[Federal Register Volume 62, Number 153 (Friday, August 8, 1997)]
[Notices]
[Pages 42793-42794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20815]
[[Page 42793]]
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FEDERAL HOUSING FINANCE BOARD
[97-N-6]
Pilot Mortgage Program Proposed by the Federal Home Loan Bank of
Seattle
AGENCY: Federal Housing Finance Board.
ACTION: Notice.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is
requesting public comment prior to its consideration of a proposal by
the Federal Home Loan Bank of Seattle (FHLBank of Seattle) to initiate
a pilot mortgage purchase program. The Finance Board will review and
consider all comments prior to taking action on the proposal. The
FHLBank of Seattle is proposing to invest up to $25 million total in
Federal Housing Agency (FHA)-insured loans originated by its members
and non-member mortgagees to affordable housing developers and local
government agencies. The loans would finance rent-to-own programs for
low- and moderate-income households wishing to become homeowners. The
FHLBank of Seattle has identified a credit need for the program and
anticipates that the program can provide more favorable pricing than
would otherwise be available while preserving the Bank's and System's
triple-A rating.
DATES: Comments must be received in writing on or before September 8,
1997.
ADDRESSES: Individuals wishing to submit comments should provide
written comments by mail to: Elaine L. Baker, Secretary to the Board,
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.
20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT:
Greg Goggans, Senior Financial Analyst, Office of Policy, (202) 408-
2878, or Roy S. Turner, Jr., Attorney-Advisor, (202) 408-2512, Office
of General Counsel, Federal Housing Finance Board, 1777 F Street, N.W.,
Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Home Loan Bank Act (Bank Act) provides that the part of
the assets of each Federal Home Loan Bank (Bank) except reserves and
amounts provided for at 12 U.S.C. 1431(g)) not required for advances to
members, may be utilized for certain types of investments. This
includes, to such extent as the Bank may deem desirable and subject to
such regulations, restrictions, and limitations as may be prescribed by
the Finance Board, such securities in which fiduciary and trust funds
may be invested under the laws of the State in which the Bank is
located. See 12 U.S.C. 1431(h). The Finance Board implements the
investment provisions of the Bank Act through the Financial Management
Policy (FMP).
The FMP establishes a framework within which the Banks are allowed
to implement prudent and responsible financial management strategies
that assist them in accomplishing their mission, and in generating
income sufficient to meet their financial obligations, in a safe,
sound, and profitable manner. Section II of the FMP specifies certain
types of assets as permissible investments to the extent they are
specifically authorized under 12 U.S.C. 1431(g), 1431(h), or 1436(a) of
the Bank Act, or to the extent a Bank has determined that they are
securities in which fiduciary or trust funds may be invested under the
laws of the state in which the Bank is located. Investments that
support housing and community development are permitted, provided that
the Bank:
Ensures the appropriate levels of expertise, establishes
policies, procedures, and controls, and provides for any reserves
required to effectively limit and manage risk exposure and preserve
the triple-A rating of the Bank and the Federal Home Loan Bank
System:
Ensures that its involvement in such investment activity assists
in providing housing and community development financing that is not
generally available, or that is available at lower levels or under
less attractive terms;
Ensures that such investment activity promotes (or at the very
least, does not detract from) the cooperative nature of the System;
Provides a complete description of the contemplated investment
activity (including a comprehensive analysis of how the above three
requirements are fulfilled) to the Finance Board; and
Receives written confirmation from the Finance Board, prior to
entering into such investments, that the above investment
eligibility standards and requirements have been satisfied.
II. Pilot Proposal
The FHLBank of Seattle proposes investing up to a total of $25
million in FHA-insured loans originated by its members and non-member
mortgagees to Housing and Urban Development (HUD)-eligible public and
private non-profit organizations such as affordable housing developers
and local government agencies. The purpose of the loans will be to
finance rent-to-own programs for low- and moderate-income households.
The loans will be 15- to 30- year, fully amortizing, fixed-rate
mortgages that are FHA-insured under Section 203 of the Federal Housing
Act. The terms of the proposal, which have not yet been considered by
the Finance Board and are subject to change as part of the review
process, are set out below.
Borrowers (non-profit organizations and local government agencies)
will enter into ``lease to own'' arrangements with low- and moderate-
income households wishing to become homeowners. A portion of each lease
payment will be set aside until a sufficient amount is accumulated to
make the 3 percent down-payment required for an FHA-insured loan. At
that point, the tenant(s), if qualified under FHA program guidelines,
will assume the mortgage. FHA insurance will be maintained throughout
the life of the loan.
The loans will be originated by the FHLBank of Seattle's members
and non-member mortgagees, that have been certified by HUD as Direct
Endorsement Underwriters. The originators or other designated program
participants will service the loans and must be HUD-FHA-approved or
Government National Mortgage Association (GNMA)-approved servicing
agents.
According to the proposal, all risk associated with these loans are
manageable. All loans will be underwritten to FHA standards and the FHA
will guarantee the principal repayment of each loan. The FHLBank of
Seattle will sign a loan purchase and servicing agreement with each
program participant. The originators will service the loan or contract
with a FHLBank of Seattle-approved loan servicer. The servicer will
handle all assignments or foreclosure activities, and assume
responsibility for any shortfall in interest income. The servicer will
absorb any interest losses. The servicing agreement will require the
servicer to recover any expenses, such as foreclosures, from FHA. The
agreement will include a buy-back clause for any loan determined to be
ineligible for FHA insurance and/or not in compliance with State and
Federal housing regulations. The FHLBank of Seattle will periodically
review financial statements of all servicers and will monitor whether
servicers remain in good standing with HUD.
The FHLBank of Seattle believes that because of these risk
management efforts, losses are not probable and estimable and reserves
are therefore unnecessary under generally accepted accounting
principles. The Finance Board has final authority as to what reserves,
if any, may be required for this program.
Interest-rate risk management will be handled the same as a pass-
through
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security with a mix of consolidated obligations and other asset/
liability management tools. Liquidity risk will be mitigated by the
relatively small size of the pilot.
The FHLBank of Seattle will purchase the loans at a price/yield
equivalent to that quoted for loans securitizing GNMA I securities
instead of the lower price/yields for loans securitizing GNMA II
securities. The FHLBank of Seattle indicates that the FHA-insured loans
that will be purchased under the program are normally securitized into
GNMA II securities instead of GNMA I securities because of the low
volume of such loans, longer time to originate, and wider range of
interest rates.\1\
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\1\ Single-Family pools for GNMA I securities are required to be
$1 million or more while such pools for GNMA II securities have a
minimum of $250,000. Loans placed into GNMA I securities may not
vary by more than 50 basis points in rate whereas loans securitized
into GNMA II securities may vary by 50 to 150 basis points in rate.
The small pool size and the broader range enables more loans to fit
into the GNMA II pools.
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The proposal also notes that the pilot will assist in providing
financing under more attractive terms than are generally available.
Program participants may sell such loans for immediate delivery to
FHLBank of Seattle instead of accumulating a pool of loans required to
securitize a GNMA security. This reduces the cost to the lender since
it no longer has to hold the loans and hedge the interest rate risk
associated with the loans until such time as sufficient quantity is
accumulated for GNMA pooling. The lender may request from the FHLBank
of Seattle a forward commitment of up to six months on a loan rate.
Additionally, the FHLBank of Seattle will pay a servicing fee of 50
basis points to the servicer (lender) instead of the 44 basis points
paid by GNMA (net of a 6 basis points fee for insurance).
The FHLBank of Seattle also believes that the pilot advances the
mission of the Bank System because the pilot will stimulate more
lending for lease-to-own programs. According to the FHLBank of Seattle,
lease-to-own programs are costly for lenders to develop because of the
low mortgage amounts as well as the higher costs associated with
underwriting loans to non-profits and local housing agencies compared
to loans to families/individuals. The FHLBank of Seattle intends to
work to reduce the amount of time and hence the cost of underwriting
the loans by providing technical advice to lenders and borrowers. In
addition, origination of these types of loans for sale to the FHLBank
of Seattle creates an opportunity for member and nonmember mortgagees
to transact Community Reinvestment Act-eligible lending at more
favorable rates.
Finally, the FHLBank of Seattle believes that its proposal would
enhance the cooperative nature of the System because the loans will be
originated by members and approved non-member mortgagees of the FHLBank
of Seattle. In addition, the FHLBank of Seattle will only purchase such
loans directly from these originators and thereby provide a secondary
market outlet for them. Members have informed the FHLBank of Seattle
that the lack of a secondary market outlet has impeded them from making
this type of loan. The proposal indicates that the pilot will therefore
enhance the flow of credit to an under-served segment of the mortgage
market.
Dated: August 1, 1997.
William W. Ginsberg,
Managing Director.
[FR Doc. 97-20815 Filed 8-7-97; 8:45 am]
BILLING CODE 6725-01-M