[Federal Register Volume 84, Number 131 (Tuesday, July 9, 2019)]
[Notices]
[Pages 32738-32742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14475]
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FEDERAL HOUSING FINANCE AGENCY
[No. 2019-N-5]
Designation of Replacement for Federal Housing Finance Agency's
ARM Index
AGENCY: Federal Housing Finance Agency.
ACTION: Notice.
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SUMMARY: The Federal Housing Finance Agency (FHFA or Agency) recently
discontinued publication of its monthly index for adjustable rate
mortgage loans, known as the National Average Contract Mortgage Rate
for the Purchase of Previously Occupied Homes by Combined Lenders, due
to dwindling participation by mortgage originators in the Agency's
Monthly Survey of Rates and Terms on Conventional One-Family Non-farm
Mortgage Loans, on which the index had been based. By this notice, FHFA
is designating a replacement index, to be called ``PMMS+.'' The
replacement index will be an adjusted version of Freddie Mac's Primary
Mortgage Market Survey 30-Yr FRM, and will take effect immediately.
FHFA intends to publish the PMMS+ Index value monthly and on
approximately the same schedule as it has been publishing the existing
index. FHFA is soliciting public comments on its designation of the
replacement index and will consider any comments received before
finalizing its decision about the successor index.
DATES: Interested persons may submit comments on or before September 9,
2019.
ADDRESSES: Submit comments to FHFA, identified by ``Designation of
Replacement for Federal Housing Finance Agency's ARM Index (No. 2019-N-
5)'' by any of the following methods:
Agency Website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by the agency.
Mail/Hand Delivery: Federal Housing Finance Agency, Eighth
Floor, 400 Seventh Street SW, Washington, DC 20219, ATTENTION: Proposed
Collection; Comment Request: ``Designation of Replacement for Federal
Housing Finance Agency's ARM Index (No. 2019-N-5)''.
We will post all public comments we receive without change,
including any personal information you provide, such as your name and
address, email address, and telephone number, on the FHFA website at
http://www.fhfa.gov. In addition, copies of all comments received will
be available for examination by the public through the electronic
comment docket for the Notice also located on the FHFA website.
FOR FURTHER INFORMATION CONTACT: David L. Roderer, Senior Financial
Analyst, [email protected], (202) 649-3206; or Eric Raudenbush,
Associate General Counsel, [email protected], (202) 649-3084
(these are not toll-free numbers); Federal Housing Finance Agency, 400
Seventh Street SW, Washington, DC 20219. The Telecommunications Device
for the Hearing Impaired is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
A. Background of MIRS and the ARM Index
FHFA's Monthly Survey of Rates and Terms on Conventional One-Family
Non-farm Mortgage Loans, commonly referred to as the ``Monthly Interest
Rate Survey'' or ``MIRS,'' was a monthly survey of mortgage lenders
that solicited information on the terms and conditions on all
conventional, single-family, fully amortized, purchase-money mortgage
loans closed during the last five working days of the preceding month.
The MIRS collected monthly information on interest rates, loan terms,
and house prices by property type (i.e., new or previously occupied),
by loan type (i.e., fixed- or adjustable-rate), and by lender type
(i.e., mortgage companies, savings associations, commercial banks, and
savings banks), as well as information on 15-year and 30-year fixed-
rate loans. In addition, the survey collected quarterly information on
conventional loans by major metropolitan area and by Federal Home Loan
Bank district. The MIRS did not collect information on loans insured by
the Federal Housing
[[Page 32739]]
Administration or guaranteed by the Veterans Administration, loans
secured by multifamily property or manufactured housing, or loans
created by refinancing an existing mortgage loan.
The MIRS originated with one of FHFA's predecessor agencies, the
former Federal Home Loan Bank Board (FHLBB), in the 1960s and was
continued by the former Federal Housing Finance Board (Finance Board)
from 1989 through 2008. Data collected through the MIRS was used to
derive the FHLBB's National Average Contract Mortgage Rate for the
Purchase of Previously Occupied Homes by Combined Lenders (ARM Index),
which was used by lenders to set mortgage rates on adjustable rate
mortgages. From 2008 through May 2019,\1\ FHFA continued to conduct the
MIRS and to produce the ARM Index. For various market reasons, the
number of loans reported through the MIRS fell substantially over that
period, which resulted in the data sample sizes becoming deficient.\2\
When submitting its data for the May 2019 survey, one respondent whose
loans have constituted a substantial majority of the monthly MIRS data
in recent years informed FHFA that it would no longer submit any
mortgage loan data for the survey. Without that loan data, the survey
would no longer generate a reliable and statistically robust benchmark,
including the ARM Index. Accordingly, FHFA decided that it had no other
option than to discontinue the MIRS and announced in its May 29, 2019
MIRS news release that it had discontinued the survey and the ARM
Index, effective immediately.
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\1\ The last MIRS release was dated May 29, 2019, and was based
on April data.
\2\ In recent years, all publications of MIRS data have included
a disclaimer stating, ``The indices are based on a small monthly
survey of mortgage lenders, which may not be representative. The
sample is not a statistical sample but is rather a convenience
sample.''
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Section 402(e) of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) addresses the continuation, subsequent
to FIRREA, and the possible replacement of indices that previously had
been used to calculate the interest rates on adjustable rate mortgage
instruments.\3\ As applied to the ARM Index, section 402(e)(4) of
FIRREA requires that if FHFA can no longer make the ARM Index available
it may substitute a substantially similar index, provided that the FHFA
Director determines, after notice and opportunity for comment, that:
(A) The new index is based upon data substantially similar to that of
the ARM Index; and (B) the substitution of the new index will result in
an interest rate substantially similar to the rate in effect at the
time the ARM Index became unavailable. As discussed in further detail
below, FHFA has determined that the weekly average interest rate on 30-
year fixed rate mortgage loans, as published in the Freddie Mac Primary
Mortgage Market Survey (PMMS), with a time adjustment and small spread
adjustment, would satisfy those requirements and thus can be designated
as a replacement for the ARM Index. To avoid confusion with the Freddie
Mac index, FHFA is naming the replacement index ``PMMS+'' and will
refer to the replacement index by that name when publishing the monthly
index values going forward. FHFA is designating a replacement index so
that holders of adjustable rate mortgage notes that currently use the
ARM Index as the basis for adjusting the interest rates on their
mortgage loans will be able to substitute the PMMS+ Index value for
future adjustments.
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\3\ See Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA), Public Law 101-73, Title IV, section 402(e),
103 Stat. 359-60 (Aug. 9, 1989), as amended by Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, title
III, section 367(5)(D), 124 Stat. 1557 (July 21, 2010), codified at
12 U.S.C. 1437 note.
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B. Designation of PMMS+ as Replacement Index
Since FHFA announced the termination of the ARM Index, it has
received requests from lenders with outstanding mortgage loans that are
linked to the ARM Index to name a replacement index as soon as
possible. Section 402(e) of FIRREA does not specify a timeframe within
which FHFA must designate a replacement index. In the past, the Finance
Board has solicited public comment prior to the effective date of any
replacements.\4\ Because of the abruptness of the recent withdrawal of
the largest source of data for the MIRS, however, FHFA did not have an
opportunity to solicit public comments before it needed to terminate
the MIRS and ARM Index. In order to give effect to the apparent intent
of Congress that FHFA should continue to make available a replacement
index for any lenders that have been using the ARM Index to calculate
the interest rates on their adjustable rate mortgage instruments, FHFA
has determined that its designation of PMMS+ as the replacement index
shall take effect immediately. So as to fulfill the other elements of
the statutory process contemplated by FIRREA, FHFA also is soliciting
comments on its determination that PMMS+ meets the requirements for a
substitute index provided in Section 402(e)(4) of FIRREA. After
reviewing any comments received, FHFA will determine whether to retain
PMMS+ as the replacement index or to designate some other index, and
will issue a subsequent notice informing the public of its decision.
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\4\ See 67 FR 79099, 79100 (Dec. 27, 2002) (Finance Board
substitution of index rates subsequent to prior notice); 62 FR 9767,
9769 (March 4, 1997) (Finance Board request for comments on proposed
revisions to MIRS).
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C. Selection of PMMS+
As described above, FHFA is no longer able to produce the ARM Index
because of the recent loss of a substantial amount of mortgage loan
data from which the ARM Index had been compiled. FHFA has determined
that an adjusted version of Freddie Mac's PMMS can serve as the
replacement index because it would satisfy the statutory requirements,
i.e., it would be based on substantially similar data and would result
in substantially similar interest rates, and would align more closely
to the ARM Index than the other index considered.
1. Substantially Similar Data
No other survey replicates the loan data that is collected by the
MIRS, and no other mortgage index precisely matches the ARM Index.
Moreover, the options available to FHFA as potential successor indices
are rather limited, as most other mortgage indices have ceased being
produced. FHFA has considered two mortgage rate indices as possible
replacements for the ARM Index, both of which are still in production
as of June 2019. In considering possible replacements for the ARM
Index, FHFA has construed the statutory language regarding
``substantially similar'' data as requiring that FHFA look first to
indices that are based on data pertaining to mortgage loans. Because of
that statutory provision, FHFA has not considered other types of
indices or references rates, such as LIBOR or U.S. Treasury security
rates, as possible replacements for the ARM Index.
The MIRS Index was based on the interest rates of closed loans made
by various kinds of mortgage originators, all of whom provided the
information voluntarily. This type of data is no longer available to
FHFA due to a variety of market factors. FHFA's analysis determined a
good proxy for rates of mortgage loans that are closed are rates for
mortgage loans that have been quoted or committed to in the origination
process. We determined that two indices were substantially similar to
[[Page 32740]]
MIRS when an appropriate time lag is applied.
Those indices are the PMMS and the Mortgage Bankers Association's
Weekly Applications Survey (WAS) Index. Both indices are more timely,
more reliable, and provide better representation of the mortgage market
than the MIRS-based ARM Index. Both indices have been produced for long
periods of time, with WAS having a history of over 25 years and PMMS
has a history of over 47 years, commencing in 1971. Having considered
these options, FHFA has concluded that the PMMS 30-Yr FRM meets the
statutory requirements and is the better choice as a replacement
because it has substantially similar raw data.
Neither PMMS nor WAS is drawn from data that are identical to the
MIRS data, but the underlying data are similar in both cases. However,
this data is substantially similar due to MIRS, PMMS and WAS being
based on single family residential mortgage loans that are in or have
just completed the origination process. The MIRS ARM Index is a
composite national index covering closed fully amortized conventional
jumbo and non-jumbo 30- and 15-year fixed-rate and \5/1\ adjustable-
rate purchase mortgages on single family homes. In contrast, the WAS
Index covers those types of loans included in MIRS, as well as fully
amortized refinance loans at the time of commitment. The PMMS 30-Yr FRM
Index covers only conventional 30-year non-jumbo fixed-rate purchase
mortgages (Freddie Mac does not produce a composite index). As shown in
Figure 1 below, however, since 2008 the vast majority of loans reported
through the MIRS have been 30-year conventional non-jumbo fixed-rate
purchase mortgages, and the number of such loans has approached 90
percent for the past several years.
[GRAPHIC] [TIFF OMITTED] TN09JY19.001
This analysis has led FHFA to conclude that the PMMS 30-Yr FRM
Index is based on data that is ``substantially similar'' to that of the
ARM Index as required by FIRREA Section 402(e)(4)(A). The WAS Index
fails to satisfy this requirement because the loan mix is substantially
different. Additionally, it does not correlate as closely to the ARM
Index as would the PMMS+ Index.
2. Substantially Similar Rates
As a result of the similar composition of the data pools, the PMMS
30-Yr FRM Index rate has been in close alignment with the ARM Index
rate over an extended period of time, when appropriate adjustments are
made to account for timing differences. The ARM Index is published
monthly and reflects rates on closed loans, while both the WAS and PMMS
Index are published weekly and reflect rates that reporting
institutions would be likely to offer borrowers if they were to request
a loan on the day the survey is to be published.\5\
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\5\ Both PMMS and WAS are weekly indices. PMMS is based on data
that is reported one day prior to the publication of the index. WAS
is based on data that is reported three days prior to its
publication.
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PMMS tracks the interest rates that would be obtained from the ARM
Index more closely than does the WAS, based on a correlation analysis.
Correlations improve for PMMS when applied with an eleven week lag
time, i.e., when a lender uses a PMMS Index value as of a date that is
eleven weeks earlier than would ordinarily be the case if using the ARM
Index.
As previously discussed, the majority of the discrepancy can be
adjusted for by utilizing a lagging PMMS 30-Yr FRM Index. FHFA compared
the historical ARM Index Rate with the PMMS 30-Yr FRM Index Rate using
different lag times and found that the two indices are significantly
different if determined as of the same date or as of dates that are up
to ten weeks apart, as shown on Table 1. Table 1 also illustrates that
[[Page 32741]]
PMMS has a higher correlation than WAS.\6\
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\6\ The closer to a value of 1,00 the more perfect positive
correlation. A value of 0 means there is no correlation.
Table 1--Pairwise Correlation Between MIRS and PMMS, and MIRS and WAS
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0 9 10 11 12 13 14
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PMMS.................................... 0.9846 0.9930 0.9930 0.9931 0.9932 0.9931 0.9927
WAS..................................... 0.9757 0.9882 0.9877 0.9870 0.9868 0.9857 0.9852
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The differences between the ARM Index and PMMS become statistically
insignificant, however, with an 11-week lag time between the dates
(with a difference between the mean rates of less than 1.0 basis point
and a high correlation). This concept is intuitively logical given that
the interest rate on a closed loan often reflects a rate commitment
made two or three months earlier. Figure 2 below shows that the 11-week
lagging PMMS 30-Yr FRM Index rate has closely tracked the ARM Index
rate over time, particularly over the last 19 years.\7\
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\7\ FHFA calculates the ARM Index from MIRS as a simple average,
while the PMMS Index is a weighted average based on lender size.
FHFA has recalculated the ARM Index as a weighted average based on
the lender size starting in 2007 and found that the differences
between the weighted and unweighted figures are insignificant. Thus,
the difference in calculation methodology does compromise the PMMS
30-Yr FRM Index's suitability as a potential replacement for the ARM
Index.
[GRAPHIC] [TIFF OMITTED] TN09JY19.002
Based on those comparisons, FHFA has concluded that the replacement
of the ARM Index with an index based on the 11-week lagging PMMS 30-Yr
FRM Index will result in an interest rate that is substantially similar
to the interest rate that would be obtained from the MIRS ARM Index, as
required by FIRREA section 402(e)(4)(B). As shown in Table 2 below, the
11-week lagging PMMS 30-Yr FRM Index rate has been substantially
similar to the ARM Index rate for each of the first five months of
2019. FHFA conducted a similar comparison using different lag times for
the WAS Index, which is also based on loan commitments, but found that
the differences in the composition of the data pools for the two
indices resulted in dissimilar reported interest rates, irrespective of
any adjustment for lag time. That dissimilarity in interest rates led
FHFA to conclude that the WAS Index would not satisfy the statutory
requirements to replace the ARM Index.
Table 2--Comparison of ARM Index Rates With 11-Week Lagging PMMS 30-Yr
FRM Index Rates During 2019
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11-Week lag
MIRS release date ARM Index from the final PMMS 30-yr FRM
Thursday Index
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1/29/2019............... 4.83 11/15/2018 4.94
2/28/2019............... 4.60 12/13/2018 4.63
3/28/2019............... 4.46 1/10/2019 4.45
4/30/2019............... 4.36 2/07/2019 4.41
[[Page 32742]]
5/29/2019............... 4.15 3/14/2019 4.31
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There are several additional reasons that FHFA believes the PMMS
30-Yr FRM Index to be an appropriate basis for a replacement index: (1)
It includes data from more lenders than does the ARM Index--around 80
per week versus 20 per month for the ARM Index in 2018; (2) Freddie Mac
intends to continue the PMMS for the foreseeable future and lenders
have been willing to provide sufficient loan data on a voluntary basis;
and (3) similar to the ARM Index, but unlike the WAS Index, the PMMS
indices are available to the public at no cost.
FHFA further determined that the transition from the ARM Index to
the PMMS+ Index should not adversely affect the borrowers or the
lenders, i.e., the coupon rate on the mortgage loan should be the same
whether the lender were to use the ARM Index or PMMS+ for the next
interest rate reset. Notwithstanding the close correlation between the
ARM Index rates and the lagged PMMS rates over time, they do diverge
from month to month, as was the case for the May 2019 ARM Index value,
which was 16 basis points (bps) less than the value for the 11-week
lagged PMMS Index.\8\ To ensure that the transition is neutral with
respect to loan coupons, FHFA has adjusted the 11-week lagged PMMS rate
by a spread of -16 bps, using the last available MIRS data from May
2019. This adjustment creates exactly the same reference rate at the
May 2019 transition. Therefore the adjusted interest rate of a mortgage
loan would be the same whether using MIRS or PMMS+. Over time, however,
the 10 year average spread differential has been much lower,
approximately -1 basis point. To accommodate this average spread, FHFA
will gradually reduce (on an absolute basis) the embedded spread by 3
bps a month until the spread has been reduced to -1 basis point.
Thereafter, the value of the PMMS+ Index for a given month will equal
the 11-week lagged PMMS Index reduced by one basis point.
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\8\ Bps are basis points or 0.01%. Therefore -16 bps means
0.16%.
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Table 3 indicates the appropriate PMMS dates to use for the ARM
Index for the rest of the year.\9\ FHFA intends to publish updated
information about the PMMS+ values each month, on approximately the
same schedule that it currently publishes the ARM Index values. FHFA
expects servicers to use the appropriate PMMS+ reference rate based on
the released monthly calculated PMMS+ after adjusting for the look back
period of the mortgage. For illustrative purposes, if a mortgage loan
interest rate adjusting on October 1, 2019 has a 60-day look back
period for determining the index value, the servicer would use the
August 2019 PMMS+ Index as its reference rate value.
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\9\ Due to the 11-week lag, FHFA can calculate the PMMS+ values
into August.
Table 3--PMMS 30-Yr FRM Dates To Use as a Replacement for the ARM Index for 2019
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Release month (2019) PMMS Adjustment MIRS replacement (PMMS+)
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May..................................... 4.31...................... -0.16 4.15.
June.................................... 4.12...................... -0.13 3.99.
July.................................... 4.10...................... -0.10 4.00.
August.................................. 3.82...................... -0.07 3.75.
September............................... unknown................... -0.04 unknown.
October................................. unknown................... -0.01 unknown.
November................................ unknown................... -0.01 unknown.
December................................ unknown................... -0.01 unknown.
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D. Designation of Replacement Index Is for Benefit of Current Note
Holders
For the reasons discussed above, FHFA is exercising its authority
under section 402(e)(4) of FIRREA to designate PMMS+ as the replacement
for the ARM Index so that holders of currently outstanding adjustable
rate mortgage instruments may use it in lieu of the discontinued index
to calculate future adjustments to the interest rates on those loans.
This designation is not intended to apply to newly-originated loans and
FHFA does not endorse the use of PMMS+ or any other PMMS Index as a
reference rate on newly-originated adjustable rate mortgage loans.
Dated: July 1, 2019.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2019-14475 Filed 7-8-19; 8:45 am]
BILLING CODE 8070-01-P