[Federal Register Volume 77, Number 36 (Thursday, February 23, 2012)]
[Proposed Rules]
[Pages 10695-10707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3934]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Chapter II

[Docket No. FR-5572-N-01]


Federal Housing Administration (FHA) Risk Management Initiatives: 
Revised Seller Concessions

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

ACTION: Request for comments.

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SUMMARY: On July 15, 2010 (75 FR 41217), HUD issued a notice seeking 
comment on three initiatives that HUD proposed would contribute to the 
restoration of the Mutual Mortgage Insurance Fund (MMIF) capital 
reserve account. On September 3, 2010 (75 FR 54020), HUD published a 
follow-up final rule implementing the proposal to introduce a minimum 
credit score and reduce the maximum loan-to-value ratio for FHA single 
family mortgage insurance. HUD is in the process of implementing 
another notice tightening the underwriting standards for mortgage loan 
transactions that are manually underwritten. This document addresses 
the third proposal; namely, the proposal to reduce the amount of 
closing costs a seller may pay on behalf of a homebuyer purchasing a 
home with financing insured by the Federal Housing Administration 
(FHA). This document takes into consideration the public comments on 
the July 15, 2010, final rule regarding the proposed cap on ``seller 
concessions'' and revises the proposed cap in response. HUD is seeking 
comment for 30 days on this revised proposal for limiting seller 
concessions.

DATES: Comment Due Date March 26, 2012.

FOR FURTHER INFORMATION CONTACT: Karin Hill, Director, Office of Single 
Family Program Development, Office of Housing, Department of Housing 
and Urban Development, 451 7th Street SW., Room 9278, Washington, DC 
20410; telephone number 202-708-4308 (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 Relay Service at 800-877-
8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. HUD's July 15, 2010 Notice

    On July 15, 2010, at 75 FR 41217, HUD issued a notice seeking 
comment on three initiatives that HUD proposed would contribute to the 
restoration of the Mutual Mortgage Insurance Fund (MMIF) capital 
reserve account. The proposed changes were developed to preserve both 
the historical role of the Federal Housing Administration (FHA) in 
providing a home financing vehicle during periods of economic 
volatility and HUD's social mission of helping underserved borrowers. 
In the July 15, 2010, notice, HUD proposed the following: (1) To reduce 
the amount of closing costs a seller (or other interested third 
parties) may pay on behalf of a homebuyer purchasing a home with FHA-
insured mortgage financing for the purposes of calculating the maximum 
mortgage amount; (2) to introduce a credit score threshold, as well as 
reduce the maximum loan-to-value (LTV) for borrowers with lower credit 
scores who represent a higher risk of default and mortgage insurance 
claim; and (3) to tighten underwriting standards for mortgage loan 
transactions that are manually underwritten.
    Over the past 3 years, the volume of FHA insurance has increased 
rapidly as private sources of mortgage finance retreated from the 
market. FHA's share of the single-family mortgage market was estimated 
at 17 percent (33 percent for home purchase mortgages) in Fiscal Year 
(FY) 2010, up from 3.4 percent in FY 2007, and the dollar volume of 
insurance written has jumped from the $77 billion issued in FY 2007 to 
$319 billion in FY 2010. The growth in the MMIF portfolio over such a 
short period of time coincided with worsening

[[Page 10696]]

economic conditions that have seen high levels of defaults and 
foreclosures and, consequently, unacceptable risks of loss to the 
MMIF.\1\ The National Housing Act (12 U.S.C. 1701 et seq.), which 
authorizes FHA's mortgage insurance, envisions that FHA will adjust 
program standards and practices, as necessary, to operate the MMIF on a 
financially sound basis.
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    \1\ While the Federal Credit Reform Act of 1990 requires that 
FHA (and all other government credit agencies) estimate and budget 
for the anticipated cost of mortgage loan guarantees, the National 
Housing Act imposes a special requirement that the MMIF hold an 
additional amount of funds in reserve to cover unexpected losses. 
FHA maintains these back-up funds in the MMIF capital reserve 
account, a special reserve account.
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    The independent actuarial study conducted in 2009 showed that the 
MMIF capital ratio has fallen below its statutorily mandated 
threshold.\2\ Consistent with HUD's responsibility under the National 
Housing Act to ensure that the MMIF remains financially sound, HUD 
published the July 15, 2010, notice and sought public comment on the 
three proposals described above. The July 15, 2010, notice represented 
another step in HUD's effort to preserve the MMIF and preserve FHA as a 
source of available credit for affordable home mortgages. Interested 
parties are referred to the July 15, 2010, notice for details regarding 
the proposed changes to FHA requirements.
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    \2\ On November 13, 2009, HUD released an independent actuarial 
study that reported that FHA will likely sustain significant losses 
from mortgage loans made prior to 2009, due to the high 
concentration of seller-financed downpayment assistance mortgage 
loans and declining real estate values nationwide, and that the MMIF 
capital reserve relative to the amount of outstanding insurance in 
force had fallen below the statutorily mandated 2 percent ratio. The 
capital ratio generally reflects the reserves available (net of 
expected claims and expenses), as a percentage of the current 
portfolio, to address unexpected losses. The report can be found at: 
http://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf.
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B. The September 3, 2010 Final Rule Implementing New Credit Score and 
Loan-to-Value Requirements

    At the close of the public comment period on August 16, 2010, HUD 
had received 902 public comments in response to the July 15, 2010, 
notice. The majority of the public comments focused on the reduction in 
seller concessions. In order to provide the necessary additional time 
to consider the issues raised by the commenters, HUD decided to 
separately implement the three proposals contained in the July 15, 
2010, notice.
    On September 3, 2010, at 75 FR 54020, HUD published a final rule 
implementing the introduction of a minimum credit score and the 
reduction in the maximum LTV ratio for FHA single family mortgage 
insurance. The September 3, 2010, final rule also contained a 
discussion of the public comments received in response to the new 
credit score and LTV requirements. The final rule advised that HUD's 
decision on the two other proposals described in the July 15, 2010, 
notice would be addressed separately.
    Commencing on October 4, 2010, borrowers were required to have a 
minimum decision credit score of no less than 500 to be eligible for 
FHA financing. The LTV for FHA-insured mortgage loans (purchase and 
refinance) is limited to 90 percent for borrowers with a decision score 
between 500 and 579. Maximum FHA-insured financing (96.5 percent LTV 
for purchase transactions and 97.75 percent for rate-and-term refinance 
transactions) continues to be available for borrowers with credit 
scores at or above 580. However, FHA is providing a special, temporary 
allowance to permit higher LTV mortgage loans for borrowers with lower 
decision credit scores, so long as they involve a reduction of existing 
mortgage indebtedness pursuant to FHA program adjustments announced in 
HUD Mortgagee Letter 2010-23. Interested readers are referred to the 
September 3, 2010, final rule and HUD Mortgagee Letter 2010-29 for 
additional information regarding the new credit score and LTV 
requirements. All HUD Mortgagee Letters are available at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/.

C. Proposed Final Rule Implementing Revised Manual Underwriting 
Requirement

    HUD is in the process of finalizing a rule implementing the revised 
manual underwriting requirements and addressing the public comments 
received on this proposal in response to the July 15, 2010, notice. The 
new manual underwriting requirements will reduce the risk to the MMIF 
and ensure that homebuyers are offered mortgage loans that are 
sustainable.
    As discussed in the July 15, 2010, notice, the purpose of mortgage 
underwriting is to determine a borrower's ability and willingness to 
repay the debt and to limit the probability of default. An underwriter 
must consider a borrower's credit history, evaluate the borrower's 
capacity to repay the loan based on income and current debt, determine 
if cash to be used for closing is sufficient and from an acceptable 
source, and determine if the value of the collateral supports the 
amount of money being borrowed. In cases where the borrower has a very 
limited or nontraditional credit history, a credit score may not have 
been issued by the credit bureaus, or the credit score may be based on 
references that are few in number or do not effectively predict future 
credit worthiness. Mortgage loans for borrowers in this category are 
manually underwritten as are all ``Refer'' risk classifications 
provided by FHA's TOTAL Mortgage Score Card. These categories of 
borrowers require a more extensive review that can be tailored to 
circumstances to discern the level of risk. Manual underwriting 
guidelines are generally more stringent to address that higher risk 
level. The final rule will consider factors for manually underwritten 
mortgage loans.

II. This Notice--Reduction of Seller Concession: Revised Proposal for 
Reducing Seller Concessions

    This notice revises the third proposal contained in the July 15, 
2010, notice; namely, the proposed cap on the amount of ``seller 
concessions'' that can be considered as offsets to actual closing costs 
rather than inducements to purchase. When a homeseller pays all or part 
of the buyer's closing costs and other fees, such payments are referred 
to as seller concessions. Seller concessions include any payment toward 
the borrower's closing costs and other fees, by any third party with an 
interest in the transaction, including the seller, builder, developer, 
mortgage broker, lender, or Settlement Company. HUD's existing policy 
defining seller concessions provides that any concessions exceeding 6 
percent must be treated as inducements to purchase, resulting in a 
reduction in the FHA mortgage amount.

A. Changes to the July 15, 2010, Notice

    In the July 15, 2010, notice, HUD proposed to cap the seller 
concessions in FHA-insured, single-family mortgage transactions at 3 
percent of the lesser of the sales price or appraised value, for the 
purpose of calculating the maximum insured mortgage amount, reducing it 
from the 6 percent limitation currently in place. As discussed in the 
July 15, 2010, notice, conventional mortgage lenders have capped 
allowances for seller concessions at 3 percent of the sales price on 
loans with LTV ratios similar to FHA. Loans guaranteed by the 
Department of Veterans Affairs have a cap on seller concessions of 4 
percent of the sales price. In the July 15, 2010, notice, HUD also 
provided statistical data illustrating a higher incidence of home loss 
for borrowers who received seller concessions in excess of 3 percent. 
The proposed cap was designed to align FHA's single-family mortgage

[[Page 10697]]

insurance programs to industry practice and reduce home loss among 
homebuyers relying on FHA-insured financing. Of the homebuyers with 
FHA-insured mortgages, 82 percent of such homebuyers make only the 
minimum required downpayment of 3.5 percent. It is important, 
therefore, for HUD to assure that allowable mortgage amounts are 
appropriately adjusted for what may actually be inducements to 
purchase. For borrowers having more than the minimum required 
downpayment of 3.5 percent, this rule may or may not affect them.
    As noted in the preamble, the majority of the 902 public comments 
received in response to the July 15, 2010, notice pertained to the 
proposed cap on seller concessions. Comments were submitted by mortgage 
lenders, credit unions, realtors, home builders, state housing finance 
agencies, and other interested organizations. After careful 
consideration of the issues raised by the commenters, HUD has decided 
to make the following changes to the proposed cap to seller concessions 
and seek public comment on those changes:
    <bullet> Reduce the amount of seller concessions permitted as 
offsets to actual closing costs to 3 percent \3\ or $6,000, whichever 
is greater, but not allow the offsets, in any event, to exceed the 
borrower's actual costs. This reduction in concession allowances does 
not apply to HUD's Real Estate Owned homes and Neighborhood 
Stabilization programs, for which the allowance remains at 6 percent.
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    \3\ The percentage is based on the lesser of sales price or 
appraised value.
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    <bullet> Limit acceptable uses of seller concessions to payments 
toward borrower closing costs, prepaid items, discount points, the FHA 
Up Front Mortgage Insurance Premium, and any Interest Rate Buydown. 
This revised definition eliminates payment supplements such as 
homeowner or condominium association fees, mortgage interest payments, 
and mortgage payment protection plans.
    To address potential future increases in closing costs, the $6,000 
cap established in this notice is not static but tied to an index. The 
dollar limitation may increase annually, and at the same percentage 
rate as the FHA national loan limit floor, rounded up to the nearest 
$100 for anything at or above $50 increments and rounded down to the 
nearest $100 for anything below $50 increments. For example, should the 
FHA national loan limit floor rise by 1.5 percent, then the cap may 
increase to $6,100. Any increase in the dollar limitation will be 
announced via mortgagee letter, most likely in the same mortgagee 
letter that announces the new FHA loan limits for the upcoming calendar 
year.
    This revised proposal takes into consideration the 
disproportionately negative impact an across-the-board reduction to 3 
percent would have had on borrowers with low and moderate incomes who 
are purchasing modestly priced homes. It also appropriately limits the 
dollar amount of seller concessions on higher-priced homes, which under 
currently policy could be as high as $43,785.\4\ Concession amounts 
above the revised-proposal limit would not be prohibited, but rather 
would result in a dollar-for-dollar reduction in the sales price for 
the purpose of calculating the maximum insured loan amount.
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    \4\ That amount is 6 percent of FHA's current national mortgage 
limit ceiling of $729,750.
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B. Definition of Acceptable Concessions

    As part of the revised proposal on reducing seller concessions, HUD 
is also proposing to narrow the definition of acceptable concessions. 
In this new definition, HUD continues to permit sellers to pay for the 
borrower's actual costs to close on the loan, as well as pay the Up 
Front Mortgage Insurance Premium due on the loan and fund an Interest 
Rate Buydown.\5\ What HUD proposes to eliminate are payment supplements 
offered by sellers, such as a year's worth of homeowner association 
fees, 6 months' worth of mortgage interest, or mortgage payment 
protection plans. HUD believes that these types of payment supplements, 
while permissible under current seller concession guidance, are really 
inducements to purchase and should be treated as such. The impact of 
this revised definition should be minimal on the housing market since 
the loan level review of FHA-insured loans revealed that sellers 
typically offer concessions that pay for borrowers' actual costs to 
acquire the property, and not payment supplements.
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    \5\ Interest Rate Buydowns are designed to reduce the borrower's 
monthly payment during the early years of the mortgage. At 
settlement, an escrow account is established and each month, the 
servicing lender draws down an amount equal to the difference 
between the principal and interest payment (P&I) at the Note rate, 
and the P&I at the buydown rate. For more information on FHA 
requirements for Interest Rate Buydowns, see HUD Handbook 4155.1 
6.A.2.

------------------------------------------------------------------------
     Current seller concession            Proposed seller concession
             definition                           definition
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The seller and/or interested third   The seller and/or interested third
 party may contribute towards the     party may contribute towards the
 buyer's:                             buyer's:
 <bullet> Closing Costs              <bullet> Closing Costs
 <bullet> Prepaid Expenses           <bullet> Prepaid Expenses
 <bullet> Discount Points            <bullet> Discount Points
 <bullet> Interest Rate Buydowns     <bullet> UFMIP
 and other payment supplements       <bullet> Interest Rate Buydowns
 (i.e. Homeowner Association fees)   All other third-party contributions
 <bullet> Payments of mortgage        are considered inducements to
 interest for fixed-rate mortgages    purchase, resulting in a dollar-
 <bullet> Mortgage Payment            for-dollar reduction to the lesser
 Protection Insurance and Up-Front    of sale price or appraised value
 Mortgage Insurance Premium           before applying the appropriate
All other third-party contributions   LTV factor (96.5%). This excludes
 are considered inducements to        closing costs and prepaid items
 purchase, resulting in a dollar-     paid by the lender through premium
 for-dollar reduction to the lesser   (rebate) pricing.
 of sale price or appraised value
 before applying the appropriate
 LTV factor (96.5%). This excludes
 closing costs and prepaid items
 paid by the lender through premium
 (rebate) pricing.
------------------------------------------------------------------------

    Closing costs vary from borrower to borrower, lender to lender, and 
state to state. These costs even vary from closing cost study to 
closing cost study, because each study defines closing costs in 
slightly different ways. The definition of closing costs for HUD's 
analysis included fixed and variable closing costs, but not prepaid 
expenses, because prepaid expenses are typically financed. Fixed costs 
are those that are a fixed dollar amount, are not tied to a percentage 
of the loan amount, and are generally offered within a dollar range. 
Variable costs are those that are based

[[Page 10698]]

on a percentage of the loan amount, or property value. Prepaid items 
include funds needed to establish an escrow account, as well as state 
and local property taxes and per diem interest. FHA's Upfront Mortgage 
Insurance Premium is also included in this category, and it is 
typically prepaid by financing into the mortgage amount.

                       Categories of Closing Costs
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             Fixed                   Variable             Prepaid
------------------------------------------------------------------------
Appraisal.....................  Adjusted           Hazard/Homeowners
                                 Origination        Insurance.
                                 Charge.
Credit Report.................  Lender's Title     Flood Insurance.
                                 Insurance.
Survey........................  Lender's Title     Homeowners/
                                 Insurance.         Condominium
                                                    Association Fees.
Pest Inspection...............  Owner's Title      Upfront Mortgage
                                 Insurance.         Insurance Premium.
Title Services................  Transfer Tax.....  Taxes.
Lien Certification............  .................  Per Diem Interest.
Flood Certification
Flood Determination
Lender Inspection
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    In the July 15, 2010, notice, HUD clarified the definition of 
Interested Third Party. HUD is not revising the definition of 
Interested Third Party but clarifying the definition where it was vague 
and possibly subject to varied interpretation.

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     Current interested third party        Clarification of interested
               definition                     third party definition
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Seller or other interested parties such  Seller or other interested
 as real estate agents, builders,         party such as a real estate
 developers, etc., or combination of      agent, builder, developer,
 these parties.                           mortgage broker, lender, and/
                                          or settlement company.
------------------------------------------------------------------------

C. Statutory Authority

    FHA has determined that maintaining the amount of eligible seller 
concessions at 6 percent of the sales price of the property increases 
the risk of default and claim payment by FHA from the insurance fund. 
FHA's determination is solidly based on statutory grounds in both the 
National Housing Act and the Department of Housing and Urban 
Development Act (42 U.S.C. 3531 et seq.) There are five specific 
statutory areas that support the action by FHA to reduce the amount of 
allowable seller concessions for FHA purposes: (1) The mortgagor's 
ability to pay the mortgage; (2) the amount of funds the mortgagor must 
have available to close; (3) the Secretary's fiduciary duty to the 
MMIF; (4) the capital ratio of the MMIF; and (5) FHA risk management. 
Each one of these five statutory grounds is explained in more detail 
below.
    1. Ability to pay mortgage payment. Section 203(b)(4) of the 
National Housing Act provides that the mortgage, in order to be 
eligible for insurance, must contain complete amortization provisions 
satisfactory to the Secretary requiring periodic payments by the 
mortgagor not in excess of his reasonable ability to pay as determined 
by the Secretary. FHA has found that seller concessions can, in some 
instances, affect the borrower's ability to make monthly mortgage 
payments some time after the mortgage loan is closed. An example is 
when certain reoccurring homeownership costs are prepaid on a temporary 
basis, but then, after the prepayment period ends, become the financial 
burden of the mortgagor. FHA has found that the seller concessions such 
as prepayment of taxes or homeowner association fees, which then become 
due a year or two later, can result in mortgagors experiencing mortgage 
payment shock and subsequent default. This example of an impact on a 
mortgagor's reasonable ability to pay illustrates a clear statutory 
basis under section 203(b)(4) of the National Housing Act for issuing 
this notice.
    2. Money to close. Section 203(b)(9)(A) of the National Housing 
Act, as amended by the Housing and Economic Reform Act of 2008 (Pub. L. 
110-289, approved July 30, 2008), addresses the need for a mortgagor to 
make a minimum investment in the purchase of the mortgaged property. 
Under section 203(b)(9)(A) of the National Housing Act, the mortgagor 
shall have paid on account of the property an amount equal to not less 
than 3.5 percent of the appraised value of the property or such larger 
amount as the Secretary may determine. The reduction in seller 
concessions impacts on the funding that the homebuyer has to bring to 
the table to close. Indirectly, by reducing the amount of seller 
concessions, the Secretary is determining that the mortgagor must pay 
on account of the property an amount that can be greater than the 
minimum 3.5 percent. Requiring, directly or indirectly, that the 
mortgagor must come to the closing table with more of his own funds is 
clearly rooted in this statutory provision of the National Housing Act.
    3. Fiduciary Duty to the MMIF. The determination to decrease the 
allowable amount of seller concessions is part of FHA's ongoing risk 
management practices. FHA is a large government insurance corporation, 
and has statutorily mandated requirements placed upon it to manage its 
financial affairs prudently. One of the statutes with such a mandate is 
found at section 202(a)(3) of the National Housing Act. Under that 
section, the Secretary has a fiduciary duty to ensure that the MMIF 
remains financially sound. Taking action such as issuing this Notice 
regarding seller concessions furthers the Secretary's obligation to 
meet the requirements of this section of the National Housing Act. 
Reducing defaults and subsequent claims for insurance benefits payments 
from the MMIF logically should financially help the MMIF.
    4. Capital Ratio of the MMIF. Coupled with the fiduciary duty to 
preserve the MMIF is the statutory requirement to maintain an adequate 
MMIF capital ratio. Under section 205(f)(2) of the National Housing 
Act, the Secretary shall ensure that the capital ratio of the MMIF is 
maintained at not less than 2 percent. The ratio has fallen below this 
threshold, and this is one action of many that FHA is taking to address 
this statutory requirement.
    5. FHA Risk Management. Under section 4(b) of the Department of 
Housing and Urban Development Act,

[[Page 10699]]

the Secretary shall ensure that managers of the FHA are held 
accountable for program operations and risk management along with other 
duties. Because the action proposed by this Notice addresses risk 
management directly, reducing the amount of eligible seller concessions 
is authorized under this statutory provision. As is more fully 
addressed in Section III of this Notice, which discusses the public 
comments received on the July 15, 2010, notice, some program 
participants have expressed concerns that reducing the amount of seller 
concessions may impact the housing market at a time when the market is 
depressed. However, FHA also has obligations to manage the MMIF soundly 
and prudently. The reduction in the amount of seller concessions is 
specifically being implemented to directly meet these statutory 
mandates, and is being done in accordance with specific statutory 
authority governing required funds to close and the mortgagor's ability 
to make the monthly mortgage payments. FHA officials would be remiss in 
their fiscal responsibilities if this action, after thoughtful study 
and analysis of program data and careful review of and taking into 
account the public comments, was not implemented.

D. Reducing Seller Concessions

    Many of the commenters on the July 15, 2010, notice suggested that 
the primary illustration of credit risk for loans with high rates of 
seller concessions was not appropriate because it focused on loans 
insured from 2005 to 2008, and those insurance endorsements had large 
shares with seller-funded downpayment assistance and with lower 
borrower credit scores than are acceptable to HUD today. In response, 
HUD has completed an analysis of 2009 and 2010 loans. These latter 
loans were originated after the use of seller-funded downpayments was 
made illegal, and after lenders tightened their own internal credit 
guidelines to eliminate the low credit score loans that made up a 
sizable portion of FHA insurance activity in the 2005-to-2008 period. 
Loans outside of current HUD policy on minimum borrower credit scores 
also were excluded from the analysis, though they comprised only a 
small number of the 2009 and 2010 loan originations.\6\
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    \6\ These are loans for which borrower credit scores are below 
500, or for which the credit scores are below 580 if the loan-to-
value ratio is above 90 percent.
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    In this new analysis, HUD addresses four key areas: (1) The 
distribution of closing costs and concessions in dollar amounts and in 
percent of property value, for different sized loans; (2) the 
introduction into the FHA portfolio of loans for much larger amounts 
than had been insured in previous years; (3) the juxtaposition of 
closing costs and concessions, by percent of property value; and (4) 
the credit risk associated with different levels of seller concessions.
    To prepare this revised proposal, HUD updated its data analysis to 
use more recent loan originations. While this does not provide the type 
of loan seasoning that demonstrates long-run performance and credit 
risk, as was shown in Table C of the July 15, 2010, notice, it does 
permit differentiation between low- and high-balanced loans to a degree 
not possible with earlier loan originations. Prior to passage of the 
Economic Stimulus Act of 2008, the FHA national loan limit ceiling was 
$369,720; after that, it rose to $729,750, where it remains today, 
which causes HUD to be concerned about credit risk from high dollar 
concession amounts on high balanced loans with high loan-to-value 
ratios.
    For this analysis, HUD developed a data set of borrower-required 
closing costs and seller concessions that covers 74 percent of the two 
million FHA insured home purchase loans originated in 2009 and 2010.\7\ 
To measure credit risk on these loans, HUD focused only on 2009 loan 
originations, which now have as much as 26 months of seasoning. 
Patterns of credit risk already seen in this population are likely to 
persist over the life of the loans.
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    \7\ Loans were excluded from this analysis primarily because HUD 
was not able to discern from the various data submitted by lenders 
the amounts of total borrower required closing costs and/or the 
presence of seller concessions. A small number of loans were 
excluded because borrower credit scores were below current limits 
for FHA eligibility.
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    Table A shows the distribution of borrower-required closing costs 
as a percentage of home value. That information highlights how fixed-
cost factors tend to create percentage amounts that are greatest for 
small balance loans. More than 70 percent of loans of up to $180,000 
have closing costs in excess of 3 percent of property value, while 
among loans above $240,000, the share is just 26 percent.

                  Table A--Borrower Closing Costs--by Loan Amount and Percent of Property Value
                                    [2009-2010 FHA-insured loan originations]
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                                                   Percent of property value (rows sum to 100%) \a\
          Loan amt. ($000)          ----------------------------------------------------------------------------
                                        <=1         2          3          4          5          6          >6
----------------------------------------------------------------------------------------------------------------
<=180..............................       1.35       8.42      19.12      25.51      19.37      11.36      14.88
181-240............................       4.50      20.23      35.59      22.50       9.55       4.25       3.39
241-360............................       8.63      29.80      35.40      15.35       6.26       2.88       1.68
>360...............................      11.81      33.51      29.13      14.02       6.95       3.14       1.44
                                    ----------------------------------------------------------------------------
    All............................       4.45      18.57      30.22      22.03      11.97       6.18       6.57
----------------------------------------------------------------------------------------------------------------
\a\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here,
  except for the final one, represents amounts up to the percentage shown in the column heading.

    Concessions are present in 65 percent of FHA-insured home purchase 
loans. That rate appears to have been fairly constant over time; data 
samples taken by HUD on FY 2000 to 2002 home purchase loans insured by 
FHA show a similar rate of concessions. Table B provides a companion to 
Table A, highlighting the distribution of seller concessions, by size, 
in percent of home value. The greatest rate of use of concessions is 
for loan amounts up to $240,000, and the greatest share of concessions 
for amounts above 3 percent of property value are for the lowest loan 
amount categories shown there, and especially for loan amounts up to 
$180,000.

[[Page 10700]]



                                              Table B--Seller Contributions as a Percent of Property Value
                                                        [2009-2010 FHA-insured loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Percent of property value \a\ (rows sum to 100%)
                        Loan amt. ($000)                         ---------------------------------------------------------------------------------------
                                                                    0 \a\        1          2          3          4          5          6        >6 \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180...........................................................      34.02       2.55       8.29      21.25      16.43       8.95       8.03       0.48
181-240.........................................................      32.74       6.04      16.43      27.59      11.98       3.47       1.65       0.09
241-360.........................................................      38.79       9.52      21.51      21.38       6.18       1.58       0.99       0.05
>360............................................................      47.28      12.54      18.96      13.93       3.73       1.91       1.61       0.04
All.............................................................      34.66       5.76      14.76      24.15      12.15       4.81       3.50       0.20
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here, except for the final one, represents
  amounts up to the percentage shown in the column heading.
\b\ Shares of loans with rates of closing costs and concessions above 6 percent rose in 2010 in conjunction with a higher share of loans on properties
  with purchase prices below $50,000.

    Table C juxtaposes information from Tables A and B to show how 
concession rates align with closing-cost rates. Shaded cells represent 
loans for which concessions are generally larger than the closing 
costs. Those account for 7 percent of all loans and 10 percent of loans 
with concessions. Table C also shows that the largest single 
concentration of loans (13.77 percent) is found where both closing 
costs and concessions are between 2 and 3 percent of home value. As 
seen in Table A, closing costs occur in this range for more than 30 
percent of all home-purchase loans insured by FHA. Table B shows that 
concessions in this range represent 24 percent of all subject loans, 
and 37 percent of loans with concessions. The next largest 
concentrations seen in Table C (for loans with positive concessions) 
are for loans where closing costs and concessions are both between 1 
and 2 percent of property value (7.62 percent), and those where each 
measure is between 3 and 4 percent of property value (7.21 percent). 
The next highest concentrations also are adjacent to the most populated 
group.

                                   Table C--Borrower Closing Costs and Concessions, in Percentage of Property Value a
                                                        [2009-2010 FHA-insured loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Concessions rates (% of value)
            Closing cost rate (% of value)            ----------------------------------------------------------------------------------------    All
                                                         0 \b\       <=1         2          3          4          5          6          >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................       2.21       1.10       0.33       0.50       0.21       0.06       0.04       0.00       4.45
2....................................................       7.03       1.57       7.62       1.52       0.57       0.15       0.10       0.01      18.57
3....................................................       8.99       1.66       4.00      13.77       1.23       0.35       0.20       0.01      30.22
4....................................................       6.74       0.81       1.66       4.72       7.21       0.49       0.37       0.02      22.03
5....................................................       4.06       0.35       0.65       1.98       1.67       2.84       0.41       0.02      11.97
6....................................................       2.38       0.15       0.27       0.88       0.72       0.53       1.23       0.02       6.18
9....................................................       3.25       0.12       0.23       0.77       0.54       0.39       1.15       0.13       6.57
All..................................................      34.66       5.76      14.76      24.15      12.15       4.81       3.50       0.20     100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Property value is the lesser of purchase price and appraisal amount.
\b\ Any amount up to $500 is considered zero.

    Table D provides summary statistics on the dollar amounts of 
closing costs and concessions, by the same four loan-amount classes 
shown in Tables A and B.

          Table D--Borrower Closing Costs and Seller Concessions Descriptive Statistics by Loan Amount
----------------------------------------------------------------------------------------------------------------
                                                                                Percentiles
       Loan amt. ($000)            Cost or        Loans   ------------------------------------------------------
                                  concession                  5th        25th       50th       75th       95th
----------------------------------------------------------------------------------------------------------------
                                                 Dollar Amounts
----------------------------------------------------------------------------------------------------------------
<=180........................  Cost...........    449,548      1,489      2,561      3,435      4,476      6,904
                               Concession.....    449,548          0          0      2,049      3,251      4,900
181-240......................  Cost...........    748,048      1,789      3,385      4,571      6,054      9,594
                               Concession.....    748,048          0          0      3,000      4,703      7,012
241-360......................  Cost...........    203,623      2,335      4,759      6,586      8,933     14,610
                               Concession.....    203,623          0          0      3,150      6,468     10,062
>360.........................  Cost...........     69,346      3,209      6,794      9,795     14,253     23,702
                               Concession.....     69,346          0          0      1,527      8,155     16,453
----------------------------------------------------------------------------------------------------------------
                                            Percentage of Home Value
----------------------------------------------------------------------------------------------------------------
<=180........................  Cost...........    449,548       1.60       2.84       3.82       5.09       8.01
                               Concession.....    449,548       0.00       0.00       2.44       3.50       5.71

[[Page 10701]]

 
181-240......................  Cost...........    748,048       1.04       2.01       2.71       3.56       5.53
                               Concession.....    748,048       0.00       0.00       1.75       2.87       4.04
241-360......................  Cost...........    203,623       0.81       1.66       2.27       3.05       4.90
                               Concession.....    203,623       0.00       0.00       1.11       2.23       3.49
>360.........................  Cost...........     69,346       0.70       1.51       2.12       3.03       4.92
                               Concession.....     69,346       0.00       0.00       0.33       1.83       3.54
----------------------------------------------------------------------------------------------------------------

    Tables E-G parallel Tables A-C and provide performance information 
for loans originated in 2009.\8\ The defining metric is a ``failure'' 
rate, which includes all loans that have either resulted in an 
insurance claim (as of March 31, 2011), are presently in foreclosure 
processing, or else have gone through the foreclosure process but the 
insurance claim has not yet been filed or processed. HUD adopted this 
metric because present economic circumstances are resulting in delays 
both in foreclosure completions and in claim filings. In addition, 
focusing on such ``failures'' is more directly associated with losses 
to the FHA insurance operations than are delinquency rate measures.\9\
---------------------------------------------------------------------------

    \8\ Loans originated in 2010 are still too new for there to be 
defined performance patterns. The 2009 loans comprise 51.6 percent 
of the cases in this analysis.
    \9\ HUD recognizes that not all loans for which a foreclosure 
process is started will result in loss of a home to the borrower and 
claim payment from FHA. However, the various rates at which 
foreclosure actions have been initiated do provide a valid measure 
for differentiating credit risk across groups of loans.
---------------------------------------------------------------------------

    These tables show that, within each loan amount category, credit 
risk is highest for loans with larger closing costs and with larger 
concessions. For loan amounts above $240,000, credit risk rises faster 
and higher than it does for lower loan amounts, as closing cost and 
concessions each exceed 3 percent of property value. Table F shows that 
while the lowest risk loans are those in the highest loan amount 
category (above $360,000), when no concessions are present, the highest 
risk is for the same category of loans when concessions are above 4 
percent of property value, and especially when they are above 5 
percent. In Table E, the highest loan-amount group also shows the 
highest credit risk of all is when closing costs exceed 4 percent.

                                     Table E--To-Date Failure Rates a by Loan Amount and Borrower Closing Cost Rates
                                                                [2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower closing cost (percent of property value \b\)
                 Loan amt ($000)                 -------------------------------------------------------------------------------------------     All
                                                      <=1           2            3            4            5            6            >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180...........................................         0.92         0.81         0.99         1.11         1.11         1.19         0.99         1.04
181-240.........................................         0.65         0.70         0.79         0.91         0.74         1.04         0.98         0.79
241-360.........................................         0.61         0.79         0.92         1.03         1.12         1.24         1.48         0.88
>360............................................         0.63         0.62         0.86         1.22         1.70         3.73         2.32         0.93
All.............................................         0.66         0.73         0.85         1.00         0.98         1.20         1.02         0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
  completed and a claim filing is pending. Data as of March 31, 2011.
\b\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here, except for the final one, represents
  amounts up to the percentage shown in the column heading.


                                      Table F--To-Date Failure Rates a by Loan Amount and Seller Concessions Rates
                                                                [2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Seller concessions (percent of property value \b\)
                   Loan amt. ($000)                   ----------------------------------------------------------------------------------------    All
                                                         0 \b\       <=1         2          3          4          5          6          >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180................................................       0.72       1.12       1.01       1.03       1.18       1.41       1.58       2.15       1.04
181-240..............................................       0.62       0.67       0.73       0.87       1.04       1.09       1.45       1.71       0.79
241-360..............................................       0.70       0.79       0.82       1.03       1.48       1.85       1.51       2.27       0.88
>360.................................................       0.58       0.91       0.76       1.15       1.53       2.24       6.70   \c\ 0.00       0.93
All..................................................       0.66       0.77       0.80       0.94       1.14       1.32       1.66       2.02       0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
  completed and a claim filing is pending. Data is as of March 31, 2011.
\b\ Any amount up to $500 is considered zero; other categories represent amounts greater than the next lower limit, and up to the percentage listed;
  rows add to 100 percent.
\c\ There are just 19 loans in this cell.


[[Page 10702]]


                                Table G--To-Date Failure Rates a by Closing Cost (CC) and Seller Concessions (SC) Rates b
                                                                [2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Seller concessions (%)
                  Closing costs (%)                   ----------------------------------------------------------------------------------------   by CC
                                                         0 \c\       <=1         2          3          4          5          6          >6        rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
<= 1.................................................       0.55       0.69       0.57       0.80       1.05       1.36       1.28       4.35       0.66
2....................................................       0.63       0.70       0.80       0.73       0.79       1.32       1.11       0.00       0.73
3....................................................       0.65       0.84       0.70       0.99       1.06       1.08       1.40       1.11       0.85
4....................................................       0.73       0.85       1.00       0.89       1.25       1.02       1.88       2.68       1.00
5....................................................       0.61       1.00       0.90       0.80       0.90       1.44       1.64       2.74       0.98
6....................................................       0.80       0.87       1.22       1.07       1.09       1.18       1.86       3.25       1.20
>6...................................................       0.73       1.41       1.26       0.85       0.75       1.38       1.48       1.70       1.02
by SC rate...........................................       0.66       0.13       0.39       0.73       0.43       0.20       0.19       0.01       0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
  completed and a claim filing is pending. Shaded cells represent loans for which concessions are larger than closing costs. Data is as of March 31,
  2011.
\b\ Rates are in percent of property value (lesser of purchase price and appraisal amount).
\c\ Any amount up to $500 is considered zero; other categories represent amounts greater than the next lower limit, and up to the percentage listed;
  rows add to 100 percent.

E. Establishing the Seller Concession Percentage Cap and Dollar 
Limitation

    The Department recognizes that an across-the-board reduction in 
concession allowances could have a large negative impact on the ability 
of low- and moderate-income households to purchase moderate-priced 
homes. Thus, HUD is revising its proposed limitation on seller 
concessions to address comments to that effect that were provided in 
response to the July 15, 2010, notice. Many comments recommended that 
HUD combine a percentage cap with a dollar limitation. Such a two-part 
proposal could directly address the higher credit risk of high-balance 
loans with large seller concessions, while maintaining a sufficiently 
high allowance for the reasonable range of closing costs found on 
moderate-priced homes. Such a two-part approach would:
    (1) Reduce the amount of concessions a seller (or other interested 
third party) could provide that would be considered in excess of actual 
closing costs or inducements to sale, and
    (2) Minimize the impact that such a reduction might have on 
affordability and access to homeownership for first-time homebuyers 
needing the low downpayments permitted by FHA in what is still a 
fragile housing market.
    To determine a reasonable percentage cap and dollar limitation, HUD 
compared the range of actual closing costs for homebuyers with FHA-
insured mortgages, as seen in Table D, with the credit risk 
characteristics of loans with high concessions found in Tables F and G. 
The result is a new proposal permitting concessions as offsets to 
actual closing costs on individual loans up to the greater of 3 percent 
or $6,000 of the lesser of the sales price or appraised value. In 
mathematical terms, this limitation can be described as:
    Minimum [closing--cost, maximum ($6,000, 0.03* property--value)] 
where property--value = min (sale price, appraised value) except for 
203k where property--value = appraised--value.
    Under this proposal, the limiting factor on the allowable dollar 
amount of concessions will be:
    <bullet> Closing costs, when the amount is less than $6,000;
    <bullet> Closing costs, when they are above $6,000 but less than 3 
percent of property value;
    <bullet> $6,000, when that is more than 3 percent of property value 
and less than total closing costs; or
    <bullet> 3 percent of property value, when that amount is both 
greater than $6,000 and less than closing costs.
    Table H provides some benchmark values for understanding how this 
proposal would affect homebuyers with minimum downpayments, at 
different loan amounts. For the homebuyer with a $120,000 mortgage 
(buying a $126,000 home), concessions would be considered offsets to 
actual closing costs where closing costs are as high as $6,000, or 4.78 
percent of the home value. The loan amount after which the 3 percent of 
property value is greater than $6,000 is $194,930 (buying a $200,000 
home). For all larger loan amounts, a borrower may use concessions as 
offsets to actual closing costs up to 3 percent of property value. At 
$360,000, concessions may be used to offset actual closing costs, up to 
$11,304. For a very high loan amount of $600,000, the 3 percent 
concessions allowance is $18,000.

                         Table H--Components of the Proposed Limit on Seller Concessions
                                       [Examples at various loan amounts]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Loan Amount \a\................................     $120,000     $180,000     $194,930     $240,000     $360,000
Property Value \b\.............................     $125,596     $188,394     $200,000     $251,192     $376,788
$6,000 as a % of Value.........................        4.78%        3.18%        3.00%        2.39%        1.59%
3.0% of Value..................................       $3,768       $5,652        $6000       $7,536      $11,304
----------------------------------------------------------------------------------------------------------------
\a\ Presumed to include the FHA Upfront Mortgage Insurance Premium of 1 percent.
\b\ Based upon borrower making the minimum downpayment of 3.5 percent. (Calculated as loan--amount/(0.965/1.01),
  to also account for the typical financing of the 1 percent upfront insurance premium.)

    Referring again to Table D, the $6,000 limitation is generous to 
borrowers with loan amounts up to $180,000. In that range, $6,000 is 
beyond the 90th percentile of all borrower closing costs. Thus, less 
than 10 percent of borrowers with loan amounts under $180,000 would 
have concession allowances that are less than their actual closing 
costs. For borrowers in the next loan amount category ($180,000-
240,000), $6,000 nearly reaches the 75th percentile of

[[Page 10703]]

closing costs. However, $6,000 is not the binding limit for borrowers 
with loan amounts of $195,000 or greater (see Table H). In that range, 
3 percent of the property value is greater than $6,000 and becomes the 
amount that is compared with actual closing costs to determine maximum 
allowable concessions.
    Table I illustrates the impact of this revised proposal to the 
existing concessions limitation and at different sales prices under the 
proposed reduction. Concessions are more generous than the existing 6 
percent limitation for sales prices below $100,000. For sales prices 
between $100,000 and $200,000, the dollar cap allows for seller 
concessions greater than 3 percent. Any sales price above $200,000 is 
limited to the 3 percent cap.

                            Table I--Comparison of Limitations on Seller Concessions
----------------------------------------------------------------------------------------------------------------
                                                     Existing      Proposed reduction of  seller     Proposed
                                                      seller      concessions is  the greater of  percentage cap
                                                    concessions  -----------------------------------------------
                   Sales price                      limitation
                                                 ----------------   3.0 percent       $6,000             %
                                                     6 percent
----------------------------------------------------------------------------------------------------------------
$100,000........................................          $6,000          $3,000          $6,000             6.0
$120,000........................................           7,200           3,600           6,000             5.0
$140,000........................................           8,400           4,200           6,000             4.3
$160,000........................................           9,600           4,800           6,000            3.75
$180,000........................................          10,800           5,400           6,000             3.3
$200,000........................................          12,000           6,000           6,000             3.0
$220,000........................................          13,200           6,600           6,000             3.0
$240,000........................................          14,400           7,200           6,000             3.0
$260,000........................................          15,600           7,800           6,000             3.0
$280,000........................................          16,800           8,400           6,000             3.0
$300,000........................................          18,000           9,000           6,000             3.0
----------------------------------------------------------------------------------------------------------------

    The actual effects of the proposed limitation, when applied to the 
2009 and 2010 loan originations used in this analysis, are shown in 
Tables J and K. Overall, the limitation would have affected just 13.4 
percent of those home purchase loans. The dollar size of the resulting 
excess contributions is shown in Table J. For the lowest loan amount 
group, the median effect is under $1,000; for the highest loan amount 
group, it is above $4,000. However, as seen in Table K, among the 9.7 
percent of borrowers with loan amounts up to $180,000 that are 
affected, the binding constraint that creates excess concessions is the 
actual amount of closing costs in nearly all of those situations (93.4 
percent). For the fewer than 7 percent of the affected borrowers in 
this group, the $6,000 dollar limitation is greater than their closing 
costs. For loan amounts above $240,000, the share of affected loans 
constrained by closing costs is more closely balanced with the share 
that is constrained by 3 percent of property value (56 and 44 percent, 
respectively).

                                         Table J--Proposed Concessions Limitation, Affects by Loan Size Category
                                                              [2009-2010 FHA-insured loans]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Dollar reductions--at various percentiles (affected loans only)
            Loan amt. ($000)                 Number of    Share of loans -------------------------------------------------------------------------------
                                          loans affected    affected %          5th            25th            50th            75th            95th
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180...................................          43,592             9.7             $86            $480            $988          $1,670          $3,018
181-240.................................         114,726            15.3             116             664           1,434           2,562           4,900
241-360.................................          30,499            15.0             150           1,001           2,247           4,106           8,160
>360....................................           8,819            12.7             327           1,850           4,138           7,541          14,635
--------------------------------------------------------------------------------------------------------------------------------------------------------


     Table K--Proposed Concessions Limitation Source of Constraint on Affected Loans, by Loan Size Category
----------------------------------------------------------------------------------------------------------------
                                                                                Binding constraint
                                                                 -----------------------------------------------
                        Loan amt. ($000)                                          Property value
                                                                  Closing cost %         %        Dollar limit %
----------------------------------------------------------------------------------------------------------------
<=180...........................................................            93.4            0.11             6.5
181-240.........................................................            61.9            12.7            25.5
241-360.........................................................            57.0            43.0            0.04
>360............................................................            54.2            45.7            0.05
All.............................................................            67.7            16.0            16.2
----------------------------------------------------------------------------------------------------------------
Note: Rows sum to 100%.


[[Page 10704]]

F. Considering Alternative Approaches

    There were a variety of alternative approaches suggested by 
commenters. Some commenters recommended that HUD defer instituting a 
cap in favor of monitoring the performance of loans with seller 
concessions for a period of 2 years. Others suggested adopting the cap 
used by other federal programs such as the Department of Veterans 
Affairs Home Loan Program or capping seller concessions based on the 
buyer's credit score. While these alternatives to the proposed 
reduction all had merit, HUD believes that they do not sufficiently 
address the risk to the MMIF and/or they do not adequately mitigate the 
impact that a reduction in seller concessions may have had on the 
housing market. In considering all of the alternative approaches, HUD 
sought to achieve both of these goals. The comments that recommended 
combining a percentage cap with a dollar limitation met these goals and 
provided HUD the opportunity to revise this proposal in a manner that 
would both benefit the housing market and FHA's Mutual Mortgage 
Insurance Fund.
    Section III of this notice discusses all of the significant issues 
raised by the public comments regarding the July 15, 2010, notice's 
proposed reduction in the allowable amount of seller concessions, and 
HUD's responses to these issues.

III. Discussion of the Public Comments Regarding Proposed Reduction in 
Sellers Concessions

A. Support for Proposed Limit on Seller Concessions

    A minority of the comments expressed support for reducing seller 
concessions. The commenters wrote that the cap would require a more 
serious commitment from borrowers and should also help reduce risks to 
the FHA insurance funds.
    HUD Response. HUD appreciates the support for reducing seller 
concessions. It believes that this reduction will reduce risk to the 
MMIF, while at the same time preserving FHA's mission of helping 
underserved borrowers obtain affordable home financing.

B. Proposed Cap Will Be Ineffective and Harmful

    Comment: HUD failed to provide adequate justification for the 
proposed reduction, and reducing seller concessions will not result in 
reduced risk to FHA. Several commenters questioned HUD's stated 
rationale for limiting seller concessions. The commenters wrote that 
the data provided in the July 15, 2010, notice regarding the seller 
concession cap failed to demonstrate a significant risk to the FHA 
portfolio to justify the change. Further, commenters questioned the 
accuracy of the statistical data illustrating the correlation between 
higher seller concessions and an increased rate of default.
    HUD Response. HUD has amended its proposal in response to these 
comments. The Department conducted a more complex analysis of portfolio 
performance involving seller concessions, which revealed that the risk 
to the MMIF increased for loans with larger closing costs and 
concessions. Table E demonstrates that for loan amounts in excess of 
$240,000 for FY 2009, credit risk rises faster and higher than it does 
for lower loan amounts when closing costs and concessions exceed 3 
percent. Table F shows that the highest risk exists with loans greater 
than $360,000 and concessions are above 4 percent.
    Comment: Proposed cap does not address true problems in the housing 
market. Several commenters wrote that the proposed cap will be 
ineffective because it fails to address the true causes of increased 
defaults. Some of these commenters wrote that unscrupulous lending 
practices were primarily responsible for the increased mortgage 
defaults, while other commenters pointed at artificially inflated 
appraisals and sales prices.
    HUD Response. HUD has amended its proposal in response to these 
comments. The Department agrees that reducing seller concessions alone 
will not address the true problems associated with increased defaults 
and the volatility in the housing market. However, this revised 
proposal, in conjunction with other efforts to strengthen enforcement 
actions and reduce risk, will help ensure that borrowers relying on 
FHA-insured financing have sufficient investment in their home 
purchases and are therefore less likely to default. This revised 
proposal will also help curtail a practice where seller concessions are 
offered an amount above the borrower's actual costs as an offset to a 
higher sales price.
    Comment: Proposed cap will harm the housing market. Several 
commenters wrote that the proposed cap could have a chilling effect on 
the origination of new mortgages. Commenters wrote that reducing seller 
concessions from 6 percent to 3 percent would reduce the qualified 
borrower pool and remove a large portion of borrowers who would 
otherwise be approved under stringent underwriting requirements. The 
commenters wrote that many FHA buyers require the seller's contribution 
in order to proceed with the purchase of the home. Additionally the 
reduction in sellers concessions, some commenters argued, could result 
in less money available for post-purchase incidentals including home 
improvements and emergencies.
    HUD Response. HUD amended its proposal in response to these 
comments. HUD recognizes that borrowers with lower loan amounts were 
more negatively impacted by the initial proposal from the July 15, 
2010, notice than borrowers with high loan amounts. However, as 
evidenced in Tables A, B, C, and D, the impact of any change to seller 
concessions would not be as great as indicated by the commenters. As 
shown in Table C, the largest single concentration of loans (13.77 
percent) is where both closing costs and concessions are between 2 and 
3 percent of home value. In Table A, closing costs occur in this range 
for more than 30 percent of all home purchase loans insured by FHA. 
Table B shows that concessions in this range represents 37 percent of 
loans with concessions. The next largest concentration is for loans 
where closing costs and concessions are between 1 and 2 percent of 
property value (7.62 percent). Table A highlights how fixed cost 
factors tend to create percentage amounts that are greatest for small 
balance loans. Over 70 percent of loans of up to $180,000 have closing 
costs in excess of 3 percent of property value. This difference is 
attributed to the fact that many closing costs are fixed (e.g., 
appraisals, title services, inspections, and flood and lien 
certifications), and not a percentage of loan amount (e.g., origination 
charge, title insurance). Therefore, the revised proposal allows for 
greater than 6 percent seller concessions on loans with a sales price 
of less than $100,000 and allows for seller concessions greater than 3 
percent for loans with a sales price up to $200,000. It is anticipated 
that this revised proposal will minimize, if not eliminate, the 
concerns that a reduction in seller concessions would have a negative 
impact on the housing market. Also, this proposal will assist borrowers 
who are less able to absorb the post-purchase financial costs of home 
improvements and emergency repairs, by not requiring them to devote all 
available funds to the acquisition of the home.
    Comment: Reduction in seller's cap will disproportionately impact 
low-income and first-time homebuyers. Several commenters suggested that 
the proposed seller concession cap will unfairly impact low-income and 
first-time homebuyers. The reduction from 6 percent to 3 percent will 
impact less

[[Page 10705]]

expensive properties and have a disparate impact on lower income 
borrowers and potential homeowners purchasing homes worth less than 
$150,000. The cap will burden low income buyers and require a higher 
percentage of cash relative to buyers purchasing more expensive homes. 
Additionally, commenters wrote that first-time homebuyers are less 
likely to have cash available to meet closing costs. The commenters 
wrote that these buyers rely heavily on the 6 percent seller's 
concessions and will experience a greater decrease in buying power than 
second- or third-time buyers.
    HUD Response. HUD has amended its proposal in response to these 
comments and agrees that an across-the-board reduction in seller 
concessions had a disproportionately negative impact on low- and 
moderate-income borrowers purchasing lower priced homes. As noted in 
previous responses, this revised proposal allows for greater than 6 
percent seller concessions on loans with sales prices less than 
$100,000 and allows for seller concessions greater than 3 percent for 
loans with sales prices up to $200,000 (See Table I).
    Comment: Proposed cap fails to consider regional differences in 
housing markets. Several commenters wrote that the reduction in seller 
concessions to 3 percent should be reevaluated to account for varying 
home prices regionally. Commenters wrote that closing costs, taxes, and 
insurance vary greatly by state. The commenters wrote that the 3 
percent cap will have a variable impact on buyers depending on the 
regional market and that HUD should consider a more flexible market-
driven approach.
    HUD Response. HUD does not engage in regional eligibility and 
underwriting standards based on local market conditions. FHA's role in 
stabilizing the current housing market is due to the fact that its 
programs are available under the same terms and conditions regardless 
of the borrower's and subject property's location. However, HUD does 
recognize that there are regional differences in the housing market 
and, therefore, it crafts its policies by taking these differences into 
consideration. HUD analyzed FHA loans from both high-cost and low-cost 
states and used a reasonable range (25th percentile to 75th percentile) 
to determine the appropriate cutpoints. HUD also reviewed various 
external closing cost studies such as by Bankrate.com and analyzed 
additional external data provided by an FHA-approved lender. HUD is 
confident that its own analysis is consistent with other reliable 
closing costs studies.

C. Alternative Approaches

    Comment: HUD should defer instituting a cap. Several commenters 
wrote that the analysis provided in the July 15, 2010, notice was 
conducted prior to the implementation of other recently enacted FHA 
risk management initiatives and, therefore, does not take the 
beneficial impact of such changes into account. The commenters 
questioned whether the increase in average default rates was caused by 
the difference in seller concessions or by some other factor such as 
lower borrower credit scores. The commenters proposed that HUD delay 
implementing the 3 percent cap until the results and impacts of the 
other recently implemented FHA risk change can be tracked. Commenters 
suggested that HUD analyze the performance of loans left at a 6 percent 
cap for 2 years prior to instituting the change.
    HUD Response. HUD has amended its proposal in response to these 
comments. HUD believes that it has completed the necessary due 
diligence in proposing a reduction in seller concessions, from 
analyzing the impact on its portfolio to the impact a reduction would 
have on the housing market. As part of the analysis for this revised 
proposal, which includes performance data from FYs 2009 and 2010, HUD 
did not include loans it no longer insures, such as those with credit 
scores below 580 and LTVs greater than 90 percent, as well as those 
with seller-funded downpayment assistance. By eliminating these loans 
from the analysis, HUD was able to analyze seller concessions and their 
impact on the portfolio without skewing the data with known factors 
that more likely contributed to the default and claim. Readers are 
referred to the discussion in Section II that illustrates the need to 
make these reductions while at the same time preserving the 6 percent 
cap for those borrowers who need it the most; i.e., low- and moderate-
income borrowers purchasing lower priced homes.
    Comment: HUD should allow for gradual reduction of seller 
concessions. Commenters recommended that if HUD plans to implement the 
reduction in seller concessions, that a gradual approach be used. 
Commenters argued that the 3 percent reduction would result in many 
buyers being priced out of the market. Commenters argued that a gradual 
approach would protect potential buyers and would allow HUD to study 
the impact of each change.
    HUD Response. HUD believes that its revised proposal has 
essentially the same effect the commenters are seeking, ensuring that a 
reduction to seller concessions has minimal impact on the housing 
market and that borrowers who need additional assistance in purchasing 
a home may receive it. As stated previously, this revised proposal 
allows for seller concessions greater than 6 percent on loans with 
sales prices less than $100,000 and permits seller concessions greater 
than 3 percent for loans with sales prices up to $200,000 (See Table 
I).
    Comment: Cap seller concessions by dollar amount in addition to 
percentage. Several commenters wrote that providing a dollar range in 
addition to a percentage would resolve regional and economic disparity 
issues posed by the proposed 3 percent cap.
    HUD Response. HUD has amended its proposal based on these comments 
and has proposed that seller concessions be reduced to 3 percent or 
$6,000, whichever is the greater (but not to exceed the borrower's 
actual costs). Like the commenters, the Department believes that 
combining a cap based on percentage with a cap based on a dollar amount 
addresses the regional and economic disparities that may have occurred 
with an across-the-board reduction. Readers are directed to the 
discussion in Section II regarding this revised proposal.
    Comment: Base seller concessions on buyer credit score. Several 
commenters suggested that FHA adopt a graduated system for determining 
the allowable amount of seller concessions. Commenters suggested basing 
this graduated system either on income level or credit score. 
Commenters suggested that a graduated approach will more directly speak 
to the correlation between poor credit and default. Rather than reduce 
the seller contribution of FHA transactions to 3 percent universally, 
commenters suggested that FHA adjust the cap using other risk 
identifiers such as correlating the seller concession with credit 
scores.
    HUD Response. HUD believes that limiting seller concessions based 
on the borrower's income level and credit score would not achieve its 
mission of assisting low-income borrowers overcome a chief obstacle to 
purchasing a home: having sufficient funds for a downpayment, as well 
as for paying all of their closing costs. With this revised proposal, 
HUD is striking the appropriate balance between its historic role of 
making it easier for families to purchase their homes, while at the 
same time ensuring that they have sufficient investment in their home 
purchases and are therefore less likely to default.
    Comment: HUD should align the seller concession cap with other 
federal programs. Several commenters

[[Page 10706]]

suggested that if HUD implements a reduction in the allowable amount of 
seller concessions, that it should be reduced to 4 percent. This 
reduction would align it with the Department of Veterans Affairs 
Veterans' Home Loan Program.
    HUD Response. HUD did consider aligning itself with the Department 
of Veterans Affairs Veterans' Home Loan Program but found in its 
analysis that doing so would have resulted in a disproportionately 
negative impact on borrowers purchasing lower priced homes. By 
combining a percent cap with a dollar amount cap, HUD believes that it 
has addressed such disparities and minimizes the impact a reduction in 
seller concessions may have on the market.

IV. Findings and Certification

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this notice 
under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). The notice was determined to be a ``significant regulatory 
action,'' as defined in section 3(f) of the Order (although not 
economically significant, as provided in section 3(f)(1) of the Order).
    As discussed in this preamble, this notice proposes to reduce the 
amount of closing costs a seller may pay on behalf of a homebuyer 
purchasing a home with financing insured by FHA. The increased role of 
FHA in the mortgage lending marketplace, combined with the economic 
difficulties faced by many FHA borrowers, has increased the risk to the 
FHA insurance funds. While HUD has undertaken several steps to mitigate 
this risk and strengthen the financial soundness of the FHA programs, a 
reduced cap on seller concessions remains a vitally needed reform.
    As provided in the economic analysis that accompanies this notice, 
the combined compliance cost for borrowers and sellers under HUD's 
proposal to reduce seller concessions ranges from $21 million to $97 
million. The actual cost of compliance depends greatly on the state of 
the housing mortgage market. Where the mortgage market is healthier and 
private lending is available, the cost of compliance will be at the 
lower end of the range, and concomitantly at the higher end of the 
range in a slowed market in which private lending is substantially 
reduced. With respect to benefits, HUD expects its proposal to help 
prevent foreclosures in the amount of approximately $25 million, and 
prevention of foreclosures means sustainable homeownership. Another 
highly important benefit will be to reduce the net losses to the FHA 
insurance fund resulting from high rates of insurance claims. The total 
gain to FHA from the implementation of HUD's proposal as presented in 
this notice is expected to range from $60 million to $70 million. As 
the current housing market has shown, the importance of maintaining FHA 
as a source of credit for homeownership is a highly important benefit, 
which cannot be overstated.
    Because of the downturn in the housing market, FHA loans are now in 
higher demand as a result of the absence of sufficient private lending 
in the mortgage market. The volume of FHA insurance increased rapidly 
as private sources of mortgage finance retreated from the market. As 
noted earlier in this preamble, FHA's share of the single-family 
mortgage market today is approximately 33 percent--up from 3 percent in 
2007, and the dollar volume of insurance written has jumped from the 
$77 billion issued in that year to $319 billion in 2010. Accordingly, 
over the last several years, FHA's primary contribution to the public 
is to provide a financing source for affordable and sustained 
homeownership when the market is not achieving this goal on its own. 
FHA cannot, however, contribute to sustained homeownership if FHA 
itself is not sustained.
    As has been reported, FHA's capital reserve ratio has fallen below 
the statutorily mandated minimum capital reserve ratio of 2 percent. A 
primary reason why is that the recent demands placed on FHA have 
resulted in increased losses to the FHA insurance fund. FHA has a 
fiduciary duty, imposed by statute, to preserve the MMIF and to 
maintain the capital ratio of the MMIF at not less than 2 percent. In 
brief, FHA must take action to reduce risks and eliminate losses. FHA 
has already taken several steps to reduce risks, and this proposal on 
reduced seller concessions is another such measure to do so and restore 
the MMIF to the statutory minimum capital reserve ratio.
    The full economic analysis is available for review at 
www.regulations.gov. The docket file is available for public inspection 
in the Regulations Division, Office of General Counsel, Department of 
Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, please schedule an appointment to review the 
docket file by calling the Regulations Division at 202-402-3055 (this 
is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal Relay 
Service at 800-877-8339.

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 of 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. 
The notice reduces the seller concessions cap. The benefit of this 
action will be to reduce the net losses due to mortgage defaults. As 
noted in the economic analysis for the notice, few borrowers are served 
in the categories that would be excluded under the new policies, 
relative to the total FHA portfolio. Further, as noted by many of the 
public commenters on the July 15, 2010, notice, the policy changes 
being made by FHA aligns the seller concession cap with that found in 
the conventional mortgage market. The impact of the policy changes 
will, therefore, largely be limited to conforming FHA standards to 
widespread industry practice.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was prepared for the July 15, 2010, notice, in accordance 
with HUD regulations at 24 CFR part 50, which implement section 
102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 
4332(2)(C)). The Finding of No Significant Impact remains applicable to 
this notice and is available for public inspection between the hours of 
8 a.m. and 5 p.m. weekdays in the Regulations Division, Office of 
General Counsel, Department of Housing and Urban Development, 451 7th 
Street SW., Room 10276, Washington, DC 20410. Due to security measures 
at the HUD Headquarters building, please schedule an appointment to 
review the FONSI by calling the Regulations Division at 202-708-3055 
(this is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal 
Information Relay Service at 800-877-8339.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any document that has federalism implications if the 
document either imposes substantial direct

[[Page 10707]]

compliance costs on state and local governments and is not required by 
statute, or preempts state law, unless the agency meets the 
consultation and funding requirements of section 6 of the Executive 
Order. This document would not have federalism implications and would 
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 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This document would not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

    Dated: January 30, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 2012-3934 Filed 2-22-12; 8:45 am]
BILLING CODE 4210-67-P