[Federal Register Volume 70, Number 59 (Tuesday, March 29, 2005)]
[Rules and Regulations]
[Pages 16080-16082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-6061]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 203



Eligibility of Adjustable Rate Mortgages; Interim Final Rule

  Federal Register / Vol. 70, No. 59 / Tuesday, March 29, 2005 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4946-I-01; HUD 2005-0004]
RIN 2502-AI26


Eligibility of Adjustable Rate Mortgages

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

ACTION: Interim rule.

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SUMMARY: This rule makes available a new adjustable rate mortgage (ARM) 
product. In accordance with statutory authority, this rule enables the 
Secretary to insure five-year hybrid ARMs with interest rates 
adjustable up to two percentage points annually (this type of mortgage 
is known as a 5/1 ARM). The lifetime cap on annual interest rate 
adjustments for five-year ARMs is set at six percentage points.

DATES: Effective Date: April 28, 2005.
    Comment Due Date: May 31, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Electronic comments may be submitted 
through either:
     The Federal eRulemaking Portal at http://www.regulations.gov; or
     The HUD electronic Web site at http://www.epa.gov/feddocket. Follow the link entitled ``View Open HUD Dockets.'' 
Commenters should follow the instructions provided on that site to 
submit comments electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available for public inspection 
and copying between 8 a.m. and 5 p.m. weekdays at the above address. 
Copies are also available for inspection and downloading at http://www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of 
Single Family Program Development, Office of Insured Single Family 
Housing, Room 9266, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410-8000; telephone (202) 708-
2121 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 251 of the National Housing Act (12 U.S.C. 1715z-16) 
authorizes the Secretary to insure adjustable rate mortgages (ARMs). 
ARMs are mortgages that remain at a fixed interest rate for a certain 
period of time, but then provide for periodic adjustments in the 
interest rate charged on the mortgage. An ARM may be attractive to a 
potential homebuyer because it offers a lower initial interest rate 
than most fixed rate mortgage loans.
    Section 251 of the National Housing Act limits the amount of the 
annual interest rate adjustments on ARMs insured by HUD--Federal 
Housing Administration (FHA) depending on the duration of the initial 
fixed interest rate term. Section 301 of Public Law 108-186 (approved 
December 16, 2003) (2003 Act), amended section 251(d) of the National 
Housing Act to provide for greater flexibility in this regard. Prior to 
enactment of the 2003 Act, section 251 of the National Housing Act 
limited annual interest rate adjustments on FHA-insured ARMs to one 
percentage point only if the initial fixed interest rate term was for a 
period of five years or less. Section 301 amended section 251(d)(1)(C) 
of the National Housing Act to reduce this period to three years or 
less. In other words, the annual adjustment of one percent only applies 
to ARMs with a fixed term for the first three or fewer years. For five-
, seven- and ten-year ARMs, the mortgagee may make an annual adjustment 
that exceeds one percent.
    HUD's regulations implementing section 251 of the National Housing 
Act are located at 24 CFR 203.49 (entitled ``Eligibility for adjustable 
rate mortgages''). Under Sec.  203.49, the types of ARMs that are 
insurable are those for which the interest rate may be adjusted 
annually by the mortgagee beginning after one, three, five, seven, or 
ten years from the date of the mortgagor's first debt service payment. 
The provisions of Sec.  203.49 governing the amount of annual interest 
rate adjustments are consistent with section 251 of the National 
Housing Act prior to the amendments made by the 2003 Act. In the case 
of one-, three-, and five-year ARMs, Sec.  203.49(f)(1) authorizes the 
mortgagee to annually adjust the interest rate by no more than one 
percentage point. For seven- and ten-year ARMs, the mortgagee may 
annually adjust the interest rate by two percentage points (see Sec.  
203.49(f)(2)). Adjustments in the effective rate of interest over the 
entire term of the mortgage may not result in a change in either 
direction of more than five percentage points (for one-, three-, and 
five-year ARMs) and six percentage points (for seven- and ten-year 
ARMs) from the initial contract interest rate (see Sec.  203.49(f)(1) 
and (2)).

II. This Interim Rule

    This interim rule revises 24 CFR 203.49 to implement the 
flexibility provided under section 301 of the 2003 Act for FHA-insured 
five-year ARMs. As noted above, section 301 permits annual interest 
adjustments of greater than one percent on ARMs with an initial fixed 
interest rate period of at least five years. In the case of seven- and 
ten-year ARMs, the current regulations already reflect this flexibility 
by authorizing annual interest rate adjustments of two percentage 
points. However, Sec.  203.49(f)(1) limits the annual interest rate 
adjustment for five-year ARMs to a single percentage point. Consistent 
with section 301 of the 2003 Act, this interim rule provides for annual 
interest rate adjustments of two percentage points for five-year ARMs.
    HUD has become aware of concerns among mortgage lenders and 
borrowers regarding the current one percentage point limitation on 
annual interest rate adjustments for five-year ARMs. For example, three 
of the four public commenters on HUD's March 11, 2003, (68 FR 11730) 
proposed rule implementing seven- and ten-year ARMs expressed support 
for enactment of section 301 of the 2003 Act, which at the time was 
pending approval by Congress, and urged HUD to remove the one 
percentage point cap on adjustments for five-year ARMs as soon as 
feasible.
    These concerns are based primarily on the fact that the one 
percentage point limitation on FHA-insured five-year ARMs does not 
accurately reflect the realities of the mortgage market. Conventional 
mortgage lenders do not offer five-year ARMs with a one percentage 
point cap on annual interest rate adjustments. A maximum annual 
increase of one percentage point does not provide lenders with 
sufficient interest rate flexibility to offer five-year ARMs at an 
interest rate below the traditional 30-year fixed rate mortgage. This 
inability reduces the attractiveness of FHA-insured five-year ARMs to 
both borrowers and lenders since, as noted above in this preamble, the 
appeal of ARMs is based on their lower initial interest rate. 
Accordingly, the one percentage point limitation undercuts HUD's 
ability to offer mortgage insurance for a full range of ARM loans with 
standing initial interest rates lower

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than those on conventional 30-year fixed rate mortgages.
    This interim rule addresses these concerns by providing for annual 
interest rate adjustments of two percentage points for five-year ARMs. 
This is consistent with the annual rate adjustment authorized under the 
current regulations for seven- and ten-year ARMs. The additional 
flexibility provided by this interim rule will make FHA-insured five-
year ARMs more attractive to homebuyers and more closely adhere to the 
conditions of the mortgage lending market.
    In addition, the interim rule raises the lifetime cap on interest 
rate adjustments for five-year ARMs to six percentage points. As noted 
above, five-year ARMs are currently limited to a maximum lifetime-
interest rate adjustment of five percentage points. This change will 
conform the lifetime cap for five-year ARMs to those applicable to 
seven- and ten-year ARMs.

III. Justification for Interim Rulemaking

    HUD generally publishes a rule for public comment before issuing a 
rule for effect, in accordance with its own regulations on rulemaking 
in 24 CFR part 10. However, part 10 provides for exceptions to the 
general rule if the agency finds good cause to omit advanced notice and 
public participation. The good cause requirement is satisfied when 
prior public procedure is ``impractical, unnecessary, or contrary to 
the public interest'' (see 24 CFR 10.1). HUD finds that good cause 
exists to publish this rule for effect without first soliciting public 
comment in that prior public comment is contrary to the public 
interest. The reasons for HUD's determination are as follows.
    This interim rule does not impose any new regulatory burdens, but 
rather benefits lenders and potential homebuyers by expanding the 
number of available insured mortgage options. Specifically, the interim 
rule updates the requirements for FHA-insured five-year ARMs to more 
accurately reflect market conditions and conform to the statutory 
language of the 2003 Act. Further, as noted above in this preamble, the 
changes made by this interim rule address concerns raised to HUD by the 
public, including the majority of the public commenters on HUD's March 
11, 2003, proposed rule on ARMs. The current one percentage point cap 
on annual interest rate adjustments prevents lenders from offering FHA-
insured five-year ARMs at interest rates below those offered on 
conventional fixed rate 30-year mortgages. This undercuts the appeal of 
FHA-insured five-years ARMs, and denies HUD's ability to offer mortgage 
insurance for a full range of ARM loans. The additional flexibility 
provided by this interim rule will allow lenders to offer these five-
year ARMs thus providing potential homeowners with more options for 
insured mortgage products. Delaying the effectiveness of this interim 
rule to solicit prior public comment would unnecessarily perpetuate the 
inability of lenders to offer a competitive and viable FHA mortgage 
insurance product to potential homebuyers. Accordingly, HUD has 
determined that it would be contrary to the public interest to delay 
the effectiveness of this amendment to solicit prior public comment.
    Although HUD has determined that good cause exists to publish this 
rule for effect without prior public comment, HUD recognizes the value 
of public comment in the development of its regulations. HUD, 
therefore, is issuing these regulations on an interim basis and is 
providing the public with a 60-day comment period. HUD welcomes 
comments on the regulatory amendments made by this interim rule. The 
public comments will be addressed in the final rule.

IV. Findings and Certifications

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis on any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This rule permits greater flexibility for all lenders, regardless of 
size, to offer a revised mortgage product that is eligible for FHA 
insurance. This rule imposes no additional economic or monetary 
requirements on businesses. Therefore, the undersigned certifies that 
this interim rule will not have a significant economic impact on a 
substantial number of small entities. Notwithstanding HUD's 
determination that this rule will not have a significant economic 
effect on a substantial number of small entities, HUD specifically 
invites comments regarding any less burdensome alternatives to this 
rule that will meet HUD's objectives as described in this preamble.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implements Section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4332(2)(C)). This finding is available for 
public inspection between 8 a.m. and 5 p.m. weekdays in the Regulations 
Division, Room 10276, Office of General Counsel, Department of Housing 
and Urban Development, 451 Seventh Street, SW., Washington, DC 10240-
0500.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from publishing any 
rule that has federalism implications and either imposes substantial 
direct compliance costs on state and local governments and is not 
required by statute, or the rule preempts state law, unless the agency 
meets the consultation and funding requirements of section 6 of the 
Executive Order. This rule does not have federalism implications and 
does not impose substantial direct compliance costs on state and local 
governments or preempt state law within the meaning of the Executive 
Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531-1538) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments and the private sector. This final rule does not 
impose any federal mandates on any state, local, or tribal government 
or the private sector within the meaning of UMRA.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
OMB determined that this rule is a ``significant regulatory action'' as 
defined in section 3(f) of the Executive Order (although not 
economically significant, as provided in section 3(f)(1) of the 
Executive Order). Any changes made to the rule subsequent to its 
submission to OMB are identified in the docket file, which is available 
for public inspection between 8 a.m. and 5 p.m. weekdays in the 
Regulations Division, Room 10276, Office of General Counsel, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Washington, 
DC 20410-0500.

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Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers applicable to 
this rule are 14.108, 14.117, and 14.119.

List of Subjects in 24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

0
For the reasons stated in the preamble, HUD amends 24 CFR part 203 as 
follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for 24 CFR part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 
U.S.C. 3535(d).

0
2. Revise Sec.  203.49 (f)(1) and (2) to read as follows:


Sec.  203.49  Eligibility of adjustable rate mortgages.

* * * * *
    (1) For one- and three-year adjustable rate mortgages, no single 
adjustment to the interest rate shall result in a change in either 
direction of more than one percentage point from the interest rate in 
effect for the period immediately preceding that adjustment. Index 
changes in excess of one percentage point may not be carried over for 
inclusion in an adjustment for a subsequent year. Adjustments in the 
effective rate of interest over the entire term of the mortgage may not 
result in a change in either direction of more than five percentage 
points from the initial contract interest rate.
    (2) For five-, seven-, and ten-year adjustable rate mortgages, no 
single adjustment to the interest rate shall result in a change in 
either direction of more than two percentage points from the interest 
rate in effect for the period immediately preceding that adjustment. 
Index changes in excess of two percentage points may not be carried 
over for inclusion in an adjustment in a subsequent year. Adjustments 
in the effective rate of interest over the entire term of the mortgage 
may not result in a change in either direction of more than six 
percentage points from the initial contract rate.
* * * * *

    Dated: March 3, 2005.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 05-6061 Filed 3-28-05; 8:45 am]
BILLING CODE 4210-27-P