[Federal Register Volume 67, Number 51 (Friday, March 15, 2002)]
[Rules and Regulations]
[Pages 11850-11872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-4417]



[[Page 11849]]

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Part V





Department of Housing and Urban Development





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Office of Federal Housing Enterprise Oversight



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12 CFR Part 1750



Risk-Based Capital; Final Rule

  Federal Register / Vol. 67, No. 51 / Friday, March 15, 2002 / Rules 
and Regulations  

[[Page 11850]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1750

RIN 2550-AA23


Risk-Based Capital

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final rule.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
amending appendix A to subpart B of 12 CFR part 1750 Risk-Based 
Capital. These amendments modify provisions relating to counterparty 
haircuts, multifamily loans, and refunding and make several technical 
adjustments and corrections. These amendments are intended to refine 
the stress test model to tie capital more closely to risk.

DATES: April 15, 2002.

FOR FURTHER INFORMATION CONTACT: Leonard Reid, Associate Director, 
Office of Risk Analysis and Model Development, telephone (202) 414-3754 
(not a toll-free number), or David Felt, Deputy General Counsel, 
telephone (202) 414-3750 (not a toll-free number), Office of Federal 
Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The telephone number for the Telecommunications 
Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Background

    OFHEO published a final regulation setting forth a risk-based 
capital stress test (Rule) on September 13, 2001, which formed the 
basis for determining the risk-based capital requirement for the 
Federally sponsored housing enterprises--Federal National Mortgage 
Association (Fannie Mae) and Federal Home Loan Mortgage Corporation 
(Freddie Mac) (collectively, the Enterprises).\1\ The risk-based 
capital stress test set forth in the Rule simulates the performance of 
each Enterprise's assets, liabilities, and off-balance-sheet 
obligations under severe credit and interest rate stress for a period 
of ten years (stress period). The stress test projects rates of default 
and prepayment for the mortgages guaranteed by the Enterprises, as well 
as cash flows from these and other assets, liabilities, and off-
balance-sheet obligations. Using these cash flows, the stress test 
produces monthly balance sheets for the 120 months of the stress period 
in order to determine the amount of starting capital that would be 
necessary to maintain positive capital during the stress period. Thirty 
percent of the amount of capital so determined is then added to that 
amount to protect against management and operations risk. By statute, 
the Rule becomes fully enforceable on September 13, 2002, one year 
after it was issued.\2\
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    \1\ Risk-based Capital, 66 FR 47730 (September 13, 2001).
    \2\ Section 1364 of Title XIII of the Housing and Community 
Development Act of 1992, Pub. L. 102-550, known as the Federal 
Housing Enterprises Financial Safety and Soundness Act of 1992 (1992 
Act), (12 U.S.C. 4614(d)).
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    On December 18, 2001, OFHEO published a notice proposing to amend 
certain provisions in the risk-based capital stress test (AmendNPR).\3\ 
The proposed amendments related to counterparty haircuts, multifamily 
loans, and refunding and included several technical adjustments and 
corrections. The purpose of the proposed changes was to improve the 
Rule's measurements and formulas to tie capital more closely to risk 
and to ensure that the Rule supports the safety and soundness regime 
created by the 1992 Act. OFHEO stated that such a proposal is 
consistent with OFHEO's intention to review, on an ongoing basis, the 
operation of the stress test and its various components and to evaluate 
the need for revisions and improvements. Also, OFHEO committed to act 
expeditiously to remedy any technical and operational issues that arise 
during the one-year implementation period during which time the capital 
requirement under the Rule is not being enforced.
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    \3\ Risk-based Capital, Notice of proposed rulemaking 66 FR 
65146 (December 18, 2001).
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    OFHEO received 48 comments on the AmendNPR. Commenters included 
Freddie Mac; Fannie Mae; housing and financial trade associations; 
financial services companies, including mortgage insurance companies; 
housing advocacy groups; State housing authorities; academics; 
consultants; and other interested parties. Many of the comments 
discussed aspects of the Rule that were not addressed specifically in 
the AmendNPR. In other instances, commenters approved of certain 
changes proposed, but suggested that OFHEO go farther or make 
additional changes in the same area. Numerous commenters, for instance, 
applauded OFHEO's changes to the multifamily model, which had the 
effect of lowering adjustable rate mortgage (ARM) defaults in the 
stress test, but urged OFHEO to take additional steps to lower ARM loss 
rates. The amended Rule reflects OFHEO's consideration of all of these 
comments. However, the need for OFHEO to establish a firm baseline for 
the stress test and apply it to the Enterprises prior to the end of the 
implementation period does not allow OFHEO to consider further changes 
or enhancements at this time. A description of the comments along with 
OFHEO's responses to them is set forth below.

A. Changes to Counterparty Haircuts

    The Rule gives the Enterprises credit for cash payments that would 
be received during the stress period from securities and various 
counterparties, such as mortgage insurance companies and derivative 
counterparties. However, because Enterprise counterparties are 
themselves likely to be adversely affected by the economic conditions 
of the stress period and to default on some or all of their 
obligations, the stress test discounts the value of cash payments 
received during the stress period by a specified percentage, based on 
the public credit rating of the security or counterparty. The amount by 
which cash payments from a counterparty or security are discounted in 
each month of the stress period is the haircut. The specified haircut 
percentages increase as the credit rating declines--the lower that 
rating, the more severe the haircut. In the previous Rule, the haircuts 
were phased in over the first five years of the stress period, except 
for haircuts for below-investment-grade providers and instruments, 
which are applied fully in the first month of the stress period.
    The Rule applies one set of haircuts for non-derivative 
counterparties and securities, based on analysis of historical bond 
default rates, and a different set of haircuts for derivative 
counterparties, reflecting lower expected loss severities associated 
with the use of strong collateral agreements.\4\ To further refine the 
previous Rule's treatment of haircuts, OFHEO has improved the 
consistency between haircuts for derivative counterparties and 
securities and non-derivative counterparties and securities by 
specifying default and severity rates separately; extending the phase-
in period for the haircuts from five to ten years; providing for 
netting of exposures to the same derivative counterparty;

[[Page 11851]]

providing for certain technical amendments described herein; and 
providing for an exception to the BBB haircut for certain unrated 
multifamily seller/servicers, as described in the AmendNPR.
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    \4\ The term ``derivative'' is used to refer to over-the-counter 
interest rate and foreign currency derivatives that are used by the 
Enterprises to hedge interest rate risk and foreign exchange risk. 
The term should not be read to encompass credit derivatives, which 
are currently not in use by the Enterprises and would be considered 
a ``new activity'' and dealt with under section 3.11 of the Rule, if 
the Enterprises began to use them.
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    OFHEO proposed lowering the maximum haircuts for both non-
derivative and derivative counterparties and securities. The specified 
default and severity rates were calculated separately. Their products 
are the maximum haircuts. Previously, no explicit allowance was made 
for recoveries after default (severities of less than 100 percent) for 
non-derivative losses.
Default Rates
    The amended Rule adopts the former Rule's non-derivative maximum 
haircut levels as maximum default rates, except that the percentage for 
AA-rated firms and securities was lowered from 15 to 12.5. Many 
commenters argued that using data from the Great Depression as a basis 
for default rates was inappropriate because of the broad changes in the 
economy since then and because default rates should be consistent with 
mortgage losses applied elsewhere in the stress test. Others focused on 
the relationship between defaults in the AA and AAA categories. Most 
argued that the ratio embodied in the proposal (2.5:1), which is lower 
than in the former Rule, was still too high or that there should be no 
differential between the categories at all. Many suggested that the 
proposed difference would drive all or most mortgage insurance business 
to the two AAA-rated firms, lessening competition and creating 
concentration risk for the Enterprises.
    One commenter, however, opposed the change in the ratio, arguing 
that the average ratio (3:1) over the longest period available, 1920-
1999, should be the basis for the Rule. A few commenters argued that 
maintaining a substantial differential between AAA and AA categories 
was important in either the maximum default rates used or the phase-in 
of those rates. In their view, a large differential would promote 
capital accumulation by mortgage insurers, decreasing the risk of 
losses to the Enterprises, and reversing the trend toward smaller 
market shares of mortgage insurance at AAA-rated firms. These 
commenters also noted that defaults of AAA-rated firms generally have 
occurred later for any given cohort of mortgage loans than defaults of 
AA-rated firms. One commenter further pointed out that OFHEO's haircuts 
differ far less across rating categories than rating agency haircuts on 
reinsurance that is provided by lesser-rated insurance providers.
    After reviewing the comments, OFHEO has decided to adopt the 
proposed default rates. No single set of data provides a clear guide to 
the determination of default rates for the stress test. OFHEO agrees 
that many changes have occurred since the Great Depression and, 
therefore, does not view it as the sole relevant period for determining 
appropriate haircuts during the stress period. Data from the past three 
decades, however, do not contain any periods of interest rate stress or 
credit stress on a national basis comparable to that during the stress 
period.\5\ Furthermore, the implication of data raised by some 
commenters that AAA-rated firms are as risky or riskier than AA-rated 
firms is based on a very small number of actual defaults. The 
characteristics of AAA-rated and AA-rated firms, as described in rating 
agency analyses, suggest significantly better relative credit 
performance should be expected for AAA-rated firms in a future 
stressful environment.
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    \5\ Some commenters argued that OFHEO should use the years, 
1983-1984, of the benchmark loss experience. The benchmark loss 
experience, which is specified by the 1992 Act, includes only loans 
from a small area of the country and is intended only as a benchmark 
for credit losses on mortgage loans. It was never intended to be and 
would be entirely inappropriate as a benchmark for counterparty 
defaults for many reasons. Even more inappropriate would be use of 
the national data from those years without applying the requirement 
that they represent the highest default rates from an area of the 
country containing at least five percent of the population.
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    OFHEO has examined the available data from a variety of sources 
with varying perspectives as described in the preambles to NPR2,\6\ the 
September 13, 2001 Rule, and the AmendNPR. OFHEO has based its choices 
on the totality of the data, but also has taken into account treatment 
of credit supports by rating agencies, although OFHEO recognizes that 
the agencies' purposes and perspectives differ somewhat from OFHEO's. 
The Depression-era data are of particular interest because, unlike 
other data, they reflect a very stressful period. OFHEO notes, however, 
that cumulative defaults in Moody's data for 1929-31, as discussed in 
the proposal, are very close to those obtained by using Moody's 1920-
1999 data and adding 2\1/2\ standard deviations to the average 10-year 
default rates. Data from Hickman's 1928 cohort and more recent time 
periods could suggest higher default rates for the AAA category 
relative to the other categories, but the relatively later timing of 
AAA defaults in much of the data is also relevant given that OFHEO has 
not imposed different phase-in patterns for different rating 
categories. OFHEO has similarly considered the earlier timing of 
historical defaults in the A category and especially in the BBB 
category. OFHEO also considered the fact that the stress test interest 
rate shocks and mortgage losses as specified in the 1992 Act are 
heavily front-loaded in comparison to historical periods.
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    \6\ The second notice of proposed rulemaking issued prior to the 
initial issuance of a final Rule on September 13, 2001. 64 FR 18084 
(April 13, 1999).
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    OFHEO recognizes that relative haircut levels for the different 
rating categories can have competitive implications and, therefore, has 
focused great attention on differences in haircuts across rating 
categories, so that they reflect differences in risk to the Enterprises 
well, without adding undue complexity to the Rule.
Severity Rates
    The amended Rule adopts the severity rates from the proposal, a 70 
percent severity rate for all non-derivative defaults and a 10 percent 
rate for derivative defaults. Much of the comment with respect to non-
derivative severity rates was positive, but some commenters suggested 
higher or lower rates. Those favoring lower rates objected to the use 
of Great Depression data and suggested focusing on severity rates for 
senior obligations. One commenter also suggested reflecting ultimate 
recovery rates (1 minus severity rates) in historical data rather than 
security prices at the time of default. Those favoring higher severity 
rates stressed the variability of recovery rates, not only across users 
and industries, but also over time. One of the commenters also 
recommended using data for recovery rates on financial issues, which 
tend to be lower. This commenter also noted that Moody's average 
recovery rate for even senior secured debt was only 31 percent (69 
percent severity) during the 1970s. Finally, some commenters suggested 
special treatment for particular types of counterparties, such as 
mortgage insurers, or obligations, such as mortgage revenue bonds or 
other mortgage related securities.
    OFHEO decided to adopt the proposed non-derivative severity rates. 
Severity data from the Great Depression, which show higher severities 
during stressful periods, are relevant for the same reasons as default 
data from the same period. As two commenters pointed out, more recent 
data also show higher severity during recessions. At the same time, 
however, OFHEO found the average experience of 10-year periods, such as 
the 1930s or the 1970s more

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relevant than subtracting standard deviations of annual data from long-
term averages as one commenter suggested. Year-to-year variability does 
not imply that a string of ten consecutive poor results is a reasonable 
projection. Also, OFHEO has found data on security prices at default to 
be more relevant than ultimate recoveries, because prices at default 
take account the time value of money and uncertainties about actual 
future payments, which payments may even be lower during a continuing 
period of stress than otherwise expected.
    OFHEO recognizes that the characteristics of specific exposures, 
such as collateral or line of business, may affect severity rates. 
However, taking account of such characteristics could add undue 
complexity to the Rule. At this time, OFHEO does not consider such 
additional complexity to be warranted, but may reevaluate that 
conclusion in the future, if appropriate.
    Comments on the proposed severity of 10 percent for derivative 
defaults were mostly favorable. Some commenters recommended 
consideration of even lower severities, in the range of 1 percent to 
2\1/2\ percent. They view the proposed severity rate as consistent only 
with a combination of very unlikely events; sudden failures and large, 
simultaneous, adverse changes in interest rates. A few commenters, 
however, voiced disapproval of OFHEO's reasoning, which relies heavily 
on the existence and implementation of collateral agreements. They 
argued that haircuts on derivative receipts should be unchanged or 
raised to the level of non-derivative receipts. They suggested that 
only actual collateral held by an Enterprise at the start of the stress 
period should be considered, not promises to provide collateral under 
certain circumstances. They questioned whether it would be feasible to 
unwind and replace the very large positions the Enterprises have with 
individual counterparties in a market that may have experienced a shock 
of some type.
    OFHEO has decided to adopt the proposed severity rate for 
derivative defaults. OFHEO continues to have a high level of confidence 
in the successful operation of the Enterprises' collateral agreements, 
even in difficult times. The majority of the Enterprises' over-the-
counter derivatives are simple interest rate swaps, which have been 
consistently very liquid, even in weak markets. Nonetheless, some 
caution is appropriate, given the high levels of stress contemplated in 
the stress test and potentially significant levels of correlation 
between the unlikely events considered in the proposal. While some 
derivatives are less liquid and could merit more cautious treatment, 
OFHEO judges that the added complexity is unwarranted at this time.
Haircuts
    Under the amendment, haircuts will be determined by multiplying the 
default rate for each rating category by the severity rate. The 
resulting haircuts are set forth in Table 1 below.

                             Table 1--Stress Test Haircut by Ratings Classification
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                                                                                                 Non-Derivative
                                                                                 Derivative         Contract
                           Ratings Classification                                 Contract       Counterparties
                                                                               Counterparties    or Instruments
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Cash                                                                                        0%                0%
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AAA                                                                                       0.5%              3.5%
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AA                                                                                       1.25%             8.75%
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A                                                                                           2%               14%
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BBB                                                                                         4%               28%
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Below BBB and Unrated                                                                     100%             100%
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\1\ Does not include interim rates prior to implementation of netting. See Table 2.

Phase-In
    Under the former Rule, haircuts were phased in linearly over a 5-
year period. OFHEO proposed lengthening the phase-in to the full 10 
years of the stress period. Most of the comments supported the change. 
A few commenters suggested changing the pattern of the phase-in to 
reflect actual default timing during the 10-year period for the cohort 
for a specific year or the average of cohorts from a specific time 
period. This approach would have different phase-in patterns for 
different rating categories. A few other commenters urged OFHEO not to 
change the existing 5-year phase-in. They argued that it is 
particularly appropriate for AA-rated mortgage insurers, which could 
expect to experience their greatest losses during the middle years of 
the stress period.
    OFHEO decided to adopt the proposed 10-year linear phase-in. 
Historical data indicate that defaults have not been concentrated in 
the first 5 years of the 10-year periods. OFHEO recognizes that 
defaults generally occur increasingly later within 10-year experiences 
as ratings increase. That is, not only have higher-rated firms (AAA 
versus AA, for example) shown lower default rates during periods of 
economic stress, those that have not survived tended to have sufficient 
capital to withstand the stress longer and, therefore, defaulted later 
than lower-rated firms. OFHEO considered timing differences across 
different rating categories in determining maximum default rates for 
those categories, as discussed above. Determining a special timing 
pattern of defaults for any specific type of counterparty, such as 
mortgage insurers, would be difficult and speculative. Even the timing 
of claims is uncertain during the stress period because, while the 
stress test does not incorporate new business of the Enterprises, no 
similar provision applies to mortgage insurers. In any event, OFHEO can 
not add the complexity involved with explicit consideration of specific 
types of counterparties in the time frame required for implementation 
of the Rule.
Netting of Derivative Counterparty Exposures
    OFHEO adopts as proposed the treatment for netting of derivative 
counterparty exposures. Due to technical limitations, the previous Rule 
did not model the master netting

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agreements associated with derivative counterparty exposures. OFHEO 
will now recognize the risk mitigation effects of master netting 
agreements by reducing the haircuts for derivative contract 
counterparties as set forth in Table 2, under heading of Haircuts for 
Derivative Contract Counterparties prior to Implementation of Netting. 
Upon implementation of modeling of master netting agreements, maximum 
haircuts for derivative contract counterparties will be readjusted. 
(See Table 2, under heading of Haircuts for Derivative Contract 
Counterparties upon Implementation of Netting). The interim treatment 
will remain effective only for the period required to complete the 
technical software modifications necessary to model master netting 
agreements.

                      Table 2--Stress Test Haircuts for Derivative Contract Counterparties
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                                                                   Haircuts for    Haircuts for
                                                                    Derivative      Derivative
                                                                  Counterparties  Counterparties     Number of
                     Ratings Classification                          Prior to          Upon          Phase-in
                                                                  Implementation  Implementation      Months
                                                                    of Netting      of Netting
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AAA                                                                         0.3%            0.5%             120
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AA                                                                         0.75%           1.25%             120
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A                                                                           1.2%            2.0%             120
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BBB                                                                         2.4%            4.0%             120
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Below BBB and Unrated                                                       100%            100%               1
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    Commenters generally supported OFHEO's proposal to recognize the 
impact of derivative counterparty netting agreements and urged OFHEO to 
implement counterparty netting as soon as possible.
    OFHEO has adopted the proposed treatments and will continue to work 
toward implementation of the technical changes required to model 
netting agreements.
Unrated Seller/Servicers
    OFHEO adopted the change to the treatment of unrated seller-
servicers as proposed in the AmendNPR, with the addition of language to 
clarify that the change applies only to unrated multifamily seller-
servicers. The previous Rule provided that unrated seller-servicers 
will be treated as if they are BBB-rated counterparties, unlike other 
unrated counterparties, which are treated as below BBB. Consistent with 
OFHEO's commitment in the Rule to evaluate alternative approaches to 
determine risk distinctions among unrated seller-servicers, OFHEO is 
amending the Rule to permit a higher rating than BBB (but not to exceed 
AA) for certain unrated multifamily seller-servicers. These unrated 
multifamily seller-servicers must participate in a delegated 
underwriting and servicing program that requires a loss-sharing 
agreement collateralized by a fully funded reserve account pledged to 
the Enterprise and the reserve account must be in an amount that is 
equal or greater than an amount determined by OFHEO to be adequate to 
support the seller-servicer's loss-sharing obligation under the 
program. Each program will be evaluated on a case-by-case basis by the 
Director to determine whether the program qualifies the seller-servicer 
for the refined ratings treatment. The amendment only applies to 
multifamily seller-servicers and does not incorporate a similar 
treatment for single-family seller-servicers.
    For example, if the loss-sharing obligation of a seller-servicer 
participating in Fannie Mae's Delegated Underwriting and Servicing 
(DUS) Program (which is a multifamily mortgage program) is 
collateralized by a fully funded reserve account that is equal to or 
greater than one percent of the seller-servicer's aggregate unpaid 
principal balance covered by the loss-sharing agreement at the start of 
the stress test, the rating of the issuer of the instrument backing the 
reserve account may be used, in lieu of BBB, as the rating of the 
unrated seller-servicer, not to exceed AA. Determinations of the 
required reserve amount and the rating equivalent permitted will be 
made on a program-by-program and Enterprise-by-Enterprise basis.
    With a few exceptions, commenters generally viewed the proposed 
amendment to the Rule regarding unrated seller-servicers as a positive 
contribution that would tie capital more closely to risk. Indeed, 
commenters who supported the amendment largely suggested that OFHEO 
also consider other factors, such as the value of the servicing stream 
and the level of capital of unrated seller-servicers as support for an 
improved rating for these seller-servicers. Commenters who disagreed 
with the proposed amendment included some who objected to the use of a 
BBB rating for any unrated counterparty, and objected further to 
allowing a rating higher than BBB for unrated counterparties under any 
circumstances. One commenter indicated that OFHEO should have empirical 
data supporting the BBB rating for unrated seller-servicers. Others who 
objected cited the example given of the DUS program, questioning 
whether a one percent fully funded reserve account would be adequate to 
support the loss-sharing obligation under the DUS program, and 
objecting to the competitive advantage that a higher than BBB rating 
for unrated seller-servicers would impart to the Automated Underwriting 
(AU) systems of the Enterprises, thereby placing other AU systems at a 
disadvantage. Finally, one commenter recommended that OFHEO clarify its 
intent to limit this approach to unrated multifamily seller-servicers.
    OFHEO believes that the amendment ties capital more closely to risk 
by allowing for an improved rating for specified unrated multifamily 
seller-servicers. OFHEO has relied upon its own specialized expertise 
in the mortgage business and its detailed understanding of the 
Enterprises' seller-servicer agreements in making its decision to treat 
unrated seller-servicers more favorably than other unrated 
counterparties of whom OFHEO may lack such specialized understanding. 
Beyond the BBB rating to which all unrated seller-servicers are 
elevated, the amendment allows a higher rating than BBB to be used for 
certain multifamily seller-servicers. The increased rating is available 
if OFHEO determines that their ongoing relationships with the

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Enterprises and the contractual leverage available to the Enterprises 
in managing their exposure to counterparty risk from these seller-
servicers is further enhanced by a fully funded reserve account--
pledged to the Enterprise--of sufficient size to support the loss-
sharing obligation adequately. With regard to the consideration of 
other factors as the basis for ratings above BBB, OFHEO will continue 
to evaluate alternative approaches for assessing the risk of unrated 
seller-servicers.
    Finally, OFHEO notes that there appeared to be some confusion among 
commenters who objected to the amendment regarding the extent of the 
obligations of DUS lenders to share in multifamily credit losses. The 
one percent fully funded reserve account is not intended to be adequate 
to support all losses incurred on the covered loans. Rather it is 
determined to be adequate to support the much smaller loss-sharing 
obligations of the seller-servicer under the DUS program. In addition, 
there also appeared to be some confusion among commenters regarding the 
distinction between the multifamily DUS program and the single-family 
Automated Underwriting (AU) systems of the Enterprises. There is no 
connection between the two. The amendment does not apply to single-
family programs.

B. Changes to Multifamily Model

    OFHEO is adopting as proposed a number of changes to the 
multifamily default model, multifamily loss severity parameters, and 
multifamily prepayment speeds specified in the Rule. These changes and 
the comments regarding them are summarized below:
Underwater Debt Coverage Ratio Flag (UWDCRF)
    As amended, the multifamily default model includes an Underwater 
Debt Coverage Ratio Flag (UWDCRF), which accounts for the additional 
default risk posed when the projected debt service coverage ratio 
(DCR)--net operating income (NOI) divided by mortgage payment--falls 
below 0.98 during the stress test. The stress test projects the DCR in 
each month of the stress period from the prior month's value by 
updating NOI, using rent growth rates and rental vacancy rates that 
reflect the economic conditions of the benchmark region and time 
period,\7\ and adjusting mortgage payments over time according to the 
note terms and the stress test interest rate scenario. The UWDCRF adds 
value to the multifamily default model by capturing the additional risk 
of default when NOI is insufficient to cover mortgage payments.
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    \7\ The terms ``benchmark region and time period'' refer to the 
regional credit loss experience identified by OFHEO in compliance 
with the ``Credit Loss'' parameters outlined in 12 U.S.C. 4611, as 
described in additional detail in NPR2.
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    OFHEO has re-specified the UWDCRF to turn the flag on when the 
projected DCR is less than 0.98 (that is, when net operating income 
(NOI) on the collateral property is more than two percentage points 
below the mortgage payment), altering the previous Rule, which turned 
the flag on when the projected DCR fell below one. The re-specified 
multifamily default model results in a slightly lower coefficient on 
UWDCRF, and the coefficients for the other explanatory variables do not 
change materially. Simulations using the revised UWDCRF definition 
result in lower predicted default rates for ARMs in the up-rate 
scenario and for FRMs with low initial DCR in both interest-rate 
scenarios, making the revised model less sensitive to the UWDCRF than 
the prior version. The revised model does not substantially affect the 
predicted default rates for most FRMs or for ARMs in the down-rate 
scenario.
    All commenters that addressed this change recommended its adoption. 
These commenters included a number of seller-servicers of the 
Enterprises, State housing authorities, and both Enterprises. In view 
of these comments, together with OFHEO's concern, discussed in detail 
in the AmendNPR, that borrowers often have reasons to carry properties 
with slightly negative cash flows for a period of time, OFHEO decided 
to adopt the change as proposed.
ARM Flags
    The amended Rule retains the same explanatory variables as the 
model in the earlier Rule, except that three dummy variables or flags, 
the New ARM flag (NAF), the New Balloon Loan Flag (NBLF), and the 
Ratio-Updated Flag (RUF) are removed, and a re-specified flag is 
introduced that captures both the distinction between ARMs and FRMs and 
the distinction between ratio-updated and not-ratio-updated loans. 
Specifically, the new variable OFHEO has adopted in its re-specified 
default model is a Not-Ratio-updated ARM Flag (NRAF) that is turned on 
if a loan is both an ARM and not-ratio-updated and is turned off 
otherwise. However, there were insufficient data on FRMs that were not-
ratio-updated to include a flag similar to the NRAF for FRMs.\8\ 
Instead, the revised Rule calculates the monthly conditional default 
rates for not-ratio-updated FRMs by applying a factor of 1.2 to the 
conditional monthly default rates for otherwise comparable ratio-
updated FRMs.
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    \8\ OFHEO decided against using an FRM counterpart to the NRAF 
in the multifamily default model, despite the fact that a similar 
distinction between ratio-updated and not-ratio-updated FRMs was 
consistent with the data. The introduction of a flag to capture non-
ratio-updated FRMs substantially altered the size of other variable 
coefficients and the significance of other model variables. Further 
examination of Enterprise data indicated that this result likely 
occurred because of insufficient data on not-ratio-updated FRMs, 
particularly in recent years. Therefore, OFHEO rejected the 
inclusion of a not-ratio-updated flag in the re-specified default 
model.
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    The NRAF variable was introduced because OFHEO observed higher ARM 
default rates compared with FRM default rates even during historical 
periods of flat-to-declining interest rates, which should, other things 
being equal, have favored ARM performance. Additionally, when FRM and 
ARM data were combined, OFHEO found substantially higher Enterprise 
default rates for not-ratio-updated versus ratio-updated loans. This 
result was not surprising given that the ratio-updating process is 
intended to improve underwriting and the resultant performance of all 
loans. The factor of 1.2 that is applied to not-ratio-updated FRMs is 
based upon the multiplicative difference in simulated stress test 
default probabilities for the typical ratio-updated versus not-ratio-
updated ARM loan, holding all other factors constant at their means. 
Given the definition of ratio-updating, OFHEO determined that it is 
reasonable to expect proportionate performance differentials for ratio-
updated versus not-ratio-updated ARMs and FRMs when other factors are 
held constant.
    All commenters to address this issue favored the elimination of the 
NAF, NBLF, and RUF variables and the introduction of the NRAF flag. 
However, several comments, including those of Fannie Mae, suggested 
that the 1.2 factor applied to FRMs should be eliminated, because it 
lacked statistical or factual basis. Some of those commenters may have 
confused the ratio-updating process with the Enterprises' receipt or 
lack of receipt of annual operating statement data and rent rolls on 
certain loans.\9\
---------------------------------------------------------------------------

    \9\ As described in the AmendNPR, ratio-updating refers to New 
Book loans for which the LTV and the DCR have been calculated by the 
Enterprise or its delagee at loan origination or for which the LTV 
and DCR have been recalculated by an Enterprise or its delagee upon 
acquisition according to current underwriting standards. New Book 
loans for which origination and/or acquisition LTV and DCR are 
unknown cannot be considered to be ratio-updated.
---------------------------------------------------------------------------

    OFHEO disagrees with the suggestion that the 1.2 factor be dropped 
and notes that, although there are insufficient data

[[Page 11855]]

to incorporate an FRM counterpart to the NRAF into the multifamily 
default model, the decision to include a similar and proportionate 
adjustment to the default rates of not-ratio-updated FRMs was 
predicated on statistical analysis. Statistical evidence suggests that 
the ratio-update process, whereby loans originated using underwriting 
standards that may differ from those of the Enterprises are re-
underwritten using the Enterprises' standards at the time of 
acquisition, reduces stress test default rates for a typical ARM by 
about 17 percent. Furthermore, Enterprise data confirm lower historical 
default rates of ratio-updated versus not-ratio-updated loans without 
regard to product type. At this time, OFHEO has no evidence that the 
ratio-update process should operate in a different fashion for one 
product than for another. Therefore, OFHEO believes the use of a 
multiplicative factor of 1.2 applied to the conditional monthly default 
rates of not-ratio-updated FRMs is a reasonable approach reflecting 
sound judgment based in fact and statistical evidence. If sufficient 
data become available to convince OFHEO that the use of the 
multiplicative factor of 1.2 is no longer appropriate, OFHEO will 
consider a change to the Rule.
    One commenter questioned how the definition of the NRAF would be 
affected by any future changes in the underwriting standards of the 
Enterprises. For example, if as a result of ongoing experience, the 
standards of an Enterprise were to become tighter or looser, or simply 
emphasize different financial ratios, the commenter asked whether the 
entire current ARM portfolios of the two companies would be subject to 
this variable. In response to this comment, OFHEO notes that if an 
Enterprise were to stop updating the ratios of loans at acquisition, 
for example, the entire Enterprise multifamily portfolio would 
eventually be subject to the NRAF variable (or its FRM counterpart) as 
older ratio-updated loans terminated. As to the other part of the 
commenter's question, OFHEO continually examines the Enterprises' 
underwriting standards and processes and may modify variables or 
introduce new ones where the data indicates it is appropriate to do so.
Initial Vacancy Rate
    OFHEO modified the Rule so that the change in vacancy rates between 
the period immediately prior to the stress test and month one of the 
stress test is based on the change in the benchmark region vacancy rate 
from the month prior to the benchmark period to the first month of the 
benchmark period. OFHEO views this change as a technical correction. 
The change sets the initial vacancy rate at ten percent, which is the 
estimated West South Central (WSC) Census division vacancy rate in 
1983. Thus, the vacancy rate change in the initial month of the stress 
test will be increased from ten percent to 13.6 percent. All comments 
to discuss this change were favorable, although some suggested that 
OFHEO's technical correction should have reflected a higher initial 
vacancy rate. OFHEO did not find any convincing arguments from those 
who suggested the initial rate should have been higher and, therefore, 
OFHEO will adopt the rate as proposed.
Loss Severity
    OFHEO has modified the multifamily severity parameters to take into 
consideration the performance of Fannie Mae multifamily REO \10\ in the 
1980s and both Enterprises' more recent multifamily REO. Loss severity 
parameters in the previous Rule were based upon the experience of 705 
Freddie Mac multifamily REO properties from the 1980s. The multifamily 
loss severity calculations that use the severity parameters in the Rule 
have not changed. Specifically, OFHEO has decided to reduce net REO 
holding costs to seven percent from 13.33 percent and to increase REO 
sales proceeds from 58.88 percent to 63 percent of the unpaid principal 
balance as of the default date. Additionally, OFHEO is reducing the 
time from default to foreclosure completion from 18 to 9 months, while 
increasing the time from REO acquisition to REO disposition from 13 to 
15 months. Changing these severity parameters yields a 44 percent 
``baseline'' severity rate, as compared to the 55 percent ``baseline'' 
produced by the model in the Rule. ``Baseline'' severity is a simple 
way to compare one set of severity parameters with another.\11\
---------------------------------------------------------------------------

    \10\ REO is real estate owned as a result of loan default.
    \11\ The ``baseline'' consists of a simple adding up of the cost 
components of the rate, without considering discounting, credit 
enhancements, or passthrough interest on sold loans.
---------------------------------------------------------------------------

    All comments received regarding this change were favorable.
Prepayment Penalties
    OFHEO has modified the Rule to provide for no prepayments in the 
down-rate scenario inside prepayment penalty or yield maintenance 
periods. This approach is more consistent with OFHEO's preference to 
model contractual instruments according to their terms, but recognizes 
that modeling these penalties according to their terms would be 
immensely complicated, because those terms vary greatly from loan to 
loan. The change implicitly assumes that the prepayment penalty 
provisions either prevent prepayments or provide compensating economic 
benefit to the Enterprises.
    All comments regarding this change were supportive.
Other Comments
    Numerous comments were received suggesting that OFHEO should make 
further refinements to the multifamily model in the stress test. Many 
commenters stated that although the proposed changes had gone a long 
way to address what they viewed as inappropriately high loss rates 
associated with ARMs, the changes had not gone far enough and that the 
Rule might cause such loans to be disfavored by the Enterprises. OFHEO 
will consider these comments as it studies the impact of the current 
modifications to the Rule and will propose additional changes to the 
Rule when sufficient data indicates a need for them.
    Among the refinements suggested by commenters was that OFHEO take 
into consideration the effects that low-income-housing tax credits 
(LIHTCs) have in reducing the likelihood of default on loans 
collateralized by properties with these credits. OFHEO agrees with 
experts in the housing finance industry that such loans are less likely 
to default than otherwise identical non-LIHTC loans. OFHEO has 
responded to this comment by clarifying the Risk-Based-Capital Report 
Instructions to provide that potential income from the holders of the 
tax credits is included in the calculation of current debt-service-
coverage ratios on these loans. A rule change was unnecessary, because 
the existing Rule is sufficient to provide for consideration of the tax 
benefits to the equity investor from the tax credit.
    Both Enterprises argued that the multifamily model should consider 
seasoning of loans that lack annual operating statements by accounting 
for the likely improvement in NOI and DCR prior to the stress period. 
OFHEO agreed. However, this comment also did not require a change to 
the Rule, which does not prohibit consideration of such improvements. 
To provide clarity to the Enterprises about how to report current NOI 
and DCR, OFHEO has added language to the Risk-Based Capital Report 
Instructions.
    One Enterprise's comments suggest that the multifamily model does 
not account for rate caps and payment caps. In fact, the model does 
account explicitly for these features. However,

[[Page 11856]]

the Risk-Based Capital Report Instructions have been clarified to 
include specifically third party rate caps or swaps that may be 
required by loan documents and used to cap a multifamily loan.

C. Changes to Yields on Enterprise Debt

    This amended Rule modifies the previous Rule by adding 10 basis 
points to the cost of debt for an Enterprise in the stress test vis-a-
vis other borrowers in the debt markets. This amendment serves to 
reflect the reaction of the debt markets to the financial stress 
imposed upon the Enterprise.
    Only five commenters addressed the issue of the cost of new 
Enterprise debt. Those commenters voiced significant disagreement among 
themselves about whether OFHEO should add a debt premium to the 
Enterprises' cost of debt compared to other lenders. Several 
commenters, including FM Watch, the Consumer Mortgage Coalition (CMC), 
and an individual investment advisor, stated that not only was a debt 
premium appropriate but that the debt premium should be significantly 
larger than proposed. They argued that 10 basis points might not 
realistically reflect changes in the Enterprises' debt financing costs. 
CMC stated that, in times of stress, GSE debt spreads could increase 
significantly and that a 50 basis point or greater spread increase is 
not unlikely. CMC continued that Agency spreads to Treasuries have 
varied by about 70 basis points since 1998 and that a small spread 
adjustment in effect allows the GSEs to assume that they have 
essentially unlimited access to capital markets at preferred rates even 
in periods of distress. They cited the experience of the Farm Credit 
System in the 1980s as historical evidence of the need for a debt 
premium when a government sponsored enterprise faces adverse credit and 
interest rate stress.
    Another commenter noted that if the capital markets perceived the 
Enterprises to be in trouble, liquidity premiums and default premiums 
would both increase. That commenter noted that after both the Asian 
currency devaluations of 1997 and the Long Term Capital Management/
Russian debt crisis of 1998, spreads between LIBOR and AA rated 
instruments increased five to 10 basis points. He concluded that an 
economic event that directly impacted the GSEs would likely cause the 
spread between their debt and LIBOR/COFI to increase by more than 10 
basis points, especially as their perceived special status might be 
brought into question by poor performance.
    Only Freddie Mac \12\ and Fannie Mae opposed including a debt 
premium. The Enterprises claimed that there was no factual basis for 
the agency's decision and that it fails to tie capital to risk. Freddie 
Mac's consultants opined that historical evidence might instead support 
reducing Enterprise spreads relative to other issuers. Freddie Mac 
concluded that OFHEO added what it termed a costly premium on 
Enterprise debt yields based on a mere possibility, unsupported by 
evidence. Accordingly, the Enterprises recommended that OFHEO retain 
the methodology under the previous Rule, which projects yields on 
Enterprise debt based on historical spreads to Treasury, without a debt 
premium.
---------------------------------------------------------------------------

    \12\ Freddie Mac commissioned two consultants to file comments 
in support of its arguments.
---------------------------------------------------------------------------

    OFHEO has decided to adopt the proposed debt premium in which 10 
basis points is added after the first year of the stress period. After 
one year of stress conditions, the Enterprises might appear strong 
based on accounting measures of earnings and net worth. However, market 
values of the Enterprises' assets, liabilities, and derivatives 
contracts would fully reflect the effects of the interest rate shock 
and some credit quality deterioration of the stress test. Investors 
would be aware of these changes in market value and adjust their 
evaluations of the Enterprises' financial health accordingly.
    Notwithstanding the Enterprises' critique, historical evidence does 
exist to support OFHEO's decision to include a debt premium. The 
historical experiences of Fannie Mae in the early 1980s and the Farm 
Credit System in the mid-1980s were periods during which government 
sponsored enterprises faced financial stress, which indicated that 
borrowing costs would include some risk premium during economic 
conditions such as those in the stress test. In fact, in drafting the 
1992 Act, legislators referenced the Farm Credit System bailout to 
support having the Enterprises subject to a rigorous risk-based capital 
test.\13\ This historical experience is further illustrated by data 
reported in the General Accounting Office's 1990 report on government 
sponsored enterprises in which Fannie Mae's short-term borrowing costs 
during 1980 through 1982 were generally about 80 basis points in excess 
of yields of comparable maturity Treasury debt, and rising at one point 
to 200 basis points above Treasury yields. Spreads receded after sharp 
declines in interest rates greatly improved Fannie Mae's condition to a 
more normal range centered roughly at 20 basis points. Spreads were 
high again in the late 1980s for both Fannie Mae and the Farm Credit 
System, ranging from 40 to 100 basis points over a two-year period 
during the Farm Credit System's time of greatest difficulty.\14\
---------------------------------------------------------------------------

    \13\ ``Because of their Federal ties, GSEs emerged as a major 
public policy issue in the wake of the $4 billion Federal bailout of 
the Farm Credit System in 1987 * * *'' H.R. Rep. No. 102-282 (1991) 
at 109; see also S. Rep. No. 102-282 (1992)0 at 10 (``While both 
GSEs are currently very prosperous, HUD estimated in a 1986 report 
to Congress, that Fannie Mae was insolvent on a marked-to-market 
basis at year-end 1978 and did not return to solvency until 1985. 
Its negative net worth reached a peak of more that (sic) $20 billion 
in 1981, which was roughly 20 percent of its outstanding 
liabilities.'')
    \14\ U.S. General Accounting Office (1990), Government Sponsored 
Enterprises: The Government's Exposure to Risk. Washington, DC: U.S. 
General Accounting Office. (GAO/GGD-90-97) 87-88.
---------------------------------------------------------------------------

    These episodes could support a stress test projection that spreads 
of Enterprise debt yields to Treasury yields widen by 50 to 60 basis 
points. However, the stressful circumstances likely would also cause 
yield spreads of other debt to widen. OFHEO has chosen not to project 
how each yield series in the stress period might be affected by the 
stresses incorporated in the test, but wider spreads for some indexes 
generally would benefit an Enterprise with more fixed-pay than 
floating-pay swaps or swaptions. Because, in recent years, both 
Enterprises generally have relied much more heavily on fixed-pay 
instruments, that benefit could easily offset more than half of the 
cost of wider spreads on the Enterprises' own debt issues. However, 
based on recent Enterprise asset-liability structures, a substantial 
portion of new debt that would be issued by each Enterprise in stress 
tests would not be matched by fixed-pay swaps. Also, the nature of the 
stresses (sharp changes in long-term yields and high mortgage credit 
losses) is designed to affect the Enterprises specifically, and short-
term yield indexes typically used in swap contracts might be affected 
less than Enterprise yields. In view of these considerations, OFHEO has 
decided that an appropriate adjustment to Enterprise yields (in the 
absence of any adjustment to other yield indexes) should be 
significantly less than the sustained 50 to 60 basis point spread 
widenings of the 1980s, low enough to avoid potentially inappropriate 
adverse affects on the Enterprises, but high enough to be meaningful, 
pending further consideration.
    The Enterprises suggest that the only rational stress test is one 
that presumes that spreads of Enterprise debt to

[[Page 11857]]

Treasuries widen no more than spreads on any other non-Treasury rate. 
Far from being irrational to presume a wider yield spread on the debt 
of a stressed Enterprise, OFHEO determined that it was the most prudent 
and responsible course from a regulatory perspective. To assume, as the 
failed risk-management strategies at Long Term Capital Management did, 
that yield spreads would never fall far outside recent experience, is 
to ignore the reasonable implications of out-of-sample events such as 
the interest rate and credit stresses that are imposed during the 
stress period.

D. Changes to New Debt Mix

    The previous Rule provided for the funding of all cash deficits by 
the issuance of new long-or short-term debt, whichever was in shorter 
supply, until a 50/50 balance of short-to-long-term debt was reached in 
each Enterprise's portfolio. Thereafter, long- and short-term debt were 
to be issued in whatever ratio would best contribute to maintaining 
that balance. OFHEO chose this approach because it did not want to 
include an assumption about any particular behavioral preference by the 
Enterprises during the stress test. The previous Rule specified that 
the new short-term debt being issued as six-month discount notes with a 
discount rate at the six-month Enterprise Cost of Funds, and the new-
long term debt being issued as callable five-year bonds not callable 
for the first year. The previous Rule also provided a 50 basis point 
call premium, which required that callable debt would be called when it 
was 50 basis points out-of-the-money. The Rule further specified an 
issuance cost of 2.5 basis points on new short-term debt and an 
issuance cost of 20 basis points on new long-term debt.
    OFHEO has decided to adopt its proposal to change the target 
balance embodied in the previous Rule's approach. Specifically, the 50/
50 debt mix has been replaced with the actual ratio of an Enterprise's 
debt obligations (as adjusted by interest rate swaps) at the start of 
the stress period. In addition, OFHEO has decided to modify the call 
rule for long-term debt so that no calls will be executed on new long-
term debt in the up-rate scenario.
    Fannie Mae, Freddie Mac, the Mortgage Bankers Association (MBA) and 
JP Morgan each commented on the new debt mix. All these comments 
favored the proposed approach over the 50/50 mix adopted in the Rule.
    These commenters provided additional recommendations for OFHEO to 
further refine the new debt mix in the stress test. MBA suggested that 
OFHEO meet with professional portfolio risk management experts to 
devise additional funding rules for each interest rate scenario. MBA 
also stated, without elaboration, that the capital requirements 
resulting from this funding rule would cause the agencies to curtail 
their activities in the housing market at unpredictable times.
    The Enterprises provided detailed comments on this issue. Freddie 
Mac expressed concern that, under the Rule, callable debt issued in the 
up-rate stress test after month 12 would always be called at the first 
opportunity, even though interest rates remain constant during the last 
nine years of the stress period and the Enterprises would incur 
issuance fees as a result of calling the debt. Freddie Mac requested 
that the cost of callable debt reflect the degree of prepayment risk in 
the mortgages being funded. Freddie Mac argued that the issuance fees 
were inappropriate because there would be no reason for the Enterprise, 
without more, to call the debt. Freddie Mac requested that the Rule 
include detailed refunding provisions, including that callable debt 
match the callability of the mortgages being funded and that the 50 
basis point call premium for long term debt be reduced significantly. 
Specifically, Freddie Mac believed the call premium for 5-year callable 
debt should be reduced from an initial cost of 50 basis points to 5 
basis points over the first 12 months of the up-rate scenario and from 
an initial cost of 50 basis points to minus 45 basis points over the 
first 12 months of the down-rate scenario.
    Like Freddie Mac, Fannie Mae was particularly concerned about 
repeatedly calling new long-term debt at the end of one year and 
incurring the 20 basis point issuance fee for an identically yielding 
long-term debt instrument. Fannie Mae also supported Freddie Mac's 
recommendation for lower call premiums on new callable debt. In 
addition, Fannie Mae suggested that new long-term debt should be a mix 
of 5-year callable debt and seven year noncallable debt and that calls 
on newly issued callable debt should reflect the month-end cash 
position.
    As noted above, OFHEO has decided to adopt the proposed change to 
the new debt mix to reflect an Enterprise's actual short-term/long-term 
proportions of corporate debt outstanding at the start of the stress 
test. As the commenters stated, this new approach provides a more 
typical debt structure than the 50/50 mix set forth in the Rule. In 
addition, OFHEO has decided to modify the specification for calling 
long-term debt so that the call option for new long-term debt will 
never be executed in the up-rate scenario. OFHEO determined that this 
modification is appropriate because the earlier requirement would have 
resulted in new long-term debt being called even though there would be 
cost but little benefit to an Enterprise in calling it.
    OFHEO read with interest the more detailed alternative debt funding 
strategies suggested by the commenters. However, OFHEO has decided not 
to adopt any of the more detailed alternative recommendations, but will 
continue to analyze the issue. In addition, OFHEO is aware that the 
proposed treatment may place excessive significance on the quantity of 
an Enterprise's debt maturing early in the second year of the stress 
test. Such debt will contribute to the long-term (greater than one 
year) portion of its initial debt ratios, but will count as short-term 
debt in early months of the stress test when calculating whether new 
debt is issued as short-term or long-term debt. OFHEO will monitor the 
amounts of debt with these maturities closely and could decide to 
reclassify some debt if the amounts do not appear consistent with 
normal business practice.

E. Miscellaneous Technical Changes

Operating Expenses
     OFHEO has decided to modify the stress test treatment of operating 
expenses by converting 75 percent of starting-position fixed-asset 
balances to cash over the ten-year stress period. The amended Rule 
retains 25 percent of the fixed assets on an Enterprise's books 
throughout the stress period to reflect the acquisition of some new 
fixed assets, such as computer equipment, which is likely even in a 
``wind-down'' scenario. The effect of this change is to reduce the 
Enterprises' need for debt to carry nonearning fixed assets.
    Only Fannie Mae and Freddie Mac commented on this aspect of the 
proposal. Each Enterprise stated that the proposal was superior to the 
treatment of operating expenses in the Rule, because the proposal 
provides a ``more realistic'' treatment of fixed assets. Nevertheless, 
each Enterprise stated that the stress test should use an accelerated 
rate of amortization of fixed assets, which they believed would be more 
economically realistic.
    This amendment to the treatment of operating expenses adopts the 
approach proposed in the AmendNPR, without modification. OFHEO believes 
that the adopted change provides a straightforward and reasonable 
approach to the treatment of fixed assets.

[[Page 11858]]

Float Income
    The Rule provides for the modeling of float income associated with 
passthrough payments on securities issued by the Enterprises. Float 
income can be positive or negative depending upon whether the 
Enterprise holds the funds for a period of time before remitting them 
to security holders or remits funds to security holders before they are 
actually received. When an Enterprise owns its own passthrough 
securities, the timing of payment to itself is not relevant. However, 
the previous Rule included these securities in the calculation of float 
income, resulting in an overstatement of float income. OFHEO corrected 
this overstatement by reducing the float income on passthrough 
securities issued by the reporting Enterprise by the percentage of the 
Enterprise's ownership interest.
    Fannie Mae and Freddie Mac commented favorably about the proposed 
treatment of float income, provided that the stress test accurately 
accounts for such income. Freddie Mac provided an alternative equation 
which it believed more completely implements the proposal.
    After reviewing this suggested alternative, OFHEO determined that 
the alternative, with slight further modification, is correct. 
Accordingly, OFHEO has adopted its proposal with the appropriate 
adjustment.
Currency Swaps
    Regarding the treatment of Foreign Exchange Risk specified in the 
previous Rule, OFHEO stated that it would not apply haircuts to foreign 
currency swaps. However, in furtherance of its commitment to continue 
to refine the ability of the stress test to tie capital to risk more 
accurately, OFHEO indicated that it would continue to seek a suitable 
methodology for applying an appropriate haircut to foreign currency 
swaps. After additional analysis, including evaluation of the technical 
enhancements required for implementation, OFHEO has eliminated the 
simplifying assumption applied in the previous Rule and applied a 
haircut to foreign currency swap counterparties. Because the stress 
test does not project foreign currency values, the haircut is applied 
by adjusting the pay (dollar-denominated) side of the swap upward by 
the amount of the haircut percentage rather than haircutting the 
foreign-currency receive side of the swap.
    Commenters agreed with OFHEO that the stress test should recognize 
the capital impact of foreign currency swaps, however, they criticized 
OFHEO's methodology. One commenter characterized OFHEO's approach as 
imprecise and conservative, suggesting that the amendment would result 
in the imposition of an excessive capital charge for foreign currency 
swaps. Another commenter opined that OFHEO's treatment would result in 
excessive capital charges for currency swaps and suggested establishing 
haircuts based on the net amount owed on the swap. Both Enterprises 
recommended that OFHEO reduce the haircuts applied to foreign currency 
swaps by 50 percent. They argued that the proposed approach, which 
bases the haircut on the amount paid by an Enterprise, rather than the 
net amount received, implicitly assumes that the U.S. dollar would 
depreciate by 100 percent. Historical data on dollar exchange rates 
with major currencies over the past three decades show that the largest 
sustained decline (average decline over a 10-year period, relative to 
the start of the 10-year period) in the dollar was slightly less than 
50 percent--half the decline implicitly assumed in the proposed 
approach.
    Although OFHEO has declined to project currency exchange rates 
during the stress period, the amended Rule produces the same result as 
an assumption that during the stress period the dollar will have 
depreciated 50 percent relative to the forward exchange values of all 
foreign currencies embodied in the currency swaps. (A 100 percent 
dollar depreciation would imply that the dollar value of net swap 
receipts would be infinite, as would any percentage haircut.) OFHEO 
agrees that the worst sustained dollar depreciation against a major 
currency in recent times was nearly 50 percent, which is consistent 
with the implied assumption about currency rates during the stress 
period. Accordingly, OFHEO has decided to adopt the proposed change to 
the Rule.
American Call Options
    With respect to the modeling of nonmortgage instrument cash flows, 
the previous Rule did not attempt to provide a comprehensive 
explanation of the cash flows of all nonmortgage instruments utilized 
by the Enterprises. Consistent with this approach, OFHEO used a 
simplifying assumption in the previous Rule to model American call 
options. In the previous Rule, an American call option, which allows an 
issuer to exercise the call option at any time after a lockout period, 
was treated as a Bermudan call option. Bermudan options allow the owner 
to exercise the option only on certain specified dates before maturity, 
usually on coupon payment days. However, in the preamble to the 
previous Rule, OFHEO stated that it would be preferable to consider how 
options might be modeled more precisely.
    Upon further evaluation, OFHEO has modified the stress test to 
evaluate American calls on the first option date in the exercise 
schedule and on subsequent monthly anniversaries of an instrument's 
first coupon date. This methodology will allow the stress test to model 
American call options according to their terms, resulting in a 
refinement that more closely ties capital to risk.
    The comments supported OFHEO's proposed modifications to address 
American call options. Both Enterprises suggested additional 
improvements to the stress test could be achieved by incorporating 
changes designed specifically to model European call options.
    Changes to the stress test treatment of European options may be 
appropriate. OFHEO will consider the desirability of implementing 
European call related recommendations in the future.
House Price Growth Factor Clarification
    The Rule requires the use of OFHEO's most recent House Price Index 
as of the reporting date to determine the house price growth factor 
used to calculate current loan-to-value ratios. OFHEO has decided to 
expand the instructions in Section 3.6 to clarify, consistent with 
Section 3.7, that when a loan was originated since the publication of 
that report, a cumulative house price growth factor of one is used. No 
comments critical of this clarification were received.
Preferred Stock
    In the Final Rule, OFHEO decided to include rules in the stress 
test to address share repurchases during the stress period. Although 
the Rule's effect was to treat the calling of preferred stock as a 
share repurchase, this result would not be clear to some readers. 
Accordingly, OFHEO is making a technical amendment to state in section 
3.8.1[a]3 that ``no preferred stock issued by the Enterprise will be 
called.''
Technical Correction
    OFHEO added a Prepayment Penalty Flag as an additional 
classification variable for multifamily loan groups. The Flag 
distinguishes loans with active prepayment penalties or yield 
maintenance provisions from those without in the calculation of 
prepayment penalty duration for loan groups.

[[Page 11859]]

F. Process Issues

Publication of Capital Numbers
    Several commenters opined that OFHEO should have published results 
of model runs to demonstrate the impact of the proposed change on the 
Enterprises' capital requirements. One commenter stated that OFHEO 
should publish the capital requirements for the Enterprises under the 
previous version of the Rule and the modified Rule, so that the public 
can understand the impact of the changes.
    In OFHEO's view, the comments received in response to the proposed 
changes demonstrate that the AmendNPR provided sufficient information 
for a full and informed discussion of the relevant issues. OFHEO 
considered each of the proposed changes on its own merits and those 
that were adopted were approved on the basis of sound theory, research 
and, where appropriate, statistical estimation, rather than simply the 
impact they might have on the capital of an Enterprise in a particular 
historical quarter. To the extent that OFHEO did runs to test the 
developmental computer code it had created for these changes, OFHEO did 
not rely upon those results as the rationale for its choices. Those 
runs were designed primarily to check for errors in the code or the 
algorithms on which the code was based. For these reasons, OFHEO has 
found the argument that results of runs are necessary to understand or 
evaluate the impact of the proposed changes to be unfounded.
    OFHEO published a final Rule on September 13, 2001, which provided 
detailed specifications and working copies of the code to the 
Enterprises and other members of the public. As expected, when outside 
parties were able to examine the specifications in detail and begin to 
run portions of the code, OFHEO received numerous comments and requests 
for changes. Some of these changes OFHEO considered to be sufficiently 
significant that it was desirable to publish them for comment quickly 
in order to allow any of them found to be necessary to be finalized 
without delaying the implementation of the Rule and the September 2002 
date when the Rule becomes enforceable. OFHEO expects that with the 
changes approved in this document, the Rule will better tie capital to 
risk. Accordingly, the risk-based capital numbers for the first quarter 
of 2002 will accurately portray the adequacy of the Enterprises' 
capital under the Rule that will be enforced. Earlier results would be 
based upon data that are now too old to indicate any useful information 
about the Enterprises' current condition.
    Another important reason why OFHEO has delayed publishing risk-
based capital numbers is that, in OFHEO's view, the 1992 Act intends 
that the Enterprises have a year to adjust their operations to the 
requirements of the Rule. These adjustments take a number of forms. 
First, the Enterprises have needed time to adjust their computer 
systems and data production systems to support the stress test. This 
has been a time-consuming and expensive process for them and for OFHEO, 
but is an essential part of making the entire capital scheme in the 
1992 Act operational. Second, the one-year implementation period in the 
1992 Act allows the Enterprises to adjust their businesses, including 
their lending and hedging strategies, to the stress test. Third, the 
implementation period allows the Enterprises to raise any additional 
capital that might be required by the Rule. Given the fact that the 
Enterprises are publicly traded companies, the economic condition of 
which could be affected greatly by premature disclosure of capital 
requirements, OFHEO will not disclose capital numbers until the 
Enterprises have had a reasonable opportunity to make at least a large 
portion of these adjustments and present to the public their plans to 
maintain capital compliance.
Use of Code by Parties Other Than OFHEO
    Two commenters discussed the difficulties they have encountered in 
running the computer code released by OFHEO. They both expressed the 
view that OFHEO should not amend the Rule until they have had time to 
run the code and analyze the results or until OFHEO has published data 
regarding the capital impact of any proposed amendments. Instead they 
would have OFHEO enforce the previous Rule and continue to allow 
commenters to study the proposed changes. OFHEO disagrees with this 
approach. The changes that OFHEO adopted are each supportable on its 
own merits. OFHEO's goal is to have the best rule possible when the 
Rule becomes enforceable in September 2002. That goal would not be 
achieved if the changes were delayed until after that date. As a 
general matter, if OFHEO were to hold up any changes to the Rule until 
any parties who wished to run the model and test the impact of the 
changes were able to do so, the Rule would lose the flexibility it must 
have in order to be dynamic and meaningful. Although the good faith of 
these commenters in attempting to run the code is not questioned, their 
ability to do so, or the ability of any other interested party to do 
so, will not determine whether OFHEO proceeds with needed changes to 
the Rule.
    Notwithstanding that OFHEO will not delay changes to the Rule to 
allow other parties (including the Enterprises) to be able to run the 
underlying computer code, OFHEO appreciates the extensive time and 
resources certain commenters have put into studying the code and 
attempting to run it. It is beneficial to OFHEO and to the regulatory 
process to obtain the well-informed and differing views that have 
resulted. OFHEO also appreciates the importance of the capital rules to 
parties other than the Enterprises and takes their views and the 
factual information they supply into consideration in determining the 
specifications for the stress test. As time and resources allow, OFHEO 
will continue to work with these parties to help them understand and 
run the models that underlie the stress test.
    In order to assist interested parties with their continued efforts 
to replicate the model, and to maintain appropriate regulatory 
transparency, OFHEO intends to make the computer code associated with 
the Rule available to the public. The code will be available upon 
request after the Rule is published. OFHEO anticipates that the code 
will continue to evolve over time as additional efficiencies and 
technical adjustments are incorporated to enhance the functionality of 
the code. Consistent with OFHEO's need to address technical 
requirements or other contingencies that arise out of the operation of 
the code, the agency will continue to make code changes, without 
opportunity for public comment, as long as such changes are not 
inconsistent with the Rule. Any such changes to the code will be made 
available to the public.
Determination That the Amendments to the Rule Are Not ``Economically 
Significant''
    One commenter took issue with the determination by the Office of 
Information and Regulatory Affairs (OIRA) of the Office of Management 
and Budget (OMB) that the amendments to the Rule were not 
``economically significant'' within the meaning of Executive Order 
12866. OFHEO notes that this determination is entirely consistent with 
similar determinations made with regard to the capital rules of other 
federal financial regulatory agencies. As a practical matter, it is 
impossible to prove what economic impact a change in the Rule will have 
on the economy. However, OFHEO anticipates the effects on the 
Enterprises

[[Page 11860]]

and the economy as a whole will be small.
Cost/Benefit Analysis
    The same commenter suggested that OFHEO should have undertaken a 
more extensive cost/benefit analysis than was included in the AmendNPR. 
OFHEO disagrees for much the same reasons that it disagreed that these 
amendments should be considered an economically significant rule in the 
previous paragraph.
    A detailed cost/benefit analysis such as that suggested by the 
commenter would begin with an analysis of the marginal capital impact 
of each change on each of the Enterprises. It would then require 
judgments to be made about whether and to what extent these marginal 
impacts would alter the behavior of the Enterprises in the marketplace 
and the financial impact of those changes on other market participants. 
With risk-based capital rules, these types of predictions of future 
behavior are speculative, at best, and analysis is most useful after 
the change is implemented and its actual impact can be studied. That is 
why risk-based capital rules tend to be changed relatively frequently 
and incrementally, as additional information comes to light and the 
behavior of the regulated entities and the markets in which they 
operate can be studied.
Comment Period Extension
    In the AmendNPR, OFHEO proposed a comment period of thirty days. 
Two commenters each requested that the comment period be extended to 
give the public more time to analyze and provide meaningful comment 
about the proposal.
    OFHEO contacted the commenters before the close of the comment 
period and explained that it decided to deny any request to extend the 
comment period because, as discussed above, OFHEO has determined that 
the comment period provided sufficient time for a full and informed 
discussion of relevant issues. Another reason that the extension was 
denied is the tight statutory timeframe within which Congress intended 
that the Rule should become fully enforceable. Specifically, the 1992 
Act provides that the Rule becomes fully enforceable one year after the 
Rule is initially issued. It would be impracticable for OFHEO to meet 
this statutory timeframe if it were to extend the comment period any 
further.
    To meet the one-year timetable, OFHEO needs to establish a firm 
baseline set of specifications for the Rule, which can be applied to 
first quarter, 2002, data from the Enterprises. Any delay in the 
effective date of these amendments could have caused a one quarter 
delay in applying that set of specifications. Applying the new 
specifications to new data from the Enterprises before the risk-based 
capital rule becomes fully enforceable in September 2002 will allow the 
Enterprises to adjust to the revised Rule and for OFHEO to study its 
effects.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    Today's final Rule amends OFHEO's risk-based capital rule, which 
was designated as a major rule by OMB. The amendment refines various 
aspects of that Rule to tie the capital more closely to risk. Although 
the impact of these refinements is not economically significant, OMB 
has reviewed the amendment to determine whether the changes may raise 
novel policy issues. OFHEO is not required to provide the type of 
regulatory impact analysis that is required for an economically 
significant rule. Nevertheless, in accordance with OMB's guidance that 
all regulatory actions should be consistent with the principles of E.O. 
12866, OFHEO has determined, after review by agency economists, 
financial analysts, and attorneys, that the benefits of the changes to 
the Rule substantially outweigh any economic costs.
    It is impossible to estimate precisely the particular benefits and 
costs associated with the risk-based capital requirement. Although 
OFHEO believes this group of enhancements and refinements to the stress 
test will not generally increase or decrease the amount of required 
capital for an Enterprise to any substantial degree, the effect in any 
particular quarter depends upon how well that Enterprise is hedged 
against the risks and conditions specified in the stress test. OFHEO 
cannot know whether or not hedges in place at an Enterprise at the 
beginning of any quarter would have been in place in the absence of 
specific provisions of the risk-based capital rule or were put in place 
because of the test. Speculating as to what the Enterprises would do in 
the absence of specific provisions in future quarters is even more 
difficult. Therefore, a detailed economic cost/benefit analysis is not 
practical.
    Rather than trying to assess the costs and benefits of every change 
to the stress test, OFHEO looks to whether or not the changes make the 
Rule better reflect the risks faced by the Enterprises. Improving the 
Rule in this manner should reduce the potential for Enterprise 
insolvency by protecting better against interest rate, credit, and 
management and operations risk. By helping to ensure the safety and 
soundness of the Enterprises, the regulation allows them to continue to 
carry out their public purposes, which include providing stability in 
the secondary market for residential mortgages and providing access to 
mortgage credit in central cities, rural areas, and underserved 
areas.\15\ In addition, the regulation helps ensure that the 
Enterprises will continue to provide benefits to the primary mortgage 
market, such as standardizing business practices.\16\
---------------------------------------------------------------------------

    \15\ 1992 Act, section 1302(2) (12 U.S.C. 4501(2)).
    \16\ ``Managing Risk in Housing Finance Markets: Perspectives 
from the Experiences of the United States of America and Mexico,'' 
Mortgage Bankers Association of America (June 11, 1998).
---------------------------------------------------------------------------

    The amended Rule results in a capital requirement that corresponds 
more closely to capital levels that the marketplace would demand in the 
absence of the benefits afforded by the Government sponsorship of the 
Enterprises, leading to gains in overall economic efficiency. By 
improving the Rule's ability to reflect actual risks at the 
Enterprises, the amendment also may enhance investor confidence in the 
ability of the stress test to forewarn investors and regulators of 
financial weaknesses. This result would be consistent with a study by 
Standard & Poor's (S&P) that provided risk-to-the-government credit 
ratings for the Enterprises.\17\ Although S&P had rated Fannie Mae A- 
and Freddie Mac A+ in 1991, the 1997 report upgraded the ratings of 
both Enterprises to AA-. S&P cited increased governmental oversight by 
OFHEO as an important factor in these higher ratings. It further noted 
that ``OFHEO's regulatory oversight [of Freddie Mac] also gives comfort 
that appropriate interest rate risk mitigation steps would be taken as 
needed.'' \18\
---------------------------------------------------------------------------

    \17\ Report to OFHEO, Standard & Poor's, Contract No. HE09602C 
(February 3, 1997).
    \18\ Report to OFHEO, at 10.
---------------------------------------------------------------------------

    OFHEO can identify no significant additional costs associated with 
implementing the amendments. No new reports are required, and net 
effects on required future capital likely will be very small. As 
explained above in response to comments, it is not practical to measure 
all the indirect impacts that each of these amendments might have on 
various sectors of the economy. OFHEO is convinced, however, that the 
amendments do improve, incrementally, the capital requirements applied 
to the Enterprises, as described in detail above and in the AmendNPR. 
In sum, the benefits to the public, including the Enterprises and other 
private-sector

[[Page 11861]]

concerns, of improving the sensitivity of the stress test to risk far 
outweigh the already expended costs of implementing these improvements.

Paperwork Reduction Act

    This regulation does not contain any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
regulation under the Regulatory Flexibility Act. The General Counsel of 
OFHEO certifies that the regulation is not likely to have a significant 
economic impact on a substantial number of small business entities 
because the regulation is applicable only to the Enterprises, which are 
not small entities for purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1750

    Capital classification, Mortgages, Risk-based capital.

    Accordingly, for the reasons stated in the preamble, OFHEO is 
amending 12 CFR part 1750 as follows:

PART 1750--RISK-BASED CAPITAL

    1. The authority citation for part 1750 continues to read as 
follows:

    Authority: 12 U.S.C. 4513, 4514, 4611, 4612, 4614, 4618.


    2. Amend Appendix A to subpart B of part 1750 as follows:
    a. Revise Table 3-1 in paragraph 3.1.1;
    b. Revise Tables 3-2 through 3-4 in paragraph 3.1.2.1;
    c. Revise Table 3-18 in paragraph 3.1.3.1 [c];
    d. Revise paragraph 3.3.1 [b];
    e. Revise paragraph 3.3.3 [a] 3.c.;
    f. Revise Table 3-28 in paragraph 3.4.2;
    g. Add new paragraph 3.5.3 [a] 2.d.;
    h. Revise paragraph 3.5.3 [a] 3. and Table 3-31;
    i. In sentence six of paragraph 3.6.1 [e], remove the comma after 
the words ``Credit Losses'', add the word ``and'' in its place; and 
remove the words ``and the Float Income'' after the words ``Guarantee 
Fee'';
    j. Revise paragraph 3.6.3.4.3.1 [a] 2.a.;
    k. Revise paragraph 3.6.3.4.3.1 [a] 3.a.;
    l. Revise paragraph 3.6.3.5.1 [b];
    m. Revise Table 3-38 in paragraph 3.6.3.5.2.;
    n. Revise paragraph 3.6.3.5.3.1 [a] 2.;
    o. In paragraph 3.6.3.5.3.1 [a] 4, remove the first equation: 
``UWDCRFm = 1 if DCRm  1 in month m'' and add the 
equation ``UWDCRFm = 1 if DCRm  0.98 in month m'' 
in its place;
    p. Revise paragraph 3.6.3.5.3.2 [a] 1. and Table 3-39;
    q. Revise paragraph 3.6.3.5.3.2 [a] 2.b.;
    r. Revise paragraph 3.6.3.5.3.2 [a] 3.;
    s. Revise Table 3-44 in paragraph 3.6.3.6.3.2;
    t. In section 3.6.3.6.4.3, revise the four paragraphs: [a] 1., [a] 
3.b., [a] 4.b. and [a] 5.;
    u. Revise paragraph 3.6.3.7.3 [a] 9.b.;
    v. Revise paragraph 3.7.3.1 [g] 1.;
    w. In paragraphs 3.7.3.2 [a] 5. and 3.7.3.3 [a] 3., add the words 
``, as appropriate'' at the end of the sentence in each paragraph;
    x. In paragraph 3.7.4 [a] remove reference to ``Table 3-55'' and 
add ``Table 3-61'' in its place;
    y. Redesignate Tables 3-65 through 3-70 as Tables 3-66 through 3-
71;
    z. After Table 3-64, add new paragraph 3.8.1 [f], new footnote 5, 
and new Table 3-65;
    aa. In paragraphs 3.8.2 [a] and [b] remove references to ``Table 3-
65'' and add ``Table 3-66'' in their place;
    bb. Revise paragraphs 3.8.3.1 [a] 3.a. and 3.8.3.1 [a] 3.d.;
    cc. Add new paragraph 3.8.3.1 [a] 3.e.;
    dd. In paragraph 3.8.3.4 remove reference to ``Table 3-66'' and add 
``Table 3-67'' in its place;
    ee. In paragraphs 3.8.3.6.1 [e] 1. and [e] 2. remove both 
references to ``Table 3-67'' and add ``Table 3-68'' in their place;
    ff. In paragraph 3.8.3.9, in redesignated Table 3-69 remove both 
references to ``Table 3-65'' and add ``Table 3-66'' in their place;
    gg. Revise paragraphs 3.8.3.10 [a], [b] and [c];
    hh. In paragraph 3.9.2 remove reference to ``Table 3-69'' and add 
``Table 3-70'' in its place;
    ii. In paragraph 3.10.2 [a] remove reference to ``Table 3-70'' and 
add ``Table 3-71'' in its place;
    jj. Revise paragraphs 3.10.3.1 [b] 2. and [b] 3.;
    kk. Revise paragraph 3.10.3.6.2 [a] 5.; and
    ll. Revise the definition of Enterprise Cost of Funds in paragraph 
4.0 Glossary.
    The revisions and additions read as follows:

Appendix A to Subpart B of Part 1750--Risk-Based Capital Text 
Methodology and Specifications

* * * * *
3.1.1  *  *  *

                                                      Table 3-1--Sources of Stress Test Input Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Data Source(s)  R = RBC Report  P = Public Data  F = Fixed
                                                                                                                        Values
           Section of this Appendix                                Table                    ------------------------------------------------------------
                                                                                              R    P    F               Intermediate Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.1.3, Public Data                             3-19, Stress Test Single Family Quarterly                F
                                                House Price Growth Rates
                                              ----------------------------------------------------------------------------------------------------------
                                               3-20, Multifamily Monthly Rent Growth and                F
                                                Vacancy Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.2.2, Commitments Inputs                      Characteristics of securitized single family   R             3.3.4, Interest Rates Outputs
                                                loans originated and delivered within 6
                                                months prior to the Start of the Stress
                                                Test
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.2.3, Commitments Procedures                  3-25, Monthly Deliveries as a Percentage of              F   ............................................
                                                Commitments Outstanding (MDP)
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 11862]]

 
3.3.2, Interest Rates Inputs                   3-18, Interest Rate and Index Inputs                P
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.3.3, Interest Rates Procedures               3-26, CMT Ratios to the Ten-Year CMT                     F
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.4.2, Property Valuation Inputs               3-28, Property Valuation Inputs                              3.1.3, Public Data
                                                                                                            3.3.4, Interest Rates Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.5.3, Counterparty Defaults Procedures        3-30, Rating Agencies Mappings to OFHEO             P        ............................................
                                                Ratings Categories
                                              ----------------------------------------------------------------------------------------------------------
                                               3-31, Stress Test Maximum Haircut by Ratings             F
                                                Classification
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.3.2, Mortgage Amortization Schedule      3-32, Loan Group Inputs for Mortgage                         3.3.4, Interest Rates Outputs
 Inputs                                         Amortization Calculation
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.4.2, Single Family Default and           3-34, Single Family Default and Prepayment     R         F   3.6.3.3.4, Mortgage Amortization Schedule
 Prepayment Inputs                              Inputs                                                       Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.4.3.3, Prepayment and Default Rates and  3-35, Coefficients for Single Family Default             F
 Performance Fractions                          and Prepayment Explanatory Variables
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.5.2, Multifamily Default and Prepayment  3-38, Loan Group Inputs for Multifamily        R         F
 Inputs                                         Default and Prepayment Calculations
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.5.3.3, Default and Prepayment Rates and  3-39, Explanatory Variable Coefficients for              F   3.6.3.3.4, Mortgage Amortization Schedule
 Performance Fractions                          Multifamily Default                                          Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.6.2.6, Single Family Gross Loss          3-42, Loan Group inputs for Gross Loss                   F   3.3.4, Interest Rates Outputs
 Severity Inputs                                Severity                                                    3.6.3.3.4, Mortgage Amortization Schedule
                                                                                                             Outputs
                                                                                                            3.6.3.4.4, Single Family Default and
                                                                                                             Prepayment Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.6.3.6, Multifamily Gross Loss Severity   3-44, Loan Group Inputs for Multifamily                  F   3.3.4, Interest Rates Outputs 3.6.3.3.4,
 Inputs                                         Gross Loss Severity                                          Mortgage Amortization Schedule Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.6.4.8, Mortgage Credit Enhancement       3-46, CE Inputs for each Loan Group            R             3.6.3.3.4, Mortgage Amortization Schedule
 Inputs                                                                                                      Outputs
                                                                                                            3.6.3.4.4, Single Family Default and
                                                                                                             Prepayment Outputs
                                                                                                            3.6.3.5.4, Multifamily Default and
                                                                                                             Prepayment Outputs
                                                                                                            3.6.3.6.2.3, Single Family Gross Loss
                                                                                                             Severity Outputs
                                                                                                            3.6.3.6.3.3, Multifamily Gross Loss Severity
                                                                                                             Outputs
                                              ----------------------------------------------------------------------------------------------------------
                                               3-47, Inputs for each Distinct CE              R
                                                Combination (DCC)
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.7.2, Stress Test Whole Loan Cash Flow    3-51, Inputs for Final Calculation of Stress   R             3.3.4, Interest Rates Outputs
 Inputs                                         Test Whole Loan Cash Flows                                  3.6.3.3.4, Mortgage Amortization Schedule
                                                                                                             Outputs
                                                                                                            3.6.3.4.4, Single Family Default and
                                                                                                             Prepayment Outputs
                                                                                                            3.6.3.5.4, Multifamily Default and
                                                                                                             Prepayment Outputs
                                                                                                            3.6.3.6.5.6, Single Family and Multifamily
                                                                                                             Net Loss Severity Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.6.3.8.2, Whole Loan Accounting Flows Inputs  3-54, Inputs for Whole Loan Accounting Flows   R             3.6.3.7.4, Stress Test Whole Loan Cash Flow
                                                                                                             Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.7.2, Mortgage-Related Securities Inputs      3-56, RBC Report Inputs for Single Class MBS   R
                                                Cash Flows
                                              ----------------------------------------------------------------------------------------------------------
                                               3-57, RBC Report Inputs for Multi-Class and    R
                                                Derivative MBS Cash Flows
                                              ----------------------------------------------------------------------------------------------------------
                                               3-58, RBC Report Inputs for MRBs and           R
                                                Derivative MBS Cash Flows
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.8.2, Nonmortgage Instrument Inputs           3-66, Input Variables for Nonmortgage          R
                                                Instrument Cash flows
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.9.2, Alternative Modeling Treatments Inputs  3-70, Alternative Modeling Treatment Inputs    R
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 11863]]

 
3.10.2, Operations, Taxes, and Accounting      3-71, Operations, Taxes, and Accounting        R             3.3.4, Interest Rates Outputs
 Inputs                                         Inputs                                                      3.6.3.7.4, Stress Test Whole Loan Cash Flow
                                                                                                             Outputs
                                                                                                            3.7.4, Mortgage-Related Securities Outputs
                                                                                                            3.8.4, Nonmortgage Instrument Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.12.2, Risk-Based Capital Requirement Inputs                                                 R             3.3.4, Interest Rates Outputs
                                                                                                            3.9.4, Alternative Modeling Treatments
                                                                                                             Outputs
                                                                                                            3.10.4, Operations, Taxes, and Accounting
                                                                                                             Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------

* * * * * * *
3.1.2.1  * * *

                                 Table 3-2--Whole Loan Classification Variables
----------------------------------------------------------------------------------------------------------------
              Variable                             Description                              Range
----------------------------------------------------------------------------------------------------------------
Reporting Date                        The last day of the quarter for the   YYYY0331
                                       loan group activity that is being    YYYY0630
                                       reported to OFHEO                    YYYY0930
                                                                            YYYY1231
----------------------------------------------------------------------------------------------------------------
Enterprise                            Enterprise submitting the loan group  Fannie Mae
                                       data                                 Freddie Mac
----------------------------------------------------------------------------------------------------------------
Business Type                         Single family or multifamily          Single family
                                                                            Multifamily
----------------------------------------------------------------------------------------------------------------
Portfolio Type                        Retained portfolio or Sold portfolio  Retained Portfolio
                                                                            Sold Portfolio
----------------------------------------------------------------------------------------------------------------
Government Flag                       Conventional or Government insured    Conventional
                                       loan                                 Government
----------------------------------------------------------------------------------------------------------------
Original LTV                          Assigned LTV classes based on the     LTV=60
                                       ratio, in percent, between the       60 LTV=70
                                       original loan amount and the lesser  70 LTV=75
                                       of the purchase price or appraised   75 LTV=80
                                       value                                80 LTV=90
                                                                            90 LTV=95
                                                                            95 LTV=100
                                                                            100 LTV
----------------------------------------------------------------------------------------------------------------
Current Mortgage Interest Rate        Assigned classes for the current      0.0=Rate4.0
                                       mortgage interest rate               4.0=Rate5.0
                                                                            5.0=Rate6.0
                                                                            6.0=Rate7.0
                                                                            7.0=Rate8.0
                                                                            8.0=Rate9.0
                                                                            9.0=Rate10.0
                                                                            10.0=Rate11.0
                                                                            11.0=Rate12.0
                                                                            12.0=Rate13.0
                                                                            13.0=Rate14.0
                                                                            14.0=Rate15.0
                                                                            15.0=Rate16.0
                                                                            Rate=>16.0
----------------------------------------------------------------------------------------------------------------
Original Mortgage Interest Rate       Assigned classes for the original     0.0=Rate4.0
                                       mortgage interest rate               4.0=Rate5.0
                                                                            5.0=Rate6.0
                                                                            6.0=Rate7.0
                                                                            7.0=Rate8.0
                                                                            8.0=Rate9.0
                                                                            9.0=Rate10.0
                                                                            10.0=Rate11.0
                                                                            11.0=Rate12.0
                                                                            12.0=Rate13.0
                                                                            13.0=Rate14.0
                                                                            14.0=Rate15.0
                                                                            15.0=Rate16.0
                                                                            Rate=>16.0
----------------------------------------------------------------------------------------------------------------

[[Page 11864]]

 
Mortgage Age                          Assigned classes for the age of the   0=Age=12
                                       loan                                 12Age=24
                                                                            24Age=36
                                                                            36Age=48
                                                                            48Age=60
                                                                            60Age=72
                                                                            72Age=84
                                                                            84Age=96
                                                                            96Age=108
                                                                            108Age=120
                                                                            120Age=132
                                                                            132Age=144
                                                                            144Age=156
                                                                            156Age=168
                                                                            168Age=180
                                                                            Age>180
----------------------------------------------------------------------------------------------------------------
Rate Reset Period                     Assigned classes for the number of    Period =1
                                       months between rate adjustments      1 Period =4
                                                                            4 Period =9
                                                                            9 Period =15
                                                                            15 Period =60
                                                                            60 Period 999
                                                                            Period = 999 (not applicable)
----------------------------------------------------------------------------------------------------------------
Payment Reset Period                  Assigned classes for the number of    Period =9
                                       months between payment adjustments   9 Period =15
                                       after the duration of the teaser     15 Period 999
                                       rate                                 Period = 999 (not applicable)
----------------------------------------------------------------------------------------------------------------
ARM Index                             Specifies the type of index used to   FHLB 11th District Cost of Funds.
                                       determine the interest rate at each  1 Month Federal Agency Cost of
                                       adjustment                            Funds.
                                                                            3 Month Federal Agency Cost of
                                                                             Funds.
                                                                            6 Month Federal Agency Cost of
                                                                             Funds.
                                                                            12 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  24 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  36 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  60 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  120 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  360 Month Federal Agency Cost of
                                                                             Funds.
                                      ....................................  Overnight Federal Funds (Effective).
                                      ....................................  1 Week Federal Funds
                                      ....................................  6 Month Federal Funds
                                      ....................................  1 Month LIBOR
                                      ....................................  3 Month LIBOR
                                      ....................................  6 Month LIBOR
                                      ....................................  12 Month LIBOR
                                      ....................................  Conventional Mortgage Rate.
                                      ....................................  15 Year Fixed Mortgage Rate.
                                      ....................................  7 Year Balloon Mortgage Rate.
                                      ....................................  Prime Rate
                                      ....................................  1 Month Treasury Bill
                                      ....................................  3 Month CMT
                                      ....................................  6 Month CMT
                                      ....................................  12 Month CMT
                                      ....................................  24 Month CMT
                                      ....................................  36 Month CMT
                                      ....................................  60 Month CMT
                                      ....................................  120 Month CMT
                                      ....................................  240 Month CMT
                                      ....................................  360 Month CMT
----------------------------------------------------------------------------------------------------------------
Cap Type Flag                         Indicates if a loan group is rate-    Payment Capped
                                       capped, payment-capped or uncapped   Rate Capped
                                                                            No periodic rate cap
----------------------------------------------------------------------------------------------------------------
OFHEO Ledger Code                     OFHEO-specific General Ledger         Appropriate OFHEO Ledger Code based
                                       account number used in the Stress     on the chart of accounts.
                                       Test
----------------------------------------------------------------------------------------------------------------


                        Table 3-3--Additional Single Family Loan Classification Variables
----------------------------------------------------------------------------------------------------------------
              Variable                             Description                              Range
----------------------------------------------------------------------------------------------------------------
Single Family                         Identifies the mortgage product       Fixed Rate 30YR
Product Code                           types for single family loans        Fixed Rate 20YR
                                                                            Fixed Rate 15YR
                                                                            5 Year Fixed Rate Balloon
                                      ....................................  7 Year Fixed Rate Balloon
                                      ....................................  10 Year Fixed Rate Balloon
                                      ....................................  15 Year Fixed Rate Balloon

[[Page 11865]]

 
                                      ....................................  Adjustable Rate
                                      ....................................  Step Rate ARMs
                                      ....................................  Second Lien
                                      ....................................  Other
----------------------------------------------------------------------------------------------------------------
Census Division                       The Census Division in which the      East North Central
                                       property resides. This variable is   East South Central
                                       populated based on the property's    Middle Atlantic
                                       state code                           Mountain
                                                                            New England
                                      ....................................  Pacific
                                      ....................................  South Atlantic
                                      ....................................  West North Central
                                      ....................................  West South Central
----------------------------------------------------------------------------------------------------------------
Relative Loan Size                    Assigned classes for the loan amount  0=Size=.4
                                       at origination divided by the        .4Size=.6
                                       simple average of the loan amount    .6Size=.75
                                       for the origination year and for     .75Size=1.0
                                       the State in which the property is   1.0Size=1.25
                                       located. Average loan size for the   1.25Size=1.5
                                       appropriate quarter is provided by   Size>1.5
                                       OFHEO based upon data from both
                                       Enterprises. It is expressed as a
                                       decimal
----------------------------------------------------------------------------------------------------------------


                         Table 3-4--Additional Multifamily Loan Classification Variables
----------------------------------------------------------------------------------------------------------------
              Variable                             Description                              Range
----------------------------------------------------------------------------------------------------------------
Multifamily Product Code              Identifies the mortgage product       Fixed Rate Fully Amortizing
                                       types for multifamily loans          Adjustable Rate Fully Amortizing
                                                                            5 Year Fixed Rate Balloon
                                                                            7 Year Fixed Rate Balloon
                                                                            10 Year Fixed Rate Balloon
                                                                            15 Year Fixed Rate Balloon
                                                                            Balloon ARM
                                                                            Other
----------------------------------------------------------------------------------------------------------------
New Book Flag                         ``New Book'' is applied to Fannie     New Book
                                       Mae loans acquired beginning in      Old Book
                                       1988 and Freddie Mac loans acquired
                                       beginning in 1993, except for loans
                                       that were refinanced to avoid a
                                       default on a loan originated or
                                       acquired earlier
----------------------------------------------------------------------------------------------------------------
Ratio Update Flag                     Indicates if the LTV and DCR were     Yes
                                       updated at origination or at         No
                                       Enterprise acquisition
----------------------------------------------------------------------------------------------------------------
Interest Only Flag                    Indicates if the loan is currently    Yes
                                       paying interest only. Loans that     No
                                       started as I/Os and are currently
                                       amortizing should be flagged as
                                       ``N''
----------------------------------------------------------------------------------------------------------------
Current DCR                           Assigned classes for the Debt         DCR  1.00
                                       Service Coverage Ratio based on the  1.00 =DCR1.10
                                       most recent annual operating         1.10 =DCR1.20
                                       statement                            1.20 =DCR1.30
                                      ....................................  1.30 =DCR1.40
                                      ....................................  1.40 =DCR1.50
                                      ....................................  1.50 =DCR1.60
                                      ....................................  1.60 =DCR1.70
                                      ....................................  1.70 =DCR1.80
                                      ....................................  1.80 =DCR1.90
                                      ....................................  1.90 =DCR2.00
                                      ....................................  2.00 =DCR2.50
                                      ....................................  2.50 =DCR4.00
                                      ....................................  DCR >= 4.00
----------------------------------------------------------------------------------------------------------------
Prepayment                            Indicates if prepayment of the loan   Yes
Penalty Flag                           is subject to active prepayment      No
                                       penalties or yield maintenance
                                       provisions
----------------------------------------------------------------------------------------------------------------

* * * * * * *
3.1.3.1  *  *  *
[c] *  *  *

                                   Table 3-18--Interest Rate and Index Inputs
----------------------------------------------------------------------------------------------------------------
        Interest Rate Index                        Description                               Source
----------------------------------------------------------------------------------------------------------------
1 MO Treasury Bill                  One-month Treasury bill yield, monthly     Bloomberg Generic 1 Month U.S.
                                     simple average of daily rate, quoted as    Treasury bill Ticker: GB1M
                                     actual/360                                 (index)
----------------------------------------------------------------------------------------------------------------

[[Page 11866]]

 
3 MO CMT                            Three-month constant maturity Treasury     Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
6 MO CMT                            Six-month constant maturity Treasury       Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
1 YR CMT                            One-year constant maturity Treasury        Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
2 YR CMT                            Two-year constant maturity Treasury        Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
3 YR CMT                            Three-year constant maturity Treasury      Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
5 YR CMT                            Five-year constant maturity Treasury       Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
10 YR CMT                           Ten-year constant maturity Treasury        Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
20 YR CMT                           Twenty-year constant maturity Treasury     Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
30 YR CMT                           Thirty-year constant maturity Treasury     Federal Reserve H.15 Release
                                     yield, monthly simple average of daily
                                     rate, quoted as bond equivalent yield
----------------------------------------------------------------------------------------------------------------
Overnight Fed Funds (Effective)     Overnight effective Federal Funds rate,    Federal Reserve H.15 Release
                                     monthly simple average of daily rate
----------------------------------------------------------------------------------------------------------------
1 Week Federal Funds                1 week Federal Funds rate, monthly simple  Bloomberg Term Fed Funds U.S.
                                     average of daily rates                     Domestic Ticker: GFED01W (index)
----------------------------------------------------------------------------------------------------------------
6 Month Fed Funds                   6 month Federal Funds rate, monthly        Bloomberg Term Fed Funds U.S.
                                     simple average of daily rates              Domestic Ticker: GFED06M (index)
----------------------------------------------------------------------------------------------------------------
Conventional Mortgage Rate          FHLMC (Freddie Mac) contract interest      Federal Reserve H.15 Release
                                     rates for 30 YR fixed-rate mortgage
                                     commitments, monthly average of weekly
                                     rates
----------------------------------------------------------------------------------------------------------------
FHLB 11th District COF              11th District (San Francisco) weighted     Bloomberg Cost of Funds for the
                                     average cost of funds for savings and      11th District Ticker: COF11
                                     loans, monthly                             (index)
----------------------------------------------------------------------------------------------------------------
1 MO LIBOR                          One-month London Interbank Offered Rate,   British Bankers Association
                                     average of bid and asked, monthly simple   Bloomberg Ticker: US0001M
                                     average of daily rates, quoted as actual/  (index)
                                     360
----------------------------------------------------------------------------------------------------------------
3 MO LIBOR                          Three-month London Interbank Offered       British Bankers Association,
                                     Rate, average of bid and asked, monthly    Bloomberg Ticker: US0003M
                                     simple average of daily rates, quoted as   (index)
                                     actual/360
----------------------------------------------------------------------------------------------------------------
6 MO LIBOR                          Six-month London Interbank Offered Rate,   British Bankers Association,
                                     average of bid and asked, monthly simple   Bloomberg Ticker: US0006M
                                     average of daily rates, quoted as actual/  (index)
                                     360
----------------------------------------------------------------------------------------------------------------
12 MO LIBOR                         One-year London Interbank Offered Rate,    British Bankers Association,
                                     average of bid and asked, monthly simple   Bloomberg Ticker: US0012M
                                     average of daily rates, quoted as actual/  (index)
                                     360
----------------------------------------------------------------------------------------------------------------
Prime Rate                          Prevailing rate as quoted, monthly         Federal Reserve H.15 Release
                                     average of daily rates
----------------------------------------------------------------------------------------------------------------
1 MO Federal Agency COF             One-month Federal Agency Cost of Funds,    Bloomberg Generic 1 Month Agency
                                     monthly simple average of daily rates,     Discount Note Yield, Ticker:
                                     quoted as actual/360                       AGDN030Y (index)
----------------------------------------------------------------------------------------------------------------
3 MO Federal Agency COF             Three-month Federal Agency Cost of Funds,  Bloomberg Generic 3 Month Agency
                                     monthly simple average of daily rates,     Discount Note Yield, Ticker:
                                     quoted as actual/360                       AGDN090Y (index)
----------------------------------------------------------------------------------------------------------------
6 MO Federal Agency COF             Six-month Federal Agency Cost of Funds,    Bloomberg Generic 6 Month Agency
                                     monthly simple average of daily rates,     Discount Note Yield, Ticker:
                                     quoted as actual/360                       AGDN180Y (index)
----------------------------------------------------------------------------------------------------------------
1 YR Federal Agency COF             One-year Federal Agency Cost of Funds,     Bloomberg Generic 12 Month Agency
                                     monthly simple average of daily rates,     Discount Note Yield, Ticker:
                                     quoted as actual/360                       AGDN360Y (index)
----------------------------------------------------------------------------------------------------------------
2 YR Federal Agency COF             Two-year Federal Agency Fair Market        Bloomberg Generic 2 Year Agency
                                     Yield, monthly simple average of daily     Fair Market Yield, Ticker:
                                     rates                                      AGAC02 (index)
----------------------------------------------------------------------------------------------------------------
3 YR Federal Agency COF             Three-year Federal Agency Fair Market      Bloomberg Generic 3 Year Agency
                                     Yield, monthly simple average of daily     Fair Market Yield, Ticker:
                                     rates                                      AGAC03 (index)
----------------------------------------------------------------------------------------------------------------
5 YR Federal Agency COF             Five-year Federal Agency Fair Market       Bloomberg Generic 5 Year Agency
                                     Yield, monthly simple average of daily     Fair Market Yield, Ticker:
                                     rates                                      AGAC05 (index)
----------------------------------------------------------------------------------------------------------------
10 YR Federal Agency COF            Ten-year Federal Agency Fair Market        Bloomberg Generic 10 Year Agency
                                     Yield, monthly simple average of daily     Fair Market Yield, Ticker:
                                     rates                                      AGAC10 (index)
----------------------------------------------------------------------------------------------------------------
30 YR Federal Agency COF            Thirty-year Federal Agency Fair Market     Bloomberg Generic 30 Year Agency
                                     Yield, monthly simple average of daily     Fair Market Yield, Ticker:
                                     rates                                      AGAC30 (index)
----------------------------------------------------------------------------------------------------------------

[[Page 11867]]

 
15 YR fixed-rate mortgage           FHLMC (Freddie Mac) contract interest      Bloomberg FHLMC 15 YR, 10 day
                                     rates for 15 YR fixed-rate mortgage        commitment rate Ticker: FHCR1510
                                     commitments, monthly average of FHLMC      (index)
                                     (Freddie Mac) contract interest rates
                                     for 15 YR
----------------------------------------------------------------------------------------------------------------
7-year balloon mortgage rate        Seven-year balloon mortgage, equal to the  Computed
                                     Conventional Mortgage Rate less 50 basis
                                     points
----------------------------------------------------------------------------------------------------------------

* * * * *
3.3.1  * * *

    [b] The process for determining interest rates is as follows: 
first, identify values for the necessary Interest Rates at time 
zero; second, project the ten-year CMT for each month of the Stress 
Period as specified in the 1992 Act; third, project the 1-month 
Treasury yield, the 3-month, 6-month, 1-, 2-, 3-, 5-, 20- and 30-
year CMTs; fourth, project non-Treasury Interest Rates, including 
the Federal Agency Cost of Funds Index; and fifth, project the 
Enterprises Cost of Funds Index, which provides borrowing rates for 
the Enterprises during the Stress Period, by increasing the Agency 
Cost of Funds Index by 10 basis points for the last 108 months of 
the Stress Test.
* * * * *
3.3.3  * * *
    [a] * * *
3. * * *
    c. Enterprise Borrowing Rates. In the Stress Test, the Federal 
Agency Cost of Funds Index is the same as the Enterprise Cost of 
Funds Index during the Stress Period, except that the Stress Test 
adds a 10 basis-point credit spread to the Federal Agency Cost of 
Funds rates to project Enterprise Cost of Funds rates for the last 
108 months of the Stress Period.
* * * * *
3.4.2  * * *

                                      Table 3-28--Property Valuation Inputs
----------------------------------------------------------------------------------------------------------------
      Variable                             Description                                     Source
----------------------------------------------------------------------------------------------------------------
CMT10m                10-year CMT yield for months m = 1...120 of the       section 3.3, Interest Rates
                       Stress Test
----------------------------------------------------------------------------------------------------------------
ACMTo                 Unweighted nine-month average of the ten-year CMT     section 3.3, Interest Rates
                       yield for the nine months immediately preceding the
                       Stress Test. (Monthly rates are unweighted monthly
                       averages of daily rates, bond equivalent yield)
----------------------------------------------------------------------------------------------------------------
HHPGRqHSP             Quarterly single family historical house price        Table 3-19 of section 3.1.3, Public
                       growth rates computed from the HPI series for the     Data
                       Benchmark region and time period, unadjusted for
                       inflation. The specific series is the West South
                       Central Census Division for the years l984-1993, as
                       reported in OFHEO's Third Quarter, 1996 HPI Report
----------------------------------------------------------------------------------------------------------------
RGmHSP                Multifamily Rent Growth Rates for months m = 1...120  Table 3-20 of section 3.1.3, Public
                       of the Benchmark region and time period, unadjusted   Data
                       for inflation
----------------------------------------------------------------------------------------------------------------
RVRmHSP               Multifamily Rental Vacancy Rates for months m =       Table 3-20 of section 3.1.3, Public
                       1...120 of the Benchmark region and time period       Data
----------------------------------------------------------------------------------------------------------------

* * * * *
3.5.3  * * *
    [a] * * *
2. * * *
    d. The Stress Test will permit a higher rating to be used for an 
unrated seller-servicer who participates in a multifamily delegated 
underwriting and servicing program that requires a loss-sharing 
agreement when: (1) The loss sharing agreement is collateralized by 
a fully funded reserve account pledged to the Enterprise; and (2) 
the reserve account is in an amount that is equal to or exceeds the 
amount that OFHEO has determined to be adequate to support the 
seller-servicer's loss-sharing obligation under the program. 
Determinations of the reserve requirement and of the rating that 
will be permitted will be made on a program-by-program and 
Enterprise-by-Enterprise basis by the Director.
3. Determine Maximum Haircuts. The Stress Test specifies the Maximum 
Haircut (i.e., the maximum reduction applied to cash flows during 
the Stress Test to reflect the risk of loss due to counterparty 
(including security) default) by rating category and counterparty 
type as shown in Table 3-31.
    a. The Maximum Haircut for a rating category is the product of 
its default rate and its loss severity rate. For all counterparties, 
the default rates are 5 percent for AAA, 12.5 percent for AA, 20 
percent for A, 40 percent for BBB and 100 percent for Below BBB and 
Unrated. For non-derivative counterparties, the loss severity rate 
is 70 percent; for derivative counterparties, it is 10 percent. For 
all Below BBB and Unrated counterparties, the loss severity rate is 
100 percent.
    b. For periods prior to the implementation of netting, a 
separate set of Maximum Haircuts (set forth in Table 3-31) will be 
applied to derivative contract cash flows to approximate the impact 
of the net exposures to derivative contract counterparties (see 
section 3.8.3, Nonmortgage Instrument Procedures). After the 
implementation of netting, exposures will be netted as described in 
section 3.8.3 before the haircut is applied.
    c. With the exception of haircuts for the Below BBB and Unrated 
category, haircuts for all counterparty categories are phased-in 
linearly over the 120 months of the Stress Period. The Maximum 
Haircut is applied in month 120 of the Stress Period. Haircuts for 
the Below BBB and Unrated category are applied fully starting in the 
first month of the Stress Test.

    Table 3-31--Stress Test Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                  Derivative      Derivative
                   Contract        Contract     Non-Derivative   Number
    Ratings     Counterparties  Counterparties     Contract     of Phase-
Classification     prior to          after      Counterparties     in
                Implementation  Implementation  or Instruments   Months
                  of Netting      of Netting
------------------------------------------------------------------------
Cash            0%              0%              0%              N/A
------------------------------------------------------------------------
AAA             0.3%            0.5%            3.5%            120
------------------------------------------------------------------------
AA              0.75%           1.25%           8.75%           120
------------------------------------------------------------------------

[[Page 11868]]

 
A               1.2%            2%              14%             120
------------------------------------------------------------------------
BBB             2.4%            4%              28%             120
------------------------------------------------------------------------
Below BBB and   100%            100%            100%            1
 Unrated
------------------------------------------------------------------------

* * * * *
3.6.3.4.3.1  * * *
    [a] * * *
2. Calculate PNEQq, the Probability of Negative Equity in 
quarter q:
[GRAPHIC] [TIFF OMITTED] TR15MR02.000

where:

    N designates the cumulative normal distribution function.
    a. LTVq is evaluated for a quarter q as:
    [GRAPHIC] [TIFF OMITTED] TR15MR02.001
    
The HPI at Origination is updated to the beginning of the Stress 
Test using actual historical experience as measured by the OFHEO 
HPI; and then updated within the Stress Test using House Price 
Growth Factors from the Benchmark region and time period:
[GRAPHIC] [TIFF OMITTED] TR15MR02.002

Where:

UPBm=3q-3 = UPB for the month at the end of the quarter 
prior to quarter q
CHPGFoLG = 1.0 if the loan was originated in 
the same quarter as or after the most recently available HPI as of 
the reporting date
* * * * *
3. * * *
    a. Compare mortgage rates for each quarter of the Stress Test 
and for the eight quarters prior to the start of the stress test (q 
= -7, -6, ... 0, 1, ... 40):
* * * * *
3.6.3.5.1  * * *
    [b] Explanatory Variables for Default Rates. Eight explanatory 
variables are used as specified in the equations in section 
3.6.3.5.3.1, of this Appendix, to determine Default rates for 
multifamily loans: Mortgage Age, Mortgage Age Squared, New Book 
indicator, Not Ratio-updated ARM indicator, current Debt-Service 
Coverage Ratio, Underwater Current Debt-Service Coverage indicator, 
Loan-To-Value Ratio at origination/acquisition, and a Balloon 
Maturity indicator. Regression coefficients (weights) are associated 
with each variable. All of this information is used to compute 
conditional annual Default rates throughout the Stress Test. The 
annualized Default rates are converted to monthly conditional 
Default rates and are used together with monthly conditional 
Prepayment rates to calculate Stress Test Whole Loan Cash Flows. 
(See section 3.6.3.7, Stress Test Whole Loan Cash Flows, of this 
appendix).
* * * * *
3.6.3.5.2  * * *

                                    Table 3-38--Loan Group Inputs for Multifamily Default and Prepayment Calculations
--------------------------------------------------------------------------------------------------------------------------------------------------------
          Variable                                          Description                                                     Source
--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Mortgage Product Type                                                   RBC Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ao                            Age immediately prior to start of Stress Test, in months (weighted      RBC Report
                               average for Loan Group)
--------------------------------------------------------------------------------------------------------------------------------------------------------
NBF                           New Book Flag                                                           RBC Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
RUF                           Ratio Update Flag                                                       RBC Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
LTVORIG                       Loan-to-Value ratio at loan Origination                                 RBC Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
DCRo                          Debt Service Coverage Ratio at the start of the Stress Test             RBC Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
PMTo                          Amount of the mortgage Payment (principal and interest) prior to the    RBC Report
                               start of the Stress Test, or first Payment for new loans (aggregate
                               for Loan Group)
--------------------------------------------------------------------------------------------------------------------------------------------------------
PPEM                          Prepayment Penalty End Month number in the Stress Test (weighted        RBC Report
                               average for Loan Group)
--------------------------------------------------------------------------------------------------------------------------------------------------------
RM                            Remaining term to Maturity in months (i.e., number of contractual       RBC Report
                               payments due between the start of the Stress Test and the contractual
                               maturity date of the loan) (weighted average for Loan Group)
--------------------------------------------------------------------------------------------------------------------------------------------------------
RGRm                          Benchmark Rent Growth for months m = 1...120 of the Stress Test         section 3.4.4, Property Valuation Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVRm                          Benchmark Vacancy Rates for months m = 1...120 of the Stress Test       section 3.4.4, Property Valuation Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
PMTm                          Scheduled Payment for months m = 1... RM                                section 3.6.3.3.4, Mortgage Amortization Schedule
                                                                                                       Outputs
--------------------------------------------------------------------------------------------------------------------------------------------------------
OE                            Operating expenses as a share of gross potential rents (0.472)          fixed decimal from Benchmark region and time
                                                                                                       period
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVRo                          Initial rental vacancy rate                                             0.10
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 11869]]

* * * * *
3.6.3.5.3.1  * * *
    [a] * * *
2. Assign product and ratio update flags (NBF, NRAF). Note: these 
values do not change over time for a given Loan Group.
    a. New Book Flag (NBF):
NBF = 1 for Fannie Mae loans acquired after 1987 and Freddie Mac 
loans acquired after 1992, except for loans that were refinanced to 
avoid a Default on a loan originated or acquired earlier.
NBF = 0 otherwise.
    b. Not Ratio-updated Arm Flag (NRAF):
NRAF = 1 if both ARMF = 1 and RUF = 0,
NRAF = 0 otherwise.
Where:

ARMF = 1 for ARMs (including Balloon ARMs)
ARMF = 0 otherwise, and
RUF = 1 if the LTV and DCR were calculated or delegated to have been 
calculated at origination or recalculated or delegated to have been 
recalculated at Enterprise acquisition according to current 
Enterprise standards.
RUF = 0 otherwise
* * * * *
3.6.3.5.3.2  * * *
    [a] * * *
1. Compute the logits for multifamily Default using inputs from 
Table 3-38 and coefficients from Table 3-39. For indexing purposes, 
the Default rate for a period m is the likelihood of missing the 
mth payment; calculate its corresponding logit 
(Xm) based on Loan Group characteristics as of 
the period prior to m, i.e. prior to making the m\th\ payment.
[GRAPHIC] [TIFF OMITTED] TR15MR02.003


  Table 3-39--Explanatory Variable Coefficients for Multifamily Default
------------------------------------------------------------------------
                                                        Default Weight
              Explanatory Variable (V)                   (v)
------------------------------------------------------------------------
AY                                                                0.5256
AY\2\                                                             0.0284
NBF                                                               -1.219
NRAF                                                              0.4193
DCR                                                               -2.368
UWDCRF                                                             1.220
LTV                                                               0.8165
BMF                                                                1.518
Intercept (0)                                            -4.553
------------------------------------------------------------------------

* * * * *
2. * * *
    b. For the down-rate scenario,
    APRm = 0 percent during the Prepayment penalty period 
(i.e., when m  PPEM)
    APRm = 25 percent after the Prepayment penalty period 
(i.e., when m > PPEM)
* * * * *
3. Convert annual Prepayment and Default rates to monthly rates (MPR 
and MDR) using the following formulas for simultaneous processes:
[GRAPHIC] [TIFF OMITTED] TR15MR02.004

    If both ARMF = 0 and RUF = 0, then
    [GRAPHIC] [TIFF OMITTED] TR15MR02.005
    
    otherwise,
    [GRAPHIC] [TIFF OMITTED] TR15MR02.006
    
* * * * *
3.6.3.6.3.2  * * *

                        Table 3-44--Loan Group Inputs for Multifamily Gross Loss Severity
----------------------------------------------------------------------------------------------------------------
         Variable                       Description                              Value or Source
----------------------------------------------------------------------------------------------------------------
                            Government Flag                      RBC Report
----------------------------------------------------------------------------------------------------------------
DRm                         Discount Rate in month m (decimal    6-month Enterprise Cost of Funds from Section
                             per annum)                           3.3, Interest Rates
----------------------------------------------------------------------------------------------------------------
MQ                          Time during which delinquent loan    4 for sold loans
                             interest is passed-through to MBS   0 otherwise
                             holders
----------------------------------------------------------------------------------------------------------------
PTRm                        Pass Through Rate applicable to      section 3.6.3.3.4, Mortgage Amortization
                             payment due in month m (decimal      Schedule Outputs
                             per annum)
----------------------------------------------------------------------------------------------------------------
NYRm                        Net Yield Rate applicable to         section 3.6.3.3.4, Mortgage Amortization
                             payment due in month m (decimal      Schedule Outputs
                             per annum)
----------------------------------------------------------------------------------------------------------------
RHC                         Net REO holding costs as a decimal   0.07
                             fraction of Defaulted UPB
----------------------------------------------------------------------------------------------------------------
MF                          Time from Default to completion of   9 months
                             foreclosure (REO acquisition)
----------------------------------------------------------------------------------------------------------------
MR                          Months from REO acquisition to REO   15 months
                             disposition
----------------------------------------------------------------------------------------------------------------
RP                          REO proceeds as a decimal fraction   0.63
                             of Defaulted UPB
----------------------------------------------------------------------------------------------------------------

* * * * * * *
3.6.3.6.4.3  * * *
    [a] * * *
1. Determine Mortgage Insurance Payment (MIm) for single 
family loans in the DCC, or Loss Sharing Payment (LSAm) 
for multifamily loans in the DCC, as a percentage of Defaulted UPB, 
applying appropriate counterparty Haircuts from section 3.5., of 
this Appendix:
[GRAPHIC] [TIFF OMITTED] TR15MR02.007

Where:


[[Page 11870]]


m' = m, except for counterparties rated below BBB, where m' = 120
[GRAPHIC] [TIFF OMITTED] TR15MR02.008

* * * * * * *
3. * * *
b. Determine CE Payment in Dollars after application of Haircuts:
[GRAPHIC] [TIFF OMITTED] TR15MR02.009

Where:

m' = m, except for counterparties rated below BBB, where m' = 120
* * * * * * *
4. * * *
b. Determine CE Payment in Dollars after application of Haircuts:
[GRAPHIC] [TIFF OMITTED] TR15MR02.010

Where:

m' = m, except for counterparties rated below BBB, where m' = 120
* * * * * * *
5. Convert Aggregate Limit First and Second Priority Contract 
receipts in Dollars for each DCC in month m to a percentage of DCC 
Defaulted UPB:
[GRAPHIC] [TIFF OMITTED] TR15MR02.011

Where:

ELPI\DCC,C\ = 0 if ELPF\DCC,C\ = Y (Yes, indicating that Contract C 
is an Enterprise Loss Position)
ELPI\DCC,C\ = 1 otherwise
* * * * * * *
3.6.3.7.3.  * * *
    [a] * * *
9. * * *
b. Float Income (FI) received in month m
[GRAPHIC] [TIFF OMITTED] TR15MR02.012

where: Prepayment Interest Shortfall (PIS) in month m is:
[GRAPHIC] [TIFF OMITTED] TR15MR02.013

* * * * *
3.7.3.1  * * *
    [g] * * *
1. Compute:
[GRAPHIC] [TIFF OMITTED] TR15MR02.014

Where:

m' = m, except for MBS credit rating below BBB where m'=120
R = MBS credit rating
* * * * *
3.8.1  * * *
    [f] In a currency swap, the Enterprise receives payments that 
are denominated in a foreign currency and it makes payments in U.S. 
dollars. The main difference between currency swaps and the type of 
swaps discussed above is that in a currency swap principal amounts 
are actually exchanged between the two counterparties. Currency 
swaps are divided into two classes, as shown in Table 3-65.\5\
---------------------------------------------------------------------------

    \5\ Ibid.

[[Page 11871]]



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

* * * * *
3.8.3.1  * * *
    [a] * * *
3. When applying the option exercise rule:
    a. For zero coupon and discount securities, instruments with 
European options, and zero coupon swaps, evaluate option exercise 
only on dates listed in the instrument's option exercise schedule. 
For Bermudan options, evaluate option exercise on the first option 
date in the instrument's option exercise schedule and subsequent 
coupon dates (coupon dates on the fixed-rate leg for swaps). For 
American options, evaluate option exercise on the first option date 
in the instrument's option exercise schedule and subsequent monthly 
anniversaries of the instrument's first coupon date.
* * * * *
    d. If the remaining maturity is greater than 360 months, use the 
equivalent-maturity Enterprise Cost of Funds as if the remaining 
maturity is 360 months.
    e. In the Stress Test, no preferred stock issued by the 
Enterprise will be called.
* * * * *
3.8.3.10  * * *
    [a] Finally, the interest and principal cash flows received by 
the Enterprises for non-mortgage instruments other than swaps and 
foreign currency-related instruments are Haircut (i.e., reduced) by 
a percentage to account for the risk of counterparty insolvency, if 
a counterparty obligation exists. The amount of the Haircut is 
calculated based on the public rating of the counterparty and time 
during the stress period in which the cash flow occurs, as specified 
in section 3.5, Counterparty Defaults, of this Appendix.
    [b] An Enterprise may issue debt denominated in, or indexed to, 
foreign currencies, and eliminate the resulting foreign currency 
exposure by entering into currency swap agreements. The combination 
of the debt and the swap creates synthetic debt with principal and 
interest payments denominated in U.S. dollars. The Haircuts for 
currency swaps are applied to the pay (dollar-denominated) side of 
the currency swaps, or to the cash outflows of the synthetic debt 
instrument. Therefore, the payments made by the Enterprise on a 
foreign currency contract are increased by the haircut amount. The 
Haircuts and the Phase-in periods for currency swaps are detailed in 
Table 3-31, under Derivative Contracts.
    [c] Haircuts for swaps that are not foreign currency related are 
applied to the Monthly Interest Accruals (as calculated in section 
3.8.3.8, of this Appendix) on the receive leg minus the Monthly 
Interest Accruals on the pay leg when this difference is positive. 
Use the maximum haircut from Table 3-31 for periods before and after 
the implementation of netting, as appropriate. After the 
implementation of netting, net the swap proceeds for each 
counterparty before applying the haircuts. The following example 
applies to an Enterprise having two swaps with the same 
counterparty. On the first swap, the Enterprise pays fixed and 
receives floating and on the second swap it pays floating and 
receives fixed. If the counterparty is a net payer to the 
Enterprise, the haircuts will be applied to the sum of the two 
receive legs net of the sum of the two pay legs.
* * * * *
3.10.3.1  * * *
    [b] * * *
2. In any month in which the cash position is negative at the end of 
the month, the Stress Test issues a mix of new short-term and long-
term debt on the 15th day of that month. New short-term debt issued 
is six-month discount notes with a discount rate at the six-month 
Enterprise Cost of Funds as specified in section 3.3, Interest 
Rates, of this Appendix, with interest accruing on a 30/360 basis. 
New long-term debt issued is five-year bonds not callable for the 
first year (``five-year-no call-one'') with an American call at par 
after the end of the first year, semiannual coupons on a 30/360 
basis with principal paid at maturity or call, and a coupon rate set 
at the five year Enterprise Cost of Funds as specified in section 
3.3, Interest Rates, of this Appendix, plus a 50 basis point premium 
for the call option. During the Stress Test, the call option for new 
long-term debt issued is not executed in the up-rate scenario and in 
the down-rate scenario follows the same call exercise rule as other 
debt. An issuance cost of 2.5 basis points is assessed on new short-
term debt at issue and an issuance cost of 20 basis points is 
assessed on new long-term debt at issue. New long-term debt is 
issued to target a total debt mix of short- to long-term debt that 
is the same as the short- to long-term debt mix at the beginning of 
the Stress Test. Issuance fees for new debt are amortized on a 
straight line basis to the maturity of the appropriate instrument.
3. Given the Net Cash Deficit (NCDm) in month m, use the 
following constants and method to calculate the amount of short-term 
and long-term debt to issue in month m:
    a. Set the Issuance Cost on new short-term debt at issue 
(ISCOST):
    ISCOST = 0.00025
    b. Set the Issuance Cost on new long-term debt at issue 
(ILCOST):
    ILCOST = 0.002
    c. Calculate Net Short-term Debt Outstanding (NSDO0) 
and Total Debt Outstanding (TDO0) at the start of the 
Stress Test (m = 0) using the following methodology:
    1) For each month m and each debt and swap instrument i (each 
swap leg is considered a separate instrument), determine the Month 
of Next Repricing (MNRm) defined as the first month 
greater than m in which the instrument matures or repricing can 
occur whether or not the coupon rate actually changes. Set the 
Principal Balance (PBm) to be:
    a) The principal (or notional principal) outstanding if the 
instrument cash flows are paid by the Enterprise,
    b) Minus the principal (or notional principal) outstanding if 
the instrument cash flows are received by the Enterprise.
    c) Zero if m is less than or equal to the issue month or the 
month in which an option exercised during the stress test would 
begin accruing cash flows to or from the Enterprise.
    d) Zero if m is greater than or equal to the maturity month or 
the month in which an option exercised during the stress test would 
cease further cash flows to or from the Enterprise.
    2) Calculate NSDOm by summing PBm,i for 
all instruments where MNRm,i is less than or equal to m 
plus 12.
    3) Calculate TDOm by summing PBm,i for 
instruments where MNRm,i, is greater than m.
    d. Set the Maximum Proportion of Total Debt (MPD):
    [GRAPHIC] [TIFF OMITTED] TR15MR02.015
    
    e. Calculate Discount Rate Factor (DRFm):
    [GRAPHIC] [TIFF OMITTED] TR15MR02.016
    
    Where: CFm = six month Enterprise Cost of Funds for 
month m

    f. Calculate the Adjustment Factor for Short-Term Debt Issuance 
Fees (AFSIFm):
[GRAPHIC] [TIFF OMITTED] TR15MR02.017

    g. Calculate the Adjustment Factor for Long-Term Debt Issuance 
Fees (AFLIFm):
[GRAPHIC] [TIFF OMITTED] TR15MR02.018

    h. Calculate the Maximum Long-Term Issuance (MLTIm):

[[Page 11872]]

[GRAPHIC] [TIFF OMITTED] TR15MR02.019

    i. Calculate Net Short-Term Debt Outstanding (NSDOm) 
and Total Debt Outstanding (TDOm) for month m using the 
methodology described in paragraph 3.10.3.1.[b]3.c. of this 
appendix. Note: This calculation must reflect all new issuances, 
option exercises, and maturities between the beginning of the Stress 
Test and month m.
    j. Calculate Interim Face Amount of Long-Term Debt to be issued 
this month (IFALDm):
[GRAPHIC] [TIFF OMITTED] TR15MR02.020

    k. Calculate Face Amount of Long-Term Debt to be issued 
(FALDm):
[GRAPHIC] [TIFF OMITTED] TR15MR02.021

    l. Calculate Face Amount of Short-Term Debt to be issued 
(FASDm):
[GRAPHIC] [TIFF OMITTED] TR15MR02.022

* * * * *
3.10.3.6.2  * * *
    [a] * * *
    5. Fixed Assets. 25 percent of fixed assets (net of accumulated 
depreciation) as of the beginning of the Stress Test remain constant 
over the Stress Test. The remaining 75 percent is converted to cash 
on a straight line basis over the ten-year Stress Period. 
Depreciation is included in the base on which operating expenses are 
calculated for each month during the Stress Period.
* * * * *
4.0  * * *
    Enterprise Cost of Funds: Cost of funds used in computing the 
cost of new debt for the Enterprises during the Stress Test, as 
specified in section 3.3.3.[a]3.c., of this Appendix.
* * * * *

    Dated: February 20, 2002.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 02-4417 Filed 3-14-02; 8:45 am]
BILLING CODE 4220-01-P