[Federal Register Volume 73, Number 62 (Monday, March 31, 2008)]
[Notices]
[Pages 16895-16899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-6560]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of Federal Housing Enterprise Oversight
Examination Guidance
AGENCY: Office of Federal Housing Enterprise Oversight, HUD.
ACTION: Notice of Final Examination Guidance--Conforming Loan Limit
Calculations; Response to Comments.
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SUMMARY: The Office of Federal Housing Enterprise Oversight is
publishing today an Examination Guidance, ``Conforming Loan Limit
Calculations,'' following two requests for public comment on a proposed
examination guidance. Material in the guidance does not constitute a
regulation.
DATES: March 31, 2008.
FOR FURTHER INFORMATION CONTACT: If you have any questions regarding
OFHEO's Examination Guidance--Conforming Loan Limit Calculations, you
may contact Alfred M. Pollard, General Counsel, at (202) 414-3800 (not
a toll free number). The telephone number for the Telecommunications
Device for the Deaf is: (800) 877-8339 (TDD Only).
SUPPLEMENTARY INFORMATION: OFHEO's Examination Guidance on Conforming
Loan Limit Calculations is posted on the Internet at http://www.ofheo.gov. This document, as well as all others mentioned in the
preamble can also be accessed on business days between the hours of 10
a.m. and 3 p.m., at the Office of Federal Housing Enterprise Oversight,
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an
appointment to inspect documents, please call the Office of General
Counsel at (202) 414-6924.
I. Background and Statement on the Conforming Loan Limit for 2008
On November 15, 2006, OFHEO announced that any decline in the house
price index used to establish the conforming loan limit would not
result in a decline in that limit for 2007. OFHEO also committed at
that time, to providing updated guidance on how future reductions in
the relevant house price index would affect the conforming loan limit.
On June 20, 2007, OFHEO released on its Web site for public
comment, a proposed revision to its existing Examination Guidance
entitled ``Conforming Loan Limit Calculations'' (the original
proposal). Subsequently, on October 22, 2007, OFHEO published in the
Federal Register for public comment a revised version of that
[[Page 16896]]
proposed guidance (the revised proposal). Today, OFHEO is issuing the
final Examination Guidance.
II. Comments Received on revised Examination Guidance--Conforming Loan
Limit Calculations
Calculations for the conforming loan limit establish the maximum
size of loans that Fannie Mae and Freddie Mac may purchase, as provided
in their charters. The conforming loan limit is adjusted annually
through a calculation of year over year changes to the existing level
of home prices based on data from the Federal Housing Finance Board's
Monthly Interest Rate Survey (MIRS).
A. Guidance Proposals. OFHEO provided for public comment on the
proposed examination guidance through OFHEO's Web site on June 20,
2007, and at the end of a thirty day comment period, some 23 comments
from 25 organizations (representing over 2 million individuals and
businesses) and individual comments were received. OFHEO took these
comments into consideration, altered its proposed draft guidance and
reissued it for further public comment on October 22, 2007. Central to
OFHEO's consideration was assuring clarity in the process of
calculating loan limits, providing for smooth market operations and
affording certainty to those involved in making and securing mortgages-
Fannie Mae and Freddie Mac, mortgage originators, and homebuyers.
The proposed guidances and the guidance made final today elaborate
on, revise and supersede an existing guidance--Supervisory Guidance
Conforming Loan Limit Calculations, SG-04-01 (February 20, 2004) that
delineated OFHEO's role in calculating and announcing the conforming
loan limit. In 2006, after a decline in housing price numbers, OFHEO
announced that, while the conforming loan level had decreased, the
resulting decline in the limit would be deferred a year. OFHEO also
indicated it would revise and update the existing guidance and address
how the decline would be implemented. OFHEO sought comment on all
aspects of the guidance, noting certain key provisions addressing (1)
whether and how existing conforming loans should be grandfathered; (2)
a number of procedural matters, including rounding down announced loan
limits to the nearest $100; and (3) needed clarity on treatment of
declines in the conforming loan limit. As proposed, the calculated
declines of less than one or, alternatively, three percent in the loan
limit (currently $417,000) would be deferred. Once cumulative deferrals
reached one or, alternatively, three percent, then the total decline
would be subtracted one year later from the calculated conforming loan
limit after adjusting for any subsequent price increase that had
occurred. Additional information on OFHEO's original and revised
guidance proposals remain on OFHEO's Web site.
B. Comments Received. OFHEO received comments from seven
commentators to its Revised Draft Examination Guidance for calculating
the conforming loan limit (CLL), proposed on October 22, 2007. Four
housing and mortgage industry trade associations commented,
specifically, the National Association of Realtors (NAR), the Mortgage
Bankers Association of America (MBA), the National Association of
Homebuilders (NAHB), and a joint comment letter from the American
Bankers Association and America's Community Bankers (ABA/ACB). Jeff
Butchko, a private citizen, submitted a comment letter. Both Freddie
Mac and Fannie Mae submitted comment letters.
1. Industry Trade Associations. The NAHB, the NAR, and the MBA
reiterated that OFHEO does not have statutory power to reduce the
conforming loan limit. The NAHB, NAR, and the MBA asserted that the
draft guidance was bad public policy and introduced a complicated
calculation method that would distort markets. Additionally, both the
MBA and NAHB repeated concerns that the proposed guidance was a
regulation under the Administrative Procedure Act and it must be issued
in accordance with the requirements of that Act, whereby the APA
promulgation would be subject to judicial review. Central to their
argument was that, for operational and other reasons, the conforming
loan limit should not decline.
The MBA requested further expansion of the ``grandfathering''
provision due to a decline in the loan limit post-commitment but prior
to closing. The NAR, however, stated that despite their statutory
authority and public policy concerns, they would support the 3 percent
de minimis threshold, the deferral of reductions for at least one year,
and the grandfathering of mortgages approved under higher conforming
loan limits. Both the MBA and NAHB resubmitted their previous comment
letters to support their criticism of the draft Guidance.
The ABA/ACB, in a joint comment, expressed support of OFHEO's
proposed guidance. They stated that the revised guidance addressed
their general concern on ``grandfathering'' issues, and they welcomed
the de minimis change from one percent to three percent in the revised
guidance.
Mr. Jeff Butchko's comment letter (e-mail) stated that the
conforming loan limit is too low for many areas of the country and
requested that OFHEO raise this limit.
2. Enterprise Comments. Fannie Mae offered comments on the
grandfather rule, questioning whether language in the draft guidance
grandfathering loans that were conforming at origination matched the
language in the preamble. They expressed a concern that this difference
in language could be disruptive to the market. Fannie Mae further
argued that the mechanism to provide for decreases in the conforming
loan limit had no long-term significance and ``potential harmful''
short-term effects. They stated that the ``question for OFHEO may be
not whether it has statutory authority to enforce a `negative increase'
in the CLL but whether the statute requires this result; not whether it
can reduce the CLL temporarily but whether it should.''
Freddie Mac had specific comments to multiple elements of the
revised guidance. Freddie Mac recommended that any decrease in the MIRS
should be offset against future increases, rather than reducing the
CLL. If OFHEO decided to require a de minimis threshold for a decrease,
the proposed three percent threshold should be raised to five percent.
Like Fannie Mae, Freddie Mac recommended that the grandfathering
language in the preamble be adopted in the body of the guidance.
Finally, Freddie Mac recommended removing the rounding provision
altogether. If OFHEO chose to retain the rounding provision, Freddie
requested that OFHEO retain its current practice of rounding down to
the nearest $50.
The final examination guidance on conforming loan limit
calculations, which OFHEO has determined to revise and issue, is set
forth below.
OFHEO
Office of Federal Housing Enterprise Oversight
Examination Guidance
Issuance Date: March 31, 2008. Doc. : EG-08-001
Subject: Conforming Loan Limit Calculations
To: OFHEO Examiners
OFHEO Associate Directors
Table of Contents
I. Introduction
a. Scope
b. Preservation of Existing Authority
II. Calculation of Conforming Loan Limit
a. General Procedures
[[Page 16897]]
b. Procedures for Years in Which Limit Declines
c. Procedures for Adjustments and Technical Changes
References
a. Supervisory Guidance SG-04-001
b. Federal Housing Enterprises Financial Safety and Soundness
Act
c. OFHEO Regulations Safety and Soundness Standards, 12 CFR part
1720 & Prompt Supervisory Response & Corrective Act, 12 CFR part
1777.
I. Introduction
a. Scope
This guidance addresses the annual establishment of the conforming
loan limit amount for mortgages purchased by Fannie Mae and Freddie Mac
(``the Enterprises'') and OFHEO supervisory procedures related to such
activity.
This guidance replaces Supervisory Guidance SG-04-01.
(1) OFHEO Supervisory Authority
OFHEO oversees two housing government sponsored enterprises--
Fannie Mae and Freddie Mac--to assure they operate in a safe and sound
manner and maintain adequate capital; 12 U.S.C. 4501, 4511, 4513.
OFHEO's responsibilities include avoiding situations that would present
safety and soundness problems; 12 CFR part 1720, Appendices A and B and
12 CFR part 1777. In addressing areas where such problems could arise,
OFHEO has highlighted corporate governance and financial disclosures;
12 CFR parts 1730 and 1710. In its regulation on disclosure, OFHEO
noted key areas of concern--access to markets and potential damages to
the firms from incurring reputation risk. Therefore, OFHEO has set
forth this guidance to ensure that the conforming loan limit is
established in a manner consistent with safe and sound operations and
with statutory requirements.
For twenty-five years of practice, the Enterprises announced a
conforming loan limit. However, in seven of those years adjustments or
decisions were made that raised safety and soundness concerns about the
annual adjustment to the conforming loan limit. OFHEO believes that the
situation may be addressed through appropriate guidance, setting a more
regularized process of oversight and control for this matter of
national significance. That is the intent of this guidance.
(2) Conforming Loan Limit (CLL)
The Enterprises are authorized by their charters to purchase
mortgages up to a specified limit as adjusted annually; 12 U.S.C.
302(b)(2) and 305(a)(2). This limit is referred to as the conforming
loan limit (CLL).
The Enterprises make this adjustment based on a survey conducted by
the Federal Housing Finance Board (FHFB). The FHFB monthly conducts and
publishes the results of a survey of mortgage interest rates, the
Monthly Interest Rate Survey (MIRS). Under the Enterprise charters, the
change in the national average one-family house price during the
twelve-month period ending with the previous October as determined by
the FHFB in its survey is the basis for changes to the conforming loan
limit. The Enterprises apply the percentage change to the current
year's conforming loan limit to establish the next year's limit. This
number constitutes part of the determinations of the eligibility of
loans for Enterprise purchases.
OFHEO as safety and soundness regulator has responsibility to
oversee safe and sound operations and may act to redress violations of
law by the Enterprises. In the case of the conforming loan limits,
OFHEO determined in 2004, following a problem in technical matters
relating to the limits, that a more formalized process for establishing
the conforming loan limit was needed.
(3) Background to Conforming Loan Limit Determinations
Since 1981, the Enterprises have adjusted the conforming loan limit
as allowed under the Housing and Community Development Act of 1980.
During this time frame, two types of occurrences have transpired that
raise the need for a more formal process: (1) The Enterprises on some
occasions adjusted their loan limits in a manner that was different
from the survey results and (2) the Federal Housing Finance Board has
made technical changes to its methodology for determining housing
prices that the Enterprises have not reflected in their adjustments.
On three occasions prior to 2006, the average house price declined
from October to October (in 1989, 1993, and 1994). In November 1989,
the Enterprises reduced the 1990 conforming loan limit by $150 from the
1989 level based on a house price decline of 0.07 percent. In November
1993 and November 1994, however, the Enterprises announced that the
conforming loan limit would remain constant at $203,150, despite
declines in house prices of 2.96 percent in 1993 and 1.46 percent in
1994. After housing prices increased from October 1994 to October 1995,
the Enterprises raised the limit for 1996 without any adjustment for
the previous declines.
Additionally, in November 1997, the Enterprises took another
course, setting a lower number than the adjustment produced. They
determined that the 1998 conforming loan limit would increase by only
3.67 percent, even though the percentage change in house prices using
FHFB data for 1996-1997 was 8.44 percent. The practical effect of this
action was to adjust retroactively for the 1993 and 1994 price
declines.
There have been three occasions--in 1992, 1998 and 2003--when the
Federal Housing Finance Board made methodological changes to the
Monthly Mortgage Interest Rate Survey that required an adjustment to
one or both of the reference years, that is, the prior or current
year's October calculation (in 1992, 1998, and 2003). In December 1992,
the Enterprises determined that the 1993 conforming loan limit would
increase 0.42 percent based on adjusted FHFB numbers for October 1991
and October 1992 national average one-family house price. In November
1998, the Enterprises determined that the 1999 conforming mortgage loan
limit would increase by 5.66 percent based on an adjusted October 1997
house price survey. Therefore, in 1992 and again in 1998, the
Enterprises used the adjusted national average one-family house
price(s) provided by the FHFB.
In 2003, however, the Enterprises adopted a conforming loan limit
that disregarded communications from the FHFB staff regarding a change
in the methodology for estimating house prices. The Enterprises
determined that the 2004 conforming loan limit would increase by 3.41
percent based on unadjusted national average house prices for October
2002 and October 2003. However, FHFB staff had indicated that the
October 2003 national average house price should be adjusted downward
by $1,647, resulting in a net increase of 2.71 percent.
Due to this inconsistent application of procedures for price
declines and methodology changes, OFHEO issued a conforming loan limit
guidance in 2004. To clarify elements of the existing guidance and to
address the concerns around possible declines in the national average
house price average, OFHEO announced in late 2006 that it would issue a
new guidance to replace the 2004 issuance.
In 2006, the October national house price average declined by 0.16
percent from the previous October, which by the standard calculation
would have reduced the maximum single family conforming loan limit from
$417,000 to $416,300. OFHEO had previously indicated, however, that the
effect of any decrease in the house price average
[[Page 16898]]
would be deferred until the Fall 2007 calculation of the limits for the
following year. OFHEO also stated that for the 2008 calculation, the
decrease of 0.16 percent would be deducted from any increase in the
average house price in the year ended October 2007 or, if the average
price decreased, the loan limit would decrease by that 0.16 percent
amount. OFHEO subsequently announced that in line with its approach in
proposed guidances, the conforming loan limit would not decrease in
2008. Left to be determined was how a further decline in 2008, if it
occurred, would be treated and whether any existing loans would be
grandfathered. The purpose of this guidance, which was subject to
public notice and comment on two occasions is to address these and
related issues.
b. Preservation of Existing Authority
Nothing contained in this guidance prevents OFHEO from undertaking
such supervisory or enforcement actions as may be necessary to meet its
statutory obligations to oversee maintenance of safety and soundness
and adequate capital.
II. Calculation of Conforming Loan Limit
a. General Procedures
(i) Consistent with statute, OFHEO will utilize the Federal Housing
Finance Board's annual October-to-October Monthly Interest Rate Survey
(MIRS) data (routinely released in November) to calculate the
conforming loan limit for the following calendar year.
(ii) Under the terms of an inter-agency agreement, the FHFB will
provide OFHEO with the confidential October survey data prior to its
public release.
(iii) OFHEO will calculate the percentage change in the average
house price, make any adjustment needed to reflect FHFB methodological
changes and determine the new maximum conforming loan limit for the
following year. The result of the calculation will be rounded downward,
in line with existing practice, to the nearest $100, for marketplace
convenience and administrative simplicity.
(iv) Immediately following the FHFB's October MIRS announcement,
OFHEO will announce the maximum level of the new conforming loan limit
and simultaneously issue a letter with its determination to each
Enterprise.
(v) Each Enterprise under its charter then determines whether to
set the conforming loan limit at its institution at or below that
level.
(vi) The purchase of any mortgage above the limit by Fannie Mae or
Freddie Mac will be considered an unsafe and unsound practice, running
contrary to statute.
b. Procedures for Years in Which the House Price Level Declines
(i) If the October MIRS survey data indicate a decline from the
previous October, no decrease in the loan limit for the next year will
be required.
(ii) The next increase in the conforming loan limit will take into
account prior decline(s) in the MIRS so that an increase in the loan
limit will reflect the net change in the MIRS average price since the
last loan limit increase. Declines will be accumulated and then reduce
increases until increases exceed such prior declines.
c. Procedures for Adjustments and Technical Changes
(i) At any time during the year after a calculation has been made
and the conforming loan limit set, if the FHFB revises the MIRS or any
calculation, the Enterprises may provide comments to the FHFB for its
consideration. Copies of any Enterprise comments should be provided
contemporaneously to OFHEO.
(ii) Once the FHFB has determined the nature, scope and timing of
technical changes or adjustments, OFHEO will make adjustments to the
next year's conforming loan limit based upon the procedures set forth
in this Guidance.
III. Changes to the Conforming Loan Limit Guidance
After careful consideration of comments received and seeking to
meet the goals of clarity, ease of implementation, providing market
certainty and in light of the temporary increase in the conforming loan
limit contained in the Recovery Rebates and Economic Stimulus for the
American People Act of 2008, OFHEO has revised and is issuing a final
Examination Guidance--Conforming Loan Limit Calculations. Regarding the
central topic of most comments and for which differing comments were
received, OFHEO has determined that any October-to-October decrease in
the national average house price, as reported by the Federal Housing
Finance Board's MIRS, will not require a decrease in the loan limit but
will be charged against the next increase or increases, as necessary.
Any percentage increase in the loan limit will not exceed the net
percentage increase in the MIRS average price since October of the year
preceding the last increase in the loan limit. In sum, the loan limit
will not decline from the present $417,000 level; however, calculated
decreases will be accumulated and offset increases until all of the
accumulated amounts have been offset. This will ensure that the
conforming loan limit remains, as contemplated, a measure tied to
housing prices. Over time, both increases and decreases will be
reflected in the limit. This also means that the de minimis and
grandfathering proposals are no longer relevant.
Other elements of the draft guidance have been adopted as proposed.
OFHEO reconsidered whether it should round the maximum permitted loan
limit to the nearest $100, as proposed, or whether it should retain the
current practice of rounding to the nearest $50. In view of the
quadrupling of house prices generally since adoption of the $50 figure,
OFHEO determined to adopt the $100 rounding factor as proposed. Below
is a summary of key provisions and additions or deletions made in the
guidance issued today.
A. Loan Limit Declines and Statute
Some comments received agreed with OFHEO's determination to address
declines in home price levels, while others disagreed. OFHEO's view
remains the same--that declines fit within the statutory language as
``negative increases.'' In the alternative, where statutory language is
silent, as is the case here, regulators routinely fill gaps in statutes
with rational solutions in line with available statutory intent. Since
loan limit calculations are tied to annual home price surveys,
increases and declines reasonably may be considered in line with that
statutory structure.
B. Loan Limit Declines--Deferrals
In line with a streamlined approach adopted herein, OFHEO has
extended the deferral period. Decreases will be accumulated and then
applied to the next following increase in the loan level. They are not
deferred for a set period but accumulated until an increase occurs and
are then applied to offset increases until increases exceed accumulated
decreases.
C. Loan Limit Declines--De Minimis Declines
In line with a streamlined approach adopted herein, OFHEO has
dropped language regarding de minimis declines. Since the conforming
loan limit does not decline, but rather increases in the limit may be
reduced by prior declines, there are no operational concerns, as were
identified in the comment period, regarding offsetting increases with
reductions or not making increases
[[Page 16899]]
where deferred amounts offset any increase.
D. Grandfathering Issues
In line with the streamlined approach adopted herein, OFHEO has
dropped language on grandfathering. Since the conforming loan limit
does not decline, no concerns exist about loans made prior to a decline
in the loan limit.
E. Rounding Down
Comments received regarding a rounding down to the lowest $100 as
opposed to the current OFHEO practice of rounding down to the lowest
$50 were mixed with some opposing and others indicating either no
objection to or no opinion on OFHEO's proposal. The final guidance
adopts the approach of rounding down to the nearest $100 as having
value as to market and consumer simplicity and understanding. Also, it
would represent a doubling of this rounding standard, a much smaller
percentage change than the four-fold increase in the loan limits since
the $50 standard was adopted.
Accordingly, as stated in the Preamble, OFHEO hereby publishes the
text of its Final Examination Guidance on Conforming Loan Limit
Calculations.
Dated: March 25, 2008.
James B. Lockhart, III,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. E8-6560 Filed 3-28-08; 8:45 am]
BILLING CODE 4220-01-P