[Federal Register Volume 62, Number 153 (Friday, August 8, 1997)]
[Notices]
[Pages 42793-42794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20815]



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FEDERAL HOUSING FINANCE BOARD

[97-N-6]


Pilot Mortgage Program Proposed by the Federal Home Loan Bank of 
Seattle

AGENCY: Federal Housing Finance Board.

ACTION: Notice.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is 
requesting public comment prior to its consideration of a proposal by 
the Federal Home Loan Bank of Seattle (FHLBank of Seattle) to initiate 
a pilot mortgage purchase program. The Finance Board will review and 
consider all comments prior to taking action on the proposal. The 
FHLBank of Seattle is proposing to invest up to $25 million total in 
Federal Housing Agency (FHA)-insured loans originated by its members 
and non-member mortgagees to affordable housing developers and local 
government agencies. The loans would finance rent-to-own programs for 
low- and moderate-income households wishing to become homeowners. The 
FHLBank of Seattle has identified a credit need for the program and 
anticipates that the program can provide more favorable pricing than 
would otherwise be available while preserving the Bank's and System's 
triple-A rating.

DATES: Comments must be received in writing on or before September 8, 
1997.

ADDRESSES:  Individuals wishing to submit comments should provide 
written comments by mail to: Elaine L. Baker, Secretary to the Board, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006. Comments will be available for public inspection at this 
address.

FOR FURTHER INFORMATION CONTACT:
 Greg Goggans, Senior Financial Analyst, Office of Policy, (202) 408-
2878, or Roy S. Turner, Jr., Attorney-Advisor, (202) 408-2512, Office 
of General Counsel, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    The Federal Home Loan Bank Act (Bank Act) provides that the part of 
the assets of each Federal Home Loan Bank (Bank) except reserves and 
amounts provided for at 12 U.S.C. 1431(g)) not required for advances to 
members, may be utilized for certain types of investments. This 
includes, to such extent as the Bank may deem desirable and subject to 
such regulations, restrictions, and limitations as may be prescribed by 
the Finance Board, such securities in which fiduciary and trust funds 
may be invested under the laws of the State in which the Bank is 
located. See 12 U.S.C. 1431(h). The Finance Board implements the 
investment provisions of the Bank Act through the Financial Management 
Policy (FMP).
    The FMP establishes a framework within which the Banks are allowed 
to implement prudent and responsible financial management strategies 
that assist them in accomplishing their mission, and in generating 
income sufficient to meet their financial obligations, in a safe, 
sound, and profitable manner. Section II of the FMP specifies certain 
types of assets as permissible investments to the extent they are 
specifically authorized under 12 U.S.C. 1431(g), 1431(h), or 1436(a) of 
the Bank Act, or to the extent a Bank has determined that they are 
securities in which fiduciary or trust funds may be invested under the 
laws of the state in which the Bank is located. Investments that 
support housing and community development are permitted, provided that 
the Bank:

    Ensures the appropriate levels of expertise, establishes 
policies, procedures, and controls, and provides for any reserves 
required to effectively limit and manage risk exposure and preserve 
the triple-A rating of the Bank and the Federal Home Loan Bank 
System:
    Ensures that its involvement in such investment activity assists 
in providing housing and community development financing that is not 
generally available, or that is available at lower levels or under 
less attractive terms;
    Ensures that such investment activity promotes (or at the very 
least, does not detract from) the cooperative nature of the System;
    Provides a complete description of the contemplated investment 
activity (including a comprehensive analysis of how the above three 
requirements are fulfilled) to the Finance Board; and
    Receives written confirmation from the Finance Board, prior to 
entering into such investments, that the above investment 
eligibility standards and requirements have been satisfied.

II. Pilot Proposal

    The FHLBank of Seattle proposes investing up to a total of $25 
million in FHA-insured loans originated by its members and non-member 
mortgagees to Housing and Urban Development (HUD)-eligible public and 
private non-profit organizations such as affordable housing developers 
and local government agencies. The purpose of the loans will be to 
finance rent-to-own programs for low- and moderate-income households. 
The loans will be 15- to 30- year, fully amortizing, fixed-rate 
mortgages that are FHA-insured under Section 203 of the Federal Housing 
Act. The terms of the proposal, which have not yet been considered by 
the Finance Board and are subject to change as part of the review 
process, are set out below.
    Borrowers (non-profit organizations and local government agencies) 
will enter into ``lease to own'' arrangements with low- and moderate-
income households wishing to become homeowners. A portion of each lease 
payment will be set aside until a sufficient amount is accumulated to 
make the 3 percent down-payment required for an FHA-insured loan. At 
that point, the tenant(s), if qualified under FHA program guidelines, 
will assume the mortgage. FHA insurance will be maintained throughout 
the life of the loan.
    The loans will be originated by the FHLBank of Seattle's members 
and non-member mortgagees, that have been certified by HUD as Direct 
Endorsement Underwriters. The originators or other designated program 
participants will service the loans and must be HUD-FHA-approved or 
Government National Mortgage Association (GNMA)-approved servicing 
agents.
    According to the proposal, all risk associated with these loans are 
manageable. All loans will be underwritten to FHA standards and the FHA 
will guarantee the principal repayment of each loan. The FHLBank of 
Seattle will sign a loan purchase and servicing agreement with each 
program participant. The originators will service the loan or contract 
with a FHLBank of Seattle-approved loan servicer. The servicer will 
handle all assignments or foreclosure activities, and assume 
responsibility for any shortfall in interest income. The servicer will 
absorb any interest losses. The servicing agreement will require the 
servicer to recover any expenses, such as foreclosures, from FHA. The 
agreement will include a buy-back clause for any loan determined to be 
ineligible for FHA insurance and/or not in compliance with State and 
Federal housing regulations. The FHLBank of Seattle will periodically 
review financial statements of all servicers and will monitor whether 
servicers remain in good standing with HUD.
    The FHLBank of Seattle believes that because of these risk 
management efforts, losses are not probable and estimable and reserves 
are therefore unnecessary under generally accepted accounting 
principles. The Finance Board has final authority as to what reserves, 
if any, may be required for this program.
    Interest-rate risk management will be handled the same as a pass-
through

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security with a mix of consolidated obligations and other asset/
liability management tools. Liquidity risk will be mitigated by the 
relatively small size of the pilot.
    The FHLBank of Seattle will purchase the loans at a price/yield 
equivalent to that quoted for loans securitizing GNMA I securities 
instead of the lower price/yields for loans securitizing GNMA II 
securities. The FHLBank of Seattle indicates that the FHA-insured loans 
that will be purchased under the program are normally securitized into 
GNMA II securities instead of GNMA I securities because of the low 
volume of such loans, longer time to originate, and wider range of 
interest rates.\1\
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    \1\ Single-Family pools for GNMA I securities are required to be 
$1 million or more while such pools for GNMA II securities have a 
minimum of $250,000. Loans placed into GNMA I securities may not 
vary by more than 50 basis points in rate whereas loans securitized 
into GNMA II securities may vary by 50 to 150 basis points in rate. 
The small pool size and the broader range enables more loans to fit 
into the GNMA II pools.
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    The proposal also notes that the pilot will assist in providing 
financing under more attractive terms than are generally available. 
Program participants may sell such loans for immediate delivery to 
FHLBank of Seattle instead of accumulating a pool of loans required to 
securitize a GNMA security. This reduces the cost to the lender since 
it no longer has to hold the loans and hedge the interest rate risk 
associated with the loans until such time as sufficient quantity is 
accumulated for GNMA pooling. The lender may request from the FHLBank 
of Seattle a forward commitment of up to six months on a loan rate. 
Additionally, the FHLBank of Seattle will pay a servicing fee of 50 
basis points to the servicer (lender) instead of the 44 basis points 
paid by GNMA (net of a 6 basis points fee for insurance).
    The FHLBank of Seattle also believes that the pilot advances the 
mission of the Bank System because the pilot will stimulate more 
lending for lease-to-own programs. According to the FHLBank of Seattle, 
lease-to-own programs are costly for lenders to develop because of the 
low mortgage amounts as well as the higher costs associated with 
underwriting loans to non-profits and local housing agencies compared 
to loans to families/individuals. The FHLBank of Seattle intends to 
work to reduce the amount of time and hence the cost of underwriting 
the loans by providing technical advice to lenders and borrowers. In 
addition, origination of these types of loans for sale to the FHLBank 
of Seattle creates an opportunity for member and nonmember mortgagees 
to transact Community Reinvestment Act-eligible lending at more 
favorable rates.
    Finally, the FHLBank of Seattle believes that its proposal would 
enhance the cooperative nature of the System because the loans will be 
originated by members and approved non-member mortgagees of the FHLBank 
of Seattle. In addition, the FHLBank of Seattle will only purchase such 
loans directly from these originators and thereby provide a secondary 
market outlet for them. Members have informed the FHLBank of Seattle 
that the lack of a secondary market outlet has impeded them from making 
this type of loan. The proposal indicates that the pilot will therefore 
enhance the flow of credit to an under-served segment of the mortgage 
market.

    Dated: August 1, 1997.
William W. Ginsberg,
Managing Director.
[FR Doc. 97-20815 Filed 8-7-97; 8:45 am]
BILLING CODE 6725-01-M