
understood to be methodological deficiencies in SMLA and limited 
applicability of RFS.
    Activities to resolve issues. HUD contracted with the Urban 
Institute for a wide-ranging evaluation of data sources and exploration 
of factors that could potentially affect multifamily originations in 
the next few years. This work included analyses of RFS, SMLA, and HMDA 
data, investigations of the methodologies used to construct these three 
data sources, and discussions with knowledgeable individuals in the 
lending community. This was supplemented by HUD in-house analyses of 
RFS, HMDA, SMLA, and GSE data on multifamily volumes. In addition, HUD 
convened two meetings with experts involved in the collection and 
compilation of RFS, SMLA, and HMDA data and other experts on mortgage 
originations. HUD also organized a discussion of affordable multifamily 
development and the secondary market involving a diverse group of 
lenders, with Urban Institute researchers. Representatives of Fannie 
Mae and Freddie Mac were present at all of these meetings. The results 
of these analyses are summarized below.

2. Multifamily Origination Volumes, 1987-1994

    The principal sources of evidence on historical multifamily 
origination volumes are RFS, SMLA, and HMDA. RFS data show the 
aggregate face value of mortgage loans by year of origination 

[[Page 61972]]
(in groups of years in the public use RFS data base) which were still 
outstanding as of the spring 1991 survey date. SMLA and HMDA data 
represent annual aggregate dollar volumes of loan originations. Table 
D.1 presents figures for 1987 through 1994.

                                    Table D.1.--Multifamily Market Estimates                                    
                                              [Billions of dollars]                                             
----------------------------------------------------------------------------------------------------------------
                                                  RFS mortgages outstanding, spring       SMLA          HMDA    
                Origination year                                 1991                 originations  originations
----------------------------------------------------------------------------------------------------------------
1987...........................................  35.7 (avg.)........................        45.1    ............
1988...........................................  35.7 (avg.)........................        38.2    ............
1989...........................................  37.4 (avg.)........................        31.1    ............
1990...........................................  37.4 (avg.)........................        23.6    ............
1991...........................................  37.4 (avg.)........................        25.5    ............
1992...........................................  37.4 (avg.)........................        25.7          10.2  
1993...........................................  37.4 (avg.)........................        31.7          13.3  
1994...........................................  37.4 (avg.)........................        31.3          15.2  
----------------------------------------------------------------------------------------------------------------

    The RFS figures in Table D.1 are expressed on an annualized basis, 
i.e., value of mortgages originated in 1987 and 1988 (and still 
outstanding as of 1991) divided by 2, and value originated in 1989-1991 
(similarly), divided by 2\1/3\ (based on the survey date approximately 
one-third of the way through 1991).
    To address the public comments, it is necessary to understand the 
methods used to compile each of these sources. Findings from HUD's 
comparative analysis will then be presented.
    RFS begins with a sample of properties based on the lists of 
properties constructed for the decennial censuses of population and 
housing. The owner of each property is then located and interviewed--
whether an owner-occupant or an absentee owner of a property that 
contains entirely rental or vacant units. The survey instrument 
includes questions on the mortgage(s) that apply to the property, as 
well as on property and owner characteristics. Each owner is asked to 
identify the holder or servicer of any applicable mortgage loans, and a 
separate lender survey instrument is administered. Responses from the 
owner questionnaires are linked to responses from the lender 
questionnaires in the data base as released by the Census Bureau. The 
strength of this survey is that it presents a highly comprehensive 
picture of residential financing, since it is based on a property 
sample rather than on a survey of lenders. Consistent and rigorous 
statistical and operational quality control procedures are applied 
throughout.
    The data that enter into SMLA are compiled by HUD from source 
materials generated in various ways from the different institutional 
types of mortgage lenders. Data on savings associations are collected 
for HUD by the Office of Thrift Supervision; these data cover all 
thrifts, not a sample. Mortgage company and life insurance company data 
are collected through sample surveys conducted by the Mortgage Bankers 
Association of America and the American Council of Life Insurance, 
respectively. Data on commercial banks and mutual savings banks are 
collected on a HUD form from samples of such lenders. The Federal 
credit agencies and State credit agencies report their data directly to 
HUD. Local credit agency data are collected by HUD staff from a 
publication that lists their mortgage financing activities. HUD 
contracted with ICF, Inc., in 1994 to evaluate the methodology used in 
constructing the SMLA.12 ICF concluded that, with respect to the 
survey of commercial banks and mutual savings banks, ``while there do 
not appear to be any significant problems with the sampling plan, the 
sample has never been redrawn since the origination of the [SMLA], and 
. . . has very likely become seriously outdated . . ..'' 13 With 
respect to mortgage bankers, ICF said that MBA staff had expressed 
``concern that estimated data on multifamily . . . originations may not 
be as reliable as corresponding data on single-family mortgage 
originations.'' Subsequently, MBA has stopped reporting multifamily 
originations data to HUD and has begun work to revise its survey 
procedures. With these two exceptions, ICF concluded that no efforts to 
improve data collection methodologies appeared warranted.

    \12\ Evaluation of Design and Implementation of the Gross Flows 
Survey of Mortgage Lending Activity, Final Report submitted to HUD, 
July 31, 1994.
    \13\ HUD's Office of Housing has issued a Request for Proposals 
for help with improving the commercial banks component of SMLA.
---------------------------------------------------------------------------

    HMDA data are collected by lending institutions and reported to 
their respective regulators as required by law. HMDA was enacted as a 
mechanism to permit the public to determine locations of properties on 
which local depository institutions make mortgage loans, ``to enable 
them to determine whether depository institutions are filling their 
obligations to serve the housing needs of the communities and 
neighborhoods in which they are located . . .'' (12 USC 2801). HMDA 
reporting requirements apply to lenders which have offices in 
Metropolitan Statistical Areas and which have more than $10 million in 
total assets. (For mortgage bankers, the $10 million includes assets of 
any parent corporations, reporting is required only if home purchase 
loan originations exceed 10 percent of total loan originations, and 
reporting since 1993 has been required only if the institution's annual 
home purchase loan origination volume is at least 100.) Reporting is 
required for all loans closed in the name of the lending institution 
and loans approved and later acquired by the lending institution, 
including multifamily loans. Thus, the HMDA data base concentrates on 
lending by depository institutions in metropolitan areas but, unlike 
SMLA and RFS, it is not a sample survey; it is intended to include 
loan-level data on all loans made by the institutions that are required 
to file reports.
    The Urban Institute researchers concluded, based on comparison of 
the methodologies used in the three surveys and on reported problems 
with SMLA and HMDA (reviewed above), and on direct analyses of each 
data base (discussed below) that the RFS is ``an excellent survey which 
represents a good source of information about multifamily originations 
in the years just prior to the survey, i.e., 1989-1991''.14 They 
infer from RFS an estimate of at least $30 billion per year of 
multifamily originations in 1987-1991.

    \14\ ``What We Know About Multifamily Mortgage Originations'', 
p. 5.
---------------------------------------------------------------------------

    With this in mind, we proceed to an examination of origination 
volumes reported by the three data sources by type of lender. Table D.2 
shows the basic figures. The column headed ``RFS'' shows the annualized 
aggregate face value of multifamily loans outstanding as of the 1991 
survey date that were originated in the indicated years, as in Table 
D.1, but disaggregated in table D.2 by category of loan servicer as of 
the 1991 survey date. The columns headed ``SMLA'' and ``HMDA'' show 
aggregate dollar volumes of loan originations by category of originator 
in the indicated years.
    In addition to category of loan servicer, RFS also reports the 
category of holder. Use of data from the servicer category, as in Table 
D.2, produces the more reliable comparison with the other surveys 
because multifamily loans that are sold into the secondary market tend 
to remain serviced by the same category of originating lender. There 
are several major differences between the servicer and holder 
breakdowns in RFS. Commercial banks hold 20-30 percent more loans for 
each origination period than they service. Mortgage bankers hold about 
one-quarter of the value of loans that they serviceone would expect 
even fewer. Since independent mortgage banking companies are not 

[[Page 61973]]
chartered to hold loans, these holdings presumably reflect a mis-
categorization problem such as loans held by depository institutions of 
which the mortgage bankers are affiliates. Life insurance companies, 
pension funds, and REITs hold more than double the value of loans than 
they service. Federally-sponsored secondary market agencies and pools, 
and to a lesser extent conventional pools, are significant non-
servicing holders of mortgages.
    The total SMLA figure for 1987-88 is greater than the corresponding 
total RFS figure, consistent with attrition from the inventory of 
multifamily mortgages outstanding before the date of administration of 
the RFS. SMLA figures are also greater than RFS figures for lender 
categories, except for mortgage bankers.
    The total RFS figure for 1989-91 is greater than the corresponding 
SMLA figure. To a significant extent, the difference reflects 
categories of lenders that SMLA does not cover: finance companies, 
individuals and estates, and ``other'' lendersthese include trust 
accounts administered by banks, nonprofit organizations, and insurance 
companies other than life insurance companies.
    The main question raised by this comparison is why SMLA and HMDA 
report such different multifamily estimates for 1993. SMLA reports 
$31.7 billion while HMDA reports $13.3 billion. The Urban Institute 
conducted extensive analysis to answer this question. The researchers 
concluded both that the SMLA multifamily origination volume was too 
high and the HMDA estimate was too low, creating the large gap in 
reported 1993 multifamily originations. They concluded that the 1993 
lending volume was actually in the range of $25-30 billion, i.e., the 
SMLA figure may be as much as $7 billion too high and the 1993 HMDA 
figure is likely at least $12 billion too low. This conclusion is 
supported by the following analyses:

BILLING CODE 4210-32-P

[[Page 61974]]
[GRAPHIC][TIFF OMITTED]TR01DE95.024



BILLING CODE 4210-32-C

[[Page 61975]]

    (a) A commercial banks figure of $7-8 billion is more plausible 
than SMLA's $18.8 billion for 1993. Comparison of HMDA and SMLA data on 
loans purchased in 1993 indicates that HMDA missed a significant volume 
of multifamily loan originations; thus the $4.8 billion HMDA figure is 
too low. A $7-8 billion figure is implied by combining the HMDA and 
SMLA data.15

    \15\  ``Estimating the Volume of Multifamily Mortgage 
Originations for Commercial Banks.''
---------------------------------------------------------------------------

    (b) The SMLA overestimate for banks is offset by underestimation of 
multifamily loans for some lender categories, particularly mortgage 
bankers, loans by individuals, and life insurance companies.16

    \16\  ``What We Know About Mortgage Originations,'' p. 20.
---------------------------------------------------------------------------

    (c) A conclusion that HMDA underreports multifamily originations is 
supported by a comparison between HMDA and Fannie Mae data. Loans 
reported in HMDA as sold to Fannie Mae in 1993 tend to be smaller in 
size than Fannie Mae's 1993 multifamily originations as shown in the 
Fannie Mae data base. In addition, 41 percent of Fannie Mae's 1993 
multifamily mortgage purchases were found to be in tracts where HMDA 
reported no multifamily originations. It appears that larger 
multifamily loans tend not to be reported in HMDA. Further evidence of 
the poor quality of the HMDA multifamily data is the fact that it 
reported that in 1993 more multifamily loans were sold to Freddie Mac 
than to Fannie Mae, when in fact Freddie Mac's purchases were only a 
small fraction of Fannie Mae's purchases.
    (d) In addition, the HMDA data base does not cover a number of 
important categories of multifamily lenders such as life insurance 
companies and State housing finance agencies, providing another reason 
that the HMDA data understates the size of the multifamily market.
    (e) The conclusion regarding HMDA is further supported by an 
analysis of RFS data, projecting loan terminations for to 1993 based on 
RFS's estimates of loans outstanding by maturity in 1991, using a 
hazard modeling framework.17

    \17\  ``An Alternative Methodology to Estimate the Volume of 
Multifamily Mortgage Originations.''
---------------------------------------------------------------------------

    The SMLA figures, with the adjustments for 1993 discussed above, 
indicate a volume of multifamily mortgage originations of at least $30 
billion around 1990, dropping to around $25 billion in the early 1990s. 
The inconsistency between the revised SMLA estimate and the HMDA 1993 
estimate is the result of HMDA's underestimation for commercial banks 
and mortgage companies, and omission of several important lending 
categories shown in SMLA and RFS.
    The estimate of $25-30 billion annual lending volume for 1993 and 
other years in the early 1990s represents around 10 percent of the 
aggregate value of multifamily mortgage debt outstanding, which was 
estimated by RFS at $329 billion as of Spring 1991.18 Such an 
originations-to-outstanding debt ratio is consistent with the value of 
this ratio during the preceding several years, which provides further 
support both for the conclusion regarding 1993 and for HUD's 
extrapolation to 1996 and beyond.

    \18\  SMLA's figure is $245 billion as of the end of 1992. 
SMLA's coverage is less than RFS's. This figure is based on call 
reports and not subject to the methodological comments concerning 
SMLA's bank origination volume estimates.
---------------------------------------------------------------------------

3. Projections for 1996 and Beyond

    Of the three data bases described above, the greatest confidence 
appears warranted for the RFS. The Urban Institute researchers 
therefore developed a model to project multifamily origination volumes 
from the 1991 survey date forward, based on RFS data on mortgages by 
year since origination. They applied a statistical model of mortgage 
terminations based on Freddie Mac's experience from the mid-1970s to 
around 1990. While mortgage characteristics in 1990 are not wholly 
similar to the characteristics of these historical mortgages financed 
by Freddie Mac, nevertheless the prepayment propensities of 
contemporary mortgages may at least be approximated by the prepayment 
experience of these historical mortgages. The research methodology took 
account of the influence of interest rate fluctuations on prepayments 
of the historical mortgages; the projections assumed that prepayments 
are motivated mainly by property sales.19

    \19\ This is the methodology used to construct the 1993 RFS-
based estimate cited above.
---------------------------------------------------------------------------

    The analysis began with the $273 billion of outstanding first 
mortgage debt shown by RFS for 1991. Forecast mortgage origination 
volumes based on mortgages existing in 1991 were: $27 billion for 1993 
(providing a useful point of comparison with the HMDA and SMLA figures 
referenced earlier), $37 billion for 1996 and $40 billion for 1997, the 
years to which this rulemaking applies. New construction was projected 
to add slightly less than $7 billion of mortgage lending volume each 
year to these figures.
    These analyses imply an aggregate volume approaching $40 billion 
for the whole multifamily market in 1996. To derive an estimate of the 
market relevant to Fannie Mae and Freddie Mac, we exclude (a) FHA-
insured loans, and (b) loans insured by State bonding agencies and held 
by State and local credit agencies. Other categories of mortgages, 
considering the type of insurer, servicer, or holder, do not tend to 
have mortgage characteristics that differ substantially from the 
multifamily mortgages that are purchased by Fannie Mae and Freddie Mac. 
There is thus no particular basis for excluding them.
    Based on this analysis, $30-$35 billion per year are reasonable 
projections of multifamily mortgage origination volumes for 1996. Urban 
Institute analysis indicates an increasing level in 1997 and 
beyond.20

    \20\ ``An Alternative Methodology to Estimate the Volume of 
Multifamily Mortgage Originations.''
---------------------------------------------------------------------------

D. Single-Family Owner and Rental Mortgage Market Shares

1. Available Data

    HUD projects that originations for single-family properties will 
total $700 billion in 1996. Because this projection is based on HUD's 
Survey of Mortgage Lending Activity, it combines mortgage originations 
for the three different types of single-family properties: owner-
occupied, one-unit properties (SF-O); 2-4 unit rental properties (SF 2-
4); and 1-4 unit rental properties owned by investors (SF-Investor). 
The fact that the goal percentages are much higher for the two rental 
categories argues strongly for disaggregating single-family mortgage 
originations by property type. This section discusses available data 
for estimating the relative size of the single-family rental mortgage 
market.
    The RFS and HMDA are the two data sources for estimating the 
relative size of the single-family rental market. The RFS provides 
mortgage origination estimates for each of the three single-family 
property types. HMDA divides single-family mortgage originations into 
two property types: 21

    \21\ This ignores the HMDA loans with ``non-applicable'' for 
owner type.
---------------------------------------------------------------------------

    (1) Owner-occupied originations, which include both SF-O and SF 2-
4.
    (2) Non-owner-occupied mortgage originations, which include SF 
Investor.
    The percentage distributions of mortgages from these data sources 
are as follows:

                                                                                                                

[[Page 61976]]
----------------------------------------------------------------------------------------------------------------
                                                                                                         HUD's  
                                                                               1994 HMDA    1987-91     proposed
                                                     1993 HMDA (percent)       (percent)    \22\ RFS      rule  
                                                                                           (percent)   (percent)
----------------------------------------------------------------------------------------------------------------
SF-O.........................................  94.3..........................      92.0        80.4        88.0 
SF 2-4.......................................  (Included above)..............  .........        2.3         2.0 
                                              ------------------------------------------------------------------
SF Investor..................................  5.7...........................       8.0        17.3        10.0 
      Total..................................  100.0.........................     100.0       100.0       100.0 
----------------------------------------------------------------------------------------------------------------



Because HMDA combines the first two categories, the comparisons between 
the data bases must necessarily focus on the SF investor category. The 
RFS estimate of 17.3 percent is over twice HMDA's highest estimate. In 
its proposed rule, HUD projected a 10.0 percent share for the SF 
investor group, only two percentage points higher than the 1994 HMDA 
figure. In fact, HUD's projection appears quite conservative relative 
to the RFS estimate of 17.3 percent.

    \22\ The year-by-year distributions from the RFS were not too 
different from the average distribution given in the text.
---------------------------------------------------------------------------

2. Urban Institute Analysis--Investor Market Share

    HUD asked the Urban Institute to analyze the differences between 
the RFS and HMDA investor shares and determine which was the more 
reasonable. The Urban Institute's analysis of this issue is contained 
in a report by Dixie Blackley and James Follain.23 Blackley and 
Follain provide reasons why HMDA should be adjusted upward as well as 
reasons why the RFS should be adjusted downward. One reason for 
adjusting HMDA's investor share upward is that the investor share of 
mortgage originations as reported by HMDA is much lower that the 
investor share of the single-family rental stock as reported by the 
AHS. The fact that investor loans prepay at a faster rate than other 
single-family loans suggests to Blackley and Follain that the investor 
share of single-family mortgage originations should be higher--not 
lower--than the investor share of the single-family housing stock. 
Follain and Blackley conclude that ``this brings into question the 
investor share based upon HMDA data'' (page 15).

    \23\ 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.
---------------------------------------------------------------------------

    The RFS's investor share should be adjusted downward in part 
because the RFS assigns all vacant properties to the rental group, but 
some of these are likely intended for the owner market, especially 
among one-unit properties. Blackley and Follain's analysis of this 
issue suggests lowering the investor share from 17.3 percent to about 
14-15 percent.
    Blackley and Follain note that a conservative estimate of the SF 
investor share is advisable because of the difficulty of measuring the 
magnitudes of the various effects that they analyzed.24 They 
conclude that 10 percent and 12 percent are reasonable estimates of the 
investor share of single-family mortgage originations.25 As noted 
earlier, HUD projected an investor share of 10 percent in its proposed 
rule. Blackley and Follain caution that uncertainty exists around these 
estimates because data bases needed to estimate these parameters do not 
provide precise measures of their size.

    \24\ For example, they note that discussions with some lenders 
suggest that because of higher mortgage rates on investor 
properties, some HMDA-reported owner-occupants may in fact be 
``hidden'' investors; however, it would be difficult to quantify 
this effect. They also note that some properties may switch from 
owner to renter properties soon after the mortgage is originated. 
While such loans would be classified by HMDA as owner-occupied at 
the time of mortgage origination, they could be classified by the 
RFS as rental mortgages. Again, it would be difficult to quantify 
this effect given available data.
    \25\ Ibid., page 22.
---------------------------------------------------------------------------

3. Single-Family Market in Terms of Unit Shares

    The market share estimates for the housing goals need to be 
expressed as percentages of units rather than as percentages of 
mortgages. Thus, it is necessary to compare unit-based distributions of 
the single-family mortgage market under the alternative estimates 
discussed so far. The mortgage-based distributions given above in 
Section D.1 were adjusted in two ways. First, the owner-occupied HMDA 
data were disaggregated between SF-O and SF 2-4 mortgages based on RFS 
data, which show that SF 2-4 mortgages represent approximately 2 
percent of all single-family mortgages. Second, the resulting mortgage-
based distributions were shifted to unit-based distributions by 
applying the unit-per-mortgage assumptions in HUD's proposed rule. HUD 
assumed 2.25 units per SF 2-4 property and 1.35 units per SF investor 
property; both figures were derived from the 1991 RFS.26

    \26\ The unit-per-mortgage data from the 1991 RFS match closely 
the GSE purchase data for 1993 and 1994. Blackley and Follain show 
that an adjustment for vacant investor properties would raise the 
average units per mortgage to 1.4; however, this increase is so 
small that it has little effect on the overall market estimates.  ..

                                                                                                                

[[Page 61977]]
----------------------------------------------------------------------------------------------------------------
                                                                                            HUD's     Blackley/ 
                                                                                1987-91    proposed    Follain  
                                                      1994 HMDA (percent)         RFS        rule    alternative
                                                                               (percent)  (percent)   (percent) 
----------------------------------------------------------------------------------------------------------------
SF-O...........................................  85.4                              73.8       83.0        80.6  
SF-2-4 Owner 27................................  1.9                                2.1        1.9         1.9  
                                                 (est.)                                                         
SF 2-4 Renter..................................  2.4                                2.7        2.4         2.3  
                                                 (est.)                                                         
SF Investor....................................  10.3                              21.4       12.7        15.2  
                                                ----------------------------------------------------------------
      Total....................................  100.0                            100.0      100.0       100.0  
SF-Rental......................................  12.7                              24.1       15.1        17.5  
----------------------------------------------------------------------------------------------------------------



    Three points should be made about these data. First, notice that 
the ``SF-Rental'' row highlights the share of the single-family 
mortgage market accounted for by all rental units.

    \27\ Notice that the SF 2-4 category has been divided into its 
owner and renter subcomponents. This is easily done based on the 
assumption of 2.25 units per SF 2-4 mortgage. For each mortgage, one 
unit represents the owner occupant and 1.25 additional units 
represent renter occupants. The owner-occupant is included in the 
SF-O category in this Appendix. This is necessary because different 
data sources are used to estimate the owner's income and the 
affordability of the rental units. The income of owners of 2-4 
properties are included in the borrower income data reported by 
HMDA. The AHS will be used to estimate the affordability of the 
rental units.
---------------------------------------------------------------------------

    Second, notice that the rental categories represent a larger share 
of the unit-based market than they did of the mortgage-based market 
reported earlier. This, of course, follows directly from applying the 
loan-per-unit expansion factors.
    Third, notice that the rental share under HMDA's unit-based 
distribution is again about one-half of the rental share under the 
RFS's distribution. The rental share in HUD's proposed rule is slightly 
larger than that reported by HMDA. The rental share in the ``Blackley-
Follain'' alternative is slightly above that in HUD's proposed 
rule.28

    \28\ Blackley and Follain say that 10 or 12 percent are 
reasonable estimates. Since HUD's proposed rule was approximately 10 
percent, the ``Blackley-Follain'' alternative assumes that investors 
account for 12 percent of all single-family mortgages.
---------------------------------------------------------------------------

4. Conclusions

    This section has reviewed data and analyses related to determining 
the rental share of the single-family mortgage market. There are two 
main conclusions:
    (1) The analytical findings do not support public commenters who 
argued that HUD had overestimated the single-family rental market in 
its proposed rule. While there is uncertainty concerning the relative 
size of this market, the projections made by HUD appear reasonable and, 
in fact, are below one set of the ``best estimates'' provided by 
Blackley and Follain.
    (2) HMDA likely underestimates the single-family rental mortgage 
market. Thus, this part of the HMDA data are not considered reliable 
enough to use in computing the market shares for the housing goals. 
HMDA's rental data are included, however, in various sensitivity 
analyses of the market shares conducted in Sections F, G, and H. These 
analyses will show the effects on the overall market estimates of the 
different projections about the size of the single-family rental 
market.

E. HUD's Market Share Model

    This section integrates findings from the previous two sections 
about the absolute size of the multifamily mortgage market and the 
relative distribution of single-family owner and rental mortgages into 
a single model of the mortgage market. The section provides the basic 
equations for HUD's market share model and identifies the remaining 
parameters that must be estimated.
    The output of this section is a unit-based distribution for the 
four property types discussed in Section B.29 Sections F-H will 
apply goal percentages to this property distribution in order to 
determine the size of the mortgage market for each of the three housing 
goals.

    \29\ The property distribution reported in Section A is an 
example of the output of the market share model. Thus, this section 
completes Step 1 of the three-step procedure outlined in Section A.
---------------------------------------------------------------------------

1. Basic Equations for Determining Units Financed in the Mortgage 
Market

    The model first estimates the number of dwelling units financed by 
conventional conforming mortgage originations for each of the four 
property types. It then determines each property type's share of the 
total number of dwelling units financed.
a. Single-Family Units
    This section estimates that 5.11 million single-family units will 
be financed in the conventional conforming market in 1996, where 
single-family units (SF-UNITS) are defined as:

SF-UNITS = SF-O + SF 2-4 + SF-INVESTOR

    First, we estimate the dollar volume of conventional conforming 
single-family mortgages (CCSFM$):

(1) CCSFM$ = CONF% * CONV% * SFORIG$

Where:

CONF% = conforming mortgage originations as a percent (measured in 
dollars) of conventional single-family originations; estimated to be 
83%.30

    \30\ The model projects that the conventional market share will 
increase slightly over its 81.4 percent of total mortgage 
originations in 1994.
---------------------------------------------------------------------------

CONV% = conventional mortgage originations as a percent of total 
mortgage originations; forecasted to 78% by industry and GSEs.31

    \31\ Data provided by Fannie Mae show that conforming loans have 
been about 78 percent of total conventional loans over the past few 
years.
---------------------------------------------------------------------------

SFORIG$ = dollar volume of single-family one-to-four unit mortgages; 
projected to be $700 billion 32 in 1996 based on industry and GSE 
market forecasts.33

    \32\ Single-family mortgage originations are estimated to be 
$700 billion in 1996, a reduction of $310 billion from the record 
setting $1,010 billion in 1993 and a reduction of $70 billion from 
the $770 billion in 1994. These reductions are due to the decline in 
refinance activity which is projected to fall from almost 60 percent 
of originations in 1993 to 25 percent in 1996.
    \33\ Fannie Mae, Freddie Mac, and the Mortgage Bankers 
Association have provided HUD with projections of 1996 single-family 
originations. Because the 1997 market is expected to be similar to 
the 1996 market, the discussion focuses on the 1996 market. The 
various market estimates reported in Sections E, F, and G for the 
1996 market serve as a proxy for the 1997 market.

Substituting these values into (1) yields an estimate for CCSFM$ of 
$453 billion. 

[[Page 61978]]

    Second, we estimate the number of conventional conforming single-
family mortgages (CCSFM#):

(2) CCSFM# = CCSFM$/SFLOAN$

Where:

SFLOAN$ = the average conventional conforming mortgage amount for 
single-family properties; estimated to be $94,000.34

    \34\ The Federal Housing Finance Board's 1994 Mortgage Interest 
Rate Survey (MIRS) reported an average loan size of $109,900 for 
one-unit, owner-occupied conventional mortgages. Assuming that 78 
percent of the dollar volume of conventional single-family 
originations is conforming and that 90 percent of the number of 
conventional originations are conforming, the average loan amount 
for one-unit, owner-occupied mortgages in the conforming market is 
obtained by multiplying $109,900 by (.78/.90); this produces 
$95,246. A small adjustment (based on GSE data) is applied to this 
figure to reflect the fact that SFORIG$ includes a relatively small 
volume of mortgages for two-to-four-unit and investor properties 
(see Section C above). This produces an average loan size of about 
$94,000 for the conventional conforming market.

Substituting this value into (2) yields an estimate of 4.82 million 
mortgages in 1996.
    Third, we estimate the total number of single-family mortgages 
among the three single-family property types. Using the 88/2/10 
percentage distribution for single-family mortgages from HUD's proposed 
rule (see Section C), the following results are obtained:

(3a) SF-OM# = .88 * CCSFM# = number of owner-occupied, one-unit 
mortgages = 4.24 million.
(3b) SF-2-4M# = .02 * CCSFM# = number of owner-occupied, two-to-four 
unit mortgages = .10 million.
(3c) SF-INVM# = .10 * CCSFM# = number of one-to-four unit investor 
mortgages = .48 million.

    Fourth, we determine the number of dwelling units financed by these 
single-family mortgages:

(4a) SF-O = SF-OM# + SF-2-4M# = number of owner-occupied dwelling units 
financed = 4.34 million.
(4b) SF 2-4 = 1.25 * SF-2-4M# = number of rental units in 2-4 
properties where a owner occupies one of the units = .12 
million.35

    \35\ Based on the RFS, there is an average of 2.25 housing units 
per mortgage for 2-4 properties. 1.25 is used here because one 
(i.e., the owner occupant) of the 2.25 units is allocated to the SF-
O category. The RFS is also the source of the 1.35 used in (4c).
---------------------------------------------------------------------------

(4c) SF-INVESTOR = 1.35 * SF-INVM# = number of single-family investor 
dwelling units financed = .65 million.

Summing equations 4a-4c gives 5.11 million for the projected number of 
newly-mortgaged single-family units (SF-UNITS).
b. Multifamily Units
    The number of dwelling units financed by conventional conforming 
multifamily originations is:

(5) MF-UNITS = CCMFM$/MFLOAN$

Where:

CCMFM$ = conventional conforming mortgage originations, which are 
projected to be $30 billion; as discussed in Section C, alternative 
estimates of the multifamily market will be included in the analysis.
MFLOAN$ = average loan amount per housing unit in multifamily 
properties = $30,000.36

    \36\ Blackley and Follain, op. cit., p. 10.

Substituting these values into (5) yields a projection for MF-UNITS of 
1.0 million.
c. Total Units Financed
    The total number of dwelling units financed by the conventional 
conforming mortgage market (TOTAL) can be expressed in three useful 
ways:

(6a) TOTAL = SF-UNITS + MF-UNITS = 6.11 million
(6b) TOTAL = SF-O + SF 2-4 + SF-INVESTOR + MF-UNITS
(6c) TOTAL = SF-O + SF-RENTAL + MF-UNITS

Where SF-RENTAL equals SF-2-4 plus SF-INVESTOR.

2. Property Distributions

    The next step is to express the number of dwelling units financed 
for each property type as a percentage of the total number of units 
financed by conventional conforming mortgage originations.37

    \37\ The share of the mortgage market accounted for by owner 
occupants is (SF-O)/TOTAL; the share of the market accounted for by 
all single-family rental units is SF-RENTAL/TOTAL; and so on.
---------------------------------------------------------------------------

    The projections used above in equations (1)-(6) produce the 
following distributions of financed units by property type:

------------------------------------------------------------------------
                                    Percent                      Percent
                                     share                        share 
------------------------------------------------------------------------
SF-O..............................     71.0                             
SF 2-4............................      2.0  SF-O..............  \38\ 71
                                                                      .8
SF INVESTOR.......................     10.6  SF-RENTER.........     12.6
MF-UNITS..........................     16.4  MF-UNITS..........     16.4
                                   -------------------------------------
      Total.......................    100.0    ................    100.0
------------------------------------------------------------------------

    Sections  C and D discussed alternative projections for the volume 
of the multifamily originations and the investor share of single-family 
mortgages. The analysis in this appendix will consider three 
multifamily origination levels--$23 billion, $30 billion, and $35 
billion--and three projections about the investor share of single-
family mortgages--7 percent, 10 percent, and 12 percent. The middle 
values ($30 billion and 10 percent) will be considered the ``baseline'' 
projections throughout the Appendix.

    \38\ Owners of 2-4 properties account for 1.6 percentage points 
of the 71.0 percent for SF-O.
---------------------------------------------------------------------------

    Table D.3 reports the unit-based distributions produced by HUD's 
market share model for different combinations of these projections. The 
effects of the different projections can best be seen by examining the 
owner category which varies by 9 percentage points, from a low of 67.2 
percent (multifamily originations of $35 billion coupled with an 
investor mortgage share of 12 percent) to a high of 76.0 percent 
(multifamily originations of $23 billion coupled with an investor 
mortgage share of 7 percent). The owner share under the baseline 
projections ($30 billion and 10 percent) is 71.0 percent.

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    Comparison with the RFS. The Residential Finance Survey is the only 
mortgage data source that provides unit-based property distributions 
similar to those reported in Table D.3. Based on RFS data for 1987 to 
1991, HUD estimated that, of total dwelling units in properties 
financed by recently acquired conventional conforming mortgages, 56.5 
percent were owner-occupied units, 17.9 percent were single-family 
rental units, and 25.6 percent were multifamily rental units.39 
Thus, the RFS presents a much lower owner share than does HUD's model. 
This difference is due mainly to the relatively high level of 
multifamily originations during the mid- to late-1980s, which is the 
period covered by the RFS.40

    \39\ Restricting the RFS analysis to 1991 resulted in only minor 
changes to the market shares.
    \40\ Between 1987 and 1991, annual multifamily mortgage 
originations averaged $32 billion, representing 7.2 percent of 
conventional mortgage originations. In 1994, conventional 
multifamily originations stood at $30 billion but because of the 
increase in single-family originations since the late 1980s, the 
multifamily share of total originations had dropped to 4.5 percent. 
In HUD's projection model, the $30 billion in multifamily 
originations represents 4.9 percent of total conventional 
originations for 1996.
---------------------------------------------------------------------------

3. Sensitivity of Property Distributions to Changes in Other Model 
Parameters

    The multifamily and single-family rental markets are not the only 
areas where some degree of uncertainty exists about their magnitudes. 
HUD examined the sensitivity of the property distributions given in 
Table D.3 to changes in several other model parameters. Most of these 
sensitivity analyses will be reported when discussing the market 
estimates for each of the housing goals. Suffice it to say here that 
any changes that reduce the owner categorysuch as reducing the overall 
level of single-family origination activity or raising the per unit 
loan amounts for single-family mortgagestend to increase the market 
estimates for each of the housing goals. This occurs because the goal 
percentages for owner mortgages are lower than those for rental 
housing.

F. Size of the Conventional Conforming Mortgage Market Serving Low- and 
Moderate-Income Families

    This section estimates the size of the low- and moderate-income 
market by applying low- and moderate-income percentages to the property 
shares given in Table D.3. This section essentially accomplishes Steps 
2 and 3 of the three-step procedure discussed in Section B.
    Technical issues and data adjustments related to the low- and 
moderate-income percentages for owners and renters are discussed in the 
first two subsections. Then, estimates of the size of the low- and 
moderate-income market are presented along with several sensitivity 
analyses. Based on these analyses, HUD concludes that 48-52 percent is 
a reasonable estimate of the mortgage market's low- and moderate-income 
share for 1996 and 1997. It is assumed that similar shares will exist 
following 1997.
    The final rule establishes the Low- and Moderate-Income Goal for 
1996 at 40 percent of the total number of dwelling units financed by 
the GSE's mortgage purchases for 1996. The level of the goal for 1997 
and subsequent years is 42 percent of each year's mortgage purchases.

1. Low- and Moderate-Income Percentage for Single-Family Owner 
Mortgages

a. HMDA Data
    The most important determinant of the low- and moderate-income 
share of the mortgage market is the income distribution of single-
family borrowers. HMDA reports annual income data for families living 
in metropolitan areas who purchase a home or refinance their existing 
mortgage.41 Table D.4 gives the percentage of mortgages taken out 
by low- and moderate-income families for the years 1992, 1993, and 
1994. For each year, an unadjusted low- and moderate-income percentage 
is reported as well as one based on the adjustments that HUD made in 
its proposed rule, that is, excluding loans less than $15,000 and 
excluding loans where the loan-to-income ratio was greater than 
six.42 The additional adjustments reported for 1993 and 1994 will 
be discussed below.

    \41\ As noted earlier, HMDA data are expressed in terms of 
number of loans rather than number of units. In addition, HMDA data 
do not distinguish between owner-occupied one-unit properties and 
owner-occupied 2-4 properties. This is not a particular problem for 
this section's analysis of owner incomes.
    \42\ The purpose of the first adjustment was to drop from the 
analysis small loans (such as mobile home loans) which the GSEs do 
not typically purchase; the purpose of the second adjustment was to 
cleanse the data base of outliers and likely coding errors. As 
discussed below, a more direct adjustment for mobile homes is made 
in this final rule.
---------------------------------------------------------------------------

    Table D.4 also reports similar data for very-low-income families 
(that is, families with incomes less than 60 percent of area median 
income). These data will be used in Section H to estimate the special 
affordable mortgage market.
    Two trends in the income data should be mentioned. First, the 
percentage of borrowers with less than area median income has increased 
significantly over the past three yearsborrowers with less than median 
income increased from 33.5 percent of the home purchase market in 1992 
to 42.6 percent of that market in 1994. This jump in low-income lending 
has been attributed to historically low interest rates during this 
period and to affordable lending initiatives and outreach efforts on 
the part of lenders, private mortgage insurers, and the GSEs. Second, 
the characteristics of borrowers refinancing mortgages appears to have 
changed between 1993 and 1994. During the refinancing waves of 1992 and 
1993, refinancing borrowers had much higher incomes than borrowers 
purchasing homes. But during 1994 these two groups exhibited 
practically the same income distributions.

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b. Adjustment for Mobile Home Loans
    The GSEs do not purchase mobile home loans under their seller/
servicer guidelines unless they are real estate loans, that is, the 
home must have a permanent foundation and the site must be either 
purchased as part of the transaction or already owned by the borrower. 
A 1993 study estimated that only 10 percent of existing mobile homes 
could qualify under GSE guidelines, but industry trends (more homes on 
private lots and on concrete foundations) suggest that this percentage 
has grown in the past few years.43 Mobile home loans present a 
problem for this analysis because an unknown number of them are 
included in the HMDA data. Since mobile homes are disproportionately 
occupied by lower-income families, their inclusion in HMDA data 
overstates the number of low-income loans eligible for GSE purchase 
under their seller/servicer guidelines. In other words, the 42.6 
percent share for less-than-median-income home purchasers given in 
Table D.4 overstates the low- and moderate-income share of home 
purchase loans available to the GSEs in 1994.

    \43\ See the study conducted by The Hamilton Securities Group 
(dated September 1993) for the National Commission on Manufactured 
Housing. Data supporting the 10 percent estimate for existing mobile 
homes was not provided by Hamilton.
---------------------------------------------------------------------------

    According to industry representatives, it is unclear how many 
mobile home lenders report to HMDA, and for those that do report to 
HMDA, how many provide information on their non-real estate loans. HUD 
was able to identify four lenders in the HMDA data that primarily 
originate mobile home loans.44 According to HMDA, these lenders 
originated 101,493 owner-occupied loans in 1993 and 124,251 in 1994. 
Reflecting the fact that over half of all mobile homes are sold in 
nonmetropolitan areas, only 33,813 (33 percent) of the four lenders' 
1993 loans and 48,400 (39 percent) of their 1994 loans had geocode 
information (such as census tract or MSA code) indicating that the 
loans were for properties located in metropolitan areas.

    \44\ These lenders were Green Tree Acceptance, Vanderbilt 
Mortgage, The CIT Group, and Oakwood. Green Tree is estimated to 
account for 20-30 percent of the mobile home market.
---------------------------------------------------------------------------

    With this information, ``ineligible'' mobile home loans under the 
GSE seller/servicer guidelines could be deducted from the unadjusted 
HMDA data in three steps. First, the percentage income distribution of 
the above-mentioned geocoded mobile home loans 45 could be applied 
to an ``estimate'' of the total number of geocoded mobile home loans 
included in the HMDA data base. (As discussed below, obtaining this 
``estimate'' is the difficult part.) This would produce numbers of 
projected mobile home loans by income category. Next, the projected 
mobile home loans could be deducted from HMDA's unadjusted numbers for 
each income category. This would produce estimates of HMDA-reported, 
non-mobile-home loans by income category. Finally, a percentage income 
distribution could be calculated from these adjusted HMDA data.

    \45\ The income distribution for the 48,400 loans included in 
the 1994 HMDA data is: 34.5% had income less than 60% of AMI, 23.6% 
had income 60-80% of AMI, 17.2% had income 80-100% of AMI, and 24.7% 
had income greater than 100% of AMI. This can be compared with the 
income distribution for all HMDA loans reported in Table D.4. A 
mobile home loan borrower is almost three times more likely to have 
a very low income than the typical borrower (34.5% versus 12.5%). 
(Similar results were obtained for 1993 HMDA data.)
---------------------------------------------------------------------------

    HUD examined other data on the size of the mortgage market for 
mobile homes in order to determine some upper bounds for the 
``estimate'' required in the first step. According to the American 
Housing Survey, there were 235,000 newly-constructed mobile homes in 
1993, and 99,300 of these were located in metropolitan areas. About 
85,000 of the newly-constructed mobile homes in metropolitan areas were 
financed with a mortgage or installment contract, rather than purchased 
``free and clear.'' The other major category of mobile home lending 
involves purchases of existing mobile homes.46 According to the 
AHS, 95,000 existing mobile homes located in metropolitan areas were 
sold and purchased using a mortgage or installment contract during 
1993. Thus, the AHS estimates that there were about 180,000 owner-
occupied mobile homes purchased and financed during 1993.47 
Assuming that 10-15 percent of these 180,000 loans are ``eligible'' 
under the GSE guidelines would reduce the estimate of ineligible loans 
to the 155,000-165,000 range.

    \46\ Only about 5 percent of the identified mobile home loans 
were refinance loans. This explains why the income percentages for 
refinance loans in Table D.4 do not change very much, and why the 
change in total loans is much less than the change in home purchase 
loans. Manufactured Housing Insurance staff tell us that mobile home 
refinance loans are uncommon. Even if mobile home refinance loans 
were important, the 25 percent refinance share for 1996 loans in 
HUD's model would reduce the importance of this issue.
    \47\ It should be noted that the AHS sample for recent movers 
purchasing mobile homes was small which means that this estimate is 
subject to some degree of uncertainty.
---------------------------------------------------------------------------

    Adjusted HMDA Data. Table D.4 shows the effects of a series of 
estimates of the size of the mobile home loan market included in HMDA. 
Adjusting HMDA data in the manner described earlier reduces the low- 
and moderate-income percentage for 1993 home purchase loans from the 
unadjusted HMDA figure of 39.6 percent to 37.9 percent if one assumes 
that 75,000 ineligible mobile home loans are included in HMDA income 
data, and to 37.3 percent if one assumes 100,000.48 Increasing the 
assumptions to 125,000 and 150,000 ineligible mobile home loans reduces 
the low- and moderate-income percentage further to 36.6 percent and 
36.0 percent, respectively.

    \48\ It should be noted that the adjustments made in HUD's 
proposed rule produce about the same effects as the mobile home 
adjustments discussed above; this can be seen by comparing 
percentages in row B with those in rows C(1) and C(2) of Table D.4. 
One reason for this similarity is that many mobile home loans are 
less than $15,000 and these were excluded from HUD's analysis in the 
proposed rule.
---------------------------------------------------------------------------

    As shown in Table D.4, the market share for very-low-income 
families is proportionately more affected by the adjustment than is the 
market share for less-than-median-income families. For instance, the 
home purchase share for very-low-income home purchase borrowers falls 
from 11.5 percent to 10.3 percent assuming that 75,000 mobile home 
loans are included in the 1993 HMDA data, and to 9.0 percent assuming 
that 150,000 mobile home loans are included in the HMDA data.
    Mobile home loans were excluded from the AHS income data reported 
in Table D.4. For home purchase loans, that data show a 38.7 percent 
low- and moderate-income percentage and a 12.9 percent very-low-income 
percentage for 1993. Thus, the AHS income data suggest that the larger 
deductions for mobile homes (125,000 and 150,000) are probably too 
high.49 In addition, when the 150,000 ``estimate'' was applied in 
the above three-step procedure, mobile homes accounted for all of the 
low- and moderate-income loans less than $15,000 included in the 1993 
HMDA data base.50 While the appropriate deduction of mobile home 
loans from HMDA data is not known, it appears to be much less than the 
higher estimates reported in Table D.4.

    \49\ Even adjusting the 12.9 percent figure for possible 
underreporting of income in the AHS (see discussion below) would not 
affect this conclusion. The AHS estimate of the very-low-income 
percentage would remain much higher than the 9.4 (9.0) percent 
figure associated with deducting 125,000 (150,000) mobile home loans 
from the 1993 HMDA data.
    \50\ This also happened when the 200,000 ``estimate'' was 
applied to 1994 HMDA data. Table D.4 gives higher ``estimates'' for 
1994 HMDA because the U.S. Census reports that newly-constructed 
mobile homes increased by 50,000 (on a nationwide basis) between 
1993 and 1994. Whether purchases of existing mobile homes also 
increased, or even declined, is not known.

[[Page 61983]]

c. Additional Adjustments to HMDA Data
    Proposed Rule Adjustments. After deducting estimates of ineligible 
mobile home loans, HUD made the same deductions as in its proposed 
rulethat is, from the remaining estimate of non-mobile-home loans, HUD 
deducted loans less than $15,000 and loans with a loan-to-income ratio 
greater than six. The effects of these adjustments are shown in rows 
D(1) and D(2) of Table D.4. For instance, the low- and moderate-income 
percentage for 1994 home purchase loans falls from 42.6 percent 
(unadjusted HMDA) to 40.8 percent (due to dropping 100,000 mobile 
homes) to 39.6 percent (due to the proposed rule adjustments). In this 
case, the 1994 market share for very-low-income borrowers falls from 
13.1 percent to 11.9 percent to 10.3 percenta reduction of over 20 
percent. When the AHS percentages given in Table D.4 are adjusted for 
loans less than $15,000 and for loans with a loan-to-income ratio 
greater than six, the low- and moderate-income percentage for home 
purchase loans falls from 38.7 to 37.2, while the very-low-income 
percentage for home purchase loans falls from 12.9 to 11.1.
    Possible Bias in HMDA Data. There is evidence that HMDA may be 
over-reporting lower-income loans relative to higher-income loans. Jim 
Berkovec and Peter Zorn compared loans that were reported by HMDA as 
being sold to Freddie Mac with loans that Freddie Mac's own records 
show as being purchased by Freddie Mac.51 Their major conclusion 
was that 1992 and 1993 HMDA data contain only 65-70 percent of 
conventional mortgage loans. They also found that HMDA's coverage 
varied across census tracts, with coverage being higher in lower-income 
census tracts.52 While there was some correlation with the percent 
minority population in the census tract, it largely disappeared when 
controlling for income.

    \51\ Jim Berkovec and Peter Zorn, ``How Complete is HMDA?: HMDA 
Coverage of Freddie Mac Purchases,'' Freddie Mac, January 4, 1995.
    \52\ Berkovec and Zorn offer two possible reasons for why HMDA 
reporting may be better in low-income areas. First, regulatory and 
CRA pressure is greater on larger banks and thrifts and all of these 
are required to report to HMDA. Smaller suburban lenders making 
loans in higher income tracts are not all required to report to HMDA 
and less likely to encounter intense regulatory pressure. Second, 
lenders have more incentive to report lower-income loans and thus 
are more careful in reporting these loans.
---------------------------------------------------------------------------

    For a census tract configuration approximating the underserved area 
definition in HUD's proposed rule, Berkovec and Zorn's simulations 
suggest that the market share for these tracts should be adjusted by a 
factor of 90%-95% in 1992 and by 85%-95% in 1993.53 However, 
Berkovec and Zorn caution that their analysis does not look at the 
whole mortgage market; rather, it looks only at HMDA loans reported as 
being sold to Freddie Mac. Loans sold to Fannie Mae are not included in 
Berkovec and Zorn's analysis. Thus, systematic over-reporting of low 
income loans sold to Freddie Mac could also explain their findings.

    \53\ These percentages were derived from their Tables 8 and 9 by 
comparing market shares under the three adjustment methods with the 
market share actually reported by HMDA. To approximate the 
underserved definition in HUD's proposed rule, high-minority tracts 
(31-100 percent) with incomes between 100 and 120 percent of area 
median income were assigned one-half of the market share of the 
high-minority tracts with income greater than area median income.
---------------------------------------------------------------------------

    The low- and moderate-income goal is defined in terms of borrower 
incomes, not census tract incomes as analyzed by Berkovec and Zorn. 
Thus, HUD compared income distributions of loans that HMDA reports were 
originated in 1993 and 1994 and sold to one of the GSEs in the year of 
origination with income distributions of loans that the GSEs report 
were purchased by them in 1993 and 1994 in the same year as 
origination. The results were consistent with Berkovec and Zorn's 
findings that HMDA may be over-reporting lower-income loans and that 
the over-reporting may be greater the lower the income. In 1993, the 
low- and moderate-income share of loans reported by HMDA as being sold 
to the GSEs was 1.7 percentage points greater than the low- and 
moderate-income share of loans that the GSEs report they purchased in 
1993 (34.2 percent versus 32.5 percent); this translates into a five 
percent rate of over-reporting. The corresponding very-low-income 
shares, on the other, differed by almost ten percent (7.1 percent based 
on HMDA data versus 6.5 percent based on GSE data). But as noted by 
Berkovec and Zorn, the absolute difference (0.6 percent in this case) 
is not so great because of the relatively small number of loans 
originated for very-low-income borrowers. Similar results were obtained 
when comparing 1994 HMDA and GSE data.
    The above comparisons suggest that low- and moderate-income 
percentages reported in row D of Table D.4 may need a slight further 
adjustment for HMDA's over-reporting of lower income loans. But, as 
noted earlier, 1993 AHS data suggest that HMDA data does not need to be 
adjusted downward. Because of this uncertainty, HUD considers several 
possible values of the low- and moderate-income percentage for owners 
when computing the low- and moderate-income market share estimates in 
Section F.3 below.
d. American Housing Survey Data
    Borrower income data from the American Housing Survey are included 
in Table D.4.\54\ The low- and moderate-income percentages from the 
1993 AHS are similar to those reported by 1993 HMDA data. According to 
the AHS, 38.7 percent of those families who recently purchased their 
homes, and who obtained conventional mortgages below the conforming 
loan limit, had incomes below the area median; this compares with 37.3 
percent based on 1993 HMDA data that excludes 100,000 mobile homes.

    \54\ The AHS data reported in this final rule were derived using 
different methods than the corresponding data reported in HUD's 
proposed rule. The differences will be explained below when 
discussing AHS data on rent affordability.
---------------------------------------------------------------------------

    A longer-term perspective of the mortgage market can be gained by 
examining income data from the last five American Housing Surveys, 
conducted in 1985, 1987, 1989, 1991, and 1993. The low- and moderate-
income share was in the 32-34 percent range except for 1985 (27 
percent) and 1991 (36 percent). The overall average during the 1985-93 
period was 32.3 percent.
    AHS Under-Reporting of Income. In commenting on the proposed rule, 
the GSEs criticized HUD's reliance on AHS data on the grounds that 
income reported in the AHS is lower than other independent estimates of 
income,\55\ and questioned AHS estimates that 60 percent of all 
households qualify as low- or moderate-income under definitions of the 
Act.\56\ The reported discrepancy is 

[[Page 61984]]
based on a comparison with sources such as Gross Domestic Product (GDP) 
and the Social Security Administration, and relates to specific sources 
of income, such as interest income and assistance income, which are 
more significant portions of the incomes of households at the upper and 
lower ends of the spectrum. AHS estimates of wage and salary income are 
quite comparable to these aggregate sources. It is unclear how these 
discrepancies affect the percentages of interest here.

    \55\ See Codebook for the American Housing Survey Data Base: 
1973-1993, at page 1-11.
    \56\ Claiming that 50 percent of the country's households are 
``below the true median by definition,'' Freddie Mac proposed 
adjusting for AHS underreporting of income by inflating incomes of 
all households until 50 percent of AHS households are ``above median 
income.'' This suggestion has a major flaw: it fails to distinguish 
between median household income and the Act's definition of ``median 
income'' as: the unadjusted median family income for the area, as 
determined and published annually by the Secretary. [Sec. 1303 (9), 
emphasis added.] Because more than 30 percent of households are 
occupied by single persons or unrelated individuals and families 
often have more earners than households, median family income is 
appreciably higher than median household income. In 1990, for 
example, U.S. median family income was $35,353, 18 percent above the 
median household income of $29,943. Interpolating from the household 
income distribution, in 1990 58.3 percent of households had income 
less than national median family income. Table 695 of the 1992 
Statistical Abstract gives the 1990 household income distribution in 
dollars with $35,000 as one cutoff. It shows that 57.9% of 
households had income below $35,000 in 1990 and 17.5% had income in 
the $35,000-$49,999 category.
---------------------------------------------------------------------------

    A more relevant issue is a comparison of AHS sample data with 
special tabulations of 1990 Census data, which has more accurate income 
data, since it explicitly asks amounts of income by source for each 
individual. Moreover, decennial Census data on median family income are 
the basic source of HUD's official estimates of area median income that 
define ``median income'' for this rule.\57\

    \57\ Note that in setting the median family income for an MSA, 
HUD compares the Census estimate to the AHS estimate. The Census 
estimate is used, unless it falls outside the confidence interval 
for the AHS estimate, in which case the AHS estimate is used. 
Currently, the Census estimate is used for all MSAs.
---------------------------------------------------------------------------

    In special Comprehensive Housing Affordability Strategy (CHAS) 
tabulations, 1990 Census data on household income were compared to 
official HUD estimates of area median income for each location in the 
country. These CHAS tabulations should be more accurate than the AHS in 
two ways--because the Census income data are better, and because the 
CHAS income data were compared to accurate median family income data 
for each metro area or nonmetro county in the country.
    Comparison between the 1989 AHS income distribution (which, taken 
in fall of 1989, is the closest in time to the April 1, 1990 Census) 
and the CHAS tabulations shows that two income distributions are 
remarkably similar for renters:

------------------------------------------------------------------------
                                                       Percent of total 
                                                         below cutoff   
                    Income cutoff                    -------------------
                                                        CHAS       AHS  
------------------------------------------------------------------------
50% of median.......................................     38.7%     38.5%
80% of median.......................................     59.0%     59.0%
95% of median.......................................     68.0%     67.5%
------------------------------------------------------------------------

    For owners, shares appear to differ by about 2 percentage points 
throughout the very low- to moderate-income range.\58\:

    \58\ These estimates of income are adjusted for family size, and 
therefore should not be taken as direct estimates of shares of 
owners qualifying as ``low or moderate income'' under GSE income 
definitions. The comparison should however provide a valid estimate 
of the effect of income underreporting on the AHS estimates of low 
or moderate income made without family size adjustments.

------------------------------------------------------------------------
                                                       Percent of total 
                                                         below cutoff   
                    Income cutoff                    -------------------
                                                        CHAS       AHS  
------------------------------------------------------------------------
50% of median.......................................     15.5%     17.6%
80% of median.......................................     29.7%     32.2%
95% of median.......................................     37.8%     40.1%
------------------------------------------------------------------------

    This suggests that reducing the 1989 AHS estimates for owners by no 
more than 2 percentage points would appropriately adjust for income 
underreporting.
    Improvements to the 1993 Survey. Income underreporting in the AHS 
was reduced after changes were made in the questionnaire for the 1993 
Survey. Formerly, the AHS reported dividend and interest income for a 
household only if it exceeded $400. Now the Survey reports all dividend 
and interest income, regardless of the amount, and various sources of 
interest are specified. In addition to unemployment and worker's 
compensation and ``any other income,'' Survey respondents were 
explicitly asked about ``other disability payments,'' and ``veterans' 
payments.'' As a result, the percentage of respondents reporting income 
in this category rose from 9.6 percent in 1991 to 13.8 percent in 1993. 
In general, the percentage of AHS households reporting income other 
than wages or salaries rose sharply, from 63 percent in 1991 to 79 
percent in 1993.

[[Page 61985]]

    Thus, it is not clear that AHS underreporting of income is a major 
problem, especially since the 1993 improvement. In any event, there 
does not appear to be a need for an adjustment of more than a couple of 
percentage points for owner-occupied units surveyed prior to 1993, and 
no adjustment is needed for rental units.

2. Low- and Moderate-Income Percentage for Renter Mortgages

a. American Housing Survey Data
    The American Housing Survey does not include data on mortgages for 
rental properties; rather, it includes data on the characteristics of 
the existing rental housing stock and recently completed rental 
properties. Current data on the income of prospective or actual tenants 
has also not been readily available for rental properties. Where such 
income information is not available, FHEFSSA provides that a rent level 
is affordable if it does not exceed 30 percent of the maximum income 
level for the low- and moderate-income category, with appropriate 
adjustments for family size as measured by the number of bedrooms. The 
GSEs' performance under the housing goals is measured in terms of the 
affordability of the rental dwelling units that are financed by 
mortgages that the GSEs purchase; the income of the occupants of these 
rental units is generally not considered in the calculation of goals' 
performance. Thus, it is appropriate to base estimates of market size 
on rent affordability data rather than on renter income data.59

    \59\ Because the ``low- and moderate-income share'' of rental 
units is based on rents rather than incomes, Freddie Mac's comment 
on the proposed rule, that estimates of the low-mod share for rental 
units should be adjusted for AHS income underreporting, is not 
valid.
---------------------------------------------------------------------------

    Table D.5 presents AHS data on the affordability of the rental 
housing stock for the survey years between 1985 and 1993. The 1993 AHS 
shows that for 1-4 unit unsubsidized rental properties, 98 percent of 
all units, and 92 percent of units constructed in the preceding three 
years had gross rent (contract rent plus the cost of all utilities) 
less than or equal to 30 percent of area median income. For multifamily 
unsubsidized rental properties, the corresponding figures are 96 
percent of all units, and 88 percent of units constructed in the 
preceding three years. The AHS data for 1989 and 1991 are similar to 
the 1993 data.
    Several commenters expressed concern about using affordability data 
from the outstanding rental stock to proxy affordability data for 
mortgage flows. Some have argued that data based on the recently 
completed stock would be a better proxy for mortgage flows. In the 
above case, there is not a large difference between the affordability 
percentages for the recently constructed stock and those for the 
outstanding stock of rental properties. But this is not the case when 
affordability is defined at the very-low-income level. As shown in 
Table D.5, the recently completed stock houses substantially fewer 
very-low-income renters than does the existing stock. Because this 
issue is important for the special affordable goal, it will be further 
analyzed in Section H when that goal is considered.
    For purposes of the Low- and Moderate-Income Goal, the analysis in 
Section H concludes that the existing stock is an adequate proxy for 
the mortgage flow when rent affordability is defined in terms of less 
than 30 percent of area median income. More specifically, that analysis 
suggests that 85 percent of single-family rental units and 90 percent 
of multifamily units are reasonable estimates for projecting the 
percentage of financed units affordable at the low- and moderate-income 
level.60

    \60\ In 1994, 87 percent of GSE purchases of single-family 
investor rental units and 95 percent of their purchases of 
multifamily units qualified under the low-mod goal.

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[[Page 61987]]

b. Improvements to AHS Analysis
    The AHS data for both owners and renters differ from those reported 
in HUD's proposed rule due to several improvements in HUD's 
methodology. The major changes are as follows:
     The income limits for the 1989-93 surveys are now based on 
1990 Census results, and those for the 1985 and 1987 survey are now 
based on 1980 Census results. Previous versions had used income limits 
from 1970 Census data for 1985, and from 1980 Census data for all other 
years. These changes basically use income limits that are more 
``correct'' for each year than was the case in the earlier analysis. 
The newly available income limits based on 1990 Census data should more 
accurately describe income distributions in 1989 and 1991 than the ones 
extrapolated from 1980 Census data.
     A bedroom-size adjustment factor used by HUD for units 
with four or more bedrooms has been added; this is important because 
these large-bedroom units represent almost one-fourth of rental units 
with three or more bedrooms. This change increases accuracy because 
earlier, the 3-plus bedroom adjustment factor was used for all units 
with more than three bedrooms.
     Utility payments in the 1985 and 1987 surveys are 
constrained to independent (lower) estimates so that they are 
comparable with procedures begun by the Census Bureau for the 1989 AHS. 
The new Census Bureau procedures were instituted to correct errors in 
reported utility payments that were known to cause upward bias. This 
change should also increase accuracy.
    The main effects of these changes are higher affordability 
estimates than reported in the proposed rule. The portion of the 
outstanding stock that is affordable at less than area median income 
goes up by only 3-6 percentage points across the five survey years; 
however, the portion of the recently completed stock shows increases 
from 5 to 20 percentage points. The portion of the outstanding stock 
affordable at the very-low-income level rises from 4 to 14 percent in 
four of the survey years and declines in the other one.61

    \61\ Except for 1991, which showed an increase from 31 to 36 
percent in the percentage of borrowers with less than median income, 
the income percentages for owners showed only slight increases or no 
increases at all.
---------------------------------------------------------------------------

3. Size of the Low- and Moderate-Income Mortgage Market

a. Market Estimates
    This section provides estimates for the size of the low- and 
moderate-income mortgage market. Three alternative sets of projections 
about property shares and property low- and moderate-income percentages 
are given in Table D.6. Case 1 projections represent the baseline and 
intermediate case; it assumes that investors account for 10 percent of 
the single-family mortgage market. Case 2 assumes a lower investor 
share (7 percent) based on HMDA data and slightly more conservative 
low- and moderate-income percentages for single-family rental and 
multifamily properties (80 percent and 85 percent, respectively). Case 
3 assumes a higher investor share (12 percent) consistent with Follain 
and Blackley's suggestions.
    The low- and moderate-income percentage for owners is the most 
important determinant of the market estimates. Thus, Table D.7 provides 
market estimates for different owner percentages as well as for 
different sizes of the multifamily market--the $30 billion baseline 
projection bracketed by $23 and $35 billion. Most low- and moderate-
income estimates reported for the baseline projections are around 50 
percent. The market estimate is 53 percent if the owner percentage is 
at its 1994 level (40 percent), and it is 51 percent if the owner 
percentage is at its 1993 level (37 percent). If the low- and moderate-
income percentage for owners falls to 32 percent (about its 1992 
level), the overall market estimate falls to 48 percent. Under HUD's 
baseline projections, the owner percentage can fall to as low as 30 
percent--about ten (seven) percentage points lower than its 1994 (1993) 
level--and the low- and moderate-income market share would still be at 
46 percent.
    The size of the multifamily market is also an important determinant 
of the low- and moderate-income market share. The market estimates 
increase by about a percentage point as multifamily volume moves from 
$23 billion to $35 billion. The market estimates for Case 2 and Case 3 
bracket those for Case 1. The smaller rental market and lower low- and 
moderate-income percentages for rental properties result in the Case 2 
estimates being almost three percentage points below the Case 1 
estimates.
    The various market estimates presented in Table D.7 are not all 
equally likely. Most of them equal or exceed 48 percent, suggesting 
that this is a reasonable lower bound for the size of the low- and 
moderate-income market.

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[[Page 61990]]

b. Economic Conditions, Market Estimates, and the Feasibility of the 
Low- and Moderate-Income Housing Goal
    The public comments indicated a concern that the market share 
estimates and the housing goals failed to recognize the volatility of 
housing markets and the existence of macroeconomic cycles. There was 
particular concern that the market shares and housing goals were based 
on a period of record low interest rates and high affordability. This 
section discusses these issues, noting that the Secretary can consider 
shifts in economic conditions when evaluating the performance of the 
GSEs on the goals, and noting further that the market share estimates 
can be examined in terms of less favorable market conditions than 
existed during 1993 and 1994.
    Volatility of Market. Industry forecasts of the 1996 mortgage 
market are the starting point for HUD's estimates of market share for 
each housing goal. HUD projected $700 billion in single-family 
originations for 1996 based on forecasts of $720 billion by the 
Mortgage Bankers Association and $700 billion by Fannie Mae. These 
industry forecasts are based on certain underlying economic conditions. 
Unanticipated shifts in economic activity will obviously affect the 
degree to which these forecasts are borne out. Thus, changing economic 
conditions can affect the validity of HUD's market estimates as well as 
the feasibility of accomplishing the housing goals.
    One only has to recall the volatile nature of the mortgage market 
in the past few years to appreciate the uncertainty around projections 
of that market. Large swings in refinancing, consumers switching 
between adjustable-rate mortgages and fixed-rate mortgages, increased 
first-time homebuyer activity due to record low interest rates, and 
shifts in FHA activity have all characterized the recent mortgage 
market. These conditions are beyond the control of the GSEs but they 
would affect their performance on the housing goals. A mortgage market 
dominated by heavy refinancing on the part of middle-income homeowners 
would reduce the GSEs' ability to reach a specific target on the low- 
and moderate-income goal, for example. A jump in interest rates would 
reduce the availability of very-low-income mortgages for the GSEs to 
purchase. But on the other hand, the next few years may be highly 
favorable to achieving the goals because of the high refinancing 
activity in 1993. A period of low interest rates would sustain 
affordability levels without causing the rush to refinance seen in 
1993. A high percentage of potential refinancers have already done so, 
and are less likely to do so again. Year-to-date 1995 data support this 
argument.
    Feasibility Determination. HUD is well aware of the volatility of 
mortgage markets and the possible impacts on the GSEs' ability to meet 
the housing goals. FHEFSSA allows for changing market conditions.\62\ 
If HUD has set a goal for a given year and market conditions change 
dramatically during or prior to the year, making it infeasible for the 
GSE to attain the goal, HUD must determine ``whether (taking into 
consideration market and economic conditions and the financial 
condition of the enterprise) the achievement of the housing goal was or 
is feasible.'' This provision of FHEFSSA clearly allows for a finding 
by HUD that a goal was not feasible due to market conditions, and no 
subsequent actions would be taken.

    \62\ Section 1336(b)(3)(A).
---------------------------------------------------------------------------

    Affordability and Market Estimates. The market share estimates rely 
on 1993 and 1994 HMDA data for the percentage of low- and moderate-
income borrowers. As discussed earlier, record low interest rates and 
affordability initiatives of the private sector encouraged first-time 
buyers and low-income borrowers to enter the market during this period. 
A significant increase in interest rates over their 1993-94 levels 
would reduce the presence of low-income families in the mortgage market 
and the availability of low-income mortgages for purchase by the GSEs.
    HUD simulated the effects of a two-percentage point increase in 
interest rates on the payment-to-income ratios of 1993 and 1994 GSE 
borrowers (see Appendix A). Lower-income borrowers started with higher 
payment ratios and were thus disproportionately affected by the 
simulated increase in interest rates. Dropping from the GSE data all 
less-than-median income borrowers whose payment-to-income ratios 
increased to above 28 percent reduced the low- and moderate-income 
percentage of GSE business by 15 percent (about 5 percentage points) 
and the very-low-income percentage by 17 percent (about 1.25 percentage 
points). While this is only a partial look at the effects of higher 
interest rates, it indicates that the effects will be concentrated at 
the lower-income end of the market. A counter-balancing effect would be 
that a rise in interest rates reduces the refinance rate. In 1993, 
refinance borrowers had higher incomes than home purchase borrowers, 
but in 1994, purchase and refinance mortgage borrowers had more similar 
incomes.
    As discussed in Appendix A, the effects of higher interest rates on 
affordability have to be considered in the context of other market 
changes. Rising employment, incomes, and consumer confidence, for 
example, can mitigate the effects of higher rates on the demand for 
mortgage credit. Unfortunately, it is difficult to quantify the impacts 
of these economic changes on the market estimates for the housing 
goals. What one can do, however, is examine the sensitivity of the 
market estimates to changes in the percentage of borrowers that have an 
income less than area median income. As noted earlier, reducing that 
percentage to 30 percent from its 1993-94 level of 37-40 percent drops 
the overall low- and moderate-income estimate to 46 percent under the 
baseline projections.
    The market model was re-estimated assuming an even higher interest 
rate environment--lower origination volumes ($535 billion for single-
family and $23 billion for multifamily) and an owner low- and moderate-
income percentage (26) that was only two-thirds of the 1994 level.\63\ 
In this case, the market estimate of 44 percent remains above HUD's 
goals of 40 percent for 1996 and 42 percent for 1997. Obviously, there 
are combinations of projections that would drive the low- and moderate-
income market estimate even lower; however, setting the goals to ensure 
their feasibility under the most pessimistic of economic conditions is 
not appropriate, given that the Secretary can re-evaluate goal 
feasibility if market conditions change dramatically.

    \63\ The $535 billion is a lower bound estimate provided by 
Freddie Mac.
---------------------------------------------------------------------------

c. Conclusions About the Size of Low- and Moderate-Income Market
    Based on the above findings as well as numerous sensitivity 
analyses, HUD concludes that 48-52 percent is a reasonable estimate of 
the mortgage market's low- and moderate-income share for 1996 and 
beyond. HUD recognizes that shifts in economic conditions could 
increase or decrease the size of the low- and moderate-income market 
during that period.

4. Further Considerations--Factors Not Taken Into Account in Developing 
the Market Estimates

    The 48-52 percent low- and moderate-income market estimate does not 
take into account several factors which could enhance the GSEs' 
performance with regard to the goals. 

[[Page 61991]]

a. Purchases of Seasoned Mortgages
    Both GSEs buy a number of seasoned mortgages, where the date of the 
mortgage note is more than one year before the date the GSE purchased 
the mortgage. HUD's market share estimates are based on current 
mortgage originations, thus there is no way for HUD to take into 
account the availability of seasoned mortgages. But many such mortgages 
would qualify for one or more of the goals.
b. Small Second Loans
    The final rule will allow the GSEs to count second mortgages for 
full credit toward the housing goals. In 1993, the GSEs purchased only 
a small number of second mortgages: Fannie Mae purchased 658 seconds, 
totalling $28.1 million, and Freddie Mac purchased 27 seconds, 
totalling $1.4 million. In 1994, the GSEs purchased both fewer such 
loans and smaller loans. Fannie Mae's second mortgage purchases fell to 
207 loans, totalling $7.8 million, while Freddie Mac's purchases of 
second mortgages fell to 1, in the amount of $24,000.
    It is unclear how the GSEs will react to the fact that seconds will 
be eligible under the goals. One scenario might involve a substantial 
increase in their purchases of small home improvement loans in inner-
city areas which would increase their performance under the goals. 
Another scenario might involve only incremental changes to their 
current business which would only marginally increase their performance 
under the goals. It is also unclear how to delineate the overall market 
in which the GSEs might be operating, because their past purchases have 
been so small. Admittedly, they could purchase second mortgages in all 
segments of the market (from inner city low-income loans to suburban 
high-income loans); however, given their current small share of the 
overall market, it might not be appropriate to assume their purchases 
would cover the entire market. In any case, HUD has made no adjustments 
in its market estimate to allow for the possible effects of making 
second mortgages eligible under the goals.
    The HMDA data do include information on home improvement loans 
(HILs). In 1993, 620,000 home improvement loans were originated, with 
an average loan amount of $20,700. Using RFS data, for the period 1989-
1991, the average loan amount for HILs was $26,700. The loan 
distribution for all HILs shows that 59 percent of these loans were for 
amounts less than $15,000. Compared with purchase mortgages, HILs are 
more targeted to lower-income borrowers. Almost 47 percent of 
conforming conventional owner-occupied HILs went to low- and moderate-
income borrowers.

G. Size of the Conventional Conforming Market Serving Central Cities, 
Rural Areas, and Other Underserved Areas

    The following discussion presents the estimates of the size of the 
conventional conforming market for the Central City, Rural Areas, and 
other Underserved Areas Goal (Geographically-Targeted Goal). The first 
two sections focus on central cities and other underserved areas. 
Section 1 presents area percentages for different property types while 
section 2 presents market estimates for these areas. Section 3 
discusses rural areas.
    The final rule establishes the Central Cities, Rural Areas, and 
other Underserved Areas Goal for 1996 at 21 percent of the total number 
of dwelling units financed by the GSE's mortgage purchases. The level 
of the goal for 1997 and subsequent years is 24 percent.

1. Central City and Other Underserved Area Shares by Property Type

    For purposes of the definitions of central cities and other 
underserved areas, underserved areas are defined as census tracts with:
    (a) Tract median income at or below 90 percent of the MSA median 
income; or
    (b) A minority composition equal to 30 percent or more and a tract 
median income no more than 120 percent of MSA median income.
    Table D.8 presents central cities and other underserved areas 
percentages for mortgages on owner, single-family rental, and 
multifamily properties. In 1994, 24.6 percent of home purchase loans 
financed properties located in these areas; this represents an increase 
from 22.4 percent for 1993.64 In 1994, refinance loans were 
slightly more likely than home purchase loans to be located in these 
areas (27.7 versus 24.6 percent) while in 1993 the situation was 
reversed (20.1 versus 22.4 percent). As table D.8 shows, the 
adjustments for mobile home loans are not nearly as large as those 
reported earlier for the borrower income data. The possibility that 
HMDA over-reports loans in low-income areas suggests that these 
percentages should be adjusted by another percent or two (see 
discussion of the Berkovec-Zorn paper in section F.1.c). Because of the 
importance of owner properties, the sensitivity analyses will examine a 
range of values for this variable.

    \64\ The corresponding percentages for the definitions in the 
proposed rule are 15.4 percent for 1993 and 17.1 percent in 1994. 
Thus, the effect of the additional 3,657 census tracts is to 
increase the home purchase percentage by 7.0 percent in 1993 and by 
7.5 percent in 1994.
---------------------------------------------------------------------------

    Based on 1993 and 1994 HMDA data, the central cities and other 
underserved areas percentage for single-family rental units is 41-43 
percent while that for multifamily properties is 48-51 percent. Thus, 
rental mortgages are about twice as likely as owner mortgages to 
finance properties located in these areas.

2. Market Estimates for Central Cities and Other Underserved Areas

    Table D.9 presents estimates for the central cities and other 
underserved areas market for the same combinations of projections used 
to analyze the Low- and Moderate-Income Goal. Table D.6 in Section F.3 
defines Cases 1, 2, and 3; Case 1 (the baseline) projects a 37.5 
percent share for single-family rentals and a 42.5 percent share for 
multifamily properties while the more conservative Case 2 projects 35.0 
percent and 40.0 percent, respectively.
    The single-family owner percentages are the driving force in the 
market for the estimate, even more so than in the low- and moderate-
income analysis. Table D.9 reports results under the baseline 
projections but for owner percentages ranging from 25 percent (1994 
HMDA without mobile homes) to 20 percent (1993 HMDA) to 17 percent. The 
market share estimates are mostly in the 25-28 percent range if the 
single-family owner central cities and other underserved areas 
percentage is 18 percent or more. If the owner percentage is at the 
1994 HMDA level of 25 percent, the market share estimate is as high as 
29 percent.
    At the lower extreme, the single-family owner percentage can go as 
low as 17 percent, which is 8 percentage points lower than the 1994 
HMDA value, and the market estimate is still 24 percent in the base 
case. Thus, the Geographically Targeted Goal allows for a market not as 
affordable as the 1993-94 period.
    Unlike the low- and moderate-income goal, the market estimates 
differ only slightly as one moves from Case 1 to Case 3 and from $23 
billion to $35 billion in the size of the multifamily market. This is 
because the central cities and other underserved areas differentials 
between the owner and rental properties are not as large as the low- 
and moderate-income differentials reported earlier.

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3. Size of Rural Underserved Area Market

    Rural areas are nonmetropolitan counties with:
    (a) County median income at or below 95 percent of the greater of 
statewide nonmetropolitan median income or nationwide nonmetropolitan 
income; or
    (b) A minority composition equal to 30 percent or more and a county 
median income no more that 120 percent of statewide nonmetropolitan 
median income.
    HMDA does not provide mortgage data for nonmetropolitan counties, 
which makes it impossible to estimate the size of the mortgage market 
in rural areas. However, all indicators suggest that counties in rural 
areas comprise a larger share of the nonmetropolitan mortgage market 
than the census tracts in central cities and other underserved areas 
comprise of the metropolitan mortgage market. Counties within rural 
areas include 54 percent of nonmetropolitan residents as well as 54 
percent of nonmetropolitan homeowners. Central cities and other 
underserved census tracts, on the other hand, account for 44 percent of 
metropolitan population and 34 percent of metropolitan homeowners.
    In 1994, 26.9 percent of Fannie Mae's total purchases in 
nonmetropolitan areas were in rural areas while 29.2 percent of Fannie 
Mae's purchases in metropolitan areas were in central cities and other 
underserved areas. The corresponding percentages for Freddie Mac were 
26.3 and 23.9, respectively. These data suggest that if the market 
share for counties in rural areas were available, it would be similar 
to the market share for census tracts in central cities and other 
underserved areas. Thus, HUD will use the metropolitan estimate to 
proxy the overall market for this goal, including rural areas.

4. Conclusions

    Based on the above findings as well as numerous sensitivity 
analyses, HUD concludes that 25-28 percent is a reasonable estimate of 
mortgage market originations that would qualify toward achievement of 
the Geographically Targeted Goal if purchased by a GSE. HUD recognizes 
that shifts in economic and housing market conditions could affect the 
size of this market; however, the market estimate allows for the 
possibility that adverse economic conditions can make housing less 
affordable than it has been in the last two years.

H. Size of the Conventional Conforming Market for the Special 
Affordable Housing Goal

    This section presents estimates of the conventional conforming 
mortgage market for the Special Affordable Housing Goal. The special 
affordable market consists of owner and rental dwelling units which are 
occupied by: (a) very-low-income families; or (b) low-income families 
in low-income census tracts 65; or (c) low-income families in 
multifamily projects that meet minimum income thresholds patterned on 
the low-income housing tax credit (LIHTC).66 HUD estimates that 
the special affordable market is 20-23 percent of the conventional 
conforming market. This market share estimate is three percentage 
points higher than the estimate in HUD's proposed rule mainly because 
low-income renters living in low-income census tracts or rural counties 
now qualify under the goal as defined in the final rule.

    \65\ Or in the case of rural areas, in low-income counties.
    \66\ There are two LIHTC thresholds: at least 20 percent of the 
units are affordable at 50 percent of AMI or at least 40 percent of 
the units are affordable at 60 percent of AMI.
---------------------------------------------------------------------------

    The final rule establishes the Special Affordable Housing Goal for 
1996 at 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, each GSE 
must purchase annually in multifamily mortgages at least an amount 
equal to 0.8 percent of the total dollar volume of mortgages purchased 
by the GSE in 1994.
    Section F described HUD's methodology for estimating the size of 
the low- and moderate-income market. Essentially the same methodology 
is employed here except that the focus is on the very-low-income market 
(0-60 percent of Area Median Income) and that portion of the low-income 
market (60-80 percent of Area Median Income) that is located in low-
income areas. Data do not exist to estimate the number of renters with 
incomes between 60 and 80 percent of Area Median Income who live in 
projects that meet the tax credit thresholds. Thus, this part of the 
Special Affordable Housing Goal is not included in the market estimate.

1. Special Affordable Shares by Property Type

    The basic approach involves estimating for each property type the 
share of dwelling units financed by mortgages in a particular year that 
are occupied by very-low-income families or by low-income families 
living in low-income areas. HUD has combined mortgage information from 
HMDA and the American Housing Survey in order to estimate these special 
affordable shares.
a. Very-Low-Income Owner Percentages
    The percentage of borrowers with very-low-incomes was reported 
earlier when discussing the Low- and Moderate-Income Goal. HMDA data 
show that very-low-income borrowers accounted for 9.4 percent of all 
conforming home purchase loans in 1992, 11.5 percent in 1993, and 13.1 
percent in 1994. Several adjustments were made to the HMDA data (see 
Table D.4). Excluding mobile home loans, for instance, reduced the 1993 
and 1994 very-low-income borrower percentages to the 9-10 percent 
range. The AHS reports a higher very-low-income percentage of 12.9 
percent for home purchase loans in 1993.
b. Very-Low-Income Rental Percentages
    Table D.5 in Section F reported the percentages of the single-
family rental and multifamily stock affordable to very-low-income 
families. According to the AHS, 61 percent of single-family units and 
51 percent of multifamily units were affordable to very-low-income 
families in 1993. The corresponding average values for the AHS's five 
surveys between 1985 and 1993 were 58 percent and 46 percent, 
respectively.
c. Outstanding Housing Stock versus Mortgage Flow
    An important issue concerns whether affordability data based on the 
existing rental stock can be used to proxy affordability of mortgaged 
rental units. Previous analysis of this issue has focussed on the 
relative merits of data from the recently completed stock versus data 
from the outstanding stock. The very-low-income percentages are much 
lower for the recently completed stock--for instance, the averages 
across the five AHS surveys were 15 percent for recently completed 
multifamily properties versus 46 percent for the multifamily stock. But 
it seems obvious that data from the recently completed stock would 
underestimate the affordability of newly-mortgaged units because they 
exclude purchase and refinance transactions involving older buildings, 
which generally charge lower rents than newly-constructed buildings. 
Blackley and Follain concluded that newly-constructed properties did 
not provide a satisfactory basis for 

[[Page 61995]]
estimating the affordability of newly-mortgaged properties.67

    \67\ ``A Critique of the Methodology Used to Determine 
Affordable Housing Goals for the Government Sponsored Housing 
Enterprises.''
---------------------------------------------------------------------------

    The remaining question is how much the affordability percentages 
from the existing rental stock should be reduced to reflect the flow of 
mortgage financing.68 HUD used the 1991 Residential Finance Survey 
to compare rents of the outstanding stock with rents of properties 
receiving mortgages. There were two main findings. The first 
findingand the important one for the Special Affordable Housing 
Goalwas that rents of newly-mortgaged properties were higher than 
those of the existing stock. About 44 percent of the units in newly-
mortgaged, multifamily properties were affordable to very-low-income 
families; this compares with 52 percent for the entire multifamily 
stock.69

    \68\ Some might argue that no adjustment is needed because the 
existing stock represents the underlying demand for mortgage credit 
and thus mortgage flows will have the same characteristics as the 
stock. While appealing at first sight, particularly if one takes a 
longer-run perspective, this argument ignores the host of reasons 
why the mortgage flow might not take on the characteristics of the 
underlying rental stockthe most obvious being that new construction 
mortgages are a significant part of mortgage activity (almost 15 
percent in 1994) but new properties represent only a minute part of 
the outstanding housing stock.
    \69\ First, HUD computed the distribution of units by rent 
category for existing and newly-mortgaged properties in the RFS. 
Because only average rent per property is reported in the RFS, all 
units in a particular property were assigned the same rent. Next, 
HUD computed the percentage of units that were affordable to 
families with less than 60 percent of area median income based on 
1989 and 1991 AHS data; this was about 50 percent for multifamily 
units. This 50 percent figure was used to define the absolute rent 
amount ($400) in the RFS that included the bottom 50 percent of 
rental units. (Because the rent brackets were in $100 increments, 
the bottom 52 percent of rents had to be used in the RFS analysis.) 
Finally, HUD computed the percentage of newly-mortgaged units below 
$400; as the text discusses, only 44 percent of the newly-mortgaged 
units were below $400.
---------------------------------------------------------------------------

    The corresponding percentages for single-family rental properties 
showed an even greater gap--47 percent for the newly-mortgaged stock 
and 60 percent for the existing stock. These comparisons suggest that 
in order to serve as a proxy for mortgage flows, the affordability 
percentages reported by the AHS should be adjusted downward by about 15 
percent in the case of multifamily properties and 20 percent in the 
case of single-family properties. The baseline analysis below will use 
very-low-income percentages of 42.5 percent for multifamily properties 
and 45 percent for single-family rentals.70

    \70\ Another approach would simply take the weighted average of 
the very-low-income percentages for newly-constructed multifamily 
properties (15 percent) and remaining stock (46 percent) with the 
weights determined by the estimated share of new construction 
mortgages (almost 15 percent in 1994). Doing this for multifamily 
also gives 42 percent.
---------------------------------------------------------------------------

    The second finding--and the one important for the low- and 
moderate-income goal--was that the percentage of newly-mortgaged 
properties renting at a level affordable to families with less than 
median income was only slightly lower than the percentage of the stock 
renting at that level. This finding is not particularly surprising 
given that most of the rental stock rents at levels affordable to 
median income families. It suggests that only a small reduction (about 
5 percent) in the affordability percentage of the existing stock is 
needed for it to proxy the mortgage flow.
d. Low-Income in Low-Income Areas
    According to HMDA data, the percentage of home purchase borrowers 
who had an income between 60 and 80 percent of area median income and 
who lived in a low-income census tract was 1.7 percent in 1992, 1.8 
percent in 1993, and 2.2 percent in 1994. The analysis below will vary 
this rate between 1 and 2 percent, depending on the percentage of very-
low-income owners being assumed at the time.

[[Page 61996]]

    HMDA does not provide similar data for renters. As a substitute, 
HUD examined the rental housing stock located in low-income zones of 41 
metropolitan areas surveyed as part of the AHS between 1989 and 1993. 
While the low-income zones do not exactly coincide with low-income 
tracts, they were the only proxy readily available to HUD.71 
Slightly over 13 percent of single-family rental units were both 
affordable at the 60-80 percent of AMI level and located in low-income 
zones; almost 16 percent of multifamily units fell into this 
category.72 The baseline analysis below assumes that 10 percent of 
the financed rental units are affordable at 60-80 percent of AMI and 
located in low-income areas.

    \71\ It would have been ideal for this purpose if AHS had 
identified its respondents by whether they live in a low-income 
census tract within a metropolitan area or low-income 
nonmetropolitan county (i.e., a tract or county whose median income 
is no more than 80 percent of metropolitan area or statewide non-
metro median income). AHS would then have yielded an estimate of the 
percentage of rental units located in such areas whose median income 
is less than 80 percent of area median, and this could have been 
combined with an AHS estimate of the percentage of those units whose 
rents are affordable at 60-80 percent of area median income to 
generate the desired figure. Instead, AHS identifies respondents in 
its metropolitan area surveys by a variable called ZONE and provides 
no corresponding variable outside of metropolitan areas. Zones were 
defined in the 1970s to be areas of at least 100,000 population that 
were socioeconomically homogeneous, and their boundaries have been 
fixed since then. HUD estimated the percentage of rental units in 
metropolitan areas affordable at 60-80 percent of area median income 
based on the AHS distribution of rental units by income of zone 
(relative to 80 percent of area median) and the AHS percentages of 
units affordable at 60-80 percent of area median within each zone. 
Because of the size difference between tracts and zones--around 
100,000 vs. around 4,000--the percentages that would have been 
generated if a tract-based analysis had been feasible would probably 
have been at least as large as the 13 percent and 16 percent figures 
generated in this analysis. This is because the larger the zones, 
the closer their median income would tend to be to the metropolitan 
area median income. HUD has no basis for estimating the degree of 
bias in extrapolating from this analysis of metropolitan area data 
to nonmetropolitan areas.
    \72\ The corresponding figures for the recently completed stock 
were 8 and 9 percent, respectively.
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2. Size of the Special Affordable Market

    The size of the special affordable market depends in large part on 
the size of the multifamily market and on the very-low-income 
percentages of both owners and renters. Table D.10 gives market 
estimates for different combinations of these factors.73 As 
before, Case 2 is slightly more conservative than the baseline 
projections (Case 1) mentioned above. For instance, Case 2 assumes that 
only 7 percent of rental units are affordable to low-income renters 
living in low-income areas.

    \73\ Table D.10 shows the size of the special affordable market 
based on alternative assumptions about the share of single-family 
owner-occupied units that are occupied by very-low-income 
households. Special affordable units also include those that are 
occupied by low-income households in low-income areas. For a very-
low-income assumption of 10 percent, the low-income in low-income 
area assumption is 2 percent. The 2 percent low-income in low-income 
area assumption is prorated downward as the very-low-income 
assumption is reduced, falling to 1.2 percent for a very-low-income 
assumption of 7 percent.
---------------------------------------------------------------------------

    The market estimates in Table D.10 suggest that 20-23 percent is a 
conservative estimate of the special affordable market. Under HUD's 
baseline projections, the market estimates remain above 20 percent even 
if the very-low-income percentage for owners falls as low as 6 percent. 
Thus, HUD's market estimate allows for the possibility that adverse 
economic conditions could keep very-low-income families out of the 
housing market. On the other hand, if the very-low-income percentage 
stays at its recent levels of 10 percent, the market estimate is as 
high as 24 percent.
    The market estimate drops by approximately one percent if the 
estimate of the multifamily mortgage market changes from $30 billion to 
$23 billion. The market estimates under the more conservative Case 2 
projections are almost 3 percentage points below those under the Case 1 
projections. This is due mainly to Case 2's lower share of single-
family rental mortgages (7 percent versus 10 percent in Case 1) and its 
lower affordability and low-income-area percentages for rental housing 
(e.g., a combined 48 percent for single-family rental units versus 55 
percent for Case 1).

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BILLING CODE 4210-32-C

[[Page 61998]]

    Tax Credit Definition. Data are not available to measure the 
increase in market share associated with including low-income units 
located in multifamily buildings that meet threshhold standards for the 
low-income housing tax credit. Currently, the effect on GSE performance 
under the Special Affordable Housing Goal is rather small. For 
instance, adding the tax credit condition increases Fannie Mae's 1994 
performance by only 0.6 percentage points, from 16.1 to 16.7 percent. 
At first glance, this small effect seems at odds with the fact that 
almost 25 percent of Fannie Mae's multifamily purchases during 1994 
involved properties with a very-low-income occupancy of 100 percent, 
and 57 percent involved properties with a very-low-income occupancy of 
over 40 percent. The explanation, of course, is that most of the rental 
units in these ``tax-credit'' properties are covered by the very-low-
income part of the special affordable goal.

3. Conclusions

    Sensitivity analyses were conducted for the market shares of each 
property type, for the very-low-income shares of each property type, 
and for various assumptions in the market projection model. These 
analyses suggest that 20-23 percent is a reasonable estimate of the 
size of the conventional conforming market for the Special Affordable 
Housing Goal. This estimate allows for the possibility that 
homeownership will not remain as affordable as it has over the past two 
years.

Appendix E--Required Loan-Level Data Elements

    As required under 24 CFR part 81, subpart E, the GSEs are required 
to provide to the Secretary the loan level mortgage data listed below.
    (a) Loan level data on single family mortgage purchases. Each GSE's 
submission of loan level data shall include the following information 
for each single family mortgage purchased by the GSE:
    (1) Loan number--a unique numerical identifier for each mortgage 
purchased;
    (2) U.S. postal state--the two-digit numerical Federal Information 
Processing Standard (FIPS) code;
    (3) U.S. postal zip code--the five digit zip code for the property;
    (4) MSA code--the four-digit numerical code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA;
    (5) Place code--the five-digit numerical FIPS code;
    (6) County--the county, as designated in the most recent decennial 
census by the Bureau of the Census, in which the property is located;
    (7) Census tract/Block Numbering Area (BNA)--the tract/BNA number 
as used in the most recent decennial census by the Bureau of the 
Census;
    (8) 1990 census tract--percent minority--the percentage of a census 
tract's population that is minority based on the most recent decennial 
census by the Bureau of the Census;
    (9) 1990 census tract--median income--the median family income for 
the census tract;
    (10) 1990 local area median income--the median income for the area;
    (11) Tract income ratio--the ratio of the 1990 census tract median 
income to the 1990 local area median income;
    (12) Borrower(s) annual income--the combined income of all 
borrowers;
    (13) Area median family income--the current median family income 
for a family of four for the area as established by the Secretary;
    (14) Borrower income ratio--the ratio of borrower(s) annual income 
to area median family income;
    (15) Acquisition UPB--the unpaid principal balance (UPB) in whole 
dollars of the mortgage when purchased by the GSE; where the mortgage 
purchase is a participation, the acquisition UPB reflects the 
participation percentage;
    (16) Loan-to-Value Ratio at Origination--the loan-to-value (LTV) 
ratio of the mortgage at the time of origination;
    (17) Date of Mortgage Note--the date the mortgage note was created;
    (18) Date of Acquisition--the date the GSE purchased the mortgage;
    (19) Purpose of Loan--indicates whether the mortgage was a purchase 
money mortgage, a refinancing, a second mortgage;
    (20) Cooperative Unit Mortgage--indicates whether the mortgage is 
on a dwelling unit in a cooperative housing building;
    (21) Special Affordable, Seasoned Loan Proceeds Recycled--for 
purposes of the special affordable housing goal, indicates whether the 
mortgage purchased by the GSE meets the requirements in section 
81.14(h)(1)(B);
    (22) Product Type--indicates the product type of the mortgage, 
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated 
payment mortgage (GPM) or growing equity mortgages (GEM), reverse 
annuity mortgage, or other;
    (23) Federal guarantee--a numeric code that indicates whether the 
mortgage has a federal guarantee from: the Federal Housing 
Administration (FHA) or the Department of Veterans Affairs (VA); the 
Farmers Home Administration's Guaranteed Rural Housing Loan program; or 
other federal guarantee;
    (24) RTC/FDIC--for purposes of the special affordable housing goal, 
indicates whether the mortgage purchased by the GSE meets the 
requirements in section 81.14(h)(1)(C);
    (25) Term of Mortgage at Origination--the term of the mortgage at 
the time of origination in months;
    (26) Amortization Term--for amortizing mortgages, the amortization 
term of the mortgage in months;
    (27) Lender Institution--the name of the institution that loaned 
the money for the mortgage;
    (28) Lender City--the city location of the institution that loaned 
the money for the mortgage;
    (29) Lender State--the State location of the institution that 
loaned the money for the mortgage;
    (30) Type of Seller Institution--the type of institution that sold 
the mortgage to the GSE, i.e., mortgage company, Savings Association 
Insurance Fund (SAIF) insured depositary institution, Bank Insurance 
Fund (BIF) insured depositary institution, National Credit Union 
Association (NCUA) insured credit union, or other seller;
    (31) Number of borrowers--the number of borrowers;
    (32) First-time home buyer--a numeric code that indicates whether 
the mortgagor(s) are first-time home buyers; second mortgages and 
refinancings are treated as not first-time home buyers;
    (33) Mortgage Purchased under GSE's Community Lending Program--
indicates whether the GSE purchased the mortgage under its community 
lending program;
    (34) Acquisition Type--indicates whether the GSE acquired the 
mortgage with cash, by swap, with a credit enhancement, a bond or debt 
purchase, reinsurance, risk-sharing, real estate investment trust 
(REIT), or a real estate mortgage investment conduit (REMIC), or other;
    (35) GSE Real Estate Owned--indicates whether the mortgage is on a 
property that was in the GSE's real estate owned (REO) inventory;
    (36) Borrower race or national origin--a numeric code that 
indicates whether the borrower is: an American Indian or Alaskan 
Native; an Asian or Pacific Islander; black; Hispanic; white; or other;
    (37) Co-borrower race or national origin--a numeric code that 
indicates whether the co-borrower is: an American Indian or Alaskan 
Native; an 

[[Page 61999]]
Asian or Pacific Islander; black; Hispanic; white; or other
    (38) Borrower gender--a numeric code that indicates whether the 
borrower is male or female;
    (39) Co-borrower gender--a numeric code that indicates whether the 
co-borrower is male or female
    (40) Age of borrower;
    (41) Age of co-borrower;
    (42) Occupancy Code--indicates whether the mortgaged property is an 
owner-occupied principal residence, a second home, or a rental/
investment property;
    (43) Number of Units--indicates the number of units in the 
mortgaged property;
    (44) Number of Bedrooms--where the property contains non-owner-
occupied dwelling units, the number of bedrooms in each of those units;
    (45) Owner-Occupied--indicates whether each of those units are 
owner-occupied;
    (46) Affordability Category--where the property contains non-owner-
occupied dwelling units, indicates under which, if any, of the special 
affordable goals the units qualified;
    (47) Reported Rent Level--where the property contains non-owner-
occupied dwelling units, the rent level for each unit in whole dollars;
    (48) Reported Rent Plus Utilities--where the property contains non-
owner-occupied dwelling units, the rent level plus the utility cost for 
each unit in whole dollars;
    (b) Loan level data on multifamily mortgage purchases. Each GSE's 
submission of loan level data shall include the following information 
for each multifamily mortgage purchased by the GSE:
    (1) Loan number--a unique numerical identifier for each mortgage 
purchased;
    (2) U.S. postal state--the two-digit numerical Federal Information 
Processing Standard (FIPS) code;
    (3) U.S. Postal Zip Code--the five digit zip code for the property;
    (4) MSA code--the four-digit numerical code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA;
    (5) Place code--the five-digit numeric FIPS code;
    (6) County--the county, as designated in the most recent decennial 
census by the Bureau of the Census, in which the property is located;
    (7) Census tract/Block Numbering Area (BNA)--the tract/BNA number 
as used in the most recent decennial census by the Bureau of the 
Census;
    (8) 1990 census tract--percent minority--the percentage of a census 
tract's population that is minority based on the most recent decennial 
census by the Bureau of the Census;
    (9) 1990 census tract--median income--the median family income for 
the census tract;
    (10) 1990 local area median income--the median income for the area;
    (11) Tract income ratio--the ratio of the 1990 census tract median 
income to the 1990 local area median income;
    (12) Area median family income--the current median family income 
for a family of four for the area as established by the Secretary;
    (13) Affordability Category--indicates under which, if any, of the 
special affordable goals the property qualified;
    (14) Acquisition UPB--the unpaid principal balance (UPB) in whole 
dollars of the mortgage when purchased by the GSE; where the mortgage 
purchase is a participation, the acquisition UPB reflects the 
participation percentage;
    (15) Participation Percent--where the mortgage purchase is a 
participation, the percentage of the mortgage that the GSE purchased;
    (16) Date of Mortgage Note--the date the mortgage note was created;
    (17) Date of Acquisition--the date the GSE purchased the mortgage;
    (18) Purpose of Loan--indicates whether the mortgage was a purchase 
money mortgage, a refinancing, a new construction mortgage, a mortgage 
financing property rehabilitation;
    (19) Cooperative Project Loan--indicates whether the mortgage is a 
project loan on a cooperative housing building;
    (20) Refinancing Loan from Own Portfolio--indicates, where the GSE 
has purchased a refinanced mortgage, whether the GSE owned the previous 
mortgage on the same property;
    (21) Special Affordable, Seasoned Loans: Proceeds Recycled?--for 
purposes of the special affordable housing goal, indicates whether the 
mortgage purchased by the GSE meets the requirements in section 
81.14(h)(1)(ii);
    (22) Mortgagor Type--indicates the type of mortgagor, i.e., an 
individual, a for-profit entity such as a corporation or partnership, a 
nonprofit entity such a corporation or partnership, a public entity, or 
other type of entity;
    (23) Term of Mortgage at Origination--the term of the mortgage at 
the time of origination in months;
    (24) Loan Type--indicates the type of the loan, i.e., fixed rate, 
adjustable rate mortgage (ARM), balloon, or graduated payment mortgage 
(GPM);
    (25) Construction Loan--indicates whether the mortgage is for a 
construction loan;
    (26) Amortization Term--for amortizing mortgages, the amortization 
term of the mortgage in months;
    (27) Lender Institution--the name of the institution that loaned 
the money for the mortgage;
    (28) Lender City--the city location of the institution that loaned 
the money for the mortgage;
    (29) Lender State--the State location of the institution that 
loaned the money for the mortgage;
    (30) Type of Seller Institution--the type of institution that sold 
the mortgage to the GSE, i.e., mortgage company, Savings Association 
Insurance Fund (SAIF) insured depositary institution, Bank Insurance 
Fund (BIF) insured depositary institution, National Credit Union 
Association (NCUA) insured credit union, or other seller;
    (31) Government insurance--indicates whether any part of the 
mortgage has government insurance;
    (32) FHA Risk Share Percent--the percentage of risk assumed for the 
mortgage purchased under a risk-sharing arrangement with the 
Department.
    (33) Acquisition Type--indicates whether the GSE acquired the 
mortgage with cash, by swap, with a credit enhancement, a bond or debt 
purchase, reinsurance, risk-sharing, real estate investment trust 
(REIT), or a real estate mortgage investment conduit (REMIC), or other;
    (34) GSE Real Estate Owned--indicates whether the mortgage is on a 
property that was in the GSE's real estate owned (REO) inventory;
    (35) Public Subsidy Program--indicates whether the mortgage 
property is involved in a public subsidy program and which level(s) of 
government are involved in the subsidy program, i.e., Federal 
government only, state or local government only, other only, Federal 
government and either state or local government, Federal government and 
other, state or local government and other, and Federal, state, or 
local government and other;
    (36) Total Number of Units--indicates the number of dwelling units 
in the mortgaged property;
    (37) The following data apply to unit types in a particular 
mortgaged property. The unit types are defined by the GSEs for each 
property and are differentiated based on the number of bedrooms in the 
units and on the average contract rent for the units. A unit type must 
be included for each bedroom size category represented in the property: 


[[Page 62000]]

    (A) Unit Type XX--Number of Bedroom(s)--the number of bedrooms in 
the unit type;
    (B) Unit Type XX--Number of Units--the number of units in the 
property within the unit type;
    (C) Unit Type XX--Average Reported Rent Level--the average rent 
level for the unit type in whole dollars;
    (D) Unit Type XX--Average Reported Rent Plus Utilities--the average 
reported rent level plus the utility cost for each unit in whole 
dollars; and
    (E) Unit Type XX--Affordability Level--the ratio of the average 
reported rent plus utilities for the unit type to the adjusted area 
median income;

BILLING CODE 4210-32-P

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[GRAPHIC][TIFF OMITTED]TR01DE95.033



[[Page 62002]]
[GRAPHIC][TIFF OMITTED]TR01DE95.034



[[Page 62003]]
[GRAPHIC][TIFF OMITTED]TR01DE95.035



[[Page 62004]]
[GRAPHIC][TIFF OMITTED]TR01DE95.036



[[Page 62005]]
[GRAPHIC][TIFF OMITTED]TR01DE95.037


[FR Doc. 95-28902 Filed 11-30-95; 8:45 am]
BILLING CODE 4210-32-C