[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Proposed Rules]
[Pages 9154-9247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3474]




[[Page 9153]]

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Part III





Department of Housing and Development





_______________________________________________________________________



Office of the Secretary



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24 CFR Part 81



The Federal National Mortgage Association (Fannie Mae) and the Federal 
Home Loan Mortgage Corporation (Freddie Mac) Regulations; Proposed Rule

Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / 
Proposed Rules 
[[Page 9154]] 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Secretary

24 CFR Part 81

[Docket No. R-95-1754; FR-3481-P-01]
RIN 2501-AB56


The Secretary of HUD's Regulation of the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac)

AGENCY: Office of the Secretary, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish new regulations 
implementing the Secretary of Housing and Urban Development's 
regulatory authorities respecting the Federal National Mortgage 
Association (``Fannie Mae'') and the Federal Home Loan Mortgage 
Corporation (``Freddie Mac''). Under the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (``the Act''), the Secretary 
has general regulatory authority over Fannie Mae and Freddie Mac 
(``GSEs'').
    Status as a GSE provides substantial advantages to Fannie Mae, 
Freddie Mac, and their shareholders. With such public benefits flow 
public responsibilities. In the Act, Congress set forth a framework to 
ensure that the GSEs fulfill the public purposes set forth in their 
Charter Acts and serve the housing needs of the country, without 
threatening the GSEs' safety and soundness. Under the Act, the 
Secretary is responsible for establishing housing goals to require the 
GSEs to extend access to mortgage credit to very low-, low-, and 
moderate-income families and families in central cities, rural areas, 
and other underserved areas. The Secretary is also responsible for 
advancing fair lending by requiring that the GSEs not discriminate in 
their mortgage purchases because of race, color, religion, sex, 
handicap, familial status, age, or national origin. This regulation 
requires that the GSEs facilitate enforcement of the Fair Housing Act 
and the Equal Credit Opportunity Act (ECOA) by submitting data on 
mortgage lenders to assist investigations of possible Fair Housing Act 
and ECOA violations. The proposed regulation also directs the GSEs to 
undertake remedial action against sellers found to violate the Fair 
Housing Act and ECOA and provides for the Secretary periodically to 
review and comment on each GSE's underwriting and appraisal guidelines. 
In addition, the regulation sets forth the scope of other Secretarial 
responsibilities, including the statutory authority to review and 
approve new programs of the GSEs, obtain data and reports from the GSEs 
on their housing activities, and disseminate publicly information 
related to the GSEs' housing activities while protecting proprietary 
information.

DATES: Comment due date: May 2, 1995.

ADDRESSES: Comments should be sent to Rules Docket Clerk, Office of 
General Counsel, room 10276, Department of Housing and Urban 
Development (HUD), 451 Seventh Street, SW, Washington DC 20410-0500. 
Communications should refer to the docket number and title. Facsimile 
(FAX) comments are not acceptable. A copy of each communication 
submitted will be available for public inspection and copying between 
the hours of 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Harold Bunce, Acting Director, 
Financial Institutions Regulation, Office of Policy Development and 
Research, telephone (202) 708-2770; or, for legal questions, Kenneth A. 
Markison, Assistant General Counsel for Government Sponsored 
Enterprises/RESPA, Office of the General Counsel, telephone (202) 708-
3137; Department of Housing and Urban Development, 451 Seventh Street, 
SW, Washington, D.C. 20410. A telecommunications device for deaf 
persons (TDD) is available at (202) 708-9300. (These are not toll-free 
telephone numbers.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Statement

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget (OMB) for review 
under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). No 
person may be subjected to a penalty for failure to comply with these 
information collection requirements until they have been approved and 
assigned an OMB control number. The OMB control number, when assigned, 
will be announced by separate notice in the Federal Register.
    Public reporting burden for the collection of information 
requirements contained in this rule is estimated to include the time 
for reviewing the instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. Information on the estimated public 
reporting burden is provided under the Preamble heading, Other Matters. 
Send comments regarding this burden estimate or any other aspect of 
this collection of information, including suggestions for reducing this 
burden, to the Department of Housing and Urban Development, Rules 
Docket Clerk, 451 Seventh Street, SW, Room 10276, Washington, DC 20410-
0500; and to the Office of Information and Regulatory Affairs, Office 
of Management and Budget, Attention: Desk Officer for HUD, Washington, 
DC 20503.

I. General

A. Purpose

    This proposed rule would establish new regulations implementing the 
authorities of the Secretary of Housing and Urban Development (``the 
Secretary'') to regulate the GSEs under the GSEs' respective Charter 
Acts (the Federal National Mortgage Association Charter Act (Fannie Mae 
Charter Act), Title III of the National Housing Act, section 301 et 
seq. (12 U.S.C. 1716 et seq.); and the Federal Home Loan Mortgage 
Corporation Act (Freddie Mac Act), Title III of the Emergency Home 
Finance Act of 1970, section 301 et seq. (12 U.S.C. 1451 et seq.) and 
the Federal Housing Enterprises Financial Safety and Soundness Act of 
1992 (``FHEFSSA'' or ``the Act''), enacted as Title XIII of the Housing 
and Community Development Act of 1992 (Pub. L. 102-550, approved 
October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641). 
FHEFSSA substantially changed the Secretary's authorities to regulate 
the GSEs, requiring the Secretary to promulgate new regulations. The 
Secretary proposes these regulations to implement these new 
authorities, to replace the Secretary's current regulations governing 
Fannie Mae and, for the first time, to establish regulations governing 
Freddie Mac.

B. Background

    In 1968, Congress chartered Fannie Mae as a stockholder-owned, 
privately managed corporation to fulfill various public purposes by 
providing a secondary market for home mortgages. In 1970, Congress 
chartered Freddie Mac within the Federal Home Loan Bank System.
    The GSEs' Charter Acts set forth identical purposes for Fannie Mae 
and Freddie Mac<SUP>1 to: (1) Provide stability in the secondary market 
for residential mortgages; (2) respond appropriately to the private 
capital market; (3) provide ongoing assistance to the secondary 
[[Page 9155]] market for residential mortgages (including activities 
relating to mortgages on housing for low- and moderate-income families 
involving a reasonable economic return that may be less than the return 
earned on other activities) by increasing the liquidity of mortgage 
investments and improving the distribution of investment capital 
available for residential mortgage financing; and (4) promote access to 
mortgage credit throughout the Nation (including central cities, rural 
areas, and other underserved areas) by increasing the liquidity of 
mortgage investments and improving the distribution of investment 
capital available for residential mortgage financing.<SUP>2

    \1\Cf. Fannie Mae Charter Act, section 301, to Freddie Mac Act, 
section 301.
    \2\Fannie Mae Charter Act, section 301, and Freddie Mac Act, 
section 301(b).
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1. The Current Fannie Mae Regulations
    In 1978, the Secretary promulgated regulations governing Fannie 
Mae.<SUP>3 These regulations were issued under the authority of the 
Fannie Mae Charter Act and, among other things, implemented the 
Secretary's ``general regulatory power'' over Fannie Mae and 
established other specific regulatory powers of the Secretary, 
including procedures under which the Secretary must approve stock and 
debt issuances, changes to a statutory debt-to-capital ratio, and new 
conventional mortgage programs.<SUP>4 The regulations also require 
Secretarial approval of Fannie Mae's underwriting guidelines to 
implement fair housing requirements and regulate equal opportunity in 
employment.<SUP>5 To ensure that Fannie Mae fulfilled its Charter Act 
purpose of providing a secondary market for home mortgages for low- and 
moderate-income families, the regulations required that 30 percent of 
Fannie Mae's aggregate mortgage purchases be mortgage purchases 
financing housing secured by mortgages located in central cities and 
that 30 percent of its aggregate mortgage purchases be mortgages 
financing housing for low- and moderate-income families.<SUP>6 Housing 
for low- and moderate-income families under the Fannie Mae regulations 
included multifamily housing insured under Federal Housing 
Administration (FHA) programs, housing receiving housing assistance 
payments (HAP), and, for single-family housing, housing purchased at a 
price not in excess of 2.5 times the area median family income.<SUP>7

    \3\24 CFR part 81.
    \4\24 CFR 81.12, 81.14, 81.15, and 81.16(c).
    \5\24 CFR 81.18 and 81.19.
    \6\24 CFR 81.16(d) and 81.17.
    \7\24 CFR 81.2(l).
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2. FIRREA and the Secretary's Assumption of Regulatory Responsibility 
Over Freddie Mac
    Section 731 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (``FIRREA'') (Pub. L. 101-73, approved August 
9, 1989) amended the Freddie Mac Act. The Secretary of HUD was granted 
general regulatory power and essentially the same specific regulatory 
powers with respect to Freddie Mac as the Secretary had respecting 
Fannie Mae, so that the Secretary's regulatory authority was 
``identical, on all relevant matters, to (the Secretary's) regulatory 
power over (Fannie Mae).''<SUP>8

    \8\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2 
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
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3. The Federal Housing Enterprises Financial Safety and Soundness Act
    Congress was concerned about the potential for loss to the 
taxpayers if the GSEs suffered serious losses.<SUP>9 In FIRREA, 
Congress required the Treasury Department, the Congressional Budget 
Office (CBO), and the General Accounting Office to study the regulation 
of the GSEs and present recommendations to the Congress.<SUP>10 These 
studies concluded that the current regulatory authorities over the GSEs 
were inadequate to protect the taxpayer and ensure that the GSEs served 
the public purposes for which they were chartered. All three agencies 
recommended that the Government be granted additional authority to 
regulate the GSEs. The Treasury study formed the basis for a 1991 
Administration proposal to create an independent office within HUD to 
regulate the safety and soundness of the GSEs.

    \9\See, e.g., H.R. Rep. 101-54, Part 1, 101st Cong., 1st Sess. 
389 (1989).
    \10\FIRREA, sections 1004 (Comptroller General study) and 1404 
(Treasury study), and 2 U.S.C. 621 note (Treasury study and CBO 
study).
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    In 1991, the House of Representatives passed H.R. 2900 (102d Cong., 
1st Sess. (1991)), establishing an independent office within HUD to 
regulate the financial safety of the GSEs.<SUP>11 The House bill also 
provided for the establishment of special affordable housing goals to 
ensure that the GSEs meet the unaddressed needs of very low-income 
families and lower-income families in lower income areas.<SUP>12 The 
Senate made substantial revisions to the House bill, including changes 
to clarify the Secretary's authority to establish central cities and 
low- and moderate-income goals and to modify provisions concerning fair 
housing.<SUP>13

    \11\H.R. 2900, section 101.
    \12\Id., at sections 121(n) and 122(l).
    \13\S. 2733, 102d Cong., 2d Sess., sections 502, 504, and 514 
(1992).
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    In 1992--as the Department was preparing regulations governing 
Freddie Mac and revising its Fannie Mae regulations--Congress enacted 
FHEFSSA, which revamped the regulatory structure concerning the GSEs 
and the GSEs' Charter Acts. In FHEFSSA, Congress chose to separate 
authority over the GSEs' safety and soundness from authority to assure 
that the GSEs accomplished their public purposes. FHEFSSA established a 
new Office of Federal Housing Enterprise Oversight (OFHEO) charged with 
new regulatory powers over the financial safety of the GSEs.<SUP>14 
FHEFSSA also granted the Secretary more specific powers and authorities 
over the housing purposes and fair lending responsibilities of the 
GSEs.

    \14\Section 1311, and see, e.g., section 1313. Unless otherwise 
specified, all section cites herein are cites to the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992.
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    The Act granted the Secretary the power to establish, monitor, and 
enforce goals for the GSEs' purchases of mortgages financing housing 
for low- and moderate-income families, housing located in central 
cities, rural areas, and other underserved areas, and special 
affordable housing meeting the unaddressed housing needs of targeted 
families.<SUP>15 Although the authority to establish goals previously 
existed under the Charter Act and was implemented under the current 
Fannie Mae regulations,<SUP>16 FHEFSSA defined and expanded this 
authority. Moreover, the Act provided that the goals would be achieved 
based on income of owners and renters. The regulations, promulgated in 
1978, had allowed a proxy of house price<SUP>17 that was easier to 
achieve.

    \15\See generally, sections 1331-34.
    \16\See 24 CFR 81.16(d) and 81.17.
    \17\24 CFR 81.2(l)(3).
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    Generally, the Act authorizes the Secretary to establish each of 
the goals after consideration of certain prescribed factors relevant to 
the particular goal.<SUP>18 However, for a transition period of 
calendar years 1993 and 1994, the Act established target percentage 
amounts for purchases by the GSEs of mortgages on housing for low- and 
moderate-income families and housing located in central cities--which 
were based on the Fannie Mae regulations--and specific dollar amounts 
for purchases of mortgages on special affordable 
[[Page 9156]] housing.<SUP>19 For the transition years, the Act set 
targets for both GSEs that low- and moderate-income and central cities 
mortgage purchases comprise at least 30 percent of the units financed 
by the GSEs' total mortgage purchases for these years.<SUP>20 The Act 
also set targets for the special affordable housing goals in the 
transition years,<SUP>21 which, unlike the other goals, were set at no 
less than a minimum number of dollars of mortgage purchases rather than 
units financed. For the transition, the Act required that the Secretary 
establish interim goals to improve the GSEs' performances relative to 
the statutory targets, so that the GSEs would meet the targets by the 
end of the transition period.<SUP>22

    \18\Sections 1332(b), 1333(a)(2), and 1334(b).
    \19\Sections 1332(d), 1333(d), and 1334(d).
    \20\Sections 1332(d)(1) and 1334(d)(1).
    \21\Section 1333(d) (1) and (2).
    \22\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
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    The Act also established new fair lending requirements for the GSEs 
under which the Secretary must, by regulation, prohibit the GSEs from 
discriminating in their mortgage purchases because of ``race, color, 
religion, sex, handicap, familial status, age, or national origin, 
including any consideration of age or location of the dwelling or the 
age of the neighborhood or census tract where the dwelling is located 
in a manner that has a discriminatory effect.''<SUP>23 Under the Act, 
the Secretary also must: require the GSEs to submit data to assist the 
Secretary in investigating whether a mortgage lender has failed to 
comply with the Fair Housing Act and the Equal Credit Opportunity Act 
(ECOA); obtain and make available to the GSEs information from other 
regulatory and enforcement agencies on violations by lenders of the 
Fair Housing Act and ECOA; direct the GSEs to take remedial action 
against lenders found to have engaged in discriminatory lending 
practices in violation of the Fair Housing Act or ECOA; and 
periodically review and comment on the underwriting and appraisal 
guidelines of each GSE to ensure that such guidelines are consistent 
with the Fair Housing Act and the Act.<SUP>24

    \23\Section 1325(1).
    \24\Section 1325 (2)-(6).
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    The Act details the Secretary's authority to review and approve new 
programs of the GSEs and establishes procedures under which the GSEs 
may contest determinations on new program requests.<SUP>25 The Act 
affirms the Secretary's authority to require reports from the 
GSEs<SUP>26 and details specific data and reports that the GSEs must 
provide.<SUP>27 The Act assigns the Secretary other responsibilities, 
including establishing a public use data base and implementing 
requirements for the protection of proprietary information provided by 
the GSEs.<SUP>28 The Act also requires the Secretary to establish 
procedures to ensure due process for the GSEs in exercising the 
Secretary's regulatory authorities.<SUP>29

    \25\Section 1322.
    \26\Section 1327.
    \27\See sections 1381 (o and p) and 1382 (r and s).
    \28\Sections 1323 and 1326.
    \29\Sections 1322, 1336, and 1341-49.
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    In light of the $850 billion in mortgage-backed securities that 
were currently outstanding from the GSEs, their $190 billion combined 
mortgage portfolios, and the GSEs' importance to the National economy, 
Congress determined that the taxpayers needed increased protection from 
potential financial losses or risks posed by the GSEs.<SUP>30 The Act 
therefore established a new independent financial regulator for the 
GSEs within HUD--the Office of Federal Housing Enterprise Oversight 
(OFHEO)<SUP>31--to design and administer a stress test for capital 
adequacy and to carry out all regulatory functions to ensure the 
financial safety of the GSEs.<SUP>32 In establishing a new regulatory 
framework for regulation of the GSEs' financial safety and soundness, 
the Act deleted several specific authorities of the Secretary, 
including authority to approve stock offerings, the rate of dividends, 
and changes in the GSEs' debt-to-capital ratio.<SUP>33 The Act assigns 
authority to approve dividends to the Director of OFHEO<SUP>34 and 
replaces the debt-to-capital ratio with a risk-based capital standard 
and stress test administered by the Director of OFHEO.<SUP>35 Under the 
Act, the Secretary retains general regulatory power over both GSEs, 
``(e)xcept for the authority of the Director of the (OFHEO) described 
in section 1313(b) and all other matters relating to the safety and 
soundness of the (GSEs) * * *.''<SUP>36

    \30\See, e.g., S. Rep. No. 102-282, 102d Cong., 2d Sess. 10 
(1992) (hereinafter cited as ``S. Rep.'').
    \31\Section 1311.
    \32\See generally, section 1313.
    \33\Sections 1381 (d)(2), (e)(1), and (k), and 1382(e).
    \34\Sections 1381(d)(2) and 1382(e).
    \35\Sections 1361-64.
    \36\Section 1321.
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4. Previous Proposed Rule
    On August 16, 1991, the Secretary published a proposed rule to 
update the Fannie Mae regulations and establish new regulations 
governing Freddie Mac.<SUP>37 Prior to the promulgation of a final 
rule, the President signed FHEFSSA into law on October 28, 1992. Since 
the new Act required complete revision of the rule, the Secretary is 
withdrawing the former proposed rule and issuing this new proposed 
rule.

    \37\56 FR 41022 (1991).
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5. Interim Housing Goals
    On October 13, 1993, the Secretary published a Notice in the 
Federal Register establishing the interim goals for the GSEs' purchases 
of mortgages financing low- and moderate-income housing, housing in 
central cities, and special affordable housing--applicable to the 
transition years of 1993 and 1994--and requirements for implementation 
of the goals.<SUP>38

    \38\58 FR 53048 and 53072 (1993).
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    For the transition period of 1993 and 1994, the Act established 
annual targets for the purchases by both GSEs of mortgages financing 
housing for low- and moderate-income families and housing located in 
central cities.<SUP>39 The Act set these targets at 30 percent of the 
units financed by mortgage purchases of the GSEs;<SUP>40 the targets 
were based on the goals established under HUD's Fannie Mae 
regulations.<SUP>41 For the transition period, the Act provided that, 
where a GSE was not meeting a target as of January 1, 1993, the 
Secretary must establish the annual goal so that the GSE would improve 
its performance relative to the 30 percent target.<SUP>42 Where a GSE 
was meeting a target, the Act required the Secretary to establish the 
goal so that the GSE would improve its performance relative to the 30 
percent target.<SUP>43 The Act also established dollar targets for the 
GSEs' purchases of mortgages financing special affordable housing, 
i.e., housing meeting the needs of and affordable to low-income 
families in low-income areas and very low-income families.<SUP>44 The 
Secretary established these goals and implementation requirements in 
the Interim Notice published in October 1993.<SUP>45

    \39\Sections 1332(d)(1) and 1334(d)(1).
    \40\Sections 1332(d)(1) and 1334(d)(1).
    \41\24 CFR 81.16(d) and 81.17.
    \42\Sections 1332(d)(2)(A) and 1334(d)(2)(A).
    \43\Sections 1332(d)(2)(B) and 1334(d)(2)(B).
    \44\Section 1333 (a)(1), (d)(1), and (d)(2).
    \45\58 FR 53048 and 53072 (1993).
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    The Notice established the goal that 30 percent of the units 
financed by mortgages purchased by Fannie Mae in 1993 and 1994 should 
be housing for low- and moderate-income families.<SUP>46 The Notice 
also established the goal that 28 percent of units financed by 
mortgages purchased by Fannie Mae in 1993, and 30 percent in 1994, 
should be on housing located in central cities.<SUP>47 For the year 
1993, Fannie Mae exceeded [[Page 9157]] the goal for low- and moderate-
income housing with 35.58 percent and is performing at a rate for 
1994<SUP>48 that likely will result in Fannie Mae's exceeding the goal 
and achieving 40 percent. In 1993, Fannie Mae did not meet the goal for 
central cities and has developed a housing plan to increase its efforts 
for 1994.

    \46\58 FR 53048, 53061 (1993).
    \47\Id. at 53063.
    \48\Fannie Mae's report on its performance under the goal for 
the first three quarters of 1994 provides that 43.29 percent of its 
mortgage purchases count toward achievement of the goal for low- and 
moderate-income families.
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    The Notice established Freddie Mac's goal for purchases of 
mortgages financing housing for low- and moderate-income families at 28 
percent for 1993 and 30 percent for 1994.<SUP>49 The Notice established 
Freddie Mac's goal for purchases of mortgages financing housing located 
in central cities for 1993 at 26 percent and 30 percent for 
1994.<SUP>50 For the year 1993, Freddie Mac exceeded the goal for low- 
and moderate-income housing with 29.18 percent and is performing at a 
rate for 1994<SUP>51 that likely will result in Freddie Mac's exceeding 
the goal and achieving 35 percent. In 1993, Freddie Mac did not meet 
the goal for central cities and has developed a housing plan to 
increase its efforts for 1994.

    \49\58 FR 53072, 53085 (1993).
    \50\Id. at 53088.
    \51\Freddie Mac's report on its performance under the goal for 
the first three quarters of 1994 indicates that 36.31 percent of its 
mortgage purchases count toward achievement of the goal for low- and 
moderate-income families.
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C. Secretary's Approach to Regulating the Enterprises

    The Secretary recognizes that the GSEs occupy a unique position in 
this country's housing finance system. The GSEs were created by the 
Congress, chartered for public purposes and receive significant public 
benefits, but the GSEs are privately owned and operated. Because of 
their status as government-sponsored enterprises, the GSEs receive 
significant benefits not enjoyed by any other shareholder-owned 
corporation in the mortgage market. The explicit benefits the GSEs 
receive include: (1) conditional access to a $2.25 billion line of 
credit from the U.S. Treasury;\52\ (2) exemption from securities 
registration requirements of the Securities and Exchange Commission and 
the states;\53\ (3) exemption from all State and local taxes except 
property taxes;\54\ and (4) higher demand for the GSEs' securities, 
since the Government gives those securities the attributes of and the 
same preferred investment status as Treasury debt.\55\ These explicit 
benefits are far outweighed by an implicit benefit--the market's 
assumption that, even though no explicit Federal guarantee exists,\56\ 
should a GSE fail to meet its obligations, Congress, and ultimately the 
American taxpayer, would assist the GSEs. As a result of this implicit 
guarantee, the GSEs can borrow at near-Treasury rates, and they can 
sell securities at prices that exceed those of wholly private 
firms.\57\ Consequently, the GSEs' cost of doing business is less than 
that of other competitors in the mortgage market.

    \52\Sections 306(c)(2) of the Freddie Mac Act and 304(c) of the 
Fannie Mae Charter Act.
    \53\Sections 306(g) of the Freddie Mac Act and 304(d) of the 
Fannie Mae Charter Act.
    \54\Sections 303(e) of the Freddie Mac Act and 309(c)(2) of the 
Fannie Mae Charter Act.
    \55\See, e.g., 12 CFR 208, App. A, section III.C.2.
    \56\The GSEs' obligations are not guaranteed by the United 
States. See, e.g., sections 1302(4), 1381(f), and 1382(n) (requiring 
each GSE to state in its obligations and securities that such 
obligations and securities ``are not guaranteed by the United 
States'').
    \57\Congressional Budget Office, Controlling the Risks of 
Government-Sponsored Enterprises, at 10 (April 1991).
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    This competitive advantage, combined with the GSEs' solid 
management, has resulted in enormous growth for both GSEs. In 1989, the 
GSEs purchased $171 billion of mortgages; in 1993, $543 billion, a 
three-fold increase. In 1993, the GSEs collectively purchased 70 
percent of the mortgages originated in the conventional conforming loan 
market.\58\ The GSEs' profitability has more than doubled in the same 
period, with combined profits of $2.7 billion in 1993, compared to $1.2 
billion in 1989. At the end of the first quarter of 1994, the combined 
dollar amount of mortgages held in portfolio and mortgage-backed 
securities outstanding between the two GSEs is nearly 2.5 times the 
thrift industry's holdings and twice as large as the holdings by 
commercial banks.\59\

    \58\Fannie Mae Economics Department.
    \59\Commercial banks held $555 billion, thrifts held $458 
billion, and the GSEs held or backed $1,164 billion. Federal Reserve 
Bulletin, Vol. 80, No. 8, Table 1.54, at A38 (August 1994).
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    Because they are publicly created entities that enjoy substantial 
publicly derived benefits, Congress requires the GSEs to carry out 
public purposes not required of other private-sector entities in the 
housing finance industry. The GSEs' Charter Acts require them to assist 
in the efficient functioning of a secondary market for residential 
mortgages, including mortgages for low- and moderate-income families, 
and to promote access to mortgage credit throughout the nation, 
including central cities, rural areas, and other underserved areas. The 
Charter Act requirements create an obligation for the GSEs to ensure 
that citizens throughout the country have the opportunity to enjoy 
access to the public benefits provided by these federally related 
entities.
    The GSEs have been successful at achieving an important part of 
their mission of providing stability in primary mortgage markets and 
bringing liquidity to housing finance markets through standardization 
and the development of mortgage-backed securities. Many home buyers 
have benefitted from lower interest rates and increased access to 
capital as a result of the GSEs' activities. The importance of the 
secondary market and its impact on who is able to buy a home and which 
communities have access to mortgage credit is substantial. Even lenders 
intending to hold loans in portfolio originate loans using the GSEs' 
standards, so that the lenders have the option to sell to the GSEs at a 
future date.
    The Act and the legislative history make clear that the GSEs should 
be serving Americans across the income spectrum and throughout the 
country. The GSEs do an excellent job of facilitating the availability 
of mortgage credit for home buyers with more than moderate incomes and 
for residents of suburban communities. The GSEs must also use their 
entrepreneurial talents and position in the marketplace to ``ensure 
that citizens throughout the country enjoy access to the public 
benefits provided by these federally related entities.''\60\ The GSEs 
are not expected to provide deep subsidies for the financing of 
affordable housing on the scale needed to solve the nation's housing 
problems. However, given the purposes for which Congress created these 
enterprises and the substantial federal benefits that they receive, it 
is essential that the GSEs' activities promote the achievement of 
national housing goals.

    \60\S. Rep. at 34.
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D. Leading the Industry

    During the consideration of the Act, Congress noted its strong 
concern that the GSEs were not doing enough to benefit low- and 
moderate-income families or the residents of underserved areas that 
lack access to credit.\61\ The Act specifically requires that in 
establishing the goals, the Secretary consider the ability of the GSEs 
to lead the industry. The intent of the Congress was clearly stated: 
the GSEs should ``lead the mortgage finance industry in making mortgage 
credit available for [[Page 9158]] low- and moderate-income 
families''.\62\ The Act also clarified the GSEs' responsibility to 
complement the requirements of the Community Reinvestment Act and fair 
lending laws in order to expand access to capital to those 
traditionally underserved by the housing finance market.

    \61\See, e.g., S. Rep. at 34.
    \62\S. Rep. at 34.
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    Fannie Mae and Freddie Mac do not lead the mortgage finance 
industry in expanding housing opportunities for low-income home buyers 
and for families who must rent because they cannot afford to be 
homeowners. The GSEs do not lead the mortgage finance industry in 
providing access to mortgage credit for residents of communities that 
are underserved. But the GSEs can and should provide this leadership. 
As noted in the Act's legislative history, ``the GSEs need to provide 
more leadership in all of these areas, and they have indicated a desire 
to do so. But direct and potentially forceful federal oversight is the 
only way to ensure that it will happen.''\63\

    \63\S. Rep. at 11.
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    The Secretary shares the concern of Congress about the GSEs' level 
of activity in making mortgage credit available for lower-income 
families. Loans originated for families with incomes below 80 percent 
of area median income are less likely to be purchased by the GSEs. Five 
out of six single-family mortgages purchased by the GSEs are for 
borrowers with incomes above 80 percent of area median income. Almost 
60 percent of the GSEs' single-family business is for borrowers with 
incomes above 120 percent of area median income.
    In considering whether the GSEs are leading the industry and in 
establishing the appropriate levels for the housing goals, the level of 
originations by the primary market must be examined. The primary market 
is able to sell to the GSEs more loans for higher-income families than 
loans for lower-income families. Based on 1993 mortgage market data, 
the GSEs purchased 55 percent of the loans originated by the primary 
market for borrowers with incomes above 120 percent of area median 
income, but only 41 percent of the mortgages originated for borrowers 
with incomes less than 60 percent of area median income. This occurred 
notwithstanding that, in response to the Community Reinvestment Act and 
their desire to meet the mortgage needs of a broad range of families, 
lenders are originating many more mortgages for very low- and low-
income families than the GSEs are purchasing.

E. Establishing the Housing Goals

    The Secretary recognizes that both GSEs have improved their 
performance in 1993 in the provision of mortgages financing for low- 
and moderate-income home buyers and central city residents. Both GSEs 
have begun new programs to increase their ability to deliver the 
benefits of their activities to traditionally underserved borrowers. 
These activities are commendable and the Secretary looks forward to 
seeing those initiatives carried forward. Both GSEs have also been 
engaged in initiatives to communicate to lenders that the GSEs' 
underwriting guidelines are not intended to prevent lenders from 
originating loans for previously underserved segments of their 
communities.
    The Secretary notes these initiatives and the performance of the 
GSEs under the 1993 housing goals. Both Fannie Mae and Freddie Mac have 
made progress in carrying out their Charter-required activities to 
expand access to credit. At the same time, greater accomplishments are 
needed to assure that the GSEs fully realize their Charter Act 
purposes. To meet the intent of the Act, the GSEs must purchase more 
loans originated by the market for borrowers with lower incomes.
    The Secretary does not intend that the GSEs do less business for 
borrowers with high incomes in order to increase their purchases of 
mortgages for lower-income families. Given the capacity of the GSEs, a 
tradeoff between high-income and low-income business does not need to 
occur. When the mortgage market spiked to a trillion dollars in volume 
in 1993, the GSEs demonstrated their capacity to expand their volume 
tremendously. The Secretary does not believe that the GSEs will have to 
shrink one portion of their business to expand their focus on achieving 
their Charter purposes of providing access to credit to all Americans.
    This view has also been expressed by James A. Johnson, Chairman and 
Chief Executive Officer of Fannie Mae, in Congressional testimony in 
April 1994:

    It is a governmental frame of reference to assume (Fannie Mae's) 
resources are limited (as appropriations would be for a government 
department) and then to 'assign' them through numerous subgoals to 
categories of need. But the fact that Fannie Mae helps moderate-
income families in no way diverts (Fannie Mae) from supporting low-
income families.\64\

    \64\Testimony before the Committee on Banking, Finance, and 
Urban Affairs, Subcommittee on General Oversight, Investigations, 
and the Resolution of Failed Financial Institutions, U.S. House of 
Representatives, at 17 (April 20, 1994).

    In setting the levels of the housing goals, the Secretary has 
considered carefully the six factors stipulated in the Act: National 
housing needs; economic, housing, and demographic conditions; the 
previous performance and effort of the enterprises in achieving the 
specific goal; the size of the market for that goal; the ability of the 
GSEs to lead the industry; and the need to maintain the sound financial 
condition of the enterprises.\65\ The Secretary has concluded that 
these factors, as well as the requirement that the GSEs lead the 
industry in affirmative efforts to meet the needs of lower-income 
families and residents of central cities, rural areas, and other 
underserved communities, dictate that the levels of the housing goals 
should be increased for 1995-1996. The Secretary considered the 
following factors which are analyzed in detail in the appendices:

    \65\12 U.S.C. 4562.
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    (1) Housing Needs. Homeownership is a key aspiration of most 
Americans. Homeownership fosters family responsibility and self-
sufficiency, expands housing choice and economic opportunity and 
promotes community stability. A homeowner has the most secure physical 
environment in which to raise a family. Children of homeowners are more 
likely to graduate from high school, less likely to commit crime, and 
less likely to themselves have children as teenagers than children of 
renters. Recent surveys indicate that lower-income families and 
minority families who do not own their own homes will make considerable 
sacrifices to purchase a home.
    During the past decade, the goal of homeownership has become more 
elusive for very low-, low-, and moderate-income families. The 
homeownership rate in this country declined from on all-time high of 
65.6 percent in 1980 to 63.9 percent in 1985, where it has remained 
essentially unchanged. The families that bore the brunt of this decline 
in homeownership are households who earn less than the median, 
particularly single-parent households and households with children.
    At the same time, housing needs of families who rent have also 
increased. Finding affordable housing is by far the most common housing 
problem for American families nationwide. Poor households compete for a 
diminishing number of affordable apartments as low-cost units are lost 
to disrepair or are upgraded to serve higher-income renters. The result 
is growing numbers of low-income households who pay high shares of 
their income for [[Page 9159]] inadequate housing. Six million low-
income families paid more than 50 percent of their income for rent, 
leaving them with less money for other necessities like food, clothing, 
health care, and education. The very lowest income renters (families 
with incomes below 30 percent of area median income) are particularly 
hard-hit by high rents relative to their incomes, with over 50 percent 
of these families spending more than half of their income on rent.
    The most unfortunate families have no homes. Precise counts of 
homeless people are not available. An estimated 600,000 people are 
homeless on any given night and as many as seven million Americans have 
experienced homelessness during the late 1980s, some for brief periods 
and some for years.\66\

    \66\Priority: HOME! The Federal Plan to Break the Cycle of 
Homeless, 17 (1994).
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    (2) Economic, Housing, and Demographic Conditions. The Department 
estimates that in 1995 originations for single-family mortgages will be 
$615 billion. The demand for purchase mortgages will increase in 1995 
and 1996, because of demographic trends, including high levels of 
immigration, changing age and family composition of households, the 
growth of the affluent elderly population, and potentially increased 
homeownership by native-born minorities. In addition, although volatile 
interest rates strongly influence both housing starts and mortgage 
market activity, rates that are low by historic standards have improved 
affordability for first-time home buyers, many of whom were closed out 
of the market during the 1980s. Increasing income inequality and 
changes in household composition will continue to create an acute need 
for rental housing affordable to very low-income families, placing 
additional pressure on the widespread shortages of rental housing 
affordable to families with incomes below 30 percent of area median 
income.
    (3) Previous Performance of the GSEs. The GSEs exceeded the 1993 
goals for low- and moderate-income housing. Neither enterprise met the 
central cities goal for 1993. For the special affordable housing goal, 
a two-year goal, both GSEs are on track to meet the single-family 
portion of the goal. Fannie Mae should meet the multifamily portion of 
the goal by the end of 1994. It is unclear whether Freddie Mac will 
meet the multifamily portion of the goal by the end of 1994. The 
Secretary notes that, during the transition period 1993-1994, both GSEs 
have engaged in new marketing efforts, and introduced new programs, 
products, and relationships in an effort to achieve the goals.
    (4) Size of the Conventional Market for Each Goal. The Secretary 
recognizes the importance of accurately determining, to the extent 
possible given current data, the size of the various markets applicable 
to each of the goals. HUD devoted significant analytical resources to 
estimating market shares, using information from four major data 
sources: The 1993 purchases by the GSEs, 1993 HMDA data, the American 
Housing Survey, and the Residential Finance Survey. HUD estimates that 
50 to 55 percent of the mortgage market in 1995-1996 will be composed 
of mortgages from low- and moderate-income households. As a subset of 
that market, at least 17-20 percent of the conventional conforming 
market will be composed of mortgages for very low-income households and 
low-income households in low-income areas. The market share for the 
central cities, rural areas, and other underserved areas goal (as 
redefined) is 21-23 percent.
    (5) Ability of the Enterprises to Lead the Industry. The Secretary 
believes that the GSEs are well-positioned to provide the leadership 
that is needed to encourage the mortgage finance industry to better 
serve very low-, low-, and moderate-income families and residents of 
communities underserved by the mortgage markets. The GSEs' ability to 
lead the industry flows from their dominant role in the mortgage 
market, their ability--through their underwriting standards and new 
programs and products--to influence the types of loans that primary 
lenders are willing to make, their development and use of cutting-edge 
technology, their competent and well-trained staff, and their financial 
resources.
    (6) Need to Maintain the Sound Financial Condition of the 
Enterprises. The enterprises are very substantial corporations as 
measured by their assets and profits. The Secretary has determined that 
the GSEs can accomplish the goals established in this regulation in 
such a way that limited, if any, risk is posed to their safety and 
soundness. The goals would require reasonable increases in the GSEs' 
purchases of mortgages that are affordable to very low-, low-, and 
moderate-income households or finance units located in areas that meet 
the proposed definition of underserved areas. Given the relatively 
small size of the proposed increases compared to their current 
business, the potential increase in the credit risk borne by the GSEs 
will be limited.

F. Setting the Levels of the Housing Goals

    In establishing the housing goals for 1995 and 1996, the Secretary 
balanced the congressionally mandated factors, i.e., size of the 
market, housing needs, safety and soundness considerations, economic 
and demographic conditions, previous performance and the GSEs ability 
to lead the industry.\67\ The Secretary was guided by the overarching 
principle that both enterprises were created by Congress to serve 
public purposes for which they receive public benefits, and that their 
unique status requires that they lead the industry in expanding access 
to mortgage credit for more Americans and communities. The factors and 
the public purposes of the GSEs also require that the GSEs lead the 
industry in affirmative efforts to meet the needs of lower-income 
families and residents of central cities, rural areas, and other 
underserved communities.\68\

    \67\See Appendices A-C for the Secretary's analysis of these 
factors.
    \68\12 U.S.C. 4501.
---------------------------------------------------------------------------

    Based on a consideration of the factors, set forth fully in 
appendices A, B and C to this rule, the Secretary proposes to establish 
the goals for 1995 and 1996 for mortgage purchases for low and moderate 
income housing at 38 percent for 1995 and 40 percent for 1996, the goal 
for mortgage purchases for central cities, rural areas and other 
underserved housing at 18 percent for 1995 and 21 percent for 1996, and 
the goals for special affordable housing at 11 percent for 1995 and at 
12 percent for 1996.
    Based on a consideration of the factors, set forth in the same 
appendices to the rule, the Secretary proposes to establish all three 
goals for 1997 and 1998 so that the goals will move the GSEs steadily 
over a reasonable period of years, including these two years, to a 
level of mortgage purchases where the GSEs will be leading the industry 
in purchasing mortgages meeting the goals. In carrying out this 
objective, the Secretary proposes to establish the goals for 1997 and 
1998 at levels ranging from the same amounts established for 1996 to 
higher levels. The purpose of any higher levels would be to continue to 
move the GSEs toward purchasing a greater proportion of mortgages 
originated by the market. The goals for 1997 to 1998 are therefore 
proposed for comment as a range; in finalizing the goals, the Secretary 
will specify definite figures on this range. In order to finalize the 
goals, the Secretary seeks responses from the public on what ``leading 
the industry'' should mean and what the goals should be over this 
period and in [[Page 9160]] the future to achieve this objective. The 
Secretary anticipates at this time that future market conditions will 
require additional adjustment of the goals by future rulemaking in the 
latter part of the 1990s.
    (1) Should the goals be established so that the GSEs are required 
to lead the industry by buying at least the percentages of mortgages 
that the market originates for each goal? If yes, at what levels and 
over what period should the GSE goals be established to achieve this 
objective and, specifically, at what levels should the 1997 and 1998 
goals be established to meet this objective? In responding, please 
note:
    (A) For the housing goal for low- and moderate-income families--the 
Secretary determined that for 1995 and 1996, 50 percent of the market 
is comprised of mortgages qualifying under this goal.
    (B) For the special affordable housing goal--the Secretary 
determined that for 1995 and 1996, 17-20 percent of the market would be 
mortgages qualifying under this goal.
    (C) For the central cities, rural areas, and other underserved 
areas goal--the Secretary determined that for 1995 and 1996, 21-23 
percent of the market would be mortgages qualifying under this goal.
    (2) Should leading the industry mean and should the goals be 
established for future years so that the GSEs are required to purchase 
(as a percentage of the GSEs' total purchases) a higher percentage of 
mortgages than are originated by the market under each housing goal? 
For example, if 16 percent of the mortgages originated and available 
are expected to be originated for mortgages for very low-income 
families, should the GSEs be expected to purchase, as a percentage of 
their overall business, an amount greater than 16 percent of mortgages 
on housing for very low-income families at some future date? If yes, at 
what levels and over what period should the goals be established to 
achieve this objective and, specifically, at what levels should the 
1997 and 1998 goals be established to achieve this objective? Also, 
what percentage over the market should be required?
    (3) Should the goals be established such that the GSEs purchase an 
equivalent proportion of loans originated by the market for borrowers 
under 80 percent of area median income as they do for borrowers over 
120 percent of area median income? If yes, at what levels and over what 
period should the goals be established to achieve this objective and, 
specifically, at what levels should the 1997 and 1998 goals be 
established to achieve this objective?
    (4) Should the goals be adjusted as the GSEs reach or fail to 
achieve the goals or should the goals be established and the GSEs' 
performance evaluated against relatively fixed goals? If the commenter 
believes that the goals should be adjusted, how frequently or under 
what conditions should the Secretary take action to adjust the goals?
    (5) To what extent should the GSEs' share of the overall mortgage 
market affect the levels of the goals? The GSEs currently purchase 
approximately 70 percent of all conventional, conforming mortgages 
originated. Should the goals increase as the GSEs' market share 
increases? If yes, how should this work? How and in what manner should 
the goals be adjusted?

G. Principles Governing Regulation

    In considering these regulations, the Secretary has set forth the 
following principles:
    (1) To fulfill the intent of the Act, the GSEs should lead the 
industry in ensuring that access to credit is made available for very 
low-, low- and moderate-income families and residents of underserved 
areas. The Secretary recognizes that, to lead the mortgage industry 
over time, the GSEs will have to stretch to reach certain goals, which 
is consistent with the Congressional statement that it ``fully expects 
the enterprises will need to stretch their efforts to achieve'' the 
goals.\69\

    \69\S. Rep. at 35.
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    (2) The Secretary's role as a regulator is to set direction through 
the goals, but not to dictate the products or delivery mechanisms the 
GSEs will use to achieve those goals. Regulating two enormous financial 
enterprises in a dynamic market requires that the GSEs be allowed to 
use their innovative capacities to determine how best to deliver 
products to the primary market. Regulation should allow the GSEs to 
maintain their flexibility and the ability to respond quickly to market 
opportunities in order to meet the goals stipulated by the Secretary.
    (3) Discrimination in lending--albeit often subtle and even 
unintentional--has denied racial and ethnic minorities the same access 
to credit to purchase a home that has been available to similarly 
situated non-minorities. The GSEs have a critical role and position in 
promoting access to capital by minorities and other historically 
underserved groups and demonstrating to other private-sector market 
players the profit potential in these traditionally underserved 
markets.
    (4) In addition to the GSEs' core business of purchasing single-
family-home loans, the GSEs also must assist in the creation of an 
active secondary market for multifamily loans. As noted, this country 
has a critical need for affordable rental housing to provide adequate 
housing for families who cannot afford to become homeowners. 
Availability of capital is a key constraint in the expansion of 
development activity to build more rental housing.
    (5) Parity between the two enterprises in the level of the goals 
they are required to meet should be established. Both enterprises 
operate in the same markets and have similar opportunities to purchase 
mortgages that will satisfy the goals. Freddie Mac has no operational 
or organizational constraints that would prevent it from meeting goals 
that Fannie Mae could meet.\70\

    \70\During the transition period of 1993-1994, the Act 
established annual targets for the purchases by both GSEs of 
mortgages financing housing for low- and moderate-income families 
and housing located in central cities. Sections 1332(d)(1) and 
1334(d)(1). For both GSEs, the Act set identical targets at 30 
percent of the units financed by mortgage purchases of the GSEs. 
Although the targets were identical, the Secretary established 
differential goal levels for Freddie Mac and Fannie Mae, in order to 
allow Freddie Mac sufficient time to reenter the multifamily market 
in a prudent and organized manner. Freddie Mac had announced its 
withdrawal from the multifamily market in 1990. In 1993, Freddie Mac 
announced its reentry into the multifamily market, after it had 
reorganized its multifamily division, greatly increased its 
staffing, implemented new information systems, released a new 
underwriting guide for multifamily properties, and established a 
network of originators and servicers with proven local expertise.
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II. Section-by-Section Discussion of Proposed Changes to Fannie Mae 
Regulations and New Freddie Mac Regulations (Part 81)

Subpart A--General

Section 81.1--Scope of Part
    This section provides that these regulations implement the 
authority of the Secretary concerning the GSEs under the Charter Acts 
and FHEFSSA. The section states that subpart A contains definitions 
applicable to this part; subpart B contains the housing goals; subpart 
C contains Fair Housing requirements; subpart D sets forth program 
review procedures for new programs; subpart E contains requirements for 
reports to the Secretary; subpart F contains regulations dealing with 
access to information; subpart G contains procedures available to the 
GSEs; subpart H contains book-entry procedures; and subpart I contains 
regulations dealing with regulatory examinations and other provisions. 
The section provides that, except where the [[Page 9161]] Secretary and 
the Director of the Office of Federal Housing Enterprise Oversight 
share authority, this part does not implement any authority of the 
Director of OFHEO.
Section 81.2--Definitions
    This section defines terms which are relevant to the Secretary's 
regulatory authorities. These terms relate to the housing goals, fair 
housing/fair lending, new program approval, and collection, 
dissemination and protection of GSE information furnished to the 
Secretary. Some of the terms are defined in FHEFSSA, some are defined 
under the Freddie Mac Act and the remainder were defined for these 
regulations.
    The Freddie Mac Act defines terms that are relevant to both GSEs 
although the same terms are not defined under the Fannie Mae Charter 
Act. The legislative history of FIRREA indicates that Congress intended 
that competitive parity exist between the GSEs and that the regulatory 
power granted to the Secretary be identical for both GSEs.<SUP>71 The 
proposed regulation, therefore, defines terms the same for both GSEs 
even where the definitions were originally provided in the Freddie Mac 
Act.

    \71\H.R. Rep. No. 101-54, 101st Cong., 1st Sess., pt. 3, at 2 
(1989), and S. Rep. No. 101-19, 101st Cong., 1st Sess. 38 (1989).
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    Defined terms that are relevant to all of the housing goals include 
``Balloon mortgage'', ``Conventional Mortgage'', ``Dwelling unit'', 
``Mortgage'', ``Mortgage purchase'', ``Multifamily Housing'', 
``Refinancing'', ``Rental housing'', ``Residence'', ``Seasoned 
mortgage'', ``Single family housing''. ``Conventional mortgage'' is 
defined as a mortgage other than a mortgage as to which a GSE has the 
benefit of any guaranty, insurance or other obligation by the United 
States. ``Mortgage purchase'' is defined as a transaction where a GSE 
buys or otherwise acquires with cash or other thing of value a mortgage 
for its portfolio or for securitization. ``Multifamily housing'' means 
a residence having more than four dwelling units. ``Single family 
housing'' is a residence consisting of one to four dwelling units.''
    Terms relating to the low- and moderate-income housing goals 
include ``Low-income'', ``Median income'', ``Moderate income'', 
``Rent,'' ``Utilities,'' and ``Utility allowance''. The term ``Low-
income'' is defined as income not in excess of 80 percent of area 
median income, adjusted for family size for rental units but unadjusted 
for owner-occupied units. ``Median income'' means, with respect to an 
area, the unadjusted median family income of the area, as most recently 
established by the Secretary; an area is the metropolitan statistical 
area (MSA) if the property is located in an MSA--otherwise, an area is 
the county in which the property is located. ``Moderate-income'' means 
income not exceeding area median income and, in the case of rental 
units, income not in excess of median income with adjustments for 
family size. ``Rent'' is defined as contract rent if the cost of all 
utilities are included in contract rent; if all utilities are not 
included, ``Rent'' is contract rent plus the cost of those utilities or 
contract rent plus a utility allowance. ``Utilities'' means charges for 
electricity, gas, water, sewage disposal, fuel, and garbage collection.
    Defined terms concerning the central cities, rural areas, and other 
underserved areas goal include the terms ``Central cities'', ``Rural'' 
and ``Underserved areas''. As discussed fully below, in this preamble's 
discussion of the housing goals, the term ``central cities'' is defined 
as the underserved areas of any political subdivision designated as a 
central city by the Office of Management and Budget. ``Rural area'' is 
defined as the underserved areas located outside of any metropolitan 
statistical area (MSA) designated by the Office of Management and 
Budget. ``Underserved area'' is defined as a census tract: With a 
median income at or below 120 percent of the area median income and a 
minority population of 30 percent or greater; or with a median income 
at or below 80 percent of area median income.
    The special affordable housing goals have specific rules requiring 
the definition of certain terms. These terms include ``Low-income 
areas'', ``Portfolio of loans'' and ``Very low-income''. ``Low-income 
area'' means a census tract in which the median income does not exceed 
80 percent of area median income. ``Portfolio of loans'' means ten or 
more loans. ``Very low-income'' is defined as income not exceeding 60 
percent of the area median income--under the Act's definition, this 
percentage is adjusted for family size for rental units but is not 
adjusted for family size for owner-occupied units.
    Terms concerning the fair housing provisions of these regulations 
include ``Familial status'', ``Handicap'' and ``Minority''. The terms 
``familial status'' and ``handicap'' are defined under these 
regulations by reference to the definitions contained in the Fair 
Housing Act regulations at 24 CFR 100.20 and 100.201. ``Minority'' 
includes American Indians, Alaskan Natives, Asian and Pacific 
Islanders, African Americans, and Hispanics.
    The defined term pertaining to the Secretary's new program approval 
authority is ``New program.'' ``New program'' is defined in the Act and 
under these regulations as a program for the purchasing, servicing, 
lending on the security of, or otherwise dealing in conventional 
mortgages that is significantly different from a program that: Was 
approved or engaged in by the GSE at the time of the enactment of 
FHEFSSA; or represents an expansion above limits expressly contained in 
any prior approval.
    Terms that are relevant to both the reports and information 
provisions of the regulations include ``Mortgage data'', ``Proprietary 
information'' and ``Public data''. ``Mortgage data'' is defined as data 
obtained by the Secretary from the GSEs under the Fannie Mae Charter 
Act and the Freddie Mac Act relating to the GSEs' mortgage purchases. 
``Proprietary information'' is defined as all categories of information 
and data submitted to the Secretary by the GSE which contain trade 
secrets and commercial or financial information of the GSE which is 
privileged or confidential and which, if released, would cause 
substantial competitive harm. Although this definition parallels the 
definition under Exemption 4 of the Freedom of Information Act (FOIA), 
5 U.S.C. 552(b)(4), in determining which GSE information is 
proprietary, the Department will not be bound by FOIA, its legislative 
history, or Exemption 4 case law. ``Public data'' means all mortgage 
data obtained by the Secretary from the GSEs which the Secretary 
determines is not proprietary and should be made publicly available; 
Appendix D to the regulations lists and describes this data.
    Finally, the proposed regulation defines the terms: ``Act,'' 
``Day,'' ``Director,'' and ``Secretary.'' ``Act'' is defined to mean 
the Federal Housing Enterprises Financial Safety and Soundness Act or 
FHEFSSA. ``Day'' is defined as a calendar day rather than a working 
day. ``Director'' means the Director of the Office of Federal Housing 
Enterprise Oversight of the Department of Housing and Urban 
Development. ``Secretary'' means the Secretary of Housing and Urban 
Development.

Subpart B--Housing Goals

Background
    The Secretary is required to establish, by regulation, annual 
housing goals for each GSE. The goals include a low- and moderate-
income housing goal,<SUP>72 a [[Page 9162]] special affordable housing 
goal,<SUP>73 and a central cities, rural areas and other underserved 
areas housing goal.<SUP>74 The Act provides that the goals are to be 
established in a manner consistent with sections 301(3) of the Fannie 
Mae Charter Act and 301(b)(3) of the Freddie Mac Act, which require the 
GSEs ``to provide ongoing assistance to the secondary market for 
residential mortgages (including * * * mortgages on housing for low- 
and moderate-income families involving a reasonable economic return 
that may be less than the return earned on other activities) * * *.'' 
Under the Act, the Secretary may, by regulation, adjust any housing 
goal from year to year.<SUP>75 The statute provides that, in 
establishing these goals, the Secretary shall apply certain prescribed 
factors, as described in Appendices A, B, and C.<SUP>76 In this 
regulation, the Secretary proposes to establish the three housing goals 
for 1995 and 1996. The Secretary is also planning to establish the 
level of the goals for 1997 and beyond in the final regulation.

    \72\Section 1332.
    \73\Section 1333.
    \74\Section 1334.
    \75\Section 1331(c).
    \76\Sections 1332(b), 1333(a)(2), and 1334(b).
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    In this regulation, each housing goal requires that a certain 
percentage of the dwelling units financed by each GSE's total mortgage 
purchases for the year be the type of dwelling units targeted by the 
housing goal. For example, for 1995, the housing goal for low- and 
moderate-income families is established at 38 percent--in other words, 
38 percent of the dwelling units financed by each GSE's mortgage 
purchases would have to be affordable to low- or moderate-income 
families; thus, if a GSE's mortgage purchases financed 2 million 
dwelling units, the proposed regulation would require that 38 percent 
of those 2 million dwelling units, or 760,000 dwelling units, be 
affordable to low- or moderate-income families.
    A single mortgage can count for all three goals. For example, a 
mortgage that finances a house for a low-income family in a central 
city would count under the special affordable housing goal (low-income 
family in a low-income area), the low- and moderate-income housing goal 
(low-income borrower), and the central cities, rural areas, and other 
underserved areas goal (central city). Under the housing goals for 
1993, the majority of the mortgages that qualified for one goal also 
qualified for a second goal.
Housing Goal for Low- and Moderate-Income Families
    The Secretary is establishing an annual housing goal for each GSE's 
purchase of mortgages on housing for low- and moderate-income families 
(``the low- and moderate-income goal''). The Secretary's detailed 
findings under the factors for establishing the goal are attached as 
Appendix A. The annual goal for 1995 for each GSE's purchases of 
conventional mortgages financing housing for low- and moderate-income 
families is established at 38 percent of the total number of dwelling 
units financed by each GSE's mortgage purchases in 1995. The annual 
goal for 1996 is 40 percent. The final regulation shall establish the 
annual goals for 1997 and 1998 and the Secretary intends that the 1998 
goal apply thereafter, unless revised through subsequent rulemaking; 
the Secretary seeks comment on the level of the goals for 1997, 1998, 
and thereafter--see the questions listed above (in the leading the 
industry discussion) and repeated at the end of this preamble.
Housing Goal for Central Cities, Rural Areas, and Other Underserved 
Areas
    The Secretary is establishing an annual goal for 1995 and 1996 for 
the GSEs' purchase of mortgages on housing located in central cities, 
rural areas, and other underserved areas. In accordance with the Act, 
under this proposed rule, the Secretary is expanding and redefining 
this goal from the central cities goal, which applied during the 
transition years of 1993 and 1994, to a goal that is directed to 
mortgage purchases in central cities, rural areas and other areas, with 
a focus on underserved areas within those geographic locations. 
``Underserved areas'' are those areas that experience problems with the 
availability of mortgage credit.
    For the transition period of 1993 and 1994, the goal was directed 
solely to the GSEs' purchases of mortgages financing housing located 
anywhere in ``central cities.'' The Act defined ``central cities'' for 
the transition period as those cities designated as central cities by 
the Office of Management and Budget (OMB). These provisions were 
modelled on HUD's existing Fannie Mae regulations. The legislative 
history of the Act states that for the transition period the goal only 
applied to purchases in OMB-defined ``central cities'' to allow time to 
gather data and establish an appropriate methodology to ``redefine and 
expand'' the goal.<SUP>77 The legislative history also provides that 
``following the transition period, geographic areas relating to the 
goal will be as determined by (the regulator).''<SUP>78

    \77\See S. Rep. at 38 and 65.
    \78\S. Rep. at 65.
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    Following the transition period, the Act requires the Secretary to 
establish an annual goal for the purchase of mortgages located in 
``rural areas and other underserved areas'' as well as ``central 
cities.'' In establishing the central cities, rural areas, and other 
underserved areas goal, Congress was concerned with the ``acute'' 
``housing problems'' in the nation's cities and with the ``neglected 
and decaying'' parts of the cities.<SUP>79 Congress directed HUD to 
target ``areas with relatively poor access to mortgage credit,'' areas 
with ``(i)nadequate access to mortgage credit,'' and areas suffering 
from ``the vestiges of redlining.''<SUP>80

    \79\S. Rep. at 28.
    \80\S. Rep. at 38; see also, id. at 34 (the GSEs must address 
``the disinvestment in central cities and rural communities''). 
``(R)edlining ha(s) effectively disadvantaged certain geographic 
areas, particularly inner city and rural areas.'' Id. at 41. See 
also, 138 Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of 
Sen. Riegle) (the bill would provide ``a greater flow of credit to 
people who otherwise have a very difficult time financing home 
mortgages'').
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    The legislative history provides that ``(t)he purpose of these 
goals is * * * to service the mortgage finance needs of low- and 
moderate-income persons, racial minorities and inner-city 
residents.''<SUP>81 Congress noted that ``* * * mortgage discrimination 
and redlining have effectively disadvantaged certain geographic areas, 
particularly inner city and rural areas.''<SUP>82 In explaining the 
conference bill on the floor of the Congress, Chairman Gonzalez stated: 
``In establishing the definition of a central city and in determining 
compliance with such a goal, the Secretary should, to the extent 
possible, exclude purchases made in non-low income census tracts that 
happen to otherwise be within the central cities area.''<SUP>83

    \81\S. Rep. at 34 (emphasis added); see also, id. at 32, and 138 
Cong. Rec. S8606 (daily ed. June 23, 1992) (statement of Sen. 
Riegle) (``inner-city lending * * * is a very important part of this 
legislation'').
    \82\S. Rep. at 41 (emphasis added).
    \83\ 138 Cong. Rec. H11453, H11457 (daily ed. Oct. 5, 1992). 
Rep. Gonzalez made the identical statement at 138 Cong. Rec. H11077, 
H11099 (daily ed. Oct. 3, 1992).
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    The title of this goal also leads to the conclusion that Congress 
intended this geographically targeted goal to focus on underserved 
areas. ``Central cities, rural areas, and other underserved areas'' 
indicate that central cities and rural areas are intended to be proxies 
for underserved areas. [[Page 9163]] 
Expanding and Redefining the Goal
    In accordance with the requirements of the Act, the Secretary is 
expanding this goal for 1995 and 1996 to include rural and other 
underserved areas as well as central cities. At the same time, the 
Secretary has redefined the term ``central cities'' to encompass the 
underserved areas of central cities and defined ``rural areas'' as the 
underserved areas of non-metropolitan areas. The goal is, therefore, 
intended to focus on communities within central cities, rural areas and 
other areas which are ``underserved'' in terms of availability of 
mortgage credit. This determination is based on the legislative intent, 
the factors for establishing the goal, HUD's research on underserved 
areas during the transition period, the results of two public forums 
held with researchers, public-interest groups, other federal agencies, 
and the GSEs, and data received from the GSEs during the transition.
Underserved Areas
    The Act did not define the term ``underserved area'' but the 
legislative history indicates that it should be defined as those areas 
that lack access to mortgage credit. As detailed in Appendix B, the 
Secretary considers ``underserved'' to mean those areas that have an 
unmet demand for mortgage credit. Using 1993 HMDA data and 1990 Census 
data, the Department analyzed mortgage application denial and 
origination rates throughout the country, as well as reports and other 
research on the availability of mortgage credit and mortgage flows. The 
research indicated that pervasive and widespread disparities exist in 
lending across the nation. The Department found, as have other 
researchers, that the availability of mortgage credit to an area is 
related to its minority concentration and income characteristics of its 
residents. Two patterns are clear in the Department's research and that 
of other researchers:
    <bullet> Census tracts with higher percentages of minority 
residents have higher mortgage denial and lower loan origination rates 
than all-white or predominately white census tracts; and
    <bullet> Census tracts with lower incomes have higher denial rates 
and lower origination rates than higher income tracts.
    As Appendix B details, HUD's research and that of others has found 
that the location of a census tract--whether it is located within a 
central city or a suburb--has minimal impact on whether the tract is 
underserved.<SUP>84 Mortgage flows in a census tract have far less to 
do with the physical location of a tract, i.e., central city versus 
suburb, than the minority concentration and median income of that 
tract. The most thorough studies available demonstrate that areas with 
lower incomes and higher shares of minority residents consistently have 
poorer access to mortgage credit, with higher denial rates and lower 
origination rates for mortgages. With income, minority composition, and 
other relevant census tract variables controlled for, differences in 
credit availability between central cities and suburbs are minimal.

    \84\See, e.g., Robert B. Avery, Patricia E. Beeson, and Mark S. 
Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA 
Data,'' (presented at the Western Economic Association Annual 
Meetings, Vancouver BC), July 1994, and William Shear, James 
Berkovec, Ann Dougherty, and Frank Nothaft, ``Unmet Housing Needs: 
The Role of Mortgage Markets,'' unpublished paper, June 1, 1994.
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    Based on this research, the Secretary has determined that this goal 
should target those areas in central cities, rural areas, and other 
areas where: 30 percent or more of the residents in a census tract are 
minority and the median income of families in the census tract is at or 
below 120 percent of the area median income; or where the median income 
of families in the census tract is less than 80 percent of the area 
median income. The goal therefore is directed to census tracts in 
central cities, rural areas, and all other parts of the country meeting 
these criteria. (For purposes of defining ``rural areas,'' the 
Secretary is seeking comments on whether counties or Block Numbering 
Areas, which are equivalent to census tracts in rural areas, are the 
appropriate geographic unit.)
    The Department has conducted an intensive research effort on 
identifying geographic areas underserved by the mortgage markets. This 
research effort is ongoing and will continue during the period of 
proposed rulemaking. Research underway includes the analysis of the 
implications of alternative definitions of underserved areas in urban, 
suburban, and rural communities. The Department will also engage in a 
multi-year research effort to identify and analyze indicators of unmet 
demand for mortgage credit. This long-term research effort will be used 
by the Department in future years to review the level of the housing 
goals established for the GSEs. In conducting this research effort on 
identifying indicators of unmet demand, the Department fully intends to 
consult with other Federal agencies including Treasury and with the 
GSEs.
Central Cities
    For purposes of this housing goal, the Secretary is defining 
``central cities'' as the underserved areas of any political 
subdivisions designated as central cities by the Office of Management 
and Budget (OMB). Directing the goal to all areas of central cities 
identified by the Office of Management and Budget (OMB) would not 
appropriately target the GSEs' activities to areas that have a relative 
lack of access to mortgage credit. OMB defines the central city or 
central cities of a metropolitan statistical area based on population 
and other factors that measure job location and commuting patterns. OMB 
does not take into account mortgage credit availability or measures of 
economic distress. As a result, the list of 545 central cities includes 
very affluent and well served cities and excludes other obviously 
distressed cities. For example, Palo Alto, California--with a per 
capita income of $32,500 and a poverty rate of 2 percent--is a central 
city but Compton, California--with a per capita income of $7,800 and a 
poverty rate of 24 percent--is not a central city.
    In addition, there are substantial regional variations in the 
portion of state urban population that are included in central cities. 
In the southern and western parts of the country, cities have often 
expanded by annexing adjacent territory. This option was generally not 
available to cities in the Northeast, which have retained their 
historical boundaries. As a result, a substantially greater portion of 
the population lives in central cities in the South and West than in 
the more urbanized Northeastern states. This has led to perverse 
results for the central cities goal in place for 1993: Central cities 
accounted for more than 50 percent of both GSEs' mortgage purchases in 
Arizona, New Mexico, and North Dakota. In New Jersey, on the other 
hand, purchases in central cities accounted for only 4 percent of GSE 
purchases.
    James A. Johnson, Fannie Mae's Chairman and Chief Executive 
Officer, in April 1994 testimony before a Congressional sub-committee 
summarized some of the problems with using the OMB designation of 
central cities:

    Central cities are also of limited value as proxies for 
distressed, needy, minority or low- and moderate-income census 
tracts. Especially in older cities that are hemmed in by separately 
incorporated suburbs and other communities, political jurisdictions 
enforce artificial barriers to describing areas of need. Conversely, 
where cities can annex neighboring communities as growth occurs, the 
result is a central city that encompasses so much territory of such 
diverse nature that [[Page 9164]] it loses much of its distinctive 
urban character.<SUP>85

    \85\Testimony before the Committee on Banking, Finance, and 
Urban Affairs, Subcommittee on General Oversight, Investigations, 
and the Resolution of Failed Financial Institutions, U.S. House of 
Representatives, at 17 (April 20, 1994).
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Rural Areas
    Determining how to define ``rural areas'' within the context of 
this goal is even more difficult than the complex analyses of HMDA and 
Census data for cities and suburbs summarized in Appendix B. This 
occurs for three interrelated reasons: (1) The general lack of accurate 
data on mortgage flows and credit activity outside metropolitan 
statistical areas (MSAs), (2) the scarcity of careful current studies 
on access to mortgage credit in rural locations, and (3) the existence 
of a variety of statutory and statistical definitions for ``rural.''
    To address the many issues pertinent to developing an appropriate 
and workable definition of ``rural areas'' for purposes of this rule, 
the Department has consulted with rural demographers and economists at 
the Department of Agriculture's Economic Research Service, the Census 
Bureau, the Farmers Home Administration, and the Housing Assistance 
Council. All of these issues were also discussed at a forum attended by 
researchers from academia, the Department of Agriculture, the Census 
Bureau, the Housing Assistance Council, the Congressional Budget 
Office, public-interest groups, and the GSEs. The Secretary's decisions 
about defining ``rural areas'' are based on these consultations as well 
as ongoing analyses of data from the 1990 Census, the American Housing 
Survey, and the Residential Finance Survey.
Framework for Defining Rural Areas
    In considering the issue of how to define rural areas for the 
central cities, rural areas, and other underserved areas goal, the 
Department analyzed available data and research on mortgage flows and 
credit access in rural locations, consulted with rural demographers and 
economists at government agencies and elsewhere, and considered the 
multiple existing definitions of ``rural'' currently in use. Based on 
the evidence that income and housing needs vary as greatly between 
nonmetropolitan counties and block numbering areas<SUP>86 as they do 
within MSAs, the Secretary has determined that the basic definition of 
``underserved areas'' developed above--as areas with high minority 
shares or low median family income--should also apply in rural areas, 
that is, outside of MSAs. The Secretary has determined that for 
purposes of this housing goal that ``rural areas'' are the underserved 
areas in nonmetropolitan counties, i.e., outside of Metropolitan 
Statistical Areas.

    \86\For data collection in the 1990 Census, block numbering 
areas (BNAs) are the non-metropolitan equivalent of census tracts--
subareas of counties that contain approximately 4,000 people.
---------------------------------------------------------------------------

    The Secretary seeks comments on whether the appropriate unit of 
geographic focus for defining underserved areas in non-MSAs is the 
county or the Block Numbering Area (the rural equivalent of census 
tracts). In addition, the Secretary seeks comment on whether this 
definition of rural should be expanded by including indicators of 
access to metropolitan areas and/or indicators of jurisdictional size 
(i.e., include small communities of less than 2,500 people). The 
following section summarizes the factors the Secretary considered in 
determining this proposed definition of rural and closes with questions 
on which the Secretary solicits comments about the proposed definition.
    (1) Unavailability of accurate data on mortgage flows and credit 
activity in rural locations. HMDA data, the source used for most of the 
studies of credit needs summarized in Appendix B, does not provide 
information on mortgage activity outside of metropolitan statistical 
areas (MSAs), and within MSAs census tracts may contain both rural and 
urban segments.<SUP>87 Other sources of mortgage flow information, like 
the Federal Reserve Call Reports, do not detail locations of loans.

    \87\Only lending institutions with offices in metropolitan 
statistical areas (MSAs) report mortgage origination data under 
HMDA. 12 U.S.C. 2803(a)(1).
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    (2) Studies of access to mortgage credit. Researchers participating 
in the Department's forum agreed that available studies do not show 
that rural areas endemically have problems with access to credit, 
although this (lack of) conclusion may stem from data unavailability. A 
1990 study by the Urban Institute, for example, found little evidence 
of a national rural home credit shortage, and attributed low mortgage 
activity in some local markets to lack of demand in weak local 
economies.<SUP>88 Yet abundant anecdotal evidence exists that 
underserved areas in rural communities require a special focus by the 
GSEs, to redress years of historic neglect by the mortgage market. 
According to the Housing Assistance Council, access to mortgage credit 
appears worse as distance from metropolitan centers increases,<SUP>89 
while Department of Agriculture representatives judge that communities 
with population below 2,500 or 5,000 are more likely than other rural 
communities to lack access to credit. More generally, the forum 
participants agreed that, as found for central cities, rural 
communities with low income and minority concentrations were those more 
likely to be underserved by the mortgage markets.

    \88\The Urban Institute, The Availability and Use of Mortgage 
Credit in Rural Areas (1990), examined data on ownership, mortgage 
terms and conditions, and Federal program coverage, particularly for 
moderate-income home buyers.
    \89\Statement of Moises Loza, Executive Director of the Housing 
Assistance Council (HAC), July 21, 1994, to the Subcommittee on 
Environment, Credit, and Community Development of the House 
Committee on Agriculture.
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    A report by the Economic Research Service of the Department of 
Agriculture shows that urban proximity is important: economic 
conditions and housing problems tend to be worse in counties most 
remote from metropolitan areas or smaller cities.<SUP>90 In particular, 
counties with ``persistent low-income,'' which are disproportionately 
more rural and remote, have had little recent economic activity, 
stagnation in real family income during the 1980s, and continue to have 
the highest incidence of housing lacking complete plumbing. These high 
poverty counties are concentrated in Appalachia and in areas with high 
proportions of minority residents.

    \90\Rural Conditions and Trends, Vol. 4, No. 3 (Fall 1993), a 
special 1990 census issue, documents differences between counties in 
population, education, employment, income, poverty, and housing.
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    (3) Current Definitions of Rural. In considering a workable 
definition of ``rural areas,'' the Secretary focused on three major 
definitions in use: (i) The Census Bureau's official designation; (ii) 
the Farmer's Home Administration's designation for several of its 
programs; and (iii) the designation of ``non-metropolitan.'' In this 
proposed rule, rural areas are defined as ``underserved areas'' 
``located outside of any Metropolitan Statistical Area designated by 
the Office of Management and Budget.'' The reasons for choosing to 
focus on non-metropolitan areas are described below:
    (a) Census Bureau definition. The Census Bureau bases its 
definition of rural on population size and density.<SUP>91 Locations 
that meet the rural definition are designated once per decade, based on 
decennial Census results. There are two major disadvantages of using 
the Census Bureau definition as part of a definition of rural areas for 
this goal. First, few relevant intercensal data [[Page 9165]] sources 
are based on the Census Bureau definition, complicating the work 
required to establish market segments and set the level of the housing 
goals. Second, geocoding addresses to rural locations based on this 
definition would be difficult and burdensome for the GSEs, given the 
current state of geographic information systems software. The Census 
Bureau's 1992 Tiger/Line file's ability to provide accurate addresses 
is weakest in rural areas, particularly for rural route 
addresses.<SUP>92

    \91\See U.S. Bureau of the Census, 1990 Census of Population and 
Housing: Guide, Part B. Glossary, 16-17 (1993) (hereinafter cited as 
``Census Glossary'').
    \92\The Tiger/Line files are the extract of the Census Bureau's 
geographic data base and are produced for geocoding by data users. 
They categorize all polygons and blocks as either rural or urban and 
have address ranges for most of the country.
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    (b) Farmers Home Administration's definition of rural. The Farmers 
Home Administration (FmHA) defines rural areas eligible for several 
programs, including the 515 loan program,<SUP>93 and the definitions 
vary among the programs. Generally, more locations qualify as ``rural'' 
under these definitions than under the Census Bureau's definition 
because the FmHA definitions include places with populations above 
2,500 and the Bureau would categorize such places as ``urban.''<SUP>94 
The most critical disadvantage in using a FmHA definition as the rural 
identifier is that there is no central or machine-readable source of 
information on areas defined by FmHA as rural; instead, local maps are 
marked to show the appropriate boundaries and then stored in field 
offices.

    \93\42 U.S.C. 1490.
    \94\Cf. 42 U.S.C. 1490 to Census Glossary at 16-17.
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    (c) Non-Metropolitan Statistical Areas. The Secretary chose to 
incorporate this designation into the definition of ``rural areas.'' 
First, geocoding and reporting would be straightforward, since MSAs are 
composed of counties in most parts of the country. This definition 
appears to correspond better to the parts of the country where 
availability of mortgage credit has been an issue. The availability of 
mortgage credit in the rural fringes of metropolitan areas appears to 
be less of a problem than in rural communities distant from 
metropolitan areas. Finally, most intercensal data, including 
population and household estimates, employment, income estimates, etc., 
are produced at least annually at the county level.
Questions Related to the Definition of Rural Areas
    The Secretary invites comment on the following questions:
    (1) Should rural areas be based on the characteristics of Block 
Numbering Areas or counties? Which of these two options makes better 
sense for lenders and for GSE reporting? Which option better directs 
goal performance at areas with poor access to mortgage credit?
    (2) In establishing the definition for rural areas, should the 
income and minority criteria (used for defining central cities and 
other underserved areas) be supplemented with other indicator(s) of the 
needs for better access to mortgage credit? Should population size 
(e.g., communities below 2500 or non-metropolitan counties below 
50,000) be considered as such an indicator?
    (3) What are the relative merits of indicators of access to 
metropolitan areas or nonmetropolitan cities such as the ``Beale'' or 
``Ghelfi-Parker'' codes?<SUP>95

    \95\These indicators of urban influence were developed by the 
Department of Agriculture's Economic Research Service. Linda M. 
Ghelfi, ``County Classifications,'' Rural Conditions and Trends, 
4(3): 6-11 (1993).
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    (4) In New England, where MSAs are not composed of counties, should 
the definition of rural areas include areas ``outside (P)MSAs'' or 
``outside NECMAs''?
Other Underserved Areas
    For purposes of this housing goal, the Secretary has determined 
that ``other underserved areas'' are census tracts located in 
metropolitan areas located outside of central cities and having the 
minority and income characteristics described above. This definition 
will cover suburban communities that lack access to credit.
Alternative Approaches to Defining the Central Cities, Rural Areas, and 
Other Underserved Areas Goal
    The Secretary considered alternative approaches to establishing 
this goal. One alternative would be to simply expand the goal by 
retaining all areas in all 545 OMB-designated central cities, all rural 
areas, and all other underserved areas. If underserved areas are 
defined as described above, this alternative approach would result in a 
goal that targets nearly 70 percent of the country's population. The 
Secretary decided this approach was inconsistent with the intent of the 
Act.
    Congress established the goals to ensure that Fannie Mae and 
Freddie Mac take special consideration of specific housing needs in 
carrying out their work. The goals are intended to be priority areas 
for the GSEs as they carry out their Charter Act purposes. A goal that 
encompasses so much of the nation's population and geography would be 
unlikely to provide the GSEs with appropriate direction. Further, this 
approach would lead to a dispersion of the GSEs' goal-oriented business 
to a large number of communities that do not meet the Congressional 
directive that they be areas with a relative lack of mortgage credit. 
Finally, an overly-broad approach would result in less support for the 
critical efforts of cities and rural communities to improve and 
stabilize neighborhoods that, because of past practices and historic 
patterns, have an unsatisfactory availability of mortgage credit.
The Size of the Goal
    Because this goal has been redefined, the market of mortgages 
originated and available for GSE purchase is different from and indeed 
smaller than the market of mortgage originations for the 1993-1994 
goal. The Secretary estimates that mortgages originated in underserved 
areas of central cities, rural areas, and other areas comprise 21 to 23 
percent of the conventional conforming mortgage market. Thus, the goal 
is established at a percentage that is lower than the central cities 
goal in the transition period (1993-94).
    Based on a consideration of the factors for establishing the goal 
detailed in Appendix B, the Secretary establishes the annual goal for 
1995 for each GSE's purchases of mortgages financing housing located in 
underserved areas at 18 percent of the total number of dwelling units 
financed by each GSE's mortgage purchases. The goal for 1996 is 21 
percent. The final regulation shall establish the annual goals for 1997 
and 1998 and the Secretary intends that the 1998 goal apply thereafter, 
unless revised through subsequent rulemaking; the Secretary seeks 
comment on the level of the goals for 1997, 1998, and thereafter--see 
the questions listed above (in the leading the industry discussion) and 
repeated at the end of this preamble. In 1993, 15.9 percent of the 
dwelling units financed by Fannie Mae's mortgage purchases were in 
areas defined under the proposed definition of central cities, rural 
areas, and other underserved areas, while Freddie Mac's performance was 
14.4 percent.
    Units will count toward this goal if the units are located in a 
central city as redefined, a rural area as defined, or any other 
underserved area. Through the use of geocoding or any similarly 
accurate and reliable method, the GSEs are required to determine 
whether units [[Page 9166]] financed under mortgages purchased by the 
GSEs are located in central cities, rural areas, and other underserved 
areas as defined by regulation.
Special Affordable Housing Goal--Background
    This goal had no antecedent in the current Fannie Mae regulations. 
The Act requires that the Secretary ``establish a special annual goal 
designed to adjust the purchase by each (GSE) of mortgages on rental 
and owner-occupied housing to meet the then-existing, unaddressed needs 
of, and affordable to, low-income families in low-income areas and very 
low-income families.''<SUP>96

    \96\Section 1333(a)(1).
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    During the transition period (1993-1994), the Act required that 
each GSE's mortgage purchases under the special affordable housing goal 
be equally divided between mortgages on single family housing and 
mortgages on multifamily housing.\97\ The multifamily goal was further 
divided, with 45 percent of the goal devoted to mortgages on 
multifamily housing where dwelling units were affordable to low-income 
families.\98\ The remaining 55 percent of the dollar volume of 
multifamily mortgages purchased had to comprise mortgages on 
multifamily housing in which either: (1) ``at least 20 percent of the 
units are affordable to families whose incomes do not exceed 50 
percent'' of area median income;\99\ or (2) ``at least 40 percent of 
the units are affordable to very low-income families.''\100\ Only the 
portions of qualifying mortgages on multifamily properties that are 
attributable to units affordable to low-income families contributed to 
the achievement of this goal.\101\ Under the transition standard, where 
at least 20 percent of the units were affordable to especially low-
income families (families whose incomes do not exceed 50 percent of 
area median income) or at least 40 percent of the units were affordable 
to very low-income families, all units from such multifamily projects 
that were affordable to low-income families counted toward the goal.

    \97\Section 1333(d)(1)-(2).
    \98\Section 1333(d)(3)(A)(i).
    \99\Section 1333(d)(3)(A)(ii)(I). The Department defined 
``especially low-income families'' as those with incomes not in 
excess of 50 percent of area median income.
    \100\Section 1333(d)(3)(A)(ii)(II).
    \101\Section 1333(d)(3)(C).
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    The Act required that, for each GSE's mortgage purchases financing 
single family housing to be counted toward achievement of the special 
affordable housing goal, 45 percent of the dollar volume of single 
family mortgages had to comprise mortgages of low-income families 
living ``in census tracts in which the median income does not exceed 80 
percent of the area median income.''\102\ The remaining 55 percent of 
the dollar volume of single family mortgage purchases had to comprise 
mortgages of very low-income families.\103\

    \102\Section 1333(d)(3)(B)(i).
    \103\Section 1333(d)(3)(B)(ii).
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The Special Affordable Housing Goal
    Following the transition period, the Act does not specify the types 
of mortgage purchases that shall count toward achievement of the 
special affordable housing goal.\104\ Based on experience during the 
transition, the Secretary concluded that determining GSE performance 
under these provisions was cumbersome and did not clearly reflect the 
number of especially low- and very low-income families actually served 
under the multifamily portion of the special affordable housing goal. 
Accordingly, as described below, the proposed regulation simplifies the 
counting under this portion of the goal.

    \104\See section 1333.
---------------------------------------------------------------------------

    The proposed regulation would substantially simplify the special 
affordable housing goal to apply to ``rental housing and owner-occupied 
housing.''\105\ Under the proposed regulation, rental housing would 
include all units in multifamily housing and all units in single family 
rental housing. The proposed regulation makes this change in part 
because of the high percentage of renters in single family dwelling 
units--41 percent of rental units in properties secured by 
conventional, conforming mortgages are located in single family 
properties.\106\

    \105\See section 1333(a).
    \106\Special tabulation derived from Bureau of the Census, 
Housing and Household Economic Statistics Division, 1991 Residential 
Finance Survey.
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    The rental portion of the special affordable housing goal would be 
targeted to very low-income families because of the substantial housing 
needs of these renters. Five-eighths of renters with incomes below 50 
percent of area median income pay more than 30 percent of their income 
for housing, live in inadequate housing, or are overcrowded.\107\ Even 
worse, almost half of the 7.4 million renters with incomes below 30 
percent of area median income pay more than half of their income for 
housing or live in severely inadequate housing.\108\ The high incidence 
of severe housing problems among these extremely-low-income renters 
reflects the severe shortages of units affordable to them.

    \107\U.S. Department of Housing and Urban Development, Office of 
Policy Development and Research, Worst Case Needs for Housing 
Assistance in the United States in 1990 and 1991--A Report to 
Congress, 4 (June 1994).
    \108\U.S. Department of Housing and Urban Development, Office of 
Policy Development and Research.
---------------------------------------------------------------------------

    Under the proposed regulation, only those rental units that are 
affordable to very low-income families would count toward the goal 
rather than all low-income units in buildings that had a certain 
percentage of very low- or especially low-income units. Under the 
owner-occupied housing portion of the goal, the dwelling units that 
count toward the goal are units: (1) Located in low-income areas and 
owned by low-income families; and (2) owned by very low-income 
families.
    The Act provides that, for each GSE, the special affordable housing 
goal ``shall not be less than 1 percent of the dollar amount of the 
mortgage purchases by the (GSE) for the previous year.''\109\ Although 
the goal has been established to exceed one percent of each GSE's total 
mortgage purchases in the preceding year, to maintain consistency, the 
special affordable housing goal, like the other two goals, is expressed 
as a percentage of dwelling units rather than dollars. The Secretary 
determined that expressing this goal as a percentage of the previous 
year's business was not preferable for several reasons: (1) Due to the 
cyclicality of the mortgage market and the GSEs' business volume, use 
of a fixed percentage of the previous year's purchases could make such 
a goal less realistic in a year such as 1995, when total purchases are 
projected to fall sharply from prior-year levels due to the decline in 
refinancing activity; (2) conversely, in years of sharply increasing 
activity, the goal represented by a set percentage of total mortgage 
purchases in the previous year could represent an insufficient 
commitment by the GSEs to special affordable housing; and (3) where a 
GSE purchases (for a given sum) mortgages financing two dwelling units 
that are affordable to families at 30 percent of area median income, 
the GSE would be making a greater contribution to affordable housing 
than if the GSE purchased (for the same sum) one mortgage that was 
affordable to one family at 60 percent of area median income. A units-
based goal takes this consideration into account, but a strict dollar-
based goal would not.

    \109\Section 1333(a).
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    The proposed regulation provides that for 1995 the special 
affordable housing goal will be 11 percent of the total 
[[Page 9167]] number of dwelling units financed by each GSE's mortgage 
purchases for 1995. The goal will be 12 percent for 1996. The goal is 
equally divided between rental housing and owner-occupied housing, 
i.e., for 1995 the goal for rental housing is 5.5 percent and the goal 
for owner-occupied housing is 5.5 percent. For 1996, the goal is 6 
percent for rental housing and 6 percent for owner-occupied housing. 
The final regulation shall establish annual goals for 1997 and 1998 and 
the Secretary intends that the 1998 goal apply thereafter, unless 
revised through subsequent rulemaking; the Secretary seeks comment on 
the level of the goals for 1997, 1998, and thereafter--see the 
questions listed above (in the leading the industry discussion) and 
repeated at the end of this preamble.
Performance Under the Special Affordable Housing Goal
    In evaluating each GSE's performance in achieving this goal, the 
Act requires that the Secretary give full credit toward achievement of 
the special affordable housing goal for: (1) The purchase or 
securitization of federally related mortgages that cannot be readily 
securitized through the Government National Mortgage Association 
(GNMA)\110\ or another Federal agency, where the GSE's participation 
substantially enhances the affordability of the housing subject to such 
mortgages,\111\ and the mortgages are on housing that otherwise 
qualifies under this goal; (2) the purchase or refinancing of seasoned 
loan portfolios where the seller has a specific program to use the 
proceeds of such sales to originate new loans that meet the special 
affordable housing goal and such purchases or refinancings support 
additional lending for housing that otherwise qualifies under this 
goal; and (3) the purchase of direct loans made by the Resolution Trust 
Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC) 
where the loans are not guaranteed by the RTC or the FDIC or other 
Federal agencies, the loans include recourse provisions similar to 
those offered through private mortgage insurance or other conventional 
sellers, and such loans are for the purchase of housing that otherwise 
qualifies under this goal.\112\

    \110\A mortgage originated more than 2 years before a GSE 
purchases it is an example of a mortgage that cannot be readily 
securitized by GNMA.
    \111\Mortgages that cannot be readily securitized through GNMA 
or another Federal agency, and mortgages where a GSE's participation 
substantially enhances the affordability of the housing subject to 
the mortgages, include mortgages under the Home Equity Conversion 
Mortgage (HECM) Insurance Demonstration Program (sec. 255 of the 
National Housing Act), 12 U.S.C. 1715z-20, and under the Guaranteed 
Rural Housing Loan program, 7 U.S.C. 1933.
    \112\Section 1333(b)(1).
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    This proposed regulation provides that entities qualify as sellers, 
under (2) above, where the sellers currently operate on their own or 
actively participate in an ongoing program that results in the 
origination of loans meeting the special affordable housing goal; thus, 
a GSE's purchase of such loans supports additional lending for housing 
that will qualify under this goal. By encompassing active 
participation, the proposed regulation allows purchases of portfolios 
from sellers, who actively participate with qualified housing groups 
that operate programs resulting in the origination of loans meeting 
this goal, to count toward achievement of the goal. However, if a GSE 
wants to count portfolio purchases toward achievement of this goal, it 
must verify and monitor that the sellers currently operate or actively 
participate in such ongoing programs that result in the origination of 
additional loans meeting the requirements of this goal. Where a 
seller's primary business is originating mortgages on housing that 
qualifies under the special affordable housing goal, the proposed 
regulation provides that such a seller is presumed to meet the 
requirement for actively participating in program(s) supporting lending 
meeting the special affordable housing goal.
    Under the Interim Notices, no credit was given toward achieving the 
special affordable housing goal for any purchases or securitization of 
mortgages associated with the refinancing of existing GSE portfolios. 
The intent of this prohibition was to preclude the GSEs from swapping 
portfolios toward the end of the year in an effort to achieve the 
special affordable housing goal. After reviewing the experience of the 
transition period, the Secretary has determined that wholesale 
exchanges of mortgages between the GSEs shall not count toward 
achievement of the housing goal; however, refinancings of individual 
mortgages should count toward the special affordable housing goal so 
long as the refinancing is an individual ``arms-length'' refinancing by 
a borrower. This is appropriate for several reasons: (1) The GSEs have 
very little influence on whether a particular single family mortgagor 
decides to refinance the mortgage--such refinancings are market driven 
and normally due to decreases in interest rates, and the Secretary 
concluded that such market driven refinancings should count toward the 
goal; and (2) determining whether the GSE had purchased the previous 
mortgage was time consuming and burdensome for the GSEs and for the 
Department and yielded little incremental value in producing more 
affordable housing finance.
General Requirements
    Performance under the goals is determined by assessing the portion 
or percentage of each GSE's business that satisfies each goal. In 
determining this percentage, a fraction is used with the denominator of 
the fraction measuring all mortgages purchased that could under 
appropriate circumstances count towards such a goal and the numerator 
including only those purchases that count toward the goal. The 
denominator does not include GSE transactions or activities that are 
not included in the terms ``mortgage'' or ``mortgage purchase.'' For 
example, where a GSE purchases a non-conventional mortgage, such as a 
mortgage insured or guaranteed by the Federal Housing Administration 
(FHA), such a mortgage purchase shall not be included in the 
denominator for purposes of determining that GSE's performance under 
the housing goal for low- and moderate-income housing because 
``mortgage purchase'' does not include the purchase of non-conventional 
mortgages.
    In establishing the goals for housing for low- and moderate-income 
families, housing located in central cities, rural areas, and other 
underserved areas, and special affordable housing, the Secretary may 
consider the number of housing units financed by any multifamily 
housing mortgage purchase.\113\ The Secretary has decided to count all 
dwelling units, whether in multifamily or single family housing, under 
these goals if the units otherwise meet the requirements of the Act and 
this proposed regulation.

    \113\See section 1331(b).
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Special Counting Rules Under the Goals
    During the transition period, the Department analyzed the impact of 
requirements under the Interim Notices concerning the extent various 
types of transactions should count toward achievement of the goals. 
Based on that analysis, the Secretary is proposing changes to or is 
clarifying the treatment of certain transactions, including credit 
enhancements, cooperative loans, refinancings, second loans, and risk-
sharing arrangements between the Department and the GSEs. In 
determining the level of credit for [[Page 9168]] various transactions, 
the Secretary developed certain principles to guide the determination, 
and these principles will be used in the future when the Secretary 
determines whether new types of transactions count toward the goals. 
The principles are: (1) Where a transaction is substantially equivalent 
to a mortgage purchase, the transaction generally should receive full 
credit; (2) where a transaction is less risky than the risk associated 
with the GSE's mortgage purchases, the amount of credit should be less 
than full credit; and (3) where a transaction creates a new market or 
increases liquidity in an existing market, the amount of credit should 
generally be full credit.
    (1) Credit Enhancements. Under this proposal, mortgages supported 
by the following credit enhancements would count toward achievement of 
the housing goals. Under these credit enhancement transactions, the GSE 
guarantees housing finance bonds issued by any entity, including a 
state or local housing finance agency; the GSE provides collateral in 
the form of specific mortgages owned by the GSE; and the GSE's 
guarantee has a credit risk substantially equivalent to the credit risk 
the GSE would have assumed if it had securitized the mortgages financed 
by the housing bonds. The Secretary will consider whether other types 
of credit enhancements should count toward the housing goals and, if 
other types are counted, whether those types of credit enhancements 
should receive full or partial credit. The Secretary is seeking 
comments on whether other types of credit enhancements should count.
    (2) REMICs. The final regulation will provide whether real estate 
mortgage investment conduits (REMICs) will count toward achievement of 
any of the housing goals. The Secretary seeks public comment on REMICs 
and requests views from the public on the following questions:
    (i) Where a REMIC contains a GSE's mortgages or mortgage-backed 
securities (MBS), should that type of REMIC count toward any of the 
housing goals? How should double counting be avoided?
    (ii) Where a REMIC does not contain a GSE's mortgages or MBS, 
should that type of REMIC count toward any of the housing goals?
    (iii) Should other types of REMICs be counted toward any of the 
housing goals?
    (iv) In determining whether any REMICs count toward achievement of 
the housing goals, what should the Secretary consider?
    (v) If any of these REMICs should count toward the housing goals, 
should the REMICs receive full credit or some level of partial credit? 
If partial credit, how should the level of credit be determined?
    (vi) How should the final regulation deal with types of REMICs that 
have not yet been created or used in the market? Should such REMICs 
only count if that type of REMIC is reviewed by the Secretary and the 
Secretary determines that the type of REMIC should count toward the 
housing goals?
    (3) Risk-sharing. Risk-sharing transactions would receive partial 
credit toward achievement of the housing goals where: (1) The GSE's 
risk-sharing arrangement is with the Department or another Federal 
agency; and (2) the GSE and the agency acquire mortgages and share the 
risks associated with those acquisitions. The credit to be awarded for 
these risk-sharing activities is to be equal to the amount of the GSE's 
risk under the risk-sharing arrangement.
    For example, under section 542 of the Housing and Community 
Development Act of 1992, codified as a note to 12 U.S.C. 1707, the 
Department has entered into separate multifamily risk-sharing 
agreements with Fannie Mae and Freddie Mac. Under those agreements, 
each GSE shares risk of mortgage default through re-insurance with HUD 
on a 50 percent expected loss basis. If, under these agreements, a GSE 
shares the risk for 1,000 multifamily dwelling units and the GSE 
certifies that its share of the risk is equal to 50 percent, that GSE's 
performance under the low- and moderate-income housing goal would 
include the following calculation: The numerator would include 50 
percent of the dwelling units affordable to low- and moderate-income 
families; and 500 dwelling units would be added to the denominator.
    Where a GSE enters a risk-sharing arrangement, to receive credit 
toward the goals, it must certify what the real percentage of risk is 
and how that percentage was calculated--that percentage will then be 
used in calculating the GSE's performance under the relevant goal. The 
Department notes that in some risk-sharing arrangements, a GSE may 
assume top loss or catastrophic loss. In those instances, the actual 
risk assumed by the GSE clearly will not equal the percentage of the 
risk stipulated, e.g., if a GSE assumes the first 20 percent of the 
risk, its actual risk is higher than 20 percent.
    (4) Participations. Where a GSE purchases only a portion of a 
mortgage, that participation receives partial credit equivalent to the 
percentage of the mortgage purchased. For example, if a GSE has a 20 
percent participation in a mortgage, the denominator shall include 20 
percent of the units financed by the mortgage and the numerator will 
include that portion of the 20 percent of the units that meet the 
requirements for the particular housing goal.
    (5) Cooperative housing loans. The purchase of a mortgage on stock 
in a cooperative housing unit (``a share loan'') is counted the same 
way as the purchase of single family owner-occupied units and, thus, 
affordability is based on the income of the owners. Where a GSE 
purchases a mortgage on a cooperative building (``the blanket loan'') 
and share loans for units in the same building, both purchases receive 
full credit, i.e., the blanket loan counts under the housing goals in 
the same manner as a multifamily mortgage purchase.
    (6) Seasoned loans. Purchases of seasoned loans are treated the 
same as purchases of recently originated mortgages and receive full 
credit under the goals. However, such purchases shall not count if the 
GSE already counted the mortgages under these housing goals or the 
goals in the Interim Notice of Housing Goals. To ensure that the 
housing covered by seasoned loans is affordable and counts, where a 
mortgage is more than three (3) years old, affordability must be 
determined based on income and/or rent level information at the time of 
purchase by the GSE.
    (7) Second loans. A second mortgage on a residential property will 
be counted under the goals, if the property otherwise counts. The 
Secretary is seeking comment on whether these loans should receive 
partial or full credit toward the goals and, if partial credit, how the 
amount of credit should be determined. These loans, many of which are 
originated to pay for the costs of rehabilitating a single-family home, 
are an important part of lending in underserved communities. Many low-
income homeowners cannot purchase new homes but seek to borrow funds to 
make repairs to their existing homes to increase their habitability and 
comfort. In many cases, however, these loans will have smaller unpaid 
principal balances than loans originated for purchase.
    (8) Tax Credit and Mortgage Revenue Bond Purchases. The Secretary 
commends the GSEs' involvement in a wide variety of undertakings, 
including equity investments in projects eligible for Low-Income 
Housing Tax Credits (tax credits)\114\ and purchases of State and local 
government housing bonds, [[Page 9169]] such as mortgage revenue 
bonds,\115\ which serve significant purposes related to low- and 
moderate-income housing. The Secretary has concluded, however, that--
although important in providing financing for low-income housing 
development--these activities are not equivalent to ``mortgage 
purchases'' and credit will not be granted toward the goals for these 
activities. This approach is consistent with the language in the Senate 
report concerning such activities: ``The (GSEs) are expected to 
continue such investments, but to carry them out in addition to 
initiatives necessary to meet the goals contained in this 
legislation.''\116\

    \114\26 U.S.C. 42.
    \115\26 U.S.C. 143.
    \116\Id. at 38. See also, id. at 31, and H.R. Rep. No. 102-206, 
102d Cong., 1st Sess. 60 (1991) (hereinafter cited as ``H. Rep.'').
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    (9) Second homes. Mortgages financing secondary residences would 
not count toward achievement of any of the goals because the Secretary 
has determined that the goals should be directed to increasing the 
supply of primary residences, not secondary residences.
    (10) Refinancings. The purchase of refinanced mortgages shall fully 
count toward achievement of the housing goals except as provided in the 
specific restrictions under the special affordable housing goal which, 
generally, permits arms-length borrower-driven refinancings to count 
toward achievement of the goal but excludes wholesale exchanges of 
mortgages between the GSEs.
Affordability Determination Under the Goals
    In analyzing a GSE's performance in achieving these goals, the 
Secretary will, for mortgage purchases on owner-occupied dwelling 
units, consider the mortgagors' income as required by the Act.\117\

    \117\Sections 1332(c)(1) and 1333(c)(1)(A).
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    For mortgage purchases on rental dwelling units, the Secretary will 
consider, based on data at the time of mortgage purchase, the income of 
prospective or actual tenants if available. Where such income 
information is not available, rent on the dwelling units is used as a 
proxy and compared to the rent levels affordable to very low-, low-, 
and moderate-income families.\118\ To be considered affordable, the 
rent cannot exceed 30 percent of the maximum income level of the 
family's classification, i.e., very low-, low-, or moderate-income, 
with adjustments for unit size.\119\

    \118\Sections 1332(c) and 1333(c).
    \119\Sections 1332(c)(2) and 1333(c)(2).
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    Consistent with the Act,\120\ the Secretary is requiring that 
tenants' income information be collected by each GSE where such income 
information is available. Based on the legislative history, income 
information is available ``when it is known by the lender because, for 
example, such information is required as a condition of an existing 
federal housing program.''\121\ Thus, where, as a condition of an 
existing federal, state, or local housing program, income information 
of tenants is required to be collected, such income information is 
considered as known to a lender and, therefore, available to the GSEs.

    \120\Sections 1332(c)(1)(B) and 1333(c)(1)(B).
    \121\S. Rep. at 35.
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    Where tenant income is not known to the lender, the 30 percent rent 
proxy is to be used to monitor and evaluate each GSE's performance in 
achieving the goals.\122\ (The Secretary notes that the 30-percent rent 
standard prescribed by the Act for determining affordability under the 
low- and moderate-income housing goal is too inclusive. In applying 
this standard, it can be anticipated that more than 80 percent of 
rental housing will be regarded as affordable to low- and moderate-
income families.)

    \122\See sections 1332(c) and 1333(c).
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    The term ``rent'' is not defined in the Act. Where the term 
``rent'' is used in eligibility and affordability requirements for 
government housing programs, the term means ``gross rent,'' which 
includes all utilities, based on either actual data or allowances. 
Likewise, this proposed regulation defines ``rent'' as gross rent, 
i.e., contract rent including utilities or contract rent plus utilities 
where some or all of the utilities are not included in the contract 
rent.
    Where all utilities are not included in rent, use of contract rent 
is unsatisfactory and excludes a significant component of housing costs 
from the rent calculation. Utility costs comprise a significantly 
larger share of total housing costs for lower income families in 
comparison with higher income families. Moreover, applying the rent 
test, with rent exclusive of utility costs, would result in an even 
more unrealistically inclusive test of affordability for rental 
dwelling units than is the case using gross rent. If contract rent were 
used, the Department projects that more than 95 percent of all rental 
units would be classified as affordable to low- and moderate-income 
families.\123\

    \123\Using rent as defined in this Notice, consistent with 
current law, 93 percent of existing rental dwelling units and 78 
percent of recently constructed rental dwelling units qualify as 
affordable to low- and moderate-income families.
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    To resolve the problem of assuring consideration of gross rents 
including utility costs, while at the same time providing workable 
means for including those costs, this proposed regulation allows the 
GSEs to use: Actual data on utilities; utility allowances based on data 
from the American Housing Survey (AHS) and issued annually by the 
Secretary; utility allowances established for the HUD Section 8 Program 
(section 8 of the United States Housing Act of 1937, 42 U.S.C. 1437f); 
and/or an alternative adjustment formula subject to approval by the 
Secretary. The proposed regulation provides that, unless such an 
alternative approach is approved by the Secretary, the GSEs shall use 
actual data, the AHS-derived allowances, or the Section 8 allowances.
    Where tenant income is not available, the Act requires that the 
test for affordability of rental dwelling units be applied to units 
``with appropriate adjustments for unit size as measured by the number 
of bedrooms.''\124\ Thus, to determine whether a unit counts toward 
achievement of a goal, rent on the unit is considered in terms of the 
number of bedrooms in the unit. The Low-Income Housing Tax Credit 
(LIHTC) provides an accepted formula for adjustments to determine 
housing capacity, see 26 U.S.C. 42(g)(2)(C), and this proposed 
regulation requires the use of those adjustments for these goals. These 
adjustments assume that an efficiency houses one person, a one bedroom 
unit houses 1.5 persons and each additional bedroom houses an 
additional 1.5 persons.

    \124\Sections 1332(c)(2) and 1333(c)(2).
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    Income adjustments for family size, required under the Act to 
determine whether a renter family's income qualifies as very low, low, 
or moderate, are established for the HUD Section 8 program and use of 
these adjustments is also required under this proposed regulation. To 
determine which rental dwelling units qualify as affordable, this 
proposed regulation combines the LIHTC unit size adjustment factors 
with the Section 8 family size adjustment factors to develop the 
necessary unit size adjustment factors to be applied to rent. For 
example, under the LIHTC an efficiency is assumed to house one person; 
under Section 8, for moderate-income, one person's rent may not exceed 
70 percent of 30 percent of area median income; thus, an efficiency is 
affordable for a moderate-income person if the rent does not exceed 21 
percent [[Page 9170]] of area median income.\125\ Similarly, a two-
bedroom unit is assumed to house three persons; three persons' rent may 
not exceed 90 percent of 30 percent of area median income; thus, a two-
bedroom unit is affordable for a moderate-income family if the rent 
does not exceed 27 percent of area median income. These percentages are 
included below under ``General Requirements.''

    \125\Similarly, for purposes of determining affordability to 
low-income families: An efficiency is assumed to house one person; 
one person's rent may not exceed 70 percent of 30 percent of 80 
percent of area median income (using family size to adjust income); 
thus, an efficiency is affordable to a low-income family if the rent 
does not exceed 16.8 percent of the area median income.
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    In some instances, the LIHTC unit size adjustments and the Section 
8 family size adjustments do not directly correspond to each other. For 
example, under the LIHTC a one-bedroom apartment is assumed to house 
1.5 persons but Section 8 does not provide a family size adjustment for 
1.5 persons. Therefore, the HUD Section 8 adjustment factors for one 
person (70 percent) and two persons (80 percent) have been averaged to 
obtain a rent not in excess of 75 percent of 30 percent of area median 
income, yielding a net one-bedroom unit size adjustment factor of 22.5 
percent of area median income.\126\ Similar interpolations also are 
made for three-bedroom and five-bedroom units.

    \126\Similarly, for purposes of low-income affordability, the 
same 75 percent figure is used to obtain a rent not in excess of 75 
percent of 30 percent of 80 percent of area median income, yielding 
a net unit size adjustment factor of 18 percent.
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    In certain rare instances (normally in New England), it may be 
unclear which area median income should be applied to determine the 
affordability of certain dwelling units. Under the proposed regulation, 
where a GSE knows that a property is located in a census tract that is 
split between two different areas and it is not clear which area median 
income should be used, the GSE must calculate a median income for the 
split census tracts. The median income for such split areas equals: (A) 
The percentage of the population of the census tract that is located in 
the first area times the median income of that area; plus (B) the 
percentage of the population of the geographic segment that is located 
in the second area times the median income of that area.
    For example, a GSE purchases a mortgage on a property located in a 
census tract that is partially in a metropolitan statistical area (MSA) 
and partially outside the MSA; seventy-five percent of the census 
tract's population is in the MSA and the remaining 25 percent is 
outside the MSA; the median income for the MSA is $40,000; the median 
income for the county outside the MSA is $30,000. The median income for 
the split census tract would be 75 percent of $40,000 plus 25 percent 
of $30,000, or $37,500.
    HUD seeks guidance on the appropriate reference for income in non-
metropolitan areas for determining affordability under the housing 
goals for low- and moderate-income families and special affordable 
housing and for defining low-income areas in the goal for central 
cities, rural areas and other underserved areas. Should borrower and 
area income in non-metropolitan areas be defined: (1) Relative to the 
county median income; or (2) relative to the maximum of the county 
median income or the median income of the non-metropolitan balance of 
the State?
Housing Plans
    The proposed rule provides procedures if a GSE fails to meet any 
housing goal. If the Secretary determines that either GSE has failed to 
meet any housing goal or there is a substantial probability that a GSE 
will fail to meet a housing goal, the Secretary shall, by written 
notice, preliminarily require that the GSE submit a housing 
plan.<SUP>127 The GSE would then have 30 days (which may be extended by 
the Secretary) to respond in writing to the Secretary's notice.\128\ 
The GSE's response may include any information that the GSE considers 
appropriate for the Secretary to consider in determining whether the 
GSE failed to meet a housing goal, whether there is a substantial 
probability that the GSE will fail to meet a housing goal, and whether 
achievement of the housing goal was or is feasible.

    \127\Section 1336(b)(1).
    \128\Section 1336(b)(2).
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    After reviewing the GSE's response, the Secretary shall issue a 
final determination as to whether the GSE has failed or there is a 
substantial probability that the GSE will fail to meet the housing 
goal.\129\ Additionally, the Secretary shall determine whether 
achievement of the housing goal was or is feasible based on market and 
economic conditions and the GSE's financial condition.\130\ Where the 
Secretary determines that the GSE has failed or there is a substantial 
probability that the GSE will fail to meet the housing goal and that 
achievement of the housing goal was or is feasible, the Secretary shall 
require the GSE to submit a housing plan.\131\

    \129\Section 1336(b)(3)(A).
    \130\Id.
    \131\Section 1336(c)(1).
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    Each housing plan must be feasible and sufficiently specific to 
enable the Secretary to monitor the GSE's performance under and 
compliance with the plan.\132\ A housing plan must describe the 
specific actions that the GSE will take to achieve the goal in the next 
calendar year or, where the Secretary has determined that a substantial 
probability exists that the GSE will fail to meet a goal in the current 
year, the plan must describe the reasonable improvements the GSE will 
make in the remainder of the year.\133\

    \132\Section 1336(c)(2).
    \133\Id.
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Subpart C--Fair Housing Requirements

    The Act requires the Secretary, by regulation, to prohibit the GSEs 
from discriminating in their mortgage purchase activities and to 
require that the GSEs submit specified data to the Secretary on 
mortgage lenders to assist the Secretary's investigative activities 
under the Fair Housing Act and to assist investigative activities under 
the Equal Credit Opportunity Act (ECOA).\134\ The Act also requires the 
Secretary to: Obtain and provide to the GSEs information on violators 
of the Fair Housing Act and ECOA; direct the GSEs to take action 
against mortgage lenders found to discriminate; and periodically review 
and comment on the GSEs' underwriting guidelines.\135\

    \134\Sections 1325(1)-(3).
    \135\Section 1325(4)-(6).
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    In enacting FHEFSSA, Congress recognized the unique position and 
responsibilities of the GSEs in the mortgage market and their 
unparalleled capabilities to effectuate fair housing and fair lending 
in that market. The GSEs are Federally sponsored and purchase a large 
majority of all of the conventional mortgages originated by primary 
lenders. The House Report on the Act stated:

    While the Committee does not intend that the (GSEs) be 
responsible for investigating and punishing acts of discrimination, 
the Committee does expect the (GSEs) to use their considerable 
influence over the mortgage market to ensure that lenders with which 
they deal are acting in a nondiscriminatory manner.\136\

    \136\H. Rep. at 57.

    Discrimination on a prohibited basis is intolerable and socially 
and economically destructive. The GSEs on many occasions have expressed 
their commitment to combatting discrimination and advancing fair 
lending. The Secretary, through this regulation, seeks to make concrete 
the [[Page 9171]] GSEs' significant fair housing and fair lending 
responsibilities under the Act.
    These provisions are intended ultimately to further fair lending by 
primary lenders. Accordingly, in developing these sections, the 
Secretary consulted with Federal agencies that regulate lending 
institutions including the Office of Comptroller of the Currency, the 
Office of Thrift Supervision, the Treasury Department, and the Federal 
Reserve. Those consultations proved extremely beneficial. 
Responsibility for enforcement of the Act's fair housing provisions is 
solely vested in the Department of Housing and Urban Development under 
the Act, including the HUD Office of Federal Housing Enterprise 
Oversight (OFHEO), and no provisions in this regulation may impede 
those authorities. However, the Secretary has concluded that in the 
implementation of these regulations further consultations in the 
operational arrangements of these regulations would be valuable.
    Consultation will assure needed coordination of regulatory actions 
within the government and the provision of beneficial information and 
views from the regulators to the Secretary. The regulations, therefore, 
specifically require that memoranda of understanding will be 
established with regulators to specify procedures for submission and 
dissemination of information from the regulators to the Secretary and 
to the GSEs. Also, prior to directing any remedial action by a GSE 
against a lender, the Secretary would be required to solicit and fully 
consider the views of the lender's regulator. Finally, at all points in 
the process where warranted, including, without limitation, the 
Secretary's review of the GSEs' underwriting guidelines and business 
practices affecting lenders, the Secretary will fully consider the 
views of the appropriate regulators in the standards used by such 
regulators in similar circumstances.
Prohibitions Against Discrimination
    The regulations generally prohibit the GSEs from discriminating in 
any manner in their mortgage purchases because of race, color, 
religion, sex, handicap, familial status, age or national origin, 
including any consideration of the age or location of the dwelling or 
the age of the neighborhood or census tract where the dwelling is 
located in a manner that has a discriminatory effect. The proposed 
regulation provides that the GSEs are liable for any discrimination by 
them, or their officers, or employees, or agents in making mortgage 
purchases. Just as the term ``mortgage purchase'' includes transactions 
which are substantively similar to mortgage purchases for purposes of 
the housing goal provisions, the term is similarly inclusive for 
purposes of the restrictions against discrimination.
    The regulation makes clear that prohibited conduct is subject to 
certain exemptions. For example, while the regulations generally forbid 
the GSEs from considering factors concerning the age and location of a 
dwelling, or the area in which the dwelling is located in a manner that 
has a discriminatory effect, these factors may be considered in certain 
cases. The age of a dwelling may be used by an appraiser as a basis for 
conducting more extensive inspections of structural aspects of the 
dwelling. Location factors that may have a negative effect on a 
dwelling's value may be properly considered in an appraisal and in 
other aspects of the underwriting process.
    The GSEs may also consider factors justified by business necessity, 
including requirements of Federal law, relating to a transaction's 
financial security or to protection against default or reduction of the 
value of the security. For example, age or location may be considered 
in circumstances other than appraisals, including requiring a different 
loan-to-value ratio for an older, more expensive to maintain, 
multifamily building. However, where a GSE's consideration of a factor 
or factors has a disparate result based upon race, color, religion, 
sex, handicap, familial status, age or national origin, including any 
consideration of the age or location of the dwelling or the age of the 
neighborhood or census tract where the dwelling is located, in order 
for the factor or factors to continue to be considered, the factor must 
be justified by business necessity. The business necessity must be 
manifest and neither hypothetical nor speculative. Even if 
consideration of the factor can be justified based on business 
necessity, its use still may be impermissible if an alternative policy 
or practice could serve the same purpose with less discriminatory 
effect.
Business Practices Analysis and Underwriting and Appraisal Guidelines
    The regulations provide that following their effective date and 
periodically thereafter as requested by the Secretary, each GSE shall 
conduct and submit to the Secretary a Business Practices Analysis to 
further implement the prohibitions against discrimination under the Act 
and facilitate the reporting requirements under sections 309(n)(2)(G) 
of the Fannie Mae Act and 307(f)(2)(G) of the Freddie Mac Act<SUP>137 
and the underwriting and appraisal guideline review requirements under 
the Act.<SUP>138 The GSEs will develop a methodology for conducting the 
Business Practices Analyses and the Secretary will review and comment 
on the methodology.

    \137\These Charter Act sections require the GSEs to ``assess 
underwriting standards, business practices, repurchase requirements, 
pricing fees, and procedures, that affect the purchase of mortgages 
for low- and moderate-income families, or that may yield disparate 
results based on the race of the borrower, including revisions 
thereto to promote affordable housing or fair lending.''
    \138\Section 1325(6).
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    The Business Practices Analysis must assess the GSE's underwriting 
standards and appraisal practices, repurchase requirements, pricing, 
fees, procedures, and other business practices that affect the purchase 
of mortgages for low- and moderate-income families or that may yield 
disparate results based on the race, color, religion, sex, handicap, 
familial status, age or national origin of the borrower. The analysis 
shall specify revisions that will be made to promote affordable housing 
and fair lending. If disparate results occur because of any business 
practices, the GSE must demonstrate that a business necessity exists 
for the practice or demonstrate how the GSE plans to remedy the 
situation. The GSEs' Charter Acts as amended by FHEFSSA require an 
analysis of business practices as part of a required report.<SUP>139 
The analysis will serve as a baseline for future reporting and as a 
necessary action by the GSEs toward remedying any systemic practices 
that are discriminatory and assuring that the GSEs are not in violation 
of the prohibitions under this subpart.

    \139\Fannie Mae Charter Act, section 309(n)(2)(G), and Freddie 
Mac Act, section 307(f)(2)(G).
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    The Secretary recognizes that, at least initially, this highly 
important analysis will require a considerable amount of time to 
complete. Accordingly, the Secretary specifically seeks comments 
concerning the deadline for completing the initial analysis and the 
time for review by the Secretary which should be included in the final 
regulations.
    Under the Act, the Secretary is required to review the GSEs' 
underwriting and appraisal guidelines to ensure compliance with the 
Fair Housing Act, the regulations promulgated thereunder, section 1325 
of the Act, and these regulations.<SUP>140 In implementing this 
responsibility--in a manner intended to maximize industry self-
regulation--this proposal places initial responsibility on the GSEs 
themselves, rather than the Department, [[Page 9172]] to review all 
current guidelines and future revisions of the guidelines. Review of 
the GSEs' current guidelines therefore will involve analyses by the 
GSEs followed by Secretarial review and comment. The GSEs' analyses of 
the current guidelines will occur for the first time, under this 
regulation, as part of the Business Practices Analysis. The regulations 
require that before instituting a revision, the GSE must certify that 
after reasonable evaluation and analysis, the GSE has determined in 
good faith that to the best of its knowledge the change will not be 
discriminatory.

    \140\Section 1325(6).
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    The Secretary will provide comments and recommendations for changes 
to guidelines and revisions to ensure consistency with the Fair Housing 
Act. If a GSE does not make such changes or otherwise resolve comments 
to the satisfaction of the Secretary, the Secretary may take action 
under the Fair Housing Act.
    In addition to requiring an analysis of the GSEs' business 
practices as a means of effectuating fair lending, the Secretary seeks 
comment concerning whether the GSEs should be required to develop a 
fair lending plan to identify and address impediments to fair housing 
and fair lending in the primary market. Lending discrimination remains 
a pervasive and persistent problem in the mortgage industry. The 
Secretary seeks comment on the following questions:
    (1) Should the GSEs be required to prepare a fair lending plan?
    (2) Could a fair lending plan offer new ways to lead the primary 
lending market in eradicating discrimination? If so, how?
    (3) What are the appropriate components of such a plan? and
    (4) How would the plan effectuate fair housing/fair lending 
objectives?
Submission of Information to Assist the Secretary
    The GSEs are required to submit information and data to the 
Secretary to assist in investigating whether any mortgage lender with 
which the GSE does business has failed to comply with the Fair Housing 
Act or ECOA.<SUP>141 The regulation requires that the GSEs: (a) Respond 
to a specific Secretarial request for information on a particular 
lender or lenders; (b) provide information when the GSE becomes aware 
of a questionable activity by a lender; and (c) develop and provide 
data that could be generated by GSE data systems, e.g., relating data 
on census tracts to lender mortgage sales. When investigating the 
practices of a particular lender, GSE data could provide the Secretary 
useful information on lending patterns of that lender and other lenders 
in the same area.

    \141\Sections 1325 (2)-(3).
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    The Secretary invites the GSEs and the public to provide comments 
on additional information that the GSEs could usefully gather on 
lenders for the Secretary's review in connection with the enforcement 
of the Fair Housing Act.
Submission of Information by the Secretary to the GSEs
    The Secretary will obtain information from Federal, State, and 
local enforcement agencies with information regarding violations of 
ECOA, the Fair Housing Act, or State and local anti-discrimination 
laws. The Secretary will provide this information to the GSEs. Such 
information may indicate violations of the GSEs' underwriting 
guidelines and/or representations or certifications from lenders. The 
specific nature of the violation information to be obtained by the 
Secretary and the procedures for referral applicable to Federal 
financial regulators will be governed by memoranda of understanding 
entered into between the Secretary and such regulators. The Secretary 
shall also consult with such regulators on the nature of the 
information to be provided to the GSEs. The Secretary is particularly 
sensitive to ensuring that only relevant and legally appropriate 
information--considering financial privacy and other pertinent 
matters--is obtained and provided to the GSEs under this provision. 
Although other provisions of the Act and regulations described below 
allow the Secretary to direct sanctions against lenders found to 
discriminate,<SUP>142 these information dissemination provisions 
neither directly nor indirectly require actions by the GSEs based upon 
violation information provided by the Secretary. The regulations merely 
provide that the GSEs may take appropriate action under their 
procedures based on information provided by HUD concerning lender 
violations of the Fair Housing Act or ECOA, i.e., the GSEs, in their 
discretion, may choose to take action against lenders based on 
violations of binding contractual arrangements with the GSEs forbidding 
discrimination.

    \142\Section 1325(5).
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Remedial Actions
    The Secretary is required to direct the GSEs to take remedial 
actions--including suspension, probation, reprimand, or settlement--
against lenders which have been found to have engaged in discriminatory 
lending practices in violation of the Fair Housing Act and ECOA 
following appropriate proceedings.<SUP>143

    \143\ Section 1325(5).
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    For purposes of remedial action, a lender will have been found to 
have violated ECOA only after a final determination on the matter has 
been made by an appropriate United States District Court or any other 
court of competent jurisdiction. A lender will have been found to have 
violated the Fair Housing Act only after a final determination on the 
matter has been made by a District Court, a HUD Administrative Law 
Judge, or the Secretary. Based on such violations, the Secretary shall 
direct the GSE to take remedial action(s) under this section. Prior to 
the date the action is to be imposed, the lender may request and, if 
the request is timely filed, will be entitled to a hearing before a HUD 
Administrative Law Judge; such hearing shall be limited to review of 
the appropriateness of the proposed remedial action only. The 
determination on the underlying violation will not be subject to review 
at the hearing.
    To ensure regulatory coordination and avoid any unnecessary 
regulatory burden, the Secretary will be required under the proposed 
regulation, prior to directing any remedial actions under this section, 
to solicit and fully consider the views of the particular lender's 
Federal financial regulator concerning the action or actions 
contemplated. Views will be solicited and considered in accordance with 
the foregoing memoranda of understanding between the Secretary and such 
regulators. The regulations address the lenders' due process rights and 
factors that the Secretary may consider in determining an appropriate 
action. The Act empowers the Director of OFHEO to enforce violations of 
section 1325 by the GSEs. Potential violations are to be referred to 
the Director by the Secretary.
The Fair Housing Act
    The Secretary's regulatory authority under section 1325 of the Act 
is in addition to the Secretary's responsibilities under the Fair 
Housing Act<SUP>144 and Executive Order 12,892.<SUP>145 The Fair 
Housing Act requires that the Secretary administer all HUD programs and 
activities relating to housing and urban development (which would 
include GSE oversight responsibilities) so as ``to affirmatively 
further'' the [[Page 9173]] purposes of the Fair Housing Act.<SUP>146 
The Secretary is in the process of developing regulations under the 
Fair Housing Act that will update HUD's current regulations concerning 
fair housing and fair lending. Those forthcoming regulations will 
supplement these GSE regulations. Nothing in these regulations is 
intended to diminish in any manner the GSEs' responsibilities under the 
Fair Housing Act.

    \144\42 U.S.C. 3601-19.
    \145\59 FR 2939 (1994).
    \146\42 U.S.C. 3608(e)(5).
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Subpart D--Review of New Programs

Background
    Under both Charter Acts, prior to amendment by FHEFSSA, the 
Secretary had statutory authority to approve the GSEs' purchasing, 
servicing, selling, lending on the security of or otherwise dealing in 
conventional mortgages. Under provisions of FHEFSSA, the Secretary must 
approve new programs unless the Secretary determines that the program 
was not authorized under specific provisions of the GSEs' Charter Acts 
or that the program was not in the public interest.<SUP>147 Until one 
year after the Director's regulations under section 1361(a) of FHEFSSA 
are issued, the Director also must review new programs and, if the 
Director determines that the new program would risk significant 
deterioration of the GSE's financial condition, the new program must be 
disapproved by the Secretary.<SUP>148 The purpose of the Secretary's 
approval is ``to ensure that (programs) are authorized by the relevant 
(C)harter Act, not detrimental to housing availability and 
affordability, and, for an undercapitalized (GSE),to ensure that such 
programs (will) not worsen the financial condition of the 
(GSE).''<SUP>149

    \147\Section 1322(b)(2).
    \148\Section 1322(b)(2).
    \149\S. Rep. at 15.
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Scope of Authority
    The Secretary intends to make certain that the GSEs continue to 
have sufficient latitude to develop innovative programs to serve 
America's housing needs. In the area of housing finance, dramatic 
innovations have occurred during the last 25 years, with the 
introduction of the mortgage-backed security, the REMIC, and other 
financing vehicles that have brought new sources of investment capital 
into housing. The GSEs have either developed or refined these vehicles. 
The Secretary wants to ensure that future innovations are also allowed 
to develop without unnecessary impediment.
    As noted in the House Report on the Act, ``(t)he Secretary's role 
with regard to approval authority over new programs is not designed to 
entangle Fannie Mae and Freddie Mac in unnecessary delays, bureaucratic 
red tape, or extraneous consideration by HUD.''<SUP>150 In reviewing 
new programs, the Secretary will follow judiciously the standards for 
review in the Act and will only disapprove a request for new program 
approval where the program is not within the scope of the GSE's 
statutory authority, the program is not in the public interest, or, 
during the transition period, where the Director determines that the 
new program would risk significant deterioration in a GSE's financial 
condition.<SUP>151

    \150\H. Rep. at 55.
    \151\Section 1322(b)(1).
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    Each GSE is required to obtain the approval of the Secretary for 
any ``new program'' before the GSE implements the program.<SUP>152 
Section 1303(13) of the Act defines ``new program'' as ``any program 
for the purchasing, servicing, selling, lending on the security of, or 
otherwise dealing in, conventional mortgages that--(A) is significantly 
different from programs that have been approved under this Act or that 
were approved or engaged in by (a GSE) before (October 28, 1992); or 
(B) represents an expansion, in terms of the dollar volume or number of 
mortgages or securities involved, of programs above limits expressly 
contained in any prior approval.'' (Programs that were specifically 
approved are referred to as ``approved programs.'')

    \152\Sections 1322(a) of FHEFSSA, 305(c) of the Freddie Mac Act, 
and 302(b)(6) of the Fannie Mae Charter Act.
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    Under the Act, all GSE programs engaged in prior to October 28, 
1992, which are referred to in the regulations as ``authorized 
programs,'' are deemed to be approved even where the GSE did not 
actually obtain approval from the Secretary and such programs need not 
be submitted to the Secretary for further review. However, where 
programs are significantly different from authorized programs, unless 
such programs are otherwise approved they are ``new programs'' subject 
to the Secretary's approval.
    Under these regulations, the ``new program'' approval procedure 
applies to ongoing ``programs,'' pilots, and demonstration programs 
that ``significantly differ'' from authorized or approved programs. 
``New program'' also would include a program that is expanded, in 
dollar volume or number of mortgages or securities involved, above any 
limits expressly contained in any prior approval by the Secretary.
    Where a question exists as to whether an activity is a program, if 
submission is otherwise required, the GSE must submit the activity for 
Secretarial review. As noted in the legislative history, where a 
planned program ``could reasonably raise significant questions'' as to 
whether the program is within a GSE's statutory purposes or in the 
public interest, that program ``should be viewed as significantly 
different from existing programs and, therefore, must be submitted for 
approval.''<SUP>153 Accordingly, the GSEs shall submit programs for 
review if the Secretary could reasonably consider the program to be 
new, even where the GSE believes the program is not new. Where the GSE 
does not believe that the program is new, the GSE may, in its 
submission, fully explain its basis for that position.

    \153\S. Rep. at 15.
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    Fannie Mae undertakes certain housing related activities under 
section 309(a) of its Charter Act, which authorizes Fannie Mae ``to do 
all things as are necessary or incidental to the proper management of 
its affairs and the proper conduct of its business.'' Freddie Mac has 
similar authority under which Freddie Mac's ``(f)unds * * * may be 
invested in such investments as (its) Board of Directors may 
prescribe,'' and Freddie Mac has the power ``to determine its necessary 
expenditures and the manner in which the same shall be incurred, 
allowed, and paid.''<SUP>154 Where any of these activities could be 
regarded as new programs subject to the Secretary's review, the 
proposed regulation would require the GSEs to submit requests for 
program approval for those activities (under sections 309(a) of the 
Fannie Mae Charter Act or 303(c)(9) or (d) of the Freddie Mac Act). The 
purpose of this requirement is to ensure that the Secretary 
appropriately reviews all new programs and ensures that the GSEs do 
not, through use of their corporate powers, violate any provisions of 
their Charter Acts such as the prohibition against the GSEs originating 
mortgage loans.<SUP>155

    \154\Freddie Mac Act, sections 303(d) and 303(c)(9).
    \155\See sections 304(a)(2)(B) of the Fannie Mae Charter Act and 
305(a)(5)(B) of the Freddie Mac Act.
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    Although new programs will be subject to Secretarial review, the 
Secretary does not intend to interfere with the GSEs' other activities 
under sections 309(a) of the Fannie Mae Charter Act or 303(c)(9) or (d) 
of the Freddie Mac Act. The Secretary encourages the GSEs to continue 
their activities under these provisions. [[Page 9174]] 
Products
    A program differs from a product. As noted in the legislative 
history, ``(o)nce a program is approved, Fannie Mae and Freddie Mac are 
expected and encouraged to develop a range of specific products under 
the umbrella of the new program. The Secretary's prior approval 
authority does not extend to the introduction of new products under an 
approved program.''<SUP>156

    \156\ H. Rep. at 55.
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Significantly Different
    To determine whether a planned GSE program is ``significantly 
different'' from a GSE program that has been approved or authorized, 
and, therefore, requires the Secretary's approval, the proposed 
regulation provides that a program is significantly different if it 
materially differs from the GSE's other approved or authorized programs 
by entailing substantially greater risk or substantially expanding the 
GSE's role in the housing markets by involving new categor(ies) of 
borrowers, properties or other securities, borrowing purposes, or 
credit enhancements. New programs do not include new activities that 
are designed to refine approved or authorized programs by repackaging 
features of those programs, making technical improvements, or creating 
other nonmaterial variations.
Requested Comments on New Program Approval
    In connection with new program approval, the Secretary seeks 
comments on the following questions:
    (1) The Act defines ``new program,'' generally, as a program that 
is significantly different from GSE programs previously approved or 
authorized. The Act does not define ``program,'' ``product,'' or 
``significantly different.'' Should these term(s) be defined in the 
final rule and, if so, how should the term(s) be defined?
    (2) The Act requires the Secretary to approve a new program unless 
the program is not authorized by the GSE's Charter Act or the Secretary 
determines that the new program is not in the public interest. Should 
the final rule include factors that the Secretary will consider in 
determining whether a program is not in the public interest and, if so, 
what factors should be included?
Procedures
    Requests from a GSE for new program approval must be submitted in 
writing and fully explain the program and whether the program is 
implemented under the authority of sections 305(a) (1), (4), or (5) of 
the Freddie Mac Act or 302(b) (2)-(5) of the Fannie Mae Charter Act. 
Each program request shall include: An opinion from counsel setting 
forth the statutory authority for the new program; a good faith 
estimate of the anticipated dollar volume of the program over the 
short- and long-term; a full description of the purpose and operation 
of the proposed program, the market targeted by the program, the 
delivery system for the program, the effect of the program on the 
mortgage market, and material relevant to the public interest.
    The Secretary and the Director (where the Director has new program 
approval authority) may, within 45 days of receiving a request for new 
program approval, determine that additional information from the GSE is 
needed to make a decision on the request.<SUP>157 When additional 
information is needed by the Secretary or the Director, the Secretary 
shall request such information from the GSE. The GSE must provide such 
information within 10 days of the Secretary's request and, if the GSE 
fails to do so, the Secretary may deny the request based on the GSE's 
failure.

    \157\ Section 1322(c)(2).
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    The Secretary shall approve or disapprove new program requests 
within 45 days, or 60 days if additional information is requested from 
the GSE.<SUP>158 When the Secretary approves a new program, the 
Secretary shall provide written notice of the approval to the GSE. When 
a new program is not approved, the Secretary shall submit an 
explanatory report to the Committee on Banking, Finance and Urban 
Affairs of the House of Representatives and the Committee on Banking, 
Housing, and Urban Affairs of the Senate.<SUP>159 If the Secretary 
fails to approve or disapprove a new program within 45 days (or 60 days 
where additional information is requested), the request shall be deemed 
approved.<SUP>160

    \158\ Section 1322(c)(2).
    \159\ Section 1322(c)(2).
    \160\ Section 1322(c)(3).
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    Where the Secretary disapproves a new program request from a GSE 
under sections 305(a) (1), (4), or (5) of the Freddie Mac Act or 302(b) 
(2)-(5) of the Fannie Mae Charter Act and these regulations, the GSE 
may request within 30 days of the disapproval an opportunity to 
supplement the administrative record at a meeting with the Secretary or 
the Secretary's designee or in writing.<SUP>161 A meeting will be 
scheduled within 10 days of a request. Within 10 days after written 
submission or a meeting, the Secretary will notify the GSE whether the 
decision is withdrawn, modified or affirmed.

    \161\See Section 1322(c)(4)(A).
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    Where the Secretary disapproves a new program because it is not in 
the public interest or because the Director determined that the program 
would risk significant deterioration of the GSE's financial condition, 
the Act<SUP>162 and these regulations provide the GSE with notice of 
and an opportunity for a hearing on the record concerning the 
disapproval as provided in subpart G.

    \162\ Section 1322(c)(4)(B).
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Subpart E--Reporting Requirements

    Sections 309 (m) and (n) of the Fannie Mae Charter Act and 307 (e) 
and (f) of the Freddie Mac Act require that the GSEs submit data about 
their mortgage purchases to the Secretary and also submit reports to 
Congress and the Secretary concerning the GSEs' housing activities. The 
Act requires that the Secretary report to Congress by June 30 of each 
year on the activities of the GSEs.<SUP>163 These regulations implement 
all of the applicable reporting requirements so that the Secretary is 
capable of appropriately monitoring the GSEs' activities and reporting 
to the Congress.

    \163\ Section 1324.
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    The current Fannie Mae regulations required Fannie Mae to submit 
numerous reports to the Secretary. The Secretary has reviewed these 
reporting requirements and determined that a simpler, more effective 
and less burdensome reporting system should be instituted for both 
GSEs.
    Under the proposed regulations the following submissions would no 
longer be required from Fannie Mae and would not be instituted for 
Freddie Mac: A report on business activities (24 CFR 81.22), including 
a description of any planned or proposed new business activities and 
the GSE's competitive position in the marketplace; a general plan for 
the conduct of the GSE's secondary market operations, a special budget 
plan for the GSE's secondary market operations, a description of 
pending legal proceedings, and details on each executive officer's 
ownership of GSE securities, remuneration, and stock options (24 CFR 
part 81, App. B); a report on each auction of commitments (24 CFR 
81.23(a)(1)); a report on investors purchasing Fannie Mae securities 
(24 CFR 81.23(a)(3)); a statement of the composition of the GSE's loan 
portfolio (24 CFR 81.23(a)(4)); a report on the characteristics of home 
loans purchased (24 CFR 81.23(a)(5)); a report on average yields of 
mortgage loans purchased (24 CFR 81.23(a)(6)); a report on the lender 
[[Page 9175]] groups from or to whom the mortgage loans were purchased 
or sold (24 CFR 81.23(a)(7)); a report on the composition of revenues 
received, expenditures made, and net income earned (24 CFR 
81.23(a)(8)); a report on the distribution of holdings of the GSE's 
common stock (24 CFR 81.23(a)(9)); and an estimate of the dollar 
amounts of purchase commitments the GSE expects to issue in its FHA-VA 
mortgage auction and in its conventional mortgage auction (24 CFR 
81.24).
    On the other hand, in enacting FHEFSSA, the lack of information on 
the GSEs' mortgage purchases particularly concerned Congress.

    [A]n information vacuum has severely impeded Congressional 
efforts to measure Fannie Mae's compliance with regulatory housing 
goals that have been in force since 1978. The Committee believes 
that enactment of this bill will fill this vacuum on an expeditious 
basis * * *. The bill requires the collection of data that are 
central to understanding and evaluating the GSEs' single-family and 
multifamily businesses.<SUP>164

    \164\ S. Rep. at 39; see also, H. Rep. at 60 (``One reason for 
adopting the low-income housing provisions set forth in the 
Committee bill is the Committee's frustration with the lack of 
concrete information on [the GSEs'] current activity in the area of 
housing for low-income persons.'')

The Act therefore required detailed reporting of mortgage data and 
extensive annual reporting on GSE housing activities to both Congress 
and the Secretary.<SUP>165

    \165\ See, e.g., sections 1324, 1327, 1328, 1381 (o and p), and 
1382 (r and s).
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    To ensure that the Secretary has the information needed to carry 
out monitoring, compliance, and other regulatory responsibilities, the 
GSEs shall submit the following:
    (1) Quarterly submittals of detailed data and aggregations on 
mortgage purchases (``the mortgage reports''); and
    (2) An annual report (``the annual housing activities report'') 
that details the GSE's actions toward meeting the housing goals and 
other issues of concern to Congress as well as year-to-date mortgage 
data.
    The GSEs shall also provide a few periodic reports and the 
Secretary may require special reports, additional analyses, or such 
underlying data as the Secretary considers appropriate.
Mortgage Data
    Each GSE is required to submit on a quarterly basis, except for the 
fourth quarter, detailed data on each mortgage purchased (``mortgage 
data'') in the previous quarter (within 60 days after the end of the 
quarter). All data shall be submitted in a format specified by the 
Secretary and shall be year-to-date data. Data will be provided on an 
aggregate basis, and also on a loan-level basis (in computer-readable 
format). Appendix D details the reporting formats and the data elements 
required on each single-family and multifamily mortgage purchased. The 
Secretary seeks comment on whether Appendix D should include additional 
data.
The Annual Housing Activities Report
    The regulations require each GSE to provide an Annual Housing 
Activities Report (within 60 days after the end of each calendar year) 
concerning its performance during the calendar year in achieving the 
housing goals. The report must describe actions that the GSE has 
undertaken during the preceding year or is planning to undertake to: 
Promote and expand its attainment of its statutory purposes; 
standardize credit terms and underwriting guidelines for multifamily 
housing and securitize multifamily housing mortgages; and promote and 
expand opportunities for first-time home buyers. The report also must 
include annual compilations of mortgage data year-to-date and any other 
information that the Secretary considers necessary for the report and 
requests in writing. To reduce the reporting burden, the Secretary has 
combined two annual reports required either by the Charter Act or the 
Act into the Annual Housing Activities Report.
    As part of the Annual Housing Activities Report, the Act requires 
that each GSE include a discussion of its business practices.<SUP>166 
To the extent a Business Practices Analysis, required under subpart C, 
encompasses the information required in this report and where the GSE 
has conducted such a Business Practices Analysis within the preceding 
three years, the GSE may reference such Analysis and use the Annual 
Housing Activities Report to update the GSE's progress concerning any 
problems referenced in the Analysis.

    \166\ Sections 1381(p) and 1382(s).
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Subpart F--Access to Information

    The Act requires the Secretary to establish a public use data base 
and to release to the public certain categories of information 
submitted by the GSEs concerning their mortgage purchases.<SUP>167 The 
Act also requires the protection of proprietary information the GSEs 
submit to the Secretary.<SUP>168 In characterizing the lack of 
information on the GSEs' performance as ``an information 
vacuum,''<SUP>169 the Senate Committee noted that ``public access and 
disclosure of information is a key tool for permitting appropriate 
public scrutiny and oversight of the activities of the [GSEs] and in 
evaluating possible improvements in housing finance markets.''<SUP>170 
The Act required a public use data base so that the public could obtain 
information on the GSEs' performance toward meeting their Charter Act 
purposes of serving a broad range of families and communities. In 
addition, Congress intended for the GSE public use data base to 
supplement HMDA data.<SUP>171 Finally, the Senate Report stated: 
``[E]very effort should be made to provide public disclosure of the 
information required to be collected and/or reported to the 
(Secretary), consistent with the exemption for proprietary data * * *. 
The (Secretary) should also take such action as is necessary to protect 
the privacy concerns of individual borrowers or renters.''<SUP>172

    \167\ Section 1323(a).
    \168\ Sections 1323 and 1326.
    \169\ S. Rep. at 39.
    \170\Id. at 44.
    \171\ See, e.g., S. Rep. at 39.
    \172\ Id. at 40.
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    Consistent with the legislative intent, the Department shall serve 
as an information clearinghouse, facilitating an end to the 
``information vacuum'' on GSE activities--as expeditiously as possible. 
To achieve this objective, the Secretary intends that:
    (1) Data on the GSEs' activities be made available to the widest 
range of housing groups, state and local governmental entities, 
academicians and other persons and entities so that--the efforts of the 
GSEs in making housing finance available to all segments of the 
population can be monitored by housing groups, State, and local 
governments, and similar entities and areas of partnership with the 
GSEs can be identified to expand housing opportunities;
    (2) Data made available should be as inclusive as possible, 
balancing the proprietary concerns of the GSEs;
    (3) Data should supplement data available under the Home Mortgage 
Disclosure Act (HMDA) to facilitate fair housing review and 
enforcement; and
    (4) Data should be available by all reasonable means.
Public Use Data Base
    Consistent with the Act,<SUP>173 the regulations establish a public 
use data base for mortgage data submitted by the GSEs under section 
309(m) of the Fannie Mae Charter Act and section 307(e) of the Freddie 
Mac Act. This data concerns the characteristics of individual mortgage 
purchases of the [[Page 9176]] GSEs, including, inter alia, census 
tract, location, race and gender of mortgagors. This data may include 
other characteristics such as the loan-to-value (LTV) ratio of the 
mortgage, whether the loan was seasoned or whether the units were 
owner-occupied. In accordance with the Act, these regulations provide 
that the Secretary may not, by regulation or order, make available to 
the public data that the Secretary determines are proprietary under 
section 1326 of the Act except that the Secretary may not restrict 
access to the income, census tract location, race, and gender data of 
single family properties.<SUP>174

    \173\ Section 1323(a).
    \174\ Section 1323(b)(2).
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    The Secretary shall, from time to time, issues orders providing 
that certain GSE information is proprietary and shall not be included 
in the public use data base. The most current Secretarial orders will 
be periodically published and included as Appendix F of this 
regulation. On June 7, 1994, the Secretary published a Temporary Order 
protecting GSE information deemed to be proprietary, pending public 
comment and further review.<SUP>175 As part of the process for 
establishing the public use data base, the Secretary intends to 
finalize a revised order early in 1995.

    \175\59 FR 29514 (1994).
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    In addition to not including proprietary information of the GSEs, 
the public use data base will not include information the release of 
which would invade personal privacy. Additionally, the data base will 
not include information required to be withheld, including requirements 
of the Trade Secrets Act, 18 U.S.C. 1905.
    The Secretary will routinely disclose to the public information 
contained in the GSEs' Annual Housing Activities Reports which are 
submitted to the Secretary, the Committee on Banking, Finance and Urban 
Affairs of the House of Representatives, and the Committee on Banking, 
Housing, and Urban Affairs of the Senate, and comprise a detailed 
picture of the GSEs' activities each year in relation to the housing 
goals and the Fair Housing provisions of the Act. Proprietary 
information from this report may be withheld if the GSEs request its 
designation as proprietary and the Secretary determines that it is 
proprietary.<SUP>176 Under the Act, none of the information under 
section 1323 or reports under section 1326 may be disclosed where the 
Secretary issues a final decision, by regulation or order, determining 
information is proprietary.<SUP>177

    \176\Section 1326.
    \177\Section 1326(c).
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Requests for Proprietary Treatment
    The regulations establish procedures for the GSEs to request 
proprietary treatment of information submitted to the Secretary in 
reports or otherwise. When a GSE submits information to the Secretary, 
the GSE shall designate which of the information the GSE deems to be 
proprietary; the GSE's submission must include the bases for the GSE's 
assertion and a statement or certification from an officer or 
authorized representative providing that the information is proprietary 
and has not been disclosed to the public.
Determinations on Requests
    The Secretary will review the information and the GSE's views. If 
the Secretary determines the information is proprietary, the Department 
will not disclose the data. The regulations then establish procedures 
for the Secretary to issue a temporary order, an order or a regulation 
to withhold proprietary information and to inform the public of the 
withholding. If the Secretary does not determine that information that 
is the subject of a GSE request is proprietary, the Secretary shall 
provide the GSE with an opportunity for a meeting on the matter where 
the GSE may provide comments and additional information on release. 
After the meeting date, the Secretary shall determine, in writing, 
which information is proprietary and shall provide the GSE with 10 
days' notice before the information is made available to the public.
FOIA Requests
    Information on the GSEs may be requested by the public pursuant to 
the Freedom of Information Act (FOIA)<SUP>178 and these regulations 
provide guidance on FOIA's applicability to GSE information. For 
purposes of FOIA, HUD is considered an agency responsible for the 
regulation and supervision of financial institutions.<SUP>179 
Accordingly, where appropriate, the Secretary may invoke FOIA Exemption 
(b)(8)<SUP>180 to withhold GSE information ``contained in or related to 
examination, operating, or condition reports prepared by, on behalf of, 
or for the use of'' the Secretary.

    \178\5 U.S.C. 552.
    \179\Section 1319F.
    \180\5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    FOIA Exemption 4<SUP>181 allows confidential business information 
to be protected from disclosure, and the Trade Secrets Act<SUP>182 
forbids Government officers and employees from releasing trade secret 
and other confidential business information. Executive Order No. 
12,600<SUP>183 requires that agencies notify submitters of FOIA 
requests for confidential business information and afford submitters an 
opportunity to comment before releasing information. If an agency 
determines to release notwithstanding a submitter's objections, the 
Executive Order requires that the agency notify the submitter a 
reasonable time prior to release. The President of the United States, 
by memorandum, dated October 4, 1993, to Heads of Departments and 
Agencies, emphasized the importance of public disclosures under FOIA 
and the implementing memorandum from the Attorney General, attached to 
the President's memorandum, instructs agencies to disclose information 
unless disclosure would harm an interest protected by a FOIA exemption. 
The President's and the Attorney General's memoranda do not, however, 
alter Executive Order 12600.

    \181\ 5 U.S.C. 552(b)(4).
    \182\ 18 U.S.C. 1905.
    \183\ 3 CFR 235 (1988).
---------------------------------------------------------------------------

Congressional Requests
    If the Department receives a request on behalf of a Congressional 
Committee or Subcommittee, the Comptroller General, a subpoena from a 
court of competent jurisdiction, or is otherwise compelled by law to 
release information determined to be proprietary, personal, or 
otherwise withheld from the public, the Department will provide the 
information in accordance with the request. In releasing proprietary 
information under this provision, the Department will advise the 
requester that the Secretary has determined that the information is 
proprietary and that public disclosure of the information may cause 
competitive harm to the GSEs. To the extent practical, the Department 
will provide notice to the GSEs after a request under this paragraph is 
received and before the Department provides information in response to 
the request.

Subpart G--Procedures for Actions and Review

    This subpart establishes procedures for hearings, disclosure of 
orders and agreements between the Secretary and the GSEs, enforcement 
of actions by the Secretary, and judicial review. These procedures 
concern actions by the Secretary to enforce housing goal related 
matters under subpart B and reporting violations under subpart E, and 
actions by GSEs seeking review of new program denials under subpart D.
    The Act empowers the Secretary to enforce requirements under the 
housing [[Page 9177]] goals provisions through cease-and-desist orders 
and to assess civil money penalties against the GSEs.<SUP>184 In view 
of the seriousness of these actions, the Act itself details the 
procedural requirements for enforcement and rights of the GSEs during 
the sanctions process.<SUP>185 Because the Act details procedural 
requirements, this subpart mainly restates and rarely augments these 
procedures in the regulations.

    \184\Sections 1341 and 1345.
    \185\See, e.g., sections 1341-1348.
---------------------------------------------------------------------------

Secretarial Enforcement Through Cease-and-Desist Orders and Civil Money 
Penalties
    The Secretary may issue a cease-and-desist order where a GSE fails 
to: Submit a housing plan that complies with the Act; make a good faith 
effort to comply with a housing plan approved by the Secretary; or 
submit any information required under the reporting requirements under 
the Fannie Mae Charter Act or the Freddie Mac Act.<SUP>186 The 
Secretary will provide the GSEs with written notice of the charges 
which will fix a date for a hearing to be conducted by a HUD 
Administrative Law Judge. If, based on the record of the hearing, the 
Administrative Law Judge finds sufficient facts to sustain the action 
or the GSE fails to appear at the hearing, the Administrative Law Judge 
may issue and serve an order. The order may require the GSE to: (1) 
Submit a housing plan, where the notice of charges was based on the 
GSE's failure to submit a plan; (2) comply with a housing plan, where 
the notice was based on the lack of good faith efforts of the GSE to 
comply with a housing plan; or (3) provide the information, where the 
notice of charges was based on the GSE's failure to submit information.

    \186\Section 1341(a).
---------------------------------------------------------------------------

Civil Money Penalties
    The Secretary may impose civil money penalties on a GSE if the GSE 
has failed to: Submit a housing plan in substantial compliance with the 
Act; make a good faith effort to comply with a housing plan approved by 
the Secretary; or submit information required under the GSEs' Charter 
Acts.<SUP>187 Civil money penalties shall not exceed the following: (1) 
For failing to submit a housing plan, $25,000 for each day that the 
failure occurs; and (2) for failing to make a good faith effort to 
comply with a housing plan or failing to submit information, $10,000 
for each day that the failure occurs.<SUP>188

    \187\Section 1345(a).
    \188\Section 1345(b).
---------------------------------------------------------------------------

Hearings, Enforcement and Judicial Review
    Under this subpart, all hearings are on the record, heard before a 
HUD Administrative Law Judge, and conducted in accordance with chapter 
5 of title 5 of the United States Code and applicable HUD regulations. 
The Secretary will make available to the public any final order and any 
written agreement or other written statement for which a violation may 
be redressed by the Secretary.<SUP>189 The Secretary may withhold 
release of an agreement or statement if the Secretary determines that 
public disclosure would: seriously threaten the GSE's financial health 
or security, or be contrary to the public interest.<SUP>190

    \189\ Section 1346(a).
    \190\ Section 1346(c).
---------------------------------------------------------------------------

    To enforce any notice or order under this subpart, the Secretary 
may request that the Attorney General bring an action against the GSE 
in the United States District Court for the District of 
Columbia.<SUP>191 A GSE may obtain judicial review of a final order by 
filing a petition praying that the United States Court of Appeals for 
the District of Columbia modify, terminate, or set aside the 
order.<SUP>192

    \191\Section 1344(a).
    \192\Section 1343(a).
---------------------------------------------------------------------------

Subpart H--Book-Entry Procedures

    This subpart authorizes the GSEs' use of book-entry systems to 
issue and maintain records of the GSEs' securities. The Secretary is 
authorized to promulgate these provisions under section 1321 of 
FHEFSSA, which confers on the Secretary general regulatory authority 
and the authority to ``make such rules and regulations as shall be 
necessary and proper'' to ensure that the purposes of the Act, the 
Fannie Mae Charter Act, and the Freddie Mac Act are accomplished.
    The GSEs currently issue and maintain records of their securities 
by entries in record systems maintained by the Federal Reserve banks; 
these systems are also used for U.S. Treasury securities. The Treasury 
Department has promulgated regulations establishing book-entry 
procedures.<SUP>193 Treasury regulations<SUP>194 permit the GSEs to use 
the system provided regulations are in force authorizing book-entry. 
Since 1978, HUD's Fannie Mae regulations (24 CFR 81.41 et seq.), 
authorized Fannie Mae to use book-entry procedures and recently, by 
regulation, the Secretary specifically extended the Fannie Mae book-
entry regulations to allow Fannie Mae to continue to use the book-entry 
system pending the issuance of these comprehensive regulations.<SUP>195 
Freddie Mac currently operates under book-entry regulations (1 CFR part 
462) that it promulgated in 1978.

    \193\ See 31 CFR 306.115 et seq.
    \194\ 31 CFR 306.0, n.1.
    \195\ 59 FR 54366 (Oct. 28, 1994).
---------------------------------------------------------------------------

    Virtually all of the GSEs' debt and mortgage-backed securities 
issuances and trading market depend on book-entry procedures. As of 
September 30, 1994, Fannie Mae debt outstanding was $239.3 billion and 
Fannie Mae MBS outstanding was $523.5 billion; as of that date, Freddie 
Mac's debt outstanding was $82 billion and Freddie Mac's MBS 
outstanding was $464 billion. Providing for use of book-entry GSE 
securities instead of definitive GSE securities has increased 
administrative efficiencies for investors, brokers and dealers as well 
as the GSEs themselves and facilitated the investment of capital in the 
GSEs' instruments. Use of the book-entry system facilitates the GSEs' 
Charter Act purposes of assisting the secondary market by improving the 
distribution of investment capital available for home 
financing.<SUP>196

    \196\Fannie Mae Charter Act, sections 301(3) and (4), and 
Freddie Mac Act, sections 301(b) (3) and (4).
---------------------------------------------------------------------------

    The regulations proposed in this subpart track the latest book-
entry procedures established by the Department of the Treasury at 31 
CFR part 306, subpart O, which are applicable to Treasury securities. 
The existing Fannie Mae book-entry regulations, 24 CFR part 81, subpart 
E, tracked an earlier version of Treasury's regulation. Minor changes 
have been made to adapt the Treasury regulation to the GSEs. In the 
interest of ensuring that the GSEs may continue to use the book-entry 
system and, at the same time, ensuring that the GSEs are subject to the 
same regulations, these regulations would replace Fannie Mae's book-
entry regulations at 24 CFR 81.41 et seq. and would supersede Freddie 
Mac's book-entry regulations at 1 CFR part 462.

Subpart I--Other Provisions

    This subpart includes miscellaneous regulatory provisions 
concerning equal employment opportunity and regulatory examinations.
    The Secretary has general regulatory power over the GSEs and is 
directed to make rules and regulations to ensure that the purposes of 
the Charter Acts are accomplished.<SUP>197 To monitor the GSEs' 
compliance with the Secretary's regulatory authorities under the 
Charter Acts, these regulations, and the Act, and to verify the GSEs' 
data submissions and [[Page 9178]] reports, the Secretary shall conduct 
regulatory examinations of the GSEs from time to time.

    \197\Section 1321.
---------------------------------------------------------------------------

    FIRREA and this regulation require that the GSEs comply with 
sections 1 and 2 of Executive Order 11478, providing for the adoption 
and implementation of equal employment opportunity 
requirements.<SUP>198

    \198\FIRREA, section 1216(b), codified as 12 U.S.C. 1833e(b).
---------------------------------------------------------------------------

Specific Areas for Public Comment

    Comment is invited on all aspects of the proposed regulation. In 
addition, the Secretary requests comments on a number of specific 
issues. A number of these questions are raised in the preamble and are 
repeated below for the convenience of commenters:
    (1) Measuring the Goals: The Act does not require that the goals be 
established as a percentage of units financed by each GSE in any one 
year (as required during the transition period for the low- and 
moderate-income and central cities goals). The Secretary is interested 
in considering alternative ways of measuring the goals.
    (a) Should the Secretary establish the goals on a numerical, 
instead of a percentage, basis? If so, should the goals be established 
as:
    (i) A certain number of mortgages purchased in one year?
    (ii) A certain number of units financed in one year?
    (iii) A certain dollar volume of mortgages purchased in one year?
    (b) Should the Secretary establish the goals as shares of the 
target mortgage markets, rather than as shares of each GSE's total 
purchases; e.g., should each GSE purchase a specified percent of 
mortgages originated for low- and moderate-income families?
    If a commenter supports any of these alternatives or others not 
described, the commenter should explain in full how such goals might be 
established, taking into account data availability, and how the 
Secretary would fulfill the responsibility under section 1326 of the 
Act to monitor each GSE's compliance with the goals.
    (2) Establishing the Future Level of the Goals: (a) Should the 
goals be established so that the GSEs are required to lead the industry 
by buying at least the percentages of mortgages that the market 
originates for each goal? If yes, at what levels and over what period 
should the GSE goals be established to achieve this objective and, 
specifically, at what levels should the 1997 and 1998 goals be 
established to meet this objective? In responding, please note:
    (i) For the housing goal for low- and moderate-income families--the 
Secretary determined that for 1995 and 1996, 50 percent of the market 
is comprised of mortgages qualifying under this goal.
    (ii) For the special affordable housing goal--the Secretary 
determined that for 1995 and 1996, 17-20 percent of the market would be 
mortgages qualifying under this goal.
    (iii) For the central cities, rural areas, and other underserved 
areas goal--the Secretary determined that for 1995 and 1996, 21-23 
percent of the market would be mortgages qualifying under this goal.
    (b) Should ``leading the industry'' mean and should the goals be 
established for future years so that the GSEs are required to purchase 
(as a percentage of the GSEs' total purchases) a higher percentage of 
mortgages than are originated by the market under each housing goal? 
For example, if 16 percent of the mortgages originated and available 
are expected to be originated for mortgages for very low-income 
families, should the GSEs be expected to purchase, as a percentage of 
their overall business, an amount greater than 16 percent of mortgages 
on housing for very low-income families at some future date? If yes, at 
what levels and over what period should the goals be established to 
achieve this objective and, specifically, at what levels should the 
1997 and 1998 goals be established to achieve this objective? Also, 
what percentage over the market should be required?
    (c) Should the goals be established such that the GSEs purchase an 
equivalent proportion of loans originated by the market for borrowers 
under 80 percent of area median income as they do for borrowers over 
120 percent of area median income? If yes, at what levels and over what 
period should the goals be established to achieve this objective and, 
specifically, at what levels should the 1997 and 1998 goals be 
established to achieve this objective?
    (d) Should the goals be adjusted as the GSEs reach or fail to 
achieve the goals or should the goals be established and the GSEs' 
performance evaluated against relatively fixed goals? If the commenter 
believes that the goals should be adjusted, how frequently or under 
what conditions should the Secretary take action to adjust the goals?
    (e) To what extent should the GSEs' share of the overall mortgage 
market affect the levels of the goals? The GSEs currently purchase 
approximately 70 percent of all conventional, conforming mortgages 
originated. Should the goals increase as the GSEs' market share 
increases? If yes, how should this work? How and in what manner should 
the goals be adjusted?
    (3) Central Cities, Rural Areas, and Other Underserved Area Goal: 
(a) Should rural areas be based on the characteristics of Block 
Numbering Areas or counties? Which of these two options makes better 
sense for lenders and for GSE reporting? Which option better directs 
goal performance at areas with poor access to mortgage credit?
    (b) In establishing the definition for rural areas, should the 
income and minority criteria (used for defining central cities and 
other underserved areas) be supplemented with other indicator(s) of the 
need for better access to mortgage credit? Should population size 
(e.g., communities below 2,500 or nonmetropolitan counties below 
50,000) be considered as such an indicator?
    (c) What are the relative merits of indicators of access to 
metropolitan areas or nonmetropolitan cities such as the ``Beale'' or 
``Ghelfi-Parker'' codes?<SUP>199

    \199\These indicators of urban influence were developed by the 
Department of Agriculture's Economic Research Service. Linda M. 
Ghelfi, ``County Classifications,'' Rural Conditions and Trends, 
4(3): 6-11 (1993).
---------------------------------------------------------------------------

    (d) In New England, where MSAs are not composed of counties, should 
the definition of rural areas include areas ``outside (P)MSAs'' or 
``outside NECMAs''?
    (4) Counting of Specific Transactions: (a) Second mortgages. Should 
second mortgages receive full credit or partial credit? If partial 
credit, how should the level of credit be determined?
    (b) REMICs.
    (i) Where a REMIC contains a GSE's mortgages or mortgage-backed 
securities (MBS), should that type of REMIC count toward any of the 
housing goals? How should double counting be avoided?
    (ii) Where a REMIC does not contain a GSE's mortgages or MBS, 
should that type of REMIC count toward any of the housing goals?
    (iii) Should other types of REMICs be counted toward any of the 
housing goals?
    (iv) In determining whether any REMICs count toward achievement of 
the housing goals, what factors should the Secretary consider?
    (v) If any of these REMICs should count toward the housing goals, 
should the REMICs receive full credit or some level of partial credit? 
If partial credit, how should the level of credit be determined?
    (vi) How should the final regulation deal with types of REMICs that 
have not yet been created or used in the market? Should such REMICs 
only count if that type of REMIC is reviewed by the Secretary and the 
Secretary determines that the type of REMIC should count toward the 
housing goals?
    (5) Fair Lending Plan: (a) Should the GSEs be required to prepare a 
fair lending plan?
    (b) Could a fair lending plan offer new ways to lead the primary 
lending market in eradicating discrimination? If so, how?
    (c) What are the appropriate components of such a plan? and
    (d) How would the plan effectuate fair housing/fair lending 
objectives?
    (6) Provision of Data: (a) Is there data, beyond that described in 
the regulation, that the GSEs could usefully gather on lenders for the 
Secretary's review in connection with the enforcement of the Fair 
Housing Act and for review by other agencies in connection with the 
enforcement of ECOA?
    (b) In addition to the loan level data required under Appendix D, 
what other loan level data should the Secretary collect from the GSEs?
    (7) Affordability in Non-Metropolitan Areas: HUD seeks guidance on 
the appropriate reference for income in non-metropolitan areas for 
determining affordability under the housing goals for low- and 
moderate-income families and special affordable housing and for 
defining low-income areas in the goal for central cities, rural areas 
and other underserved areas. Should borrower and area income in non-
metropolitan areas be defined: (a) Relative to the county median 
income; or (b) relative to the maximum of the county median income or 
the median income of the non-metropolitan balance of the State?
    (8) New Program Approval: (a) The Act defines ``new program,'' 
generally, as a program that is significantly different from GSE 
programs previously approved or authorized. The Act does not define 
``program,'' ``product,'' or ``significantly different.'' Should these 
term(s) be defined in the final rule and, if so, how should the term(s) 
be defined?
    (b) The Act requires the Secretary to approve a new program unless 
the program is not authorized by the GSE's Charter Act or the Secretary 
determines that the new program is not in the public interest. Should 
the final rule include factors that the Secretary will consider in 
determining whether a program is not in the public interest and, if so, 
what factors should be included?
    (9) Indicators of Unaddressed Needs: The Act states that the 
special affordable housing goal is designed to meet the ``unaddressed 
needs of * * * low-income families in low-income areas and very low-
income families.''\200\ But the Act does not indicate specifically what 
these unaddressed needs are. The Department has presented its views 
regarding ``unaddressed needs'' in Appendices A-C in detail, and the 
Secretary will closely review the GSEs' performance relative to the 
factors discussed therein. Specifically, the Secretary is committed to 
a monitoring and research agenda that will examine: (i) How the GSEs 
attempt to reach the 1995-96 goals (e.g., balance of rental and owner 
occupied properties, single and multifamily loans); (ii) the changing 
risk profiles of their businesses that result from the 1995-96 goals; 
(iii) the potential for new affordable housing incentives that could 
increase the pool of qualifying loans for purchase; (iv) how the goals 
affect local portfolio lender business incentives (e.g., incentives to 
sell seasoned portfolios to and obtain pre-origination purchase 
commitments from the GSEs and competitive pressures on loan 
originations); (v) how economic conditions affect the pool of potential 
qualifying mortgage originations; and (vi) the extent to which 
achieving the housing goals and meeting ``unaddressed needs'' require 
the GSEs to take on unduly risky business. [[Page 9179]] 

    \200\ Section 1333(a)(1).
---------------------------------------------------------------------------

    The Secretary welcomes the views of others regarding ``unaddressed 
needs.'' Specifically:
    (a) What are appropriate definitions for and measures of 
unaddressed needs?
    (b) What is the magnitude of unaddressed needs? Are GSE goals 
consistent with the level of unaddressed needs or do the goals require 
the GSEs to take on unduly risky business?
    (c) How can the Department best monitor unaddressed needs and how 
the GSEs are addressing them?
    (d) How should indicators of unaddressed needs be utilized in 
setting the various goals for the GSEs?

Other Matters

Public Reporting Burden

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget under the 
Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). The Department 
has determined that the following provisions contain information 
collection requirements.

                          Burden to Respondents                         
------------------------------------------------------------------------
                       Number of    Frequency      Hours                
     Information      respondents  of response    required   Total hours
------------------------------------------------------------------------
Business Practices                                                      
 Analyses...........            2            1          500       1,000 
------------------------------------------------------------------------
(Note: this is a one-time report, not an annual report.)                


------------------------------------------------------------------------
                       Annual    Frequency of                           
    Information      number of     response        Hours     Total hours
                    respondents   (per year)     required               
------------------------------------------------------------------------
Mortgage Data                                                           
 Reports..........            2          3            20             120
Annual Housing                                                          
 Activities Report            2          1            40              80
Periodic Reports..            2         61             0.08           10
Other Information                                                       
 and Analyses.....            2          0.25         20              10
Fair Housing Act/                                                       
 ECOA Information.            2          1            15              30
------------------------------------------------------------------------


                                                                        
[[Page 9180]]                                                           
                       Annual Costs to Respondents                      
------------------------------------------------------------------------
                                      Hours       Cost per              
           Information               required       hour      Total cost
------------------------------------------------------------------------
Business Practices Analyses......        1,000          $20      $20,000
Mortgage Data Reports............          120           20        2,400
Annual Housing Activities Reports           80           20        1,600
Periodic Reports.................           10           20          200
Other Information and Analyses...           10           20          200
Fair Housing Act/ECOA Information                                       
 from GSEs.......................           30           20          600
------------------------------------------------------------------------


      Annual Cost to Federal Government (For Reviewing Information)     
------------------------------------------------------------------------
                                      Hours       Cost per              
           Information               required       hour      Total cost
------------------------------------------------------------------------
Business Practices Analyses......         4800          $30     $144,000
Mortgage Data Reports............         1440           30       43,200
Annual Housing Activities Reports          400           30       12,000
Periodic Reports.................          122           30        3,660
Other Information and Analyses...           10           30          300
Fair Housing Act/ECOA Information                                       
 from GSEs.......................           40           30        1,200
------------------------------------------------------------------------

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities, other than 
those impacts specifically required to be applied universally by the 
Act.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The finding is available for public inspection 
during regular business hours in the Office of the General Counsel, 
Rules Docket Clerk, room 10276, 451 Seventh Street SW., Washington, DC 
20410.

Executive Order 12866

    The Office of Management and Budget reviewed this proposed rule 
under Executive Order 12866, Regulatory Planning and Review. Any 
changes made to the rule as a result of that review are clearly 
identified in the docket file, which is available for public inspection 
at the Office of the Rules Docket Clerk, Office of General Counsel, 
Room 10276, Department of Housing and Urban Development, 451 Seventh 
Street, SW, Washington, DC. 20410-0500. A Regulatory Impact Analysis 
(RIA) performed on this proposed rule is also available for review at 
the same address.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this proposed rule will not have substantial direct 
effects on states or their political subdivisions, or the relationship 
between the federal government and the states, or on the distribution 
of power and responsibilities among the various levels of government. 
As a result, the rule is not subject to review under the Order. 
Promulgation of this rule expands coverage of the applicable regulatory 
requirements pursuant to statutory direction.

Executive Order 12606, the Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this proposed rule does 
not have potential for significant impact on family formation, 
maintenance, and general well-being, and, thus, is not subject to 
review under the order. No significant change in existing HUD policies 
or programs will result from promulgation of this rule, as those 
policies and programs relate to family concerns.

Regulatory Agenda

    This rule was listed as Item 1722 in the Department's Semiannual 
Agenda of Regulations published on November 14, 1994 (59 FR 57632, 
57641), in accordance with Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects in 24 CFR Part 81

    Accounting, Federal Reserve System, Mortgages, Reporting and 
recordkeeping requirements, Securities.
    Accordingly, part 81 in Title 24 of the Code of Federal Regulations 
is proposed to be revised as follows:

PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL 
MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN 
MORTGAGE CORPORATION (FREDDIE MAC)

Subpart A--General

Sec.
81.1  Scope of Part
81.2  Definitions

Subpart B--Housing Goals

81.11  General.
81.12  Low- and moderate-income housing goal.
81.13  Central cities, rural areas, and other underserved areas 
housing goal.
81.14  Special affordable housing goal.
81.15  General requirements.
81.16  Special counting requirements.
81.17  Income level definitions for owner-occupied units, actual 
tenants, and prospective tenants (if family size is known).
81.18  Income level definitions for prospective tenants (if family 
size is not known).
81.19  Rent level definitions for tenants (if income is not known).
81.20  Actions to be taken to meet the goals.
81.21  Notice and determination of failure to meet goals.
81.22  Housing plans.

Subpart C--Fair Housing

81.41  General.
81.42  Prohibitions against discrimination.
81.43  Review of underwriting guidelines. [[Page 9181]] 
81.44  Submission of information to the Secretary.
81.45  Submission of information to the GSEs.
81.46  Remedial actions.
81.47  Violations of provisions by the GSEs.

Subpart D--New Program Approval

81.51  General.
81.52  Requirement for program requests.
81.53  Processing of program requests.
81.54  Review of disapproval.

Subpart E--Reporting Requirements

81.61  General.
81.62  Mortgage data.
81.63  Annual Housing Activities Report.
81.64  Periodic report.
81.65  Other information and analyses.
81.66  Submission of reports.

Subpart F--Access to Information

81.71  General.
81.72  Public use data base and public information.
81.73  GSE request for proprietary treatment.
81.74  Secretarial Determination on GSE request.
81.75  Mortgage data withheld by order and regulation.
81.76  Requests for GSE Information.
81.77  Protection of GSE Information.

Subpart G--Procedures for Actions and Review of Actions

81.81  General.
81.82  Cease-and-desist proceedings.
81.83  Civil money penalties.
81.84  Hearings.
81.85  Public disclosure of final orders and agreements.
81.86  Enforcement and jurisdiction.
81.87  Judicial review.

Subpart H--Book-Entry Procedures

81.91  Definition of terms.
81.92  Authority of Reserve Banks.
81.93  Scope and effect of book-entry procedure.
81.94  Transfer or pledge.
81.95  Withdrawal of GSE securities.
81.96  Delivery of GSE securities.
81.97  Registered bonds and notes.
81.98  Servicing book-entry GSE securities; payment of interest, 
payment at maturity or upon call.
81.99  Treasury Department regulations; applicability to GSEs.

Subpart I--Other Provisions

81.101  Equal employment opportunity.
81.102  Examinations.

    Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42 
U.S.C. 3535(d) and 3601-3619.

Subpart A--General


Sec. 81.1  Scope of part.

    (a) Authority. This part implements the regulatory power of the 
Secretary of the Department of Housing and Urban Development over the 
Federal National Mortgage Association (``Fannie Mae'') and the Federal 
Home Loan Mortgage Corporation (``Freddie Mac'') (referred to 
collectively as Government-sponsored enterprises (GSEs).) The Secretary 
has general regulatory power respecting the GSEs and is required to 
make such rules and regulations as are necessary and proper to ensure 
that the provisions of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 (FHEFSSA or the Act), codified generally at 
12 U.S.C. 4501-4641; the Fannie Mae Charter Act, 12 U.S.C. 1716-1723h; 
and the Freddie Mac Act, 12 U.S.C. 1451-59, are accomplished. Under 
FHEFSSA, the Secretary's responsibilities include: establishing, 
monitoring, and enforcing housing goals; regulating fair housing 
requirements; approving new program requests; disseminating information 
and protecting proprietary information; and requiring reports and data 
submissions.
    (b) Subparts. The provisions of this part are as follows: Subpart A 
contains definitions and other general provisions relating to the 
entire part; subpart B implements housing goal requirements; subpart C 
implements Fair Housing requirements; subpart D sets forth procedures 
for Secretarial review of requests for new program approval by the 
GSEs; subpart E contains reporting requirements; subpart F sets forth 
requirements for access to information; subpart G sets forth procedures 
for Secretarial actions and review of actions; subpart H contains book-
entry procedures; and subpart I contains other provisions.
    (c) Purposes of the GSEs. The purposes of the GSEs are to: Provide 
stability in the secondary market for residential mortgages; respond 
appropriately to the private capital market; provide ongoing assistance 
to the secondary market for residential mortgages (including activities 
relating to mortgages on housing for low- and moderate-income families 
involving a reasonable economic return that may be less than the return 
earned on other activities) by increasing the liquidity of mortgage 
investments and improving the distribution of investment capital 
available for residential mortgage financing; and promote access to 
mortgage credit throughout the Nation (including central cities, rural 
areas, and underserved areas) by increasing the liquidity of mortgage 
investments and improving the distribution of investment capital 
available for residential mortgage financing.
    (d) Relation between this part and the authorities of OFHEO. The 
Director of the Office of Federal Housing Enterprise Oversight (OFHEO) 
will issue separate regulations implementing the Director's authority 
respecting the GSEs. In this part, OFHEO and the Director are only 
referenced when the Director's responsibilities are connected with the 
Secretary's authorities.


Sec. 81.2  Definitions.

    As used in this part, the term--
    The Act or FHEFSSA means the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, enacted as Title XIII of the Housing 
and Community Development Act of 1992, and codified generally at 12 
U.S.C. 4501-4641.
    Affiliate means any entity that controls, is controlled by, or is 
under common control with, a GSE.
    AHS means the American Housing Survey.
    Balloon mortgage means a mortgage providing for payments at regular 
intervals, with a final payment (``balloon payment'') that is at least 
five percent more than the periodic payments. The periodic payments may 
cover some or all of the periodic principal and/or interest. Typically, 
the periodic payments are level monthly payments that would fully 
amortize the mortgage over a stated term and the balloon payment is a 
single payment due after a specified period (but before the mortgage 
would fully amortize) and pays off or satisfies the outstanding balance 
of the mortgage.
    Central cities means the underserved areas located in any political 
subdivision designated as a central city by the Office of Management 
and Budget of the Executive Office of the President.
    Charter Act or Charter Acts means the Federal National Mortgage 
Association Charter Act (Title III of the National Housing Act, 12 
U.S.C. 1716 et seq.) (``Fannie Mae Charter Act'') and/or the Federal 
Home Loan Mortgage Corporation Act (Title III of the Emergency Home 
Finance Act of 1970, 12 U.S.C. 1451 et seq.) (``Freddie Mac Act'').
    Contract rent means the total rent that is, or is anticipated to 
be, specified in the rental contract payable by the tenant to the owner 
for rental of a dwelling unit, including fees or charges for management 
and maintenance services and those utility charges that are included in 
the contract rent. In determining contract rent, rent concessions shall 
not be considered, i.e., contract rent is not decreased by any rent 
concessions. Contract rent is rent net of rental subsidies.
    Conventional mortgage means a mortgage other than a mortgage as to 
which a GSE has the benefit of any guaranty, insurance or other 
obligation by the United States or any of its agencies or 
instrumentalities. [[Page 9182]] 
    Day means a calendar day.
    Director means the Director of the Office of Federal Housing 
Enterprise Oversight of the Department of Housing and Urban 
Development.
    Dwelling unit means a single, unified combination of rooms designed 
for use as a dwelling by one family and includes a dwelling unit in a 
single family property, multifamily property, condominium, cooperative, 
or planned unit development project.
    ECOA means the Equal Credit Opportunity Act, 15 U.S.C. 1691 et seq. 

    Familial status has the same definition as is set forth at 24 CFR 
100.20.
    Family means one or more individuals who occupy the same dwelling 
unit.
    Family size means, for purposes of reporting on single family 
mortgages purchased, the number of people in a family including the 
borrower, the borrower's dependents, the co-borrower, and the co-
borrower's dependents.
    Fannie Mae means the Federal National Mortgage Association and any 
affiliate thereof.
    FHEFSSA or The Act means the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, codified generally at 12 U.S.C. 4501-
4651.
    Freddie Mac means the Federal Home Loan Mortgage Corporation and 
any affiliate thereof.
    Government-sponsored enterprise or GSE means:
    (1) The Federal National Mortgage Association (or ``Fannie Mae'') 
and any affiliate thereof; and
    (2) The Federal Home Loan Mortgage Corporation (or ``Freddie Mac'') 
and any affiliate thereof.
    Handicap has the same definition as is set forth at 24 CFR 100.201.
    Lender means any entity that makes, originates, sells, or services 
mortgages, and includes the secured creditors named in the debt 
obligation and document creating the mortgage.
    Low-income means:
    (1) In the case of owner-occupied units, income not in excess of 80 
percent of area median income; and
    (2) In the case of rental units, income not in excess of 80 percent 
of area median income, with adjustments for smaller and larger 
families, as determined by the Secretary.
    Low-income area or low-income census tract means a census tract in 
which the median income does not exceed 80 percent of the area median 
income.
    Median income means, with respect to an area, the unadjusted median 
family income for the area, as most recently determined and published 
by the Secretary. An area means the metropolitan statistical area (MSA) 
if the property is located in an MSA; otherwise, an area means the 
county in which the property is located.
    Minority means any individual who is included within any one or 
more of the following racial and ethnic categories:
    (1) American Indian or Alaskan Native--a person having origins in 
any of the original peoples of North America, and who maintains 
cultural identification through tribal affiliation or community 
recognition;
    (2) Asian or Pacific Islander--a person having origins in any of 
the original peoples of the Far East, Southeast Asia, the Indian 
subcontinent, or the Pacific Islands;
    (3) African-American--a person having origins in any of the black 
racial groups of Africa; and
    (4) Hispanic--a person of Mexican, Puerto Rican, Cuban, Central or 
South American, or other Spanish culture or origin, regardless of race.
    Minority census tract means a census tract in which minority 
residents comprise 30 percent or more of the total population in the 
census tract.
    Moderate-income means:
    (1) In the case of owner-occupied units, income not in excess of 
area median income; and
    (2) In the case of rental units, income not in excess of area 
median income, with adjustments for smaller and larger families, as 
determined by the Secretary.
    Moderate-income census tract means a census tract in which the 
median income does not exceed 100 percent of the area median income.
    Mortgage means a member of such classes of liens as are commonly 
given or are legally effective to secure advances on, or the unpaid 
purchase price of, real estate under the laws of the State in which the 
real estate is located, or a manufactured home that is personal 
property under the laws of the State in which the manufactured home is 
located, together with the credit instruments, if any, secured thereby, 
and includes interests in the stock or membership certificate issued to 
a tenant-stockholder or resident-member by a cooperative housing 
corporation, as defined in section 216 of the Internal Revenue Code of 
1986, and on the proprietary lease, occupancy agreement, or right of 
tenancy in the dwelling unit of the tenant-stockholder or resident-
member in such cooperative housing corporation.
    Mortgage data means data obtained by the Secretary from the GSEs 
under sections 309 (m) and (n) of the Fannie Mae Charter Act and 307 
(e) and (f) of the Freddie Mac Act relating to the GSEs' mortgage 
purchases. Appendix D of this part lists and details this data.
    Mortgage purchase means a transaction in which a GSE buys or 
otherwise acquires with cash or other thing of value, a mortgage for 
its portfolio or for securitization.
    Multifamily housing means a residence consisting of more than 4 
dwelling units.
    New program means any program, including a pilot or demonstration 
program, for the purchasing, servicing, selling, lending on the 
security of, or otherwise dealing in, conventional mortgages that:
    (1) Is significantly different from programs that have been 
approved under the Act or that were approved or engaged in by Fannie 
Mae or Freddie Mac before October 28, 1992; or
    (2) Represents an expansion, in terms of the dollar volume or 
number of mortgages or securities involved, of programs above limits 
expressly contained in any prior approval.
    OFHEO means the Office of Federal Housing Enterprise Oversight of 
the Department of Housing and Urban Development.
    Ongoing program means a program that is expected to continue for 
the foreseeable future.
    Owner-occupied unit or owner-occupied dwelling unit means a single 
family dwelling unit in which the borrower or co-borrower (on the 
mortgage that financed the dwelling unit) resides.
    Participation means a fractional interest in the principal amount 
of a mortgage.
    Portfolio of loans means 10 or more loans.
    Proprietary information means all categories of information and 
data submitted to the Secretary by a GSE that contain trade secrets or 
privileged or confidential, commercial or financial information that, 
if released, would cause the GSE substantial competitive harm.
    Public data means all mortgage data submitted to the Secretary by 
the GSEs that the Secretary determines is not proprietary and should be 
made publicly available.
    Real estate mortgage investment conduit (REMIC) means multi-class 
mortgage securities issued by a tax-exempt entity.
    Refinancing means a transaction where an existing mortgage is 
satisfied or replaced by a new mortgage undertaken by the same 
borrower. Refinancings do not include: [[Page 9183]] 
    (1) A renewal of a single payment obligation with no change in the 
original terms;
    (2) A reduction in the annual percentage rate of the mortgage as 
computed under the Truth in Lending Act with a corresponding change in 
the payment schedule;
    (3) An agreement involving a court proceeding;
    (4) A workout agreement, where a change in the payment schedule or 
in collateral requirements is agreed to as a result of the mortgagor's 
default or delinquency, unless the rate is increased or the new amount 
financed exceeds the unpaid balance plus earned finance charges and 
premiums for the continuation of insurance;
    (5) The renewal of optional insurance purchased by the mortgagor 
and added to an existing mortgage; and
    (6) The renegotiation of a mortgage on a multifamily property where 
the property has a balloon mortgage and the balloon payment is due 
within one year of the date of the closing on the renegotiated 
mortgage.
    Rent means:
    (1) The contract rent for a dwelling unit, but only where such 
contract rent includes all utilities for the dwelling unit;
    (2) Where the contract rent for a dwelling unit does not include 
all utilities, the contract rent for the dwelling unit plus the actual 
cost of utilities not included in the contract rent; or
    (3) The contract rent for a dwelling unit plus a utility allowance 
as set forth in this part.
    Rental housing means multifamily dwelling units, and dwelling units 
in single family housing that are not owner-occupied.
    Rental unit or rental dwelling unit means a dwelling unit that is 
not owner-occupied and is rented or available to rent.
    Residence means a property where one or more families reside.
    Residential mortgage means a mortgage on single family or 
multifamily housing.
    Rural area means the underserved areas located outside of any 
metropolitan statistical area (MSA), primary metropolitan statistical 
area (PMSA), or consolidated metropolitan statistical area (CMSA) 
designated by the Office of Management and Budget.
    Seasoned mortgage means a mortgage where the date of the mortgage 
note is more than one year before the GSE purchased the mortgage.
    Second mortgage means any mortgage that has a lien position 
subordinate only to the lien of the first mortgage.
    Secondary residence or second home means a dwelling where the 
mortgagor maintains (or will maintain) a part-time place of abode and 
typically spends (or will spend) less than the majority of the calendar 
year. A person may have more than one secondary residence at a time.
    Secretary means the Secretary of Housing and Urban Development and, 
where appropriate, any person designated by the Secretary to perform a 
particular function for the Secretary, including any officer, employee, 
or agent of the Department.
    Single family housing means a residence consisting of one to four 
dwelling units. Single family housing includes condominiums and 
dwelling units in cooperative housing projects.
    State means the States of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the 
Northern Mariana Islands, Guam, the Virgin Islands, American Samoa, the 
Trust Territory of the Pacific Islands, and any other territory or 
possession of the United States.
    Underserved area means a census tract having:
    (1) A median income at or below 120 percent of the area median 
income and a minority population of 30 percent or greater; or
    (2) A median income at or below 80 percent of area median income.
    Utilities means charges for electricity, piped or bottled gas, 
water, sewage disposal, fuel (oil, coal, kerosene, wood, solar energy, 
or other), and garbage and trash collection. Utilities do not include 
charges for telephone service.
    Utility allowance means either:
    (1) The amount to be added to contract rent when utilities are not 
included in contract rent (also referred to as the ``AHS-derived 
utility allowance''), as issued annually by the Secretary; or
    (2) The utility allowance established under the HUD Section 8 
Program (section 8 of the United States Housing Act of 1937, 42 U.S.C. 
1437f) for the area where the property is located.
    Very low-income means:
    (1) In the case of owner-occupied units, income not in excess of 60 
percent of area median income; and
    (2) In the case of rental units, income not in excess of 60 percent 
of area median income, with adjustments for smaller and larger 
families, as determined by the Secretary.
    Wholesale exchange means a transaction where one GSE buys or 
otherwise acquires mortgages held in portfolio or securitized by the 
other GSE, or where both GSEs swap such mortgages.

Subpart B--Housing Goals


Sec. 81.11  General.

    The Federal Housing Enterprises Financial Safety and Soundness Act 
of 1992 requires that the Secretary establish, by regulation, three 
annual housing goals for the GSEs: A low- and moderate-income housing 
goal; a central cities, rural areas, and other underserved areas 
housing goal; and a special affordable housing goal. The Act requires 
that the Secretary establish these goals after considering prescribed 
factors and implement these goals in a manner consistent with Section 
301(3) of the Fannie Mae Charter Act and Section 301(b)(3) of the 
Freddie Mac Act, which provide that one purpose of each GSE is to 
provide ongoing assistance to the secondary market for residential 
mortgages (including mortgages securing housing for low- and moderate-
income families involving a reasonable economic return that may be less 
than the return earned on other activities) by increasing the liquidity 
of mortgage investments and improving the distribution of investment 
capital available for residential mortgage financing. This subpart 
establishes these goals, implements requirements for measuring 
performance under the goals, and establishes procedures for monitoring 
and changing the goals. The Act provides that from year-to-year the 
Secretary may, by regulation, adjust any housing goal.


Sec. 81.12  Low- and moderate-income housing goal.

    (a) Authority. Section 1332 of FHEFSSA requires the Secretary to 
establish an annual goal for the purchase by each GSE of mortgages on 
housing for low- and moderate-income families (``the low- and moderate-
income housing goal'').
    (b) Purpose of goal. This goal is intended to achieve increased 
purchases by the GSEs of mortgages on housing for low- and moderate-
income families.
    (c) Factors. In establishing the low- and moderate-income housing 
goals, the Act requires the Secretary to consider:
    (1) National housing needs;
    (2) Economic, housing, and demographic conditions;
    (3) The performance and effort of the GSEs toward achieving the 
low- and moderate-income housing goal in previous years;
    (4) The size of the conventional mortgage market serving low- and 
moderate-income families relative to the size of the overall 
conventional mortgage market;
    (5) The ability of the GSEs to lead the industry in making mortgage 
credit [[Page 9184]] available for low- and moderate-income families; 
and
    (6) The need to maintain the sound financial condition of the GSEs.
    (d) Consideration of factors. The Secretary fully considered these 
factors in establishing the goals in this section. A statement 
documenting the Secretary's considerations and findings with respect to 
these factors, entitled ``Secretarial Considerations to Establish the 
Low- and Moderate-Income Housing Goal,'' is Appendix A of this part.
    (e) Goals. Based on the Secretary's consideration of the factors in 
paragraph (c) of this section, the Secretary has established the 
following goals for each GSE's purchases of conventional mortgages on 
housing for low- and moderate-income families:
    (1) The annual goal for 1995 shall be 38 percent of the total 
number of dwelling units financed by that GSE's mortgage purchases in 
1995;
    (2) The annual goal for 1996 shall be 40 percent of the 1996 
purchases;
    (3) The annual goal for 1997 shall be a number ranging from 40 
percent of the 1997 purchases to the proportion or percentage of 
mortgages qualifying under the goal that are originated by that year's 
market (``the amount of the market'') or the amount of the market plus 
an additional percentage;
    (4) The annual goal for 1998 shall be a number ranging from 40 
percent of the 1998 purchases to the amount of the market or the amount 
of the market plus an additional percentage; and
    (5) The annual goal for each succeeding year after 1998 shall be a 
number ranging from 40 percent of that year's purchases to the amount 
of the market or the amount of the market plus an additional 
percentage, or, if the Department does not set an annual goal for such 
succeeding years, the goal for such years shall be the same as the most 
recent goal established by the Secretary, pending further adjustment by 
the Secretary through rulemaking.
    (f) The Secretary shall monitor the GSEs' performance under this 
goal and the GSEs' performance shall be measured as set forth in this 
subpart.


Sec. 81.13  Central cities, rural areas, and other underserved areas 
housing goal.

    (a) Authority. Section 1334 of FHEFSSA requires the Secretary to 
establish an annual goal for the purchase by each GSE of mortgages on 
housing located in central cities, rural areas and other underserved 
areas.
    (b) Purpose of the goal. This goal is intended to achieve increased 
purchases by the GSEs of mortgages financing housing in areas that are 
underserved by mortgage credit.
    (c) Factors. In establishing the central cities, rural areas, and 
other underserved areas goals, the Act requires the Secretary to 
consider:
    (1) Urban and rural housing needs and the housing needs of 
underserved areas;
    (2) Economic, housing, and demographic conditions;
    (3) The performance and efforts of the GSEs toward achieving the 
central cities, rural areas, and other underserved areas housing goal 
in previous years;
    (4) The size of the conventional mortgage market for central 
cities, rural areas, and other underserved areas relative to the size 
of the overall conventional mortgage market;
    (5) The ability of the GSEs to lead the industry in making mortgage 
credit available throughout the United States, including central 
cities, rural areas, and other underserved areas; and
    (6) The need to maintain the sound financial condition of the GSEs.
    (d) Consideration of Factors. The Secretary fully considered these 
factors in establishing the goals in this section. A statement 
documenting the Secretary's considerations and findings with respect to 
these factors, entitled ``Secretarial Considerations to Establish the 
Central Cities, Rural Areas, and Other Underserved Areas Housing Goal'' 
is Appendix B of this part.
    (e) Goals. Based on the Secretary's consideration of the factors in 
paragraph (c) of this section, the Secretary has established the 
following goals for each GSE's purchases of conventional mortgages on 
housing located in central cities, rural areas, and other underserved 
areas:
    (1) The annual goal for 1995 shall be 18 percent of the total 
number of dwelling units financed by that GSE's mortgage purchases in 
1995;
    (2) The annual goal for 1996 shall be 21 percent of the 1996 
purchases;
    (3) The annual goal for 1997 shall be a number ranging from 21 
percent of the 1997 purchases to the proportion or percentage of 
mortgages qualifying under the goal that are originated by that year's 
market (``the amount of the market'') or the amount of the market plus 
an additional percentage;
    (4) The annual goal for 1998 shall be a number ranging from 21 
percent of the 1998 purchases to the amount of the market or the amount 
of the market plus an additional percentage; and
    (5) The annual goal for each succeeding year after 1998 shall be a 
number ranging from 21 percent of that year's purchases to the amount 
of the market or the amount of the market plus an additional 
percentage, or, if the Department does not set an annual goal for such 
succeeding years, the goal for such years shall be the same as the most 
recent goal established by the Secretary, pending further adjustment by 
the Secretary through rulemaking.
    (f) Measuring performance. The Secretary shall monitor the GSEs' 
performance under this goal. The GSEs shall determine on a mortgage-by-
mortgage basis, through geocoding or any similarly accurate and 
reliable method, whether a mortgage finances dwelling unit(s) located 
in a central city, rural area, or other underserved area.


Sec. 81.14  Special affordable housing goal.

    (a) Authority. Section 1333 of FHEFSSA requires the Secretary to 
establish a special annual goal designed to adjust the purchase by each 
GSE of mortgages on rental and owner-occupied housing to meet the then-
existing unaddressed needs of, and affordable to, low-income families 
in low-income areas and very low-income families.
    (b) Purpose of the goal. This goal is intended to achieve increased 
purchases by the GSEs of mortgages meeting the needs of low-income 
families in low-income areas and very low-income families.
    (c) Factors. In establishing the special affordable housing goals, 
the Act requires the Secretary to consider:
    (1) Data submitted to the Secretary in connection with the special 
affordable housing goal for previous years;
    (2) The performance and efforts of the GSEs toward achieving the 
special affordable housing goal in previous years;
    (3) National housing needs within the categories set forth in this 
section;
    (4) The ability of the GSEs to lead the industry in making mortgage 
credit available for low-income and very low-income families; and
    (5) The need to maintain the sound financial condition of the GSEs.
    (d) Consideration of Factors. The Secretary fully considered these 
factors in establishing the goals in this section. A statement 
documenting the Secretary's considerations and findings with respect to 
these factors, entitled ``Secretarial Considerations to Establish the 
Special Affordable Housing Goal'' is Appendix C of this part.
    (e) Goals. Based on the Secretary's consideration of the factors in 
paragraph (c) of this section, the Secretary has established the 
following annual special affordable housing goals for each GSE:
    (1) Rental housing. For purchases of conventional mortgages 
financing rental housing units meeting the then-existing, 
[[Page 9185]] unaddressed needs of and affordable to very low-income 
families:
    (i) The annual goal for 1995 shall be 5.5 percent of the total 
number of dwelling units financed by that GSE's mortgage purchases in 
1995;
    (ii) The annual goal for 1996 shall be 6 percent of the 1996 
purchases;
    (iii) The annual goal for 1997 shall be a number ranging from 6 
percent of the 1997 purchases to the proportion or percentage of 
mortgages qualifying under the goal that are originated by that year's 
market (``the amount of the market'') or the amount of the market plus 
an additional percentage;
    (iv) The annual goal for 1998 shall be a number ranging from 6 
percent of the 1998 purchases to the amount of the market or the amount 
of the market plus an additional percentage; and
    (v) The annual goal for each succeeding year after 1998 shall be a 
number ranging from 6 percent of that year's purchases to the amount of 
the market or the amount of the market plus an additional percentage, 
or, if the Department does not set an annual goal for such succeeding 
years, the goal for such years shall be the same as the most recent 
goal established by the Secretary, pending further adjustment by the 
Secretary through rulemaking.
    (2) Owner-occupied housing. For purchases of conventional mortgages 
financing owner-occupied dwelling units either located in low-income 
areas and meeting the then-existing, unaddressed needs of and owned by 
low-income families, or meeting the then-existing, unaddressed needs of 
and owned by very low-income families:
    (i) The annual goal for 1995 shall be 5.5 percent of the total 
number of dwelling units financed by that GSE's mortgage purchases in 
1995;
    (ii) The annual goal for 1996 shall be 6 percent of the 1996 
purchases;
    (iii) The annual goal for 1997 shall be a number ranging from 6 
percent of the 1997 purchases to the proportion or percentage of 
mortgages qualifying under the goal that are originated by that year's 
market (``the amount of the market'') or the amount of the market plus 
an additional percentage;
    (iv) The annual goal for 1998 shall be a number ranging from 6 
percent of the 1998 purchases to the amount of the market or the amount 
of the market plus an additional percentage; and
    (v) The annual goal for each succeeding year after 1998 shall be a 
number ranging from 6 percent of that year's purchases to the amount of 
the market or the amount of the market plus an additional percentage, 
or, if the Department does not set an annual goal for such succeeding 
years, the goal for such years shall be the same as the most recent 
goal established by the Secretary, pending further adjustment by the 
Secretary through rulemaking.
    (f) Performance. The Secretary shall monitor the GSEs' performance 
under this goal.
    (g) Double counting. Each mortgage purchase, or portion of a 
mortgage where only a portion counts toward achievement of this goal, 
shall count only once toward achievement of the goal, i.e., shall count 
under only one subsection of the goal.
    (h) Full credit activities. (1) As required by FHEFSSA, the 
Secretary will give full credit toward achievement of the special 
affordable housing goals for the following mortgage purchases by the 
GSEs:
    (i) (A) The purchase or securitization of federally insured or 
guaranteed mortgages where:
    (1) Such mortgages cannot be readily securitized through the 
Government National Mortgage Association (GNMA) or any other Federal 
agency;
    (2) Participation of the GSE substantially enhances the 
affordability of the housing subject to such mortgages; and
    (3) The mortgages involved are on housing that otherwise qualifies 
under the special affordable housing goal to be considered for purposes 
of such goal.
    (B) Mortgages under the Department's Home Equity Conversion 
Mortgage (HECM) Insurance Demonstration Program, section 255 of the 
National Housing Act, 12 U.S.C. 1715z-20, and the Farmers Home 
Administration's Guaranteed Rural Housing Loan Program, 7 U.S.C. 1933, 
meet the requirements of paragraphs (h)(1)(i)(A) (1) and (2) of this 
section.
    (ii) The purchase or refinancing of existing, seasoned portfolios 
of loans where:
    (A) The seller is engaged in a specific program to use the proceeds 
of such sales to originate additional loans that meet the special 
affordable housing goal; and
    (B) Such purchases or refinancings support additional lending for 
housing that otherwise qualifies under the goal.
    (iii) The purchase of direct loans made by the Resolution Trust 
Corporation (RTC) or the Federal Deposit Insurance Corporation (FDIC) 
where such loans are:
    (A) Not guaranteed by the RTC, FDIC, or other Federal agencies;
    (B) Made with recourse provisions similar to those offered through 
private mortgage insurance or other conventional sellers; and
    (C) Made for the purchase of housing that otherwise qualifies under 
the special affordable housing goal to be considered for purposes of 
such goal.
    (2) For purposes of determining whether a seller is engaging in a 
specific program to use proceeds of sales to originate additional loans 
that meet the special affordable housing goal under paragraph 
(h)(1)(ii) of this section:
    (i) A seller must currently operate on its own or actively 
participate in an ongoing program that will result in originating 
additional loans that meet the goal. Actively participating in such a 
program includes actively participating with a qualified housing group 
that operates a program resulting in the origination of loans that meet 
the requirements of the goal;
    (ii) To determine whether a seller meets the requirement in 
paragraph (h)(2)(i) of this section, the GSE shall verify and monitor 
that the seller meets the requirement and develop any necessary 
mechanisms to ensure compliance with this requirement; and
    (iii) Where a seller's primary business is originating mortgages on 
housing that qualifies under this special affordable housing goal, such 
seller is presumed to meet the requirements in paragraph (h)(2)(i) of 
this section.
    (3) For purposes of this section, full credit means that each unit 
financed by a mortgage purchased by a GSE and meeting the requirements 
of this section shall count toward achievement of the special 
affordable housing goal for that GSE.
    (i) No credit activities. As provided in FHEFSSA, neither the 
purchase nor the securitization of mortgages associated with the 
refinancing of a GSE's existing mortgage or mortgage-backed securities 
portfolios shall receive credit toward the achievement of the special 
affordable housing goal. In applying this restriction, refinancings 
that result from the wholesale exchange of mortgages between the two 
GSEs shall not count toward the achievement of this goal; refinancings 
of individual mortgages shall count toward achievement of this goal 
where the refinancing is an arms-length transaction that is borrower-
driven and the mortgage otherwise counts toward achievement of this 
goal. For purposes of this paragraph, ``portfolios of mortgages'' 
includes mortgages retained by Fannie Mae or Freddie Mac and mortgages 
utilized to back mortgage-backed securities.


Sec. 81.15  General requirements.

    (a) General. The Secretary shall monitor and count the performance 
of each GSE under each of the housing goals. In determining each GSE's 
performance, the general requirements in this section shall apply. 
[[Page 9186]] 
    (b) Calculating the numerator and denominator. Performance under 
each of the housing goals is based on a fraction that is converted into 
a percentage. The numerator of each fraction is the number of dwelling 
units that count toward achievement of the housing goal. The 
denominator of each fraction is, for all mortgages purchased, the 
number of dwelling units that could count toward achievement of the 
goal under appropriate circumstances. The denominators shall not 
include GSE transactions or activities that are not included in the 
terms ``mortgage'' or ``mortgage purchase.'' Where a GSE lacks 
sufficient information to determine whether a mortgage purchase counts 
toward achievement of a particular housing goal, such a mortgage 
purchase shall be included in the denominator for that housing goal.
    (c) Properties with multiple dwelling units. For the purposes of 
counting toward the achievement of the goals, whenever the real 
property securing a conventional mortgage contains more than one 
dwelling unit, each such dwelling unit shall be counted as a separate 
dwelling unit financed by a mortgage purchase.
    (d) Credit toward multiple goals. For the purposes of counting 
toward the achievement of the goals, a mortgage purchase (or dwelling 
unit financed by such purchase) by a GSE in a particular year shall 
count toward the achievement of each housing goal for which such 
purchase (or dwelling unit) qualifies in that particular year.
    (e) Counting owner-occupied units. For purposes of counting owner-
occupied dwelling units toward achievement of the low- and moderate-
income housing goal or the special affordable housing goal, mortgage 
purchases financing such owner-occupied units shall be evaluated based 
on the income of the mortgagors at the time of origination of the 
mortgage. To determine whether mortgagors may be counted under a 
particular family income level, i.e., very low-, low-, or moderate-
income, the income of the mortgagors is compared to the median income 
for the area at the time of mortgage origination, using the appropriate 
percentage factor provided under Sec. 81.17.
    (f) Counting rental units.--(1) Use of income, rent.--(i) 
Generally. For purposes of counting rental dwelling units toward 
achievement of the low- and moderate-income housing goal or the special 
affordable housing goal, mortgage purchases financing such rental units 
shall be evaluated based on the income of actual or prospective tenants 
where such data is available, i.e., known to a lender.
    (ii) Availability of income information. (A) Each GSE shall require 
lenders to provide tenant income information to the GSE, but only where 
such information is known to the lender.
    (B) Where such tenant income information is available for all 
occupied units, the GSE's performance shall be based on the income of 
the tenants in the occupied units. For unoccupied units that are vacant 
and available for rent and for unoccupied units that are under repair 
or renovation and not available for rent, the GSE shall use the income 
of prospective tenants, if paragraph (f)(4) of this section is 
applicable. If paragraph (f)(4) (income of prospective tenants) is 
inapplicable, the GSE shall use rent levels for comparable units in the 
property to determine affordability.
    (2) Model units and rental offices. A model unit or rental office 
in multifamily properties may count toward achievement of the housing 
goals only if a GSE determines that:
    (i) It is reasonably expected that the space will be occupied by a 
family within one year;
    (ii) The number of such units is reasonable and minimal; and
    (iii) Such space otherwise meets the requirements for the goal.
    (3) Income of actual tenants. Where the income of actual tenants is 
available, to determine whether tenant(s) are very low-, low-, or 
moderate-income, the income of the tenant(s) shall be compared to the 
median income for the area, adjusted for family size as provided in 
Sec. 81.17.
    (4) Income of prospective tenants. Where income for tenants is 
available to a lender because a project is subject to a Federal housing 
program that establishes the maximum income for a tenant or a 
prospective tenant in rental units, the income of prospective tenants 
may be counted at the maximum income level established under such 
housing program for that unit. Each GSE shall require lenders to 
provide such prospective tenants' income information to the GSE where 
such information is known to the lender. In determining the income of 
prospective tenants, the income shall be projected based on the types 
of units and market area involved. Where the income of prospective 
tenants is projected, each GSE must determine that the income figures 
are reasonable considering the rents (if any) on the same units in the 
past and considering current rents on comparable units in the same 
market area.
    (5) Use of rent. Where the income of the prospective or actual 
tenants of a dwelling unit is not available, performance under these 
goals will be evaluated based on rent and whether the rent is 
affordable to the income group targeted by the housing goal. A rent is 
affordable if the rent does not exceed 30 percent of the maximum income 
level of very low-, low-, or moderate-income families as provided in 
Sec. 81.19. In determining contract rent for a dwelling unit, the 
actual rent shall be used where such information (whether computerized, 
automated, or not) is available.
    (6) Timeliness of information. In determining performance under the 
housing goals, each GSE shall use tenant information required under 
this subsection as of the time of mortgage acquisition or, if 
underwriting occurs within two years of the GSE's purchasing a 
mortgage, the time of underwriting.
    (g) Median income. (1) Where, for purposes of comparing a 
mortgagor's income to the median income for an area, a GSE cannot 
precisely determine whether the mortgage is on dwelling unit(s) located 
in one area but can determine that the mortgage is on dwelling unit(s) 
located in a census tract, or within a census place code, block-group 
enumeration district, or nine-digit zip code, or another appropriate 
geographic segment, that is partially located in more than one area 
(``split area''), the GSE shall calculate a median income for the split 
area. The median income for such split areas shall equal:
    (i) The ratio of the population of the geographic segment that is 
located in the first area to the total population of the split area 
times the median income of that area; plus
    (ii) The ratio of the population of the geographic segment that is 
located in the second area to the total population of the split area 
times the median income of that area.
    (2) Where, for purposes of comparing the median income of a census 
tract to the area median income, a mortgage is on dwelling unit(s) 
located in a census tract that is partially located in more than one 
area (``split area''), the GSE shall calculate a median income for the 
split area as prescribed in paragraph (g)(1) of this section and that 
area median income shall be compared to the median income of the census 
tract.
    (h) Sampling not permitted. Performance under the housing goals for 
a particular year shall be based on a complete accounting of mortgage 
purchases for that year; a sampling of such purchases is not 
acceptable. [[Page 9187]] 
    (i) Newly available data. Where a GSE uses data to determine 
whether a mortgage purchase counts toward achievement of any goal and 
new data is released after the start of a calendar quarter, the GSE 
need not use the new data until the start of the following quarter; the 
GSE may continue to use the data that was available at the beginning of 
the quarter.


Sec. 81.16  Special counting requirements.

    (a) General. This section details the extent to which transactions 
or activities of the GSEs count toward achievement of any of the 
housing goals and, where the transaction or activity does count, 
whether full credit or some level of partial credit shall be provided 
for such transaction or activity. In determining the level of credit to 
be counted for each transaction or activity, the Secretary considers 
the following criteria:
    (1) Where a transaction or activity is substantially equivalent to 
a mortgage purchase, the GSE shall receive full credit for the 
transaction or activity toward achievement of any of the housing goals;
    (2) Where a transaction or activity has less than the normative 
risk associated with the GSE's mortgage purchases, the GSE shall 
receive less than full credit for the transaction or activity; and
    (3) Where a transaction or activity creates a new market or adds 
liquidity to an existing market, the GSE shall receive full credit for 
the transaction or activity.
    (b) Not counted. The following transactions or activities do not 
count toward achievement of any of the housing goals and shall not be 
included in the denominator in calculating either GSE's performance 
under the housing goals:
    (1) Equity investments in projects eligible for Low-Income Housing 
Tax Credits (LIHTC), 26 U.S.C. 42;
    (2) Purchases of State and local government housing bonds, 
including mortgage revenue bonds;
    (3) Purchases of non-conventional mortgages, including mortgages 
insured under HUD's One- to Four-Family Home Mortgage Insurance Program 
(section 203 (b) and (i) of the National Housing Act, 12 U.S.C. 1709 
(b) and (i)), and mortgages guaranteed by the Department of Veterans 
Affairs, except where such mortgages are acquired under a risk-sharing 
arrangement with the Department or another Federal agency and except 
where such mortgages are permitted to count toward achievement of the 
special affordable housing goals under Sec. 81.14(h)(1)(i);
    (4) Commitments to buy mortgages at a later date or time; and
    (5) Mortgage purchases to the extent mortgage purchases finance any 
dwelling units that are secondary residences.
    (c) Other special rules.--(1) Credit enhancements.
    (i) Credit enhancement transactions shall count toward achievement 
of the housing goals where:
    (A) The GSE provides specific mortgages it owns as collateral to 
guarantee bonds issued to finance housing; such bonds may be issued by 
any entity, including a State or local housing finance agency; and
    (B) The GSE assumes a credit risk in the transaction by pledging or 
guaranteeing repayment and such credit risk is substantially equivalent 
to that assumed by the GSE if it had securitized the mortgages financed 
by such State or local housing finance agency.
    (ii) Dwelling units financed under this type of credit enhancement 
transaction shall count toward a goal to the extent such dwelling units 
otherwise qualify under this rule.
    (2) Real estate mortgage investment conduits (REMICs).
    [Reserved pending responses received on the questions contained in 
the preamble].
    (3) Risk-sharing. Mortgage purchases under risk-sharing 
arrangements between the GSEs and the Department or any other Federal 
agency under which the GSE and the agency acquire mortgages and share 
the risk associated with such acquisition shall count toward 
achievement of the housing goals on a partial credit basis equal to the 
percentage of risk that the GSE takes under the risk-sharing 
arrangement multiplied by the number of dwelling units that would have 
counted toward the goal(s) if the GSE had purchased all of the 
mortgages. In calculating performance under the housing goals, the 
denominator shall include the number of dwelling units included in the 
risk-sharing arrangement multiplied by the percentage of risk that the 
GSE takes under the arrangement. The GSE shall provide a certification 
to the Secretary stating the actual percentage of risk to the GSE for 
each risk-sharing arrangement and explain how that percentage was 
calculated; that percentage of risk shall be used to count toward 
achievement of the housing goals.
    (4) Participations. Participations purchased by a GSE shall receive 
partial credit toward achievement of the housing goals equivalent to 
the percentage of the mortgage that the GSE purchases.
    (5) Cooperative housing. (i) For purposes of counting a GSE's 
purchase of a mortgage on a cooperative housing unit (``a share loan'') 
toward achievement of any of the housing goals, such a purchase is 
counted in the same manner as a mortgage purchase of single family 
owner-occupied units, i.e., affordability is based on the income of the 
owner(s).
    (ii) The purchase of a mortgage on a cooperative building (``a 
blanket loan'') shall count toward achievement of the housing goals. 
Where a GSE purchases both ``a blanket loan'' and mortgages for units 
in the same building (``share loans''), both the blanket loan and the 
share loan(s) shall count toward achievement of the housing goals.
    (6) Seasoned mortgages. A GSE's purchase of a seasoned mortgage may 
be treated as a mortgage purchase for purposes of these goals except as 
provided under the special affordable housing goal and except where the 
GSE has already counted the mortgages under a housing goal applicable 
to 1993 or any subsequent year. For seasoned, single family mortgages 
that are more than 3 years old when purchased by a GSE, the 
affordability of the housing must be determined based on income and/or 
rent level information at the time of purchase by the GSE. For 
multifamily dwelling units, a seasoned, multifamily mortgage will be 
counted toward achievement of the housing goals based on rental 
information and area median income as of the time that the GSE 
purchases the mortgage.
    (7) Purchase of refinanced mortgages. The purchase of a refinanced 
mortgage by a GSE shall count toward achievement of the housing goals 
to the extent the mortgage qualifies, except to the extent that the 
specific restrictions under the special affordable housing goal apply.
    (8) Second mortgages. [Reserved pending responses received on the 
questions contained in the preamble].


Sec. 81.17  Income level definitions for owner-occupied units, actual 
tenants, and prospective tenants (if family size is known).

    In determining whether a dwelling unit is affordable to very low-, 
low-, or moderate-income families, where (for rental housing) family 
size is known, the affordability of the unit shall be determined as 
follows:
    (a) Moderate-income means:
    (1) In the case of owner-occupied units, income not in excess of 
100 percent of area median income; and
    (2) In the case of rental units, where the income of actual or 
prospective tenants is available, income not in excess of the following 
percentages of [[Page 9188]] area median income corresponding to the 
following family sizes:

------------------------------------------------------------------------
                                                           Percentage of
               Number of persons in family                  area median 
                                                              income    
------------------------------------------------------------------------
1.......................................................              70
2.......................................................              80
3.......................................................              90
4.......................................................             100
5 or more...............................................               *
------------------------------------------------------------------------
*100% plus (8% multiplied by the number of persons in excess of 4).     

    (b) Low-income means:
    (1) In the case of owner-occupied units, income not in excess of 80 
percent of area median income; and
    (2) In the case of rental units, where the income of actual or 
prospective tenants is available, income not in excess of the following 
percentages of area median income corresponding to the following family 
sizes:

------------------------------------------------------------------------
                                                           Percentage of
               Number of persons in family                  area median 
                                                              income    
------------------------------------------------------------------------
1.......................................................              56
2.......................................................              64
3.......................................................              72
4.......................................................              80
5 or more...............................................               *
------------------------------------------------------------------------
*80% plus (6.4% multiplied by the number of persons in excess of 4).    

    (c) Very low-income means:
    (1) In the case of owner-occupied units, income not in excess of 60 
percent of area median income; and
    (2) In the case of rental units, where the income of actual or 
prospective tenants is available, income not in excess of the following 
percentages of area median income corresponding to the following family 
sizes:

------------------------------------------------------------------------
                                                           Percentage of
               Number of persons in family                  area median 
                                                              income    
------------------------------------------------------------------------
1.......................................................              42
2.......................................................              48
3.......................................................              54
4.......................................................              60
5 or more...............................................               *
------------------------------------------------------------------------
*60% plus (4.8% multiplied by the number of persons in excess of 4).    

Sec. 81.18  Income level definitions for prospective tenants (if family 
size is not known).

    In determining whether a rental dwelling unit is affordable to very 
low-, low-, or moderate-income families and counts toward achievement 
of one or more of these goals, the income of the prospective tenants 
shall be adjusted for family size. If family size is not known, income 
will be adjusted using unit size:
    (a) For moderate-income, the income of prospective tenants shall 
not exceed the following percentages of area median income with 
adjustments depending on unit size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................              70
1 bedroom...............................................              75
2 bedrooms..............................................              90
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*104% plus (12% multiplied by the number of bedrooms in excess of 3).   

    (b) For low-income, income of prospective tenants shall not exceed 
the following percentages of area median income with adjustments 
depending on unit size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................              56
1 bedroom...............................................              60
2 bedrooms..............................................              72
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*83.2% plus (9.6% multiplied by the number of bedrooms in excess of 3). 

    (c) For very low-income, income of prospective tenants shall not 
exceed the following percentages of area median income with adjustments 
depending on unit size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................              42
1 bedroom...............................................              45
2 bedrooms..............................................              54
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*62.4% plus (7.2% multiplied by the number of bedrooms in excess of 3). 

Sec. 81.19  Rent level definitions for tenants (if income is not 
known).

    For purposes of determining whether a rental dwelling unit is 
affordable to very low-, low-, or moderate-income families, where the 
income of the family in the dwelling unit is not known, the 
affordability of the unit is determined based on unit size as follows:
    (a) For moderate-income, maximum affordable rents to count as 
housing for moderate-income families shall not exceed the following 
percentages of area median income with adjustments depending on unit 
size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................              21
1 bedroom...............................................            22.5
2 bedrooms..............................................              27
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*31.2% plus (3.6% multiplied by the number of bedrooms in excess of 3). 

    (b) For low-income, maximum affordable rents to count as housing 
for low-income families shall not exceed the following percentages of 
area median income with adjustments depending on unit size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................            16.8
1 bedroom...............................................              18
2 bedrooms..............................................            21.6
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*24.96% plus (2.88% multiplied by the number of bedrooms in excess of   
  3).                                                                   

and
    (c) For very low-income, maximum affordable rents to count as 
housing for very low-income families shall not exceed the following 
percentages of area median income with adjustments depending on unit 
size:

------------------------------------------------------------------------
                                                           Percentage of
                        Unit size                           area median 
                                                              income    
------------------------------------------------------------------------
Efficiency..............................................            12.6
1 bedroom...............................................            13.5
2 bedrooms..............................................            16.2
3 bedrooms or more......................................               *
------------------------------------------------------------------------
*18.72% plus (2.16% multiplied by the number of bedrooms in excess of   
  3).                                                                   

    (d) Missing Information. Each GSE shall make every effort to obtain 
the information necessary to make the calculations in this section. If 
a GSE makes such efforts but cannot obtain data on the number of 
bedrooms in particular units, in making the calculations on such units, 
it shall be assumed that such units are efficiencies.


Sec. 81.20  Actions to be taken to meet the goals.

    To meet the goals established in this rule, each GSE shall:
    (a) Design programs and products that facilitate the use of 
assistance provided by the Federal, State, and local governments;
    (b) Develop relationships with nonprofit and for-profit 
organizations that develop and finance housing and with State and local 
governments, including housing finance agencies;
    (c) Develop the institutional capacity to help finance low- and 
moderate-income housing, including housing for first-time home buyers; 
and [[Page 9189]] 
    (d) (1) Take affirmative steps to assist:
    (i) Primary lenders to make housing credit available in areas with 
concentrations of low-income and minority families; and
    (ii) Insured depository institutions to meet their obligations 
under the Community Reinvestment Act of 1977.
    (2) The steps under paragraph (d)(1) of this section shall include 
developing appropriate and prudent underwriting standards, business 
practices, repurchase requirements, pricing, fees, and procedures.


Sec. 81.21  Notice and determination of failure to meet goals.

    (a) Notice. If, based on a GSE's reports or other data available to 
the Secretary, the Secretary determines that the GSE has failed or 
there is a substantial probability that the GSE will fail to meet any 
housing goal, the Secretary shall, by written notice to the GSE, issue 
to the GSE a preliminary determination notice that shall propose to 
require the GSE to submit a housing plan. Such notice shall include:
    (1) The preliminary determination;
    (2) The reasons for the determination;
    (3) The information on which the Secretary based the determination; 
and
    (4) The proposal to require the GSE to submit a housing plan.
    (b) Response period.--(1) In general. The GSE shall have 30 days 
from the date of the preliminary determination notice (``response 
period'') to submit any written information that the GSE considers 
appropriate for consideration by the Secretary in determining whether:
    (i) The GSE has failed to meet the housing goal;
    (ii) A substantial probability exists that the GSE will fail to 
meet any housing goal; or
    (iii) Whether achievement of the relevant housing goal was or is 
feasible.
    (2) Extended period. If the Secretary determines that good cause 
exists for extending the response period, the Secretary may extend the 
response period for up to 30 days.
    (3) Shortened period. If the Secretary determines that good cause 
exists for shortening the response period, the Secretary may shorten 
the response period.
    (4) Waiver of right to comment. The GSE's failure to provide any 
written information during the response period (as extended or 
shortened, if applicable) shall constitute a waiver of any right of the 
GSE to comment on the determination or the action of the Secretary on 
the matters addressed in the notice.
    (c) Consideration of information and final determination. After the 
expiration of the response period or upon receipt of the GSE's 
response, whichever occurs first, the Secretary shall consider the 
GSE's response to the preliminary notice, if any, and finally 
determine, in writing, whether:
    (1) The GSE has failed or there is a substantial probability that 
the GSE will fail to meet the relevant housing goal; and
    (2) Considering market and economic conditions and the GSE's 
financial condition, the achievement of the housing goals was or is 
feasible.
    (d) Notice to Congress. (1) The Secretary shall provide written 
notice, including the Secretary's response to any information submitted 
by the GSE during the response period, of:
    (i) Each determination that the GSE has failed, or that there is a 
substantial probability that the GSE will fail, to meet a housing goal;
    (ii) Each determination that the achievement of a housing goal was 
or is feasible; and
    (iii) The reasons for each such determination.
    (2) The Secretary shall provide such notice to the GSE; the 
Committee on Banking and Financial Services of the House of 
Representatives; and the Committee on Banking, Housing, and Urban 
Affairs of the Senate.


Sec. 81.22  Housing plans.

    (a) If the Secretary determines, under Sec. 81.21(c), that a GSE 
has failed or there is a substantial probability that a GSE will fail 
to meet any housing goal and that the achievement of the housing goal 
was or is feasible, the Secretary shall provide notice to the GSE 
requiring the GSE to submit a housing plan for approval by the 
Secretary.
    (b) Nature of plan. Each housing plan shall:
    (1) Be feasible;
    (2) Be sufficiently specific to enable the Secretary to monitor 
compliance periodically;
    (3) Describe the specific actions that the GSE will take:
    (i) To achieve the goal for the next calendar year; or
    (ii) If the Secretary determines that there is substantial 
probability that the GSE will fail to meet a housing goal in the 
current year, to make such improvements as are reasonable in the 
remainder of the year; and
    (4) Address any additional matters as required, in writing, by the 
Secretary.
    (c) Deadline for submission. The GSE shall submit a housing plan to 
the Secretary within 30 days after issuance of a notice under paragraph 
(a) of this section. The Secretary may extend the deadline for 
submission of a plan, in writing and for a time certain, to the extent 
the Secretary determines an extension is necessary.
    (d) Review of housing plans.--(1) Standard. The Secretary shall 
approve a housing plan if the Secretary determines that the plan:
    (i) Is likely to succeed; and
    (ii) Conforms with the appropriate GSE's Charter Act, the Act, and 
any other applicable laws and regulations.
    (2) Time period. The Secretary shall review each housing plan and 
approve or disapprove the plan within 30 days of the Secretary's 
receipt of the plan. The Secretary may extend this period for one 30-
day period if the Secretary determines such an extension is necessary 
and shall provide written notice to the GSE of such extension.
    (3) Notice to the GSE. The Secretary shall provide written notice 
to the GSE of the approval or disapproval of a housing plan. If the 
Secretary disapproves a housing plan, the notice shall include the 
reasons for disapproval.
    (e) Resubmission. If the Secretary disapproves an initial housing 
plan submitted by a GSE, the GSE shall submit an amended plan 
acceptable to the Secretary within 30 days of the Secretary 
disapproving the initial plan; the Secretary may extend the deadline if 
the Secretary determines an extension is in the public interest. If the 
amended plan is not acceptable to the Secretary, the Secretary may 
afford the GSE 15 days to submit a new plan.

Subpart C--Fair Housing


Sec. 81.41  General.

    (a) Authority. This subpart is authorized under sections 1321, 
1325, and 1327 of the Act; 309(n)(2)(G) of the Fannie Mae Charter Act; 
307(f)(2)(G) of the Freddie Mac Act; and the Fair Housing Act (42 
U.S.C. 3601-3619).
    (b) Scope. The Act requires the Secretary, by regulation, to: 
Prohibit discrimination by the GSEs in their mortgage purchases because 
of race, color, religion, sex, handicap, familial status, age, or 
national origin, including any consideration of the age or location of 
a dwelling or age of the neighborhood or census tract where the 
dwelling is located in a manner that has a discriminatory effect; 
require that the GSEs submit information to the Secretary to assist 
Fair Housing Act and Equal Credit Opportunity Act investigations; 
advise the GSEs of Fair Housing Act and ECOA violations; review the 
GSEs' underwriting and appraisal guidelines to ensure compliance with 
the Fair Housing Act; and require that the GSEs take actions 
[[Page 9190]] as directed by the Secretary following Fair Housing Act 
and ECOA adjudications. The Act provides, generally, that the Director 
of OFHEO shall enforce violations by the GSEs of FHEFSSA and 
regulations in this subpart. This subpart establishes requirements 
implementing the Secretary's authority and provides for referral of 
cases to the Director.


Sec. 81.42  Prohibitions against discrimination.

    (a) General. Neither GSE shall discriminate in any manner in making 
any mortgage purchases because of race, color, religion, sex, handicap, 
familial status, age, or national origin, including any consideration 
of the age or location of the dwelling or the age of the neighborhood 
or census tract where the dwelling is located in a manner that has a 
discriminatory effect.
    (b) Bases. In following the prohibition in paragraph (a) of this 
section, the GSEs shall not discriminate based on:
    (1) The race, color, religion, sex, handicap, familial status, age 
or national origin of:
    (i) The borrower or joint borrower, or applicant or joint 
applicant;
    (ii) Any persons associated with the borrower or joint borrower, or 
applicant or joint applicant in connection with such mortgage or the 
purposes thereof;
    (iii) The present or prospective owners, lessees, tenants, or 
occupants of the dwelling or dwellings securing such mortgage; or
    (iv) Persons in neighborhoods or communities in which properties 
secured by mortgages are located; or
    (2) The age or location of the dwelling securing the mortgage or 
the age of the neighborhood or census tract where the dwelling is 
located or the housing stock in such neighborhood or census tract in a 
manner that has a discriminatory effect.
    (c) Liability. Each GSE shall be liable for violations of this 
subpart that it or its officers, agents, or employees commit.
    (d) Exemptions. Notwithstanding the prohibitions of paragraphs (a) 
and (b) of this section:
    (1) Certain factors concerning the age and location of a dwelling, 
or the area in which the dwelling is located, properly may be 
considered.
    (i) The age of the dwelling may be properly considered in the 
appraisal and underwriting process:
    (A) To select comparable properties that have been sold or listed 
recently in the neighborhood for an appraisal; and
    (B) As a basis for conducting more extensive inspections of 
structural aspects of the dwelling. The structural soundness of a 
dwelling rather than its age may be considered in appraisal and other 
aspects of the underwriting process.
    (ii) Certain location factors that may have a negative effect on a 
dwelling's value may be properly considered in an appraisal and in 
other aspects of the underwriting process. These factors include recent 
zoning changes, the number of abandoned homes in the immediate vicinity 
of the property, the condition of streets, parks and recreation areas, 
availability of public utilities and municipal services, and exposure 
to flooding, land faults, and other natural or human-made environmental 
hazards. Such factors, if used, must be specifically documented in the 
appraisal. Location factors may be used to select comparable properties 
that have been sold or listed recently in the neighborhood for an 
appraisal.
    (2) This section does not prevent consideration of factors 
justified by business necessity, including requirements of Federal law, 
relating to a transaction's financial security or to protection against 
default or reduction of the value of the security. However, where such 
factors have a disparate result on the basis of race, color, religion, 
sex, handicap, familial status, age, or national origin, including any 
consideration of the age or location of the dwelling or the age of the 
neighborhood or census tract where the dwelling is located, as set 
forth in paragraph (b) of this section, the factors cannot be 
considered unless they both are justified by business necessity and no 
less discriminatory alternative to such factors exists.
    (3) Age of the borrower or co-borrower may be considered in the 
underwriting process when required by statute, including the age 
requirements for Home Equity Conversion Mortgages (HECMs), 12 U.S.C. 
1715z-20.
    (e) Business Practices Analysis. Within ____ days of the effective 
date of this part, and thereafter periodically as requested by the 
Secretary, each GSE shall complete a Business Practices Analysis.
    (1) Each Business Practices Analysis shall include a complete 
review of the GSE's business practices respecting the purchase of 
mortgages, including, without limitation, its underwriting guidelines 
and appraisal standards, repurchase requirements, pricing criteria, 
fees, and other procedures and practices affecting mortgage purchases 
that lead or could lead to discrimination because of race, color, 
religion, sex, handicap, familial status, age, or national origin, 
including any consideration of the age or location of the dwelling or 
the age of the neighborhood or census tract where the dwelling is 
located in a manner that has a discriminatory effect. The purpose of 
the analysis is to determine whether any such business practices yield 
disparate results because of race, color, religion, sex, handicap, 
familial status, age, or national origin, including any consideration 
of the age or location of the dwelling or the age of the neighborhood 
or census tract where the dwelling is located in a manner that has a 
discriminatory effect, and whether such disparate results are justified 
by business necessity.
    (2) Within ____ days after the effective date of this part, each 
GSE shall submit for the Secretary's review and comment a detailed 
outline and methodology for its Business Practices Analysis. Within 
____ days following receipt of the outline and methodology, the 
Secretary will respond with comments, if any.
    (3) Following completion of its Business Practices Analysis, each 
GSE shall report the results of the analysis to the Secretary. If a 
Business Practices Analysis identifies practices yielding disparate 
results affecting the protected classes under this subpart, the GSE 
must:
    (i) Set forth fully the basis for the GSE's conclusion that a 
business necessity exists for the practice;
    (ii) Present plans to end the practice; or
    (iii) Report that the practice has ended.


Sec. 81.43  Review of underwriting guidelines.

    (a) Each GSE shall analyze its underwriting and appraisal 
guidelines to determine whether such guidelines comply with the Fair 
Housing Act, the regulations promulgated thereunder, section 1325 of 
the Act, and this subpart including whether any of the guidelines are 
discriminatory on the basis of race, color, religion, sex, handicap, 
familial status, age, or national origin, including any consideration 
of the age or location of a dwelling or age of the neighborhood or 
census tract where the dwelling is located in a manner that has a 
discriminatory effect. Following the analysis, the GSE shall provide to 
the Secretary a full report on the analysis, including, without 
limitation, a description of remedies or plans to address any problems 
reported.
    (b) Each GSE shall undertake its first review and analysis of its 
underwriting and appraisal guidelines as part of its Business Practices 
Analysis under Sec. 81.42. Thereafter, each GSE shall conduct such a 
review and analysis periodically as requested by the Secretary. 
[[Page 9191]] 
    (c) The Secretary shall review and comment on each report. The 
Secretary's comments shall specify any guidelines which are, in the 
Secretary's judgment, inconsistent with the Fair Housing Act or ECOA.
    (d) Revisions to underwriting guidelines. Each time a GSE revises 
its underwriting or appraisal guidelines, the GSE shall submit a copy 
of the revision to the Secretary and a certification by the GSE that 
after reasonable evaluation and analysis, the GSE has determined in 
good faith that, to the best of its knowledge, the change does not and 
will not be discriminatory on the basis of race, color, religion, sex, 
handicap, familial status, age, or national origin, including any 
consideration of age or location of a dwelling, or age of a 
neighborhood or census tract where the dwelling is located in a manner 
that has a discriminatory effect. To the extent that a revision has or 
will have disparate results on protected classes under this subpart, 
the GSE must set forth fully the basis for the GSE's conclusion that a 
business necessity exists for the practice. The Secretary may review 
and comment on such changes after they are implemented.
    (e) Additional requests for review. The GSEs shall, at such times 
as requested by the Secretary, submit underwriting and appraisal 
guidelines to the Secretary for the Secretary's review and comment.
    (f) Day-to-day operations. Review of the GSEs' underwriting and 
appraisal guidelines and revisions thereto shall not involve the 
Secretary in the day-to-day operations of the GSEs. The Secretary shall 
review underwriting guidelines to ensure compliance with the Fair 
Housing Act, the regulations promulgated thereunder, section 1325 of 
the Act, and this subpart.


Sec. 81.44  Submission of information to the Secretary.

    (a) General. The GSEs shall submit information and data to the 
Secretary to assist in investigating whether any mortgage lender with 
which the GSE does business has failed to comply with the Fair Housing 
Act or ECOA.
    (b) Information requests and submissions.--(1) Information requests 
by the Secretary. The Secretary may require the GSEs to submit 
information to assist in Fair Housing Act or ECOA investigations of 
lenders. Other Federal agencies responsible for the enforcement of ECOA 
may submit requests for information through the Secretary or directly 
to the GSEs. Requested information may include, without limitation, 
information on mortgages sold by the lender or lenders under 
investigation to the GSE, the mortgage sales of lenders operating in 
the same or similar areas, and information on representations and 
certifications to the GSEs by the lender or lenders under 
investigation.
    (2) Information from established data systems. The Secretary may 
request that a GSE generate information or reports from its data 
system(s) to assist a Fair Housing Act or ECOA investigation. Such 
information may include, without limitation, comparing the loans 
purchased by the GSE from a particular lender to data on the racial 
composition of census tract(s) or providing data on loans sold to the 
GSE by lenders operating in the same geographical area.
    (3) Information available to a GSE. Whenever a GSE knows of 
information relevant to a potential violation of the Fair Housing Act 
or the Equal Credit Opportunity Act by a particular lender or lenders, 
the GSE shall report such information to the Secretary.
    (4) A GSE receiving any request(s) for information under this 
subsection shall reply in a complete and timely manner with any and all 
information that it possesses that is responsive to the request.
    (c) ECOA. The Secretary shall submit any information received under 
paragraph (b) of this section concerning compliance with the Equal 
Credit Opportunity Act to appropriate Federal agencies responsible for 
ECOA enforcement, as provided in section 704 of ECOA.
    (d) Other assistance. The GSEs shall, at the request of the 
Secretary or an official responsible for enforcing ECOA, provide other 
assistance to the Secretary or other officials in investigating and 
enforcing Fair Housing Act or ECOA violations. Such assistance may 
include providing additional relevant materials and testimony 
concerning information or data produced by the GSE.


Sec. 81.45  Submission of information to the GSEs.

    (a) Obtaining and disseminating information. The Secretary shall 
obtain information from other regulatory and enforcement agencies of 
the Federal Government and State and local governments regarding 
violations by lenders of the Fair Housing Act, the Equal Credit 
Opportunity Act, and/or State or local fair housing/lending laws, and 
make such information available to the GSEs as the Secretary deems 
appropriate in accordance with applicable law, memoranda of 
understanding, and other arrangements between the Secretary and Federal 
financial regulators and other agencies.
    (b) Permissible action. The GSEs may take appropriate action under 
their procedures based on such information. Such violations may 
constitute violations of the GSEs' underwriting guidelines and 
representations or certifications of lenders.


Sec. 81.46  Remedial actions.

    (a) General. The Secretary shall direct the GSEs to take one or 
more remedial actions, including suspension, probation, reprimand or 
settlement, against lenders found to have engaged in discriminatory 
lending practices in violation of the Fair Housing Act and ECOA, 
pursuant to a final adjudication on the record and an opportunity for a 
hearing under subchapter II of chapter 5 of title 5, United States 
Code.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    Indefinite suspension means that, until directed to do otherwise by 
the Secretary, the GSEs will refrain from purchasing mortgages from a 
lender.
    Probation means that, for a fixed period of time specified by the 
Secretary, a lender, that has been found to have violated the Fair 
Housing Act or ECOA, will be subject automatically to more severe 
sanctions than probation, e.g., suspension, if further violations are 
found.
    Remedial action means a reprimand, probation, temporary suspension, 
indefinite suspension, or other remedial action.
    Reprimand means a written letter to a lender from a GSE, which has 
been directed to be sent by the Secretary, stating that the lender has 
violated the Fair Housing Act or ECOA and warning of the possibility 
that the Secretary may impose more severe remedial actions than 
reprimand if any further violation occurs.
    Temporary Suspension means that, for a fixed period of time 
specified by the Secretary, the GSEs will not purchase mortgages from a 
lender.
    (c) Institution of remedial actions. (1) When a charge is issued 
against a lender for violating the Fair Housing Act or ECOA, the 
Secretary will notify each GSE. Such notice will inform the GSE of the 
facts and that the GSE may take action under its procedures.
    (2) The Secretary shall direct the GSE to take remedial action(s) 
against a lender charged with violating ECOA only after a final 
determination on the charge has been made by an appropriate United 
States District Court or any other court of competent jurisdiction. The 
Secretary shall direct the GSE to take remedial action(s) against a 
lender charged with violating the Fair Housing Act only after a final 
determination on [[Page 9192]] the matter has been made by a United 
States Court, a HUD Administrative Law Judge, or the Secretary.
    (3) Following a final determination sustaining a charge against a 
lender for violating the Fair Housing Act or ECOA in accordance with 
paragraph (c)(2) of this section, the Secretary shall determine the 
remedial action(s) that the GSE is to be directed to take for such 
violation.
    (4) In determining the appropriate remedial action(s), the 
Secretary shall solicit and fully consider the views of the Federal 
financial regulator responsible for the subject lender concerning the 
action(s) that are contemplated to be directed against such lender, 
prior to directing any such action(s). In determining what action(s) to 
direct, the Secretary in addition will also, without limitation, 
consider the following:
    (i) The gravity of the violation;
    (ii) If a judgment by an Administrative Law Judge or a court has 
previously been rendered against the lender for discriminatory actions, 
the lender's response to that judgment, including the actions taken and 
the timeliness of such actions;
    (iii) The nature and extent of cases under substantially equivalent 
State or local laws, or ECOA against the lender including cases which 
were settled, conciliated, or otherwise resolved;
    (iv) The nature and extent of fair housing enforcement actions or 
judgments by HUD, the Department of Justice, or other regulatory 
agencies, including cases that were settled or otherwise resolved;
    (v) The nature and extent of private fair housing lawsuits and 
judgments against the lender including cases that were settled, 
conciliated, or otherwise resolved;
    (vi) Whether the lender's actions demonstrate a discriminatory 
pattern or practice or an individual instance of discrimination;
    (vii) The impact or seriousness of the harm;
    (viii) The number of people affected by the discriminatory act(s);
    (ix) Whether the lender operates an effective program of self 
assessment and correction;
    (x) The extent of any actions or programs by the lender designed to 
compensate victims and prevent future fair lending violations;
    (xi) The effect of the contemplated action(s) on the safety and 
soundness of the lender (in considering this factor the Secretary shall 
solicit and fully consider the views of the regulator responsible for 
regulating the lender and, where warranted, the Director); and
    (xii) Any other information deemed relevant by the Secretary.
    (d) Notice of remedial action(s). (1) Following the Secretary's 
decision concerning the appropriate remedial action(s) that the GSE is 
to be directed to take, the Secretary shall prepare and issue to the 
GSE and the lender a written notice setting forth the remedial 
action(s) to be taken and the date such remedial action(s) are to 
commence. The Notice shall inform the lender of its right to request a 
hearing on the appropriateness of the proposed remedial action(s), 
within 20 days of receipt of the Notice, by filing a request with the 
Docket Clerk, HUD Administrative Law Judge (ALJ).
    (2) Where a lender does not timely request a hearing on a remedial 
action, the GSE shall take the action in accordance with the Notice.
    (e) Review and decision on remedial action(s). (1) Where a lender 
timely requests a hearing on a remedial action, a hearing shall be 
conducted before a HUD ALJ and a final decision rendered in accordance 
with the procedures set forth in 24 CFR 30.10, 30.15, and part 30, 
subpart E, to the extent such provisions are not inconsistent with this 
subpart or the Act. The lender and the Secretary, but not the GSE, 
shall be parties to the action. At such hearing, the appropriateness of 
the remedial action for the violation(s) will be the sole matter for 
review. The validity or appropriateness of the underlying determination 
on the violation(s) shall not be subject to review at such hearing.
    (2) The Secretary shall transmit to the GSEs each final decision by 
the Department on a remedial action and any dispositive settlement of a 
proceeding on such action.
    (3) The GSE shall take the action(s) set forth in a final decision 
by the Department on remedial action(s) or any dispositive settlement 
of such a proceeding setting forth remedial action(s) in accordance 
with such decision or settlement.


Sec. 81.47  Violations of provisions by the GSEs.

    (a) The Act empowers the Director of the Office of Federal Housing 
Enterprise Oversight to initiate enforcement actions for GSE violations 
of the provisions of section 1325 of the Act and these regulations. The 
Secretary shall refer violations and potential violations of section 
1325 and these regulations to the Director.
    (b) Where a private complainant or the Secretary is also proceeding 
against a GSE under the Fair Housing Act, the Assistant Secretary for 
Fair Housing and Equal Opportunity shall conduct the investigation of 
the complaint and make the reasonable cause/no reasonable cause 
determination required by section 810(g) of the Fair Housing Act. Where 
reasonable cause is found, a charge shall be issued and the matter will 
proceed to enforcement pursuant to sections 812(b) and (o) of the Fair 
Housing Act.

Subpart D--New Program Approval


Sec. 81.51  General.

    Sections 305(c) of the Freddie Mac Act and 302(b)(6) of the Fannie 
Mae Act provide that neither GSE may implement any new program before 
obtaining the approval of the Secretary under section 1322 of the Act. 
Section 1322(a) provides that the Secretary shall require each GSE to 
obtain the Secretary's approval before implementing any new program. 
This subpart details the requirements and procedures for review of 
requests for new program approval by the Secretary.


Sec. 81.52  Requirement for program requests.

    (a) Before implementing a new program, a GSE shall submit a request 
for new program approval (``program request'') to the Secretary for the 
Secretary's review.
    (b) Submission of a program request and Secretarial review is not 
required where the program that the GSE proposes to implement is not 
significantly different from:
    (1) A program that has already been approved in writing by the 
Secretary (hereinafter an ``approved program''); or
    (2) A program that was engaged in by the GSE prior to October 28, 
1992, the date of enactment of FHEFSSA (hereinafter an ``authorized 
program'').
    (c) Section 1303(13) of FHEFSSA approves all authorized programs.
    (d) Approved programs remain subject to all limitations and 
requirements under which such programs were being operated by the GSEs 
on or before October 28, 1992.
    (e) Significantly different programs. (1) A significantly different 
program of a GSE is a program that materially differs from approved or 
authorized programs of the GSE by:
    (i) Entailing substantially greater risk than the average financial 
risks under approved or authorized programs; or
    (ii) Substantially expanding the GSE's role in the housing markets 
by involving new categories of borrowers, properties or other 
securities, borrowing purposes, or credit enhancements.
    (2) Where a planned program reasonably raises questions as to 
whether it is significantly different from existing programs, the GSE 
shall submit a program request and may indicate in [[Page 9193]] its 
request its views respecting whether the program is subject to the 
Secretary's review.
    (3) New activities that are designed to refine approved or 
authorized programs by repackaging features of those programs, making 
technical improvements, or creating other non-material variations are 
not new programs.
    (f) Requests by the Secretary. If a GSE does not submit a program 
request for a program, the Secretary may request information about a 
program and require that the GSE submit a program request. The GSE 
shall comply with the request and may indicate in such response its 
views respecting whether the program is subject to the Secretary's 
review.


Sec. 81.53  Processing of Program Requests.

    (a) Each program request submitted to the Secretary by a GSE shall 
be in writing and shall be submitted to the Secretary and the Director, 
Financial Institutions Regulation, U.S. Department of Housing and Urban 
Development, Washington, D.C. For those requests submitted prior to the 
date occurring one year after the effective date of the regulations 
issued by the Director of OFHEO under section 1361(e) of FHEFSSA 
establishing the risk-based capital test, the GSE shall simultaneously 
submit the program request to the Director.
    (b) Each program request shall include:
    (1) An opinion from counsel stating the statutory authority for the 
new program (Freddie Mac Act section 305 (a) (1), (4), or (5), or 
Fannie Mae Charter Act section 302(b) (2)-(5));
    (2) A good faith estimate of the anticipated dollar volume of the 
program over the short- and long-term;
    (3) A full description of:
    (i) The purpose and operation of the proposed program;
    (ii) The market targeted by the program;
    (iii) The delivery system for the program;
    (iv) The effect of the program on the mortgage market; and
    (v) Material relevant to the public interest.
    (c) Following receipt of a program request, the Secretary and, 
where a program request is submitted before the date occurring one year 
after the effective date of the regulations issued by the Director 
under section 1361(e) of FHEFSSA establishing the risk-based capital 
test, the Director shall review the program request.
    (d) Transition standard for approval by the Secretary and the 
Director. Program requests submitted by the GSEs before the date 
occurring one year after the effective date of the regulations issued 
by the Director under section 1361(e) of FHEFSSA establishing the risk-
based capital test shall be approved by the Secretary unless:
    (1) The Secretary determines that the new program is not 
authorized, for a Freddie Mac program, under sections 305(a) (1), (4), 
or (5) of the Freddie Mac Act, or, for a Fannie Mae program, sections 
302(b) (2)-(5) of the Fannie Mae Charter Act;
    (2) The Secretary determines that such program is not in the public 
interest; or
    (3) The Director determines that such program would risk 
significant deterioration of the GSE's financial condition.
    (e) Permanent standard for approval by the Secretary. Program 
requests submitted after the date occurring one year after the 
effective date of the regulations issued by the Director under section 
1361(e) of FHEFSSA establishing the risk-based capital test shall be 
approved by the Secretary unless:
    (1) The Secretary determines that the new program is not 
authorized, for a Freddie Mac program, under sections 305(a) (1), (4), 
or (5) of the Freddie Mac Act, or, for a Fannie Mae program, 302(b) 
(2)-(5) of the Fannie Mae Charter Act; or
    (2) The Secretary determines that the program is not in the public 
interest.
    (f) Time for review. Unless the Secretary and, where appropriate, 
the Director of OFHEO, need additional information, a program request 
shall be approved or disapproved within 45 days from the date it is 
received by the Director, Financial Institutions Regulation and, where 
applicable, the Director of OFHEO. If within 45 days after receiving a 
request, the Secretary and/or the Director of OFHEO determine that 
additional information is necessary to review the matter and request 
such information from the GSE, the time period for consideration may be 
extended for an additional 15 days.
    (1) Where additional information is requested, the GSE must provide 
the requested information to the Secretary and, where appropriate, the 
Director, within 10 days of receipt of the request for additional 
information.
    (2) If the GSE fails to furnish requested information within 10 
days after the request for information, the Secretary may deny the 
GSE's request for approval based on such failure and so report to 
Congress under paragraph (g) of this section.
    (g) Approval or report. Within the 45-day period or, if the period 
is extended, within 60 days following receipt of a program request, the 
Secretary shall approve the request, in writing, or submit a report to 
the Committee on Banking and Financial Services of the House of 
Representatives and the Committee on Banking, Housing, and Urban 
Affairs of the Senate, explaining the reasons for not approving the 
request. If the Secretary does not act within the time period allowed, 
the GSE's program request will be deemed approved.


Sec. 81.54  Review of disapproval.

    (a) Programs disapproved as unauthorized. Where the Secretary 
disapproves a program request on the grounds that the new program is 
not authorized under sections 305(a) (1), (4), or (5) of the Freddie 
Mac Act, or 302(b) (2)-(5) of the Fannie Mae Charter Act, the GSE may, 
within 30 days of the date of receipt of the decision on disapproval, 
request: An opportunity to review and supplement the administrative 
record for the decision; and/or a meeting with the Secretary or the 
Secretary's designee. If the request for either is timely, the 
Secretary shall grant the request.
    (1) Supplementing the record. A GSE seeking to supplement the 
record in writing must submit written materials within 30 days after 
the request to supplement is granted.
    (2) Meeting. Upon receipt of a timely request from a GSE for a 
meeting, the Secretary shall arrange such a meeting which shall be 
conducted by the Secretary or the Secretary's designee within 10 
business days of receipt of the request. Such a meeting shall not be on 
the record and formal rules of procedure shall not apply. The GSE may 
be represented by counsel and may present all relevant information and 
materials to the Secretary or the Secretary's designee.
    (3) Determination. Within 10 days after submission of the 
information and materials presented in writing or a meeting, the 
Secretary shall in writing withdraw, modify, or affirm the program 
disapproval and shall provide the GSE with that decision.
    (b) Program disproved under public interest determination. Where a 
program request is disapproved because the Secretary determines that 
the program is not in the public interest or because the Director 
determined that the new program would risk significant deterioration of 
the GSE's financial condition, the Secretary shall provide the GSE with 
notice of, and an opportunity for, a hearing on the record 
[[Page 9194]] regarding such disapproval. A request for a hearing must 
be submitted by a GSE within 30 days of the Report to Congress under 
Sec. 81.53(g). The procedures for such hearings are provided in subpart 
G of this part.

Subpart E--Reporting Requirements


Sec. 81.61  General.

    Sections 309(m) of the Fannie Mae Charter Act and 307(e) of the 
Freddie Mac Act require each GSE to collect, maintain, and provide to 
the Secretary data, in a form determined by the Secretary, on each 
single family and multifamily mortgage purchased by each GSE. Sections 
309(n) of the Fannie Mae Charter Act and 307(f) of the Freddie Mac Act 
require each GSE to report on its housing activities under the housing 
provisions of the Act to the Committee on Banking, Finance and Urban 
Affairs of the House of Representatives, the Committee on Banking, 
Housing, and Urban Affairs of the Senate, and the Secretary. Section 
1327 of the Act provides that the Secretary shall require reports from 
the GSEs as the Secretary considers appropriate, and section 1328 
requires the Secretary to submit an annual report to the Congress on 
the activities of the GSEs. This subpart establishes quarterly and 
annual data submission and reporting requirements to carry out the 
requirements of the GSEs' Charter Acts and FHEFSSA.


Sec. 81.62  Mortgage data.

    (a) Required data. Under sections 309(m) of the Fannie Mae Charter 
Act and 307(e) of the Freddie Mac Act, the GSEs are required to provide 
the Secretary with the following data relating to mortgage purchases:
    (1) For single family mortgages:
    (i) The income, census tract location, race, and gender of 
mortgagors under such mortgages;
    (ii) The loan-to-value ratios of purchased mortgages at the time of 
origination;
    (iii) Whether a particular mortgage purchased is newly originated 
or seasoned;
    (iv) The number of units in the housing subject to the mortgage and 
whether the units are owner-occupied; and
    (v) Any other characteristics that the Secretary considers 
appropriate and to the extent practicable.
    (2) For multifamily mortgages:
    (i) Census tract location of housing;
    (ii) Income levels and characteristics of tenants (where such data 
is available);
    (iii) Rent levels for units in the housing;
    (iv) Mortgage characteristics (such as the number of units financed 
per mortgage and the amount of loans);
    (v) Mortgagor characteristics (such as nonprofit, for-profit, 
limited equity cooperative);
    (vi) Use of funds such as new construction, rehabilitation, 
refinancing);
    (vii) Type of originating institution; and
    (viii) Any other information that the Secretary considers 
appropriate, to the extent practicable.
    (b) Data elements and aggregated data. To implement the data 
collection and submission requirements for mortgage data under 
paragraph (a) of this section, each GSE shall collect and compile 
computerized loan level data on each mortgage purchased. Appendix D of 
this part details the loan level data.
    (c) Mortgage reports. Each GSE shall submit to the Secretary 
quarterly a Mortgage Report consisting of the loan level data compiled 
under paragraph (b) of this section. Such data shall be aggregated and 
the mortgage reports shall include the dollar volume, the number of 
units, and the number of mortgages on owner-occupied and rental 
properties purchased by the GSE that do and do not qualify under each 
housing goal and subgoal as set forth in this part and aggregations of 
the data in the formats specified, in writing, by the Secretary. The 
GSEs shall submit the Mortgage Report for each of the first three 
quarters within 60 days of the end of the quarter, and each Mortgage 
Report shall provide data on both a quarterly and a year-to-date basis. 
Any time prior to submission of the Annual Housing Activities Report, 
the GSE may revise any of the quarterly reports for that year. The GSEs 
shall submit to the Secretary computer-generated data included in the 
Mortgage Report in the format specified by the Secretary.


Sec. 81.63  Annual Housing Activities Report.

    (a) General. Sections 309(n) of the Fannie Mae Charter Act and 
307(f) of the Freddie Mac Act require each GSE to report annually to 
the Secretary and to the Congress concerning its housing activities 
under the housing goal provisions of FHEFSSA. Under the Act, the report 
must include:
    (1) In aggregate form and by appropriate category:
    (i) The dollar volume and number of mortgages on owner-occupied and 
rental properties that relate to each of the housing goals;
    (ii) The number of families served by the GSE; the income class, 
race, and gender of home buyers served; the income class of tenants of 
rental housing (to the extent such information is available); the 
characteristics of census tracts; and the geographic distribution of 
the housing financed;
    (2) The extent to which the mortgages purchased by the GSE have 
been used in conjunction with public subsidy programs;
    (3) Information on the proportion of mortgages purchased by the GSE 
and financing housing for first-time home buyers;
    (4) In aggregate form and by appropriate category the mortgage data 
required under Sec. 81.62 for the year;
    (5) A comparison of the level of securitization by the GSE versus 
portfolio activity by the GSE;
    (6) An assessment of the GSE's underwriting standards, business 
practices, repurchase requirements, pricing, fees, and procedures that 
affect the purchase of mortgages for low- and moderate-income families 
or that may yield disparate results based on the race of the borrower, 
including revisions thereto to promote affordable housing or fair 
lending;
    (7) A description of trends in both the primary and secondary 
multifamily markets, including a description of progress made and any 
factors impeding progress toward the standardization and securitization 
of mortgage products for multifamily housing;
    (8) A description of trends in the delinquency and default rates 
for mortgages secured by housing for low- and moderate-income families 
bought by the GSE, a comparison of these rates with rates for families 
above median income, and an evaluation of the impact of such trends on 
the standards and levels of risk of mortgage products serving low- and 
moderate-income families;
    (9) A description of the seller servicing network of the GSE, 
including the volume of mortgages purchased from minority-owned, women-
owned and community-oriented lenders and a description of the GSE's 
efforts to facilitate relationships with such lenders;
    (10) A description of the activities undertaken by the GSE with 
nonprofit and for-profit organizations and with State and local 
governments and housing finance agencies, including activities 
supporting comprehensive housing affordability strategies under section 
105 of the Cranston-Gonzalez National Affordable Housing Act; and
    (11) Other information that the Secretary considers appropriate.
    (b) To implement the requirements in paragraph (a) of this section 
and to assist the Secretary in preparing the Secretary's Annual Report 
to the [[Page 9195]] Congress, each GSE shall submit to the Secretary 
an Annual Housing Activities Report including the information in 
paragraph (a) of this section and mortgage year-to-date data as 
specified, in writing, by the Secretary. Each GSE shall submit such 
report, within 60 days after the end of each calendar year, to the 
Secretary; the Committee on Banking and Financial Services of the House 
of Representatives; and the Committee on Banking, Housing, and Urban 
Affairs of the Senate. Each GSE shall make its Annual Housing 
Activities Report available to the public at its principal and regional 
offices. Before making such reports available to the public, the GSE 
may exclude from the report any information that the Secretary has 
deemed proprietary.
    (c) Subpart C of this part requires each GSE to submit Business 
Practices Analyses. To the extent such a Business Practices Analysis 
encompasses the information required under paragraph (a)(6) of this 
section, and where the GSE has conducted such a Business Practices 
Analysis within the preceding three years, the GSE may, in connection 
with meeting the requirements of paragraph (a)(6) of this section, 
reference such Analysis and use the Annual Housing Activities Report to 
update the GSE's progress concerning the GSE's most recent Business 
Practices Analysis.


Sec. 81.64  Periodic reports.

    Each GSE shall provide to the Secretary all releases of information 
that are disclosed to entities outside of the GSE, at the time such 
information is disclosed, including, but not limited to:
    (a) Material prepared for the GSE's Housing Advisory Council;
    (b) Press releases;
    (c) Investor reports; and
    (d) Proxy statements.


Sec. 81.65  Other information and analyses.

    In addition to the regular reports required under this subpart, the 
GSEs shall furnish to the Secretary the data underlying the reports 
required under this subpart and conduct additional analyses, as 
required by the Secretary. The GSEs shall submit additional reports 
concerning their activities, as the Secretary considers appropriate and 
requests.


Sec. 81.66  Submission of reports.

    Each GSE shall submit all hard copy reports or other written 
information required under this subpart to the Secretary and the 
Director, Financial Institutions Regulation Staff, Department of 
Housing and Urban Development, 451 7th Street, SW. Washington, DC. 
20410. Each GSE shall submit computerized data, reports, and 
information required under this subpart to the Director, Financial 
Institutions Regulations Staff.

Subpart F--Access to Information


Sec. 81.71  General.

    This subpart provides for the establishment of a public use data 
base to make available to the public mortgage data that the GSEs are 
required to submit to the Secretary under section 309(m) of the Fannie 
Mae Charter Act, section 307(e) of the Freddie Mac Act, and subpart E 
of this part. The Act provides that proprietary information and data 
may not be made publicly available. This subpart establishes mechanisms 
for the GSEs to designate information as proprietary and for the 
Secretary to determine whether information is proprietary and to 
withhold such proprietary information from the public. This subpart 
provides procedures for disclosure of information submitted by or 
relating to the GSEs under the Freedom of Information Act or at the 
request of Congress and sets forth protections for treatment of GSE 
information by the Secretary, Departmental officers and employees, and 
contractors. This subpart provides that information submitted by or 
relating to the GSEs that would constitute a clearly unwarranted 
invasion of personal privacy shall not be disclosed to the public.


Sec. 81.72  Public use data base and public information.

    (a) General. The Secretary shall establish and make available for 
public use, in accordance with this section, a public use data base and 
shall make available for public inspection and copying the GSE's Annual 
Housing Activities Reports, except for information the Secretary 
determines to be proprietary.
    (b) Examination of submissions. Following receipt of mortgage data 
and Annual Housing Activity Reports from the GSEs and any other 
information submissions from the GSEs, the Secretary shall, as 
expeditiously as possible, examine the submissions for information 
that:
    (1) Has been deemed proprietary under this part or subsequent 
order;
    (2) The GSE has designated as proprietary in accordance with 
Sec. 81.73;
    (3) Would constitute a clearly unwarranted invasion of personal 
privacy if such information were released to the public; or
    (4) Is required to be withheld under applicable laws or 
regulations.
    (c) Public data and proprietary data. The Secretary shall exclude 
from the public use data base and from public disclosure all 
information within the scope of paragraphs (b)(1), (b)(3), and (b)(4) 
of this section and, following a determination under Sec. 81.74, 
concerning data identified by the GSE as proprietary, the Secretary 
shall place all public data in the public use data base.
    (d) Access. The Secretary shall provide such means as the Secretary 
determines are reasonable for the public to gain access to the public 
use data base. To obtain access to the public use data base, the public 
should contact the Director, Financial Institutions Regulation, 451 7th 
St. SW. Washington, DC. 20410, (202) 708-1464 (this is not a toll-free 
number).
    (e) Fees. The Secretary may charge reasonable fees to cover the 
cost of providing access to the public use data base. These fees will 
include the costs of system access, computer use, copying fees, and 
other costs.


Sec. 81.73  GSE request for proprietary treatment.

    (a) General. A GSE may request proprietary treatment of data and 
information submitted to the Secretary. Such a request does not in any 
manner affect the GSE's responsibility to provide the information to 
the Secretary.
    (b) Request for proprietary treatment. Where a GSE seeks to have 
information treated as proprietary information by the Secretary and 
withheld from public disclosure, the GSE shall submit a Request for 
Proprietary Treatment that shall:
    (1) Clearly designate those portions of the information to be 
treated as proprietary with a prominent stamp, typed legend, or other 
suitable form of notice, stating ``Proprietary Information--
Confidential Treatment Requested by [name of GSE]'' on each page or 
portion of each page. If such marking is impractical under the 
circumstances, the GSE shall attach a cover sheet prominently marked 
``Proprietary Information--Confidential Treatment Requested by (name of 
GSE)'' to the information for which confidential treatment is 
requested;
    (2) Accompany its request with a certification by an officer or 
authorized representative of the GSE that the information is 
proprietary;
    (3) Submit a statement explaining the reasons for the assertion 
that the information is proprietary, including without limitation:
    (i) A description of the information; the nature of the adverse 
consequences to the GSE, financial or otherwise, that would result from 
its disclosure and the reasons therefor, including any adverse 
[[Page 9196]] effect on the GSE's competitive position. Conclusory 
statements that particular information would be useful to competitors 
or would impair business dealings, or similar statements, ordinarily 
will not be considered sufficient to justify a determination that the 
information is proprietary;
    (ii) The existence and applicability of any prior determinations by 
the Department, other Federal agencies, or a court, concerning similar 
information;
    (iii) The measures taken by the GSE to protect the confidentiality 
of the information in question and of similar information prior to and 
after its submission to the Secretary;
    (iv) The extent to which the information is publicly available from 
other entities, such as information available to the public through 
local government offices or records, including deeds, recorded 
mortgages, and similar documents;
    (v) The difficulty of a competitor, including a seller/servicer, 
obtaining or compiling the information; and
    (vi) Such additional facts and such legal and other authorities as 
the GSE may consider appropriate.


Sec. 81.74  Secretarial determination on GSE request.

    (a) General. The Secretary shall review Requests for Proprietary 
Treatment from the GSEs and other information, if any, that the 
Secretary may elicit from other sources. The Secretary shall determine 
whether the information designated as proprietary by the GSE is 
proprietary information, or whether the information is not proprietary 
and should be released notwithstanding the GSE's request. During the 
time a request is pending determination by the Secretary, information 
submitted by the GSE that is the subject of such request shall not be 
disclosed to, or subject to the examination of data by, the public or 
any person or representative of any person or agency outside of HUD.
    (b) Determination to withhold. (1) Where the Secretary determines 
that information is proprietary, the Secretary shall notify the GSE 
that the request has been granted and may, in the discretion of the 
Secretary, issue a temporary order, a final order or a regulation 
providing that the information is not subject to public disclosure. 
Where the Secretary determines that information is proprietary, the 
Secretary shall not make such information publicly available.
    (2) Such a temporary order, final order, or regulation shall:
    (i) Document the reasons for the determination; and
    (ii) Be provided to the GSE, made available to members of the 
public, and published in the Federal Register, except that any portions 
of an order that would reveal the proprietary information shall be 
withheld from public disclosure.
    (3) Publications of temporary orders shall invite public comments 
where feasible.
    (c) Determination not to withhold or to seek further information. 
Where the Secretary determines, in response to a Request for 
Proprietary Treatment, that information submitted by the GSE may not be 
proprietary information, that the request may only be granted in part, 
or that questions exist concerning the request, the following procedure 
shall apply:
    (1) The Secretary shall provide the GSE with an opportunity for a 
meeting with departmental officers or employees to discuss the matter, 
for the purpose of gaining additional information concerning the 
request. Such meetings shall be informal and not on the record;
    (2) Following the meeting, based on the Secretary's review of the 
information and the GSE's views as to whether the information is 
proprietary, the Secretary shall make a determination;
    (3) If the Secretary determines to withhold the information as 
proprietary, the procedures in paragraph (b) of this section shall 
apply; and
    (4) If the Secretary determines that any information covered by the 
request is not proprietary, the Secretary shall provide notice in 
writing to the GSE of the reasons for this conclusion, and such notice 
shall provide that the Secretary shall not release the information to 
the public for 7 days.


Sec. 81.75  Mortgage data withheld by order and regulation.

    (a) List of withheld data. Appendix E of this part shall include a 
list and appropriately identify those categories of mortgage data 
(``data elements'') that the GSEs submit under sections 309(m) of the 
Fannie Mae Charter Act and 307(e) of the Freddie Mac Act, and that are 
determined to be proprietary information. Appendix E shall identify the 
reasons data elements have been withheld.
    (b) Updating of list. Following issuance of regulations or orders 
to withhold mortgage data, the Secretary shall expeditiously update 
Appendix E where needed to inform the public of any modifications to 
the list of proprietary information.


Sec. 81.76  Requests for GSE Information.

    (a) General. Information submitted to the Secretary by the GSEs is 
subject to request under the Freedom of Information Act (FOIA), 5 
U.S.C. 552. The Department shall process such FOIA requests in 
accordance with the Department's FOIA and Privacy Act regulations, 24 
CFR parts 15 and 16, and other applicable statutes, regulations, and 
guidelines, including the Trade Secrets Act, 18 U.S.C. 1905, and 
Executive Order 12,600.
    (b) Protection from disclosure. In responding to requests for 
information submitted by or relating to the GSEs, the Secretary may 
invoke provisions of the Freedom of Information Act and FHEFSSA to 
protect information from disclosure.
    (1) Exemption (b)(8). Under section 1319F of the Act, the Secretary 
may invoke FOIA exemption (b)(8) to withhold from the public any GSE 
information contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of HUD.
    (2) Other FOIA exemptions. Under 24 CFR part 15, the Secretary may 
invoke other exemptions including, without limitation, exemption 4 (5 
U.S.C. 552(b)(4)), to withhold from public disclosure confidential GSE 
business information, and exemption 6 (5 U.S.C. 552(b)(6)), to protect 
information that would constitute a clearly unwarranted invasion of 
personal privacy.
    (c) Requests for business information under Executive Order 12600. 
The Department will process FOIA requests for confidential business 
information of the GSEs to which FOIA exemption 4 may apply in 
accordance with 24 CFR part 15 and the predisclosure notification 
procedures of Executive Order 12600. Under these procedures, the 
Secretary will not release records marked by the GSE as proprietary or 
records that are reasonably expected to contain proprietary materials, 
if at all, until the following occurs:
    (1) The Secretary notifies the GSE that a request for such records 
has been received;
    (2) The GSE is provided a reasonable opportunity to provide 
detailed comments on and objections to the release of the records; and
    (3) Following receipt of any objection by a GSE, if the Secretary 
determines not to sustain wholly the objection, the GSE must be 
notified in writing of the Secretary's determination and given a brief 
explanation of such decision. The Secretary shall provide such 
notification enough in advance of a specified disclosure date so that 
the GSE will have an opportunity to obtain judicial review.
    (d) Release in response to requests on behalf of Congress, the 
Comptroller [[Page 9197]] General, a Subpoena, or Other Legal Process. 
If the Department receives a request on behalf of a congressional 
committee or subcommittee, the Comptroller General, or a subpoena from 
a court of competent jurisdiction, or is otherwise compelled by law to 
release information determined to be proprietary under this section, 
the Secretary shall provide the information in accordance with the 
request without regard to the provisions of this section. In releasing 
requested information under this paragraph, the Secretary will, where 
applicable, include a statement with the information to the effect that 
the GSE regards the information as proprietary, public disclosure of 
the information may cause competitive harm to the GSE, and the 
Secretary has determined that the information is proprietary under this 
section. To the extent practicable, the Secretary will provide notice 
to the GSE after a request under this paragraph is received and before 
the information is provided in response to the request.


Sec. 81.77  Protection of GSE Information.

    (a) Protection of information by officers and employees. The 
Secretary will institute all reasonable safeguards to protect GSE 
information, including, but not limited to, advising all departmental 
officers and employees having access to information submitted by or 
pertaining to either GSE of the legal restrictions against unauthorized 
disclosure of such information under HUD Standards of Conduct 
regulations, 24 CFR part 0; the government-wide Standards of Ethical 
Conduct, 5 CFR part 2635; and the Trade Secrets Act, 18 U.S.C. 1905. 
Officers and employees shall be advised of the penalties for 
unauthorized disclosure ranging from disciplinary action under 24 CFR 
part 0 and 5 CFR part 2635 to criminal prosecution.
    (b) Protection of information by contractors. (1) In relevant 
contracts and agreements where contractors have access to confidential 
business information submitted by or pertaining to either GSE, the 
Department shall include detailed provisions specifying that neither 
the contractor nor any of its officers, employees, agents, or 
subcontractors may release data submitted by or pertaining to either 
GSE without HUD's authorization, and that unauthorized disclosure may 
be a basis for:
    (i) Terminating the contract for default;
    (ii) Suspending or debarring the contractor; or
    (iii) Criminal prosecution of the contractor, its officers, 
employees, agents, or subcontractors under the Federal Criminal Code.
    (2) Contract provisions shall require safeguards against 
unauthorized disclosure, including training of contractor and 
subcontractor agents and employees, and that the contractor indemnify 
and hold HUD harmless against unauthorized disclosure of data belonging 
to the GSEs or HUD.

Subpart G--Procedures for Actions and Review of Actions


Sec. 81.81  General.

    This subpart sets forth procedures for the Secretary to issue 
cease-and-desist orders and institute civil money penalties to enforce 
housing goal provisions at subpart C of this part and information 
submission and reporting requirements under subpart E of this part. The 
subpart also provides procedures for hearings, enforcement of 
Secretarial actions, public disclosure of agreements, and judicial 
review of enforcement actions.


Sec. 81.82  Cease-and-desist proceedings.

    (a) Issuance. The Secretary may issue and serve upon a GSE a notice 
of charges for a cease-and-desist order, in accordance with this 
section, if the Secretary determines:
    (1) The GSE has failed to submit a housing plan that substantially 
complies with Sec. 81.22 within the applicable period for submission 
under that section;
    (2) The GSE is engaging or has engaged, or the Secretary has 
reasonable cause to believe that the GSE is about to engage, in any 
failure to make a good faith effort to comply with a housing plan 
submitted and approved by the Secretary; or
    (3) The GSE has failed to submit any of the information required 
under sections 309 (m) or (n) of the Fannie Mae Charter Act, or 307 (e) 
or (f) of the Freddie Mac Act, or under Secs. 81.62 or 81.63 of this 
part.
    (b) Procedure for issuance.--(1) Notice of charges. The Secretary 
shall notify the GSE in writing of the notice of charges. The 
notification shall provide:
    (i) A concise statement of the facts constituting the conduct upon 
which the Secretary has relied in determining that an order should be 
issued and the violations with which the GSE is charged;
    (ii) Notice of the GSE's right to a hearing on the record on the 
cease-and-desist order;
    (iii) A time and date for a hearing on the record on whether the 
order should issue;
    (iv) The consequences of failing to contest the matter; and
    (v) The effective date of the order if the GSE does not contest the 
matter.
    (2) Administrative Law Judge. The hearing and other proceedings 
conducted under this section shall be presided over by a HUD 
Administrative Law Judge, in accordance with Sec. 81.84 and 24 CFR 
30.10, 30.15, and part 30, subpart E, to the extent such provisions are 
not inconsistent with any of the procedures in these regulations or the 
Act.
    (3) Issuance of order. If the Administrative Law Judge finds, based 
on the record, that any of the conduct specified in the notice of 
charges sufficient to sustain the charges has been established by 
substantial evidence (or a GSE consents to the order), the 
Administrative Law Judge may issue and serve upon the GSE an order 
requiring the GSE to:
    (i) Submit a housing plan in compliance with Sec. 81.22;
    (ii) Comply with the housing plan; or
    (iii) Provide the information required under subpart E of this 
part.
    (4) Effective date. An order under this section shall be effective 
upon the expiration of the 30-day period beginning on the service of 
the order upon the GSE (except in the case of an order issued upon 
consent, which shall become effective at the time specified therein), 
and shall remain effective and enforceable as provided in the order, 
except to the extent that the Secretary stays, modifies, terminates, or 
sets aside the order as provided in Sec. 81.84(l).


Sec. 81.83  Civil money penalties.

    (a) Imposition. The Secretary may impose a civil money penalty, in 
accordance with the provisions of this section, on a GSE that has 
failed:
    (1) To submit a housing plan that substantially complies with 
Sec. 81.22 within the applicable period required under the regulations;
    (2) To make a good faith effort to comply with a housing plan for 
the GSE submitted and approved by the Secretary; or
    (3) To submit any of the information required under subsection (m) 
or (n) of Section 309 of the Fannie Mae Charter Act, under subsection 
(e) or (f) of section 307 of the Freddie Mac Act, or under Secs. 81.62 
or 81.63.
    (b) Amount of penalty. The Secretary shall determine the amount of 
the penalty, and such penalty shall not exceed:
    (1) For any failure described in paragraph (a)(1) of this section, 
$25,000 for each day that the failure occurs; and
    (2) For any failure described in paragraphs (a) (2) or (3) of this 
section, [[Page 9198]] $10,000 for each day that the failure occurs.
    (c) Factors in determining amount of penalty. In determining the 
amount of a penalty under this section, the Secretary shall give 
consideration to such factors as:
    (1) The gravity of the offense;
    (2) Any history of prior offenses;
    (3) The GSE's ability to pay the penalty;
    (4) The nature of the injury to the public caused by the failure;
    (5) The benefits received by the GSE because of the GSE's failure;
    (6) Deterrence of future violations that would result from the 
penalty; and
    (7) Other factors that the Secretary determines in the public 
interest warrant consideration.
    (d) Procedures.--(1) Notice of determination to impose civil money 
penalties. The Secretary shall notify the GSE in writing of the 
Secretary's determination to impose a civil money penalty by issuing a 
Notice of Intent to Impose Civil Money Penalties (``Notice of 
Intent''). The Notice of Intent shall provide:
    (i) A concise statement of the facts constituting the conduct upon 
which the Secretary has relied in determining that a civil penalty 
should be imposed;
    (ii) The amount of the civil money penalty that the Secretary 
intends to impose;
    (iii) Notice of the GSE's right to a hearing on the record on the 
civil money penalty;
    (iv) The procedures to follow to obtain such a hearing;
    (v) The consequences of failing to request a hearing; and
    (vi) The date the penalty shall be due unless stayed or rescinded.
    (2) To appeal the Secretary's decision to impose a civil money 
penalty, a GSE shall, within 20 days after receiving service of the 
Notice of Intent, file a written Answer with the Chief Docket Clerk, 
Office of Administrative Law Judges, Department of Housing and Urban 
Development, at the address provided in the Notice of Intent.
    (3) The hearing and other proceedings conducted under this section 
shall be presided over by a HUD Administrative Law Judge, in accordance 
with Sec. 81.84 and 24 CFR 30.10, 30.15, and part 30, subpart E, to the 
extent such provisions are not inconsistent with any of the procedures 
in these regulations or the Act.
    (4) Issuance of order. If the Administrative Law Judge finds, on 
the record made at a hearing, that any conduct specified in the notice 
of charges has been established by a preponderance of the evidence (or 
a GSE consents to the order pursuant to Sec. 81.84), the Administrative 
Law Judge may issue an order imposing a civil money penalty.
    (5) Consultation with the Director. In the Secretary's discretion, 
the Director of the Office of Federal Housing Enterprise Oversight may 
be requested to review any Notice of Intent, determination, order, or 
interlocutory ruling arising from a hearing.
    (e) Action to collect penalty. If a GSE fails to comply with an 
order by the Secretary imposing a civil money penalty under this 
section, after the order is no longer subject to review as provided by 
sections 1342 and 1343 of the Act, the Secretary may request the 
Attorney General of the United States to bring an action in the United 
States District Court for the District of Columbia to obtain a monetary 
judgment against the GSE and such other relief as may be available. The 
monetary judgment may, in the court's discretion, include attorney fees 
and other expenses incurred by the United States in connection with the 
action. In an action under this subsection, the validity and 
appropriateness of the order imposing the penalty is not subject to 
review.
    (f) Settlement by Secretary. The Secretary may compromise, modify, 
or remit any civil money penalty that may be, or has been, imposed 
under this section.
    (g) Deposit of penalties. The Secretary shall deposit any civil 
money penalties collected under this section into the general fund of 
the Treasury.


Sec. 81.84  Hearings.

    (a) Applicability. The hearing procedures in this section apply to 
hearings on the record to review cease-and-desist orders, civil money 
penalties, and new programs disapproved based upon a determination by 
the Secretary that such programs are not in the public interest.
    (b) Hearing requirements--(1) Hearings shall be held on the record 
and in the District of Columbia.
    (2) Hearings shall be conducted by a HUD Administrative Law Judge 
authorized to conduct proceedings under 24 CFR part 30.
    (c) Timing. Unless an earlier or later date is requested by a GSE 
and such request is granted by the Administrative Law Judge, hearings 
shall be fixed for a date not earlier than 30 days, nor later than 60 
days, after: service of the notice of charges under Sec. 81.82; service 
of the Notice of Intent to Impose Civil Money Penalt(ies) under 
Sec. 81.83; or a request for a hearing under Sec. 81.54(b).
    (d) Procedure. Hearings shall be conducted in accordance with the 
procedures set forth in 24 CFR 30.10, 30.15, and part 30, subpart E, to 
the extent that such provisions are not inconsistent with any of the 
procedures in these regulations or the Act.
    (e) Method of service. Any service required or authorized to be 
made by the Secretary under this subpart may be made to the Chief 
Executive Officer of a GSE or such other representative as the GSE may 
designate in writing to the Secretary.
    (f) Subpoena authority--(1) General. In the course of or in 
connection with any hearing, the Secretary and/or the Administrative 
Law Judge shall have the authority to:
    (i) Administer oaths and affirmations;
    (ii) Take and preserve testimony under oath;
    (iii) Issue subpoenas and subpoenas duces tecum; and
    (iv) Revoke, quash, or modify subpoenas and subpoenas duces tecum 
issued by the Secretary.
    (2) Witnesses and documents. The attendance of witnesses and the 
production of documents provided for in this section may be required 
from any place in any State at any designated place where such 
proceeding is being conducted.
    (3) Enforcement. The Secretary may request the Attorney General of 
the United States to bring an action in the United States District 
Court for the judicial district in which such proceeding is being 
conducted or where the witness resides or conducts business, or in the 
United States District Court for the District of Columbia, for 
enforcement of any subpoena or subpoena duces tecum issued pursuant to 
this section.
    (4) Fees and expenses. Witnesses subpoenaed under this section 
shall be paid the same fees and mileage that are paid witnesses in the 
district courts of the United States. Any court having jurisdiction of 
any proceeding instituted under this section may allow to any such 
party such reasonable expenses and attorneys fees as the court deems 
just and proper. Such expenses and fees shall be paid by the GSE or 
from its assets.
    (g) Failure to appear. If a GSE fails to appear at a hearing 
through a duly authorized representative, the GSE shall be deemed to 
have consented to the issuance of the cease-and-desist order, the 
imposition of the penalty, or the disapproval of the new program, 
whichever is applicable.
    (h) Public hearings. All hearings shall be open to the public, 
unless the Secretary, in the Secretary's discretion, 
[[Page 9199]] determines that holding an open hearing would be contrary 
to the public interest.
    (i) Decision of Administrative Law Judge. After each hearing, the 
Administrative Law Judge shall issue an initial decision and serve the 
initial decision on the GSE, the Secretary, any other parties, and the 
General Counsel of the Department.
    (j) Review of initial decision--(1) At the Secretary's discretion. 
The Secretary, in the Secretary's discretion, may review any initial 
decision.
    (2) Requested by a party. Any party may file within 15 days after 
receipt of the initial decision a notice of appeal to the Secretary 
seeking review of an initial decision. The Secretary shall decide 
within 30 days after receipt of a notice of appeal whether to review or 
to decline review of the initial decision.
    (k) Final decision. (1) The initial decision will become the final 
decision of the Department unless the Secretary or the Secretary's 
designee issues a final decision within 90 days after the initial 
decision is served on the Secretary. The Secretary by written notice to 
the parties may extend such 90 day period for an additional 30 days.
    (2) Issuance of final decision by Secretary. The Secretary or the 
Secretary's designee may review any finding of fact, conclusion of law, 
or order contained in the initial decision of the Administrative Law 
Judge and may issue a final decision in the proceeding. Any decision 
shall include findings of fact upon which the decision is predicated. 
The Secretary or the Secretary's designee may affirm, modify, or set 
aside, in whole or in part, the initial decision or may remand the 
initial decision for further proceedings. The final decision shall be 
served on all parties and the Administrative Law Judge.
    (l) Decisions on remand. If the initial decision is remanded for 
further proceedings, the Administrative Law Judge shall issue an 
initial decision on remand within 60 days of the date of issuance of 
the final decision, unless it is impractical to do so.
    (m) Modification. The Secretary or the Secretary's designee may at 
any time, modify, terminate, or set aside any order, upon such notice 
and in such manner as the Secretary or designee considers proper. When 
a petition for judicial review is timely filed as provided in 
Sec. 81.87, and after the Secretary has filed the record in the 
proceeding with the court, the Secretary or designee may modify, 
terminate, or set aside any such order with permission of the court.


Sec. 81.85  Public disclosure of final orders and agreements.

    (a) General. The Secretary shall make available to the public:
    (1) Any written agreement or other written statement for which a 
violation may be redressed by the Secretary, or any modification to or 
termination of such agreement or statement, unless the Secretary, in 
the Secretary's discretion, determines that public disclosure would be 
contrary to the public interest, or determines under paragraph (b) of 
this section that public disclosure would seriously threaten the GSE's 
financial health or security;
    (2) Any order that is issued with respect to any administrative 
enforcement proceeding initiated by the Secretary under this subpart 
and that has become final in accordance with Secs. 81.84 and 81.87; and
    (3) Any modification to or termination of any final order made 
public pursuant to this section.
    (b) Delay of public disclosure under exceptional circumstances. If 
the Secretary makes a determination in writing that the public 
disclosure of any final order pursuant to paragraph (a)(1) of this 
section would seriously threaten a GSE's financial soundness, the 
Secretary may delay the public disclosure of such order for a 
reasonable time.
    (c) Documents filed under seal in public enforcement hearings. The 
Secretary may file any document or part thereof under seal in any 
hearing under this subpart if the Secretary determines in writing that 
disclosure thereof would be contrary to the public interest.
    (d) Retention of documents. The Secretary shall keep and maintain a 
record, for not less than 6 years, of all documents described in 
paragraph (a) of this section and all enforcement agreements and other 
supervisory actions and supporting documents issued with respect to, or 
in connection with, any enforcement proceeding initiated by the 
Secretary under this subpart.
    (e) Disclosures to Congress. This section shall not be construed to 
authorize the withholding, or to prohibit the disclosure, of any 
information to the Congress or any committee or subcommittee thereof.


Sec. 81.86  Enforcement and jurisdiction.

    (a) Enforcement. If a GSE fails to comply with a final decision, 
the Secretary may request the Attorney General of the United States to 
bring an action in the United States District Court for the District of 
Columbia for the enforcement of the notice or order. Such court has the 
jurisdiction and power to order and require compliance with such notice 
or order.
    (b) Limitation on jurisdiction. Except as otherwise provided in 
sections 1341-49 of the Act, no court has jurisdiction to affect, by 
injunction or otherwise, the issuance or enforcement of any notice or 
order under Secs. 81.82 or 81.83, or to review, modify, suspend, 
terminate, or set aside any such notice or order.
    (c) Other relief. The Secretary may obtain such other relief as may 
be available, including attorney fees and other expenses, in connection 
with the action.
    (d) Interest. In the case of civil money penalties, interest on and 
other charges for any unpaid penalty may be assessed in accordance with 
31 U.S.C. 3717.


Sec. 81.87  Judicial review.

    (a) Commencement. A GSE may obtain review of any final order issued 
under Sec. 81.84 by filing in the United States Court of Appeals for 
the District of Columbia Circuit, within 30 days after the date of 
service of such order, a written petition praying that the order of the 
Secretary be modified, terminated, or set aside. The clerk of the court 
shall transmit a copy of the petition to the Secretary and the Chief 
Docket Clerk, Office of Administrative Law Judges.
    (b) Filing of record. Upon receiving a copy of a petition, the 
Chief Docket Clerk, Office of Administrative Law Judges, shall file in 
the court the record in the proceeding, as provided in 28 U.S.C. 2112.
    (c) Jurisdiction. Upon the filing of a petition, such court shall 
have jurisdiction, which upon the filing of the record by the Secretary 
shall be exclusive (except as provided in Sec. 81.84(l)), to affirm, 
modify, terminate, or set aside, in whole or in part, the order of the 
Secretary.
    (d) Review. Review of such proceedings shall be governed by chapter 
7 of title 5, United States Code.
    (e) Order To pay penalty. Such court has the authority in any such 
review to order payment of any penalty imposed by the Secretary under 
this subpart.
    (f) No automatic stay. The commencement of proceedings for judicial 
review under this section shall not, unless specifically ordered by the 
court, operate as a stay of any order issued by the Secretary.

Subpart H--Book-Entry Procedures


Sec. 81.91  Definition of terms.

    In this subpart, unless the context otherwise requires or 
indicates:
    Book-entry GSE security means a GSE security in the form of an 
entry made as [[Page 9200]] prescribed in this subpart on the records 
of a Reserve Bank.
    Date of call means:
    (1) With respect to GSE securities issued by Fannie Mae under 
section 304 (d) and (e), the date fixed in the authorizing resolution 
of the Board of Directors of Fannie Mae on which the obligor will make 
payment of the security before maturity in accordance with its terms;
    (2) With respect to GSE securities issued by Fannie Mae under 
section 304(b) of the Fannie Mae Charter Act, the date fixed in the 
offering notice issued by Fannie Mae; and
    (3) With respect to GSE securities issued by Freddie Mac, the date 
fixed in the authorizing resolution of the Board of Directors of 
Freddie Mac on which Freddie Mac will make payment of the security 
before maturity in accordance with its terms.
    Definitive GSE security means a GSE security in engraved or printed 
form.
    GSE security means any obligation of a GSE (except short-term 
discount notes and obligations convertible into shares of common stock) 
issued under the Freddie Mac Act, or sections 304 (b), (d), or (e) of 
the Fannie Mae Charter Act, in the form of a definitive GSE security or 
book-entry GSE security.
    Member bank means any national bank, State bank, or bank or trust 
company that is member of a Reserve Bank.
    Pledge includes a pledge of, or any other security interest in, GSE 
securities as collateral for loans or advances or to secure deposits of 
public monies or the performance of an obligation.
    Reserve Bank means a Federal Reserve bank and its branches acting 
as Fiscal Agent of a GSE and, when indicated, acting in its individual 
capacity or as Fiscal Agent of the United States.


Sec. 81.92  Authority of Reserve Banks.

    Each Reserve Bank is hereby authorized, in accordance with the 
provisions of this subpart, to:
    (a) Issue book-entry GSE securities by means of entries on its 
records that shall include the name of the depositor, the amount, the 
loan title (or series), and maturity date;
    (b) Effect conversions between book-entry GSE securities and 
definitive GSE securities;
    (c) Otherwise service and maintain book-entry GSE securities; and
    (d) Issue a confirmation of transaction in the form of a written 
advice (serially numbered or otherwise) that specifies the amount and 
description of any securities; that is, loan title (or series) and 
maturity date, sold or transferred, and the date of the transaction.


Sec. 81.93  Scope and effect of book-entry procedure.

    (a) (1) A Reserve bank as fiscal agent of a GSE may apply the book-
entry procedure provided for in this subpart to any GSE securities that 
have been or are hereafter deposited for any purpose in accounts with 
it in its individual capacity, under terms and conditions which 
indicate that the Reserve bank will continue to maintain such deposit 
accounts in its individual capacity, notwithstanding application of the 
book-entry procedure to such securities. This paragraph is applicable, 
but not limited, to securities deposited:
    (i) As collateral pledged to a Reserve bank (in its individual 
capacity) for advances by it;
    (ii) By a member bank for its sole account;
    (iii) By a member bank held for the account of its customers;
    (iv) In connection with deposits in a member bank of funds of 
States, municipalities, or other political subdivisions; or
    (v) In connection with the performance of an obligation or duty 
under Federal, State, municipal, or local law, or judgments or decrees 
of courts.
    (2) The application of the book-entry procedure under this 
paragraph shall not derogate from or adversely affect the relationships 
that would otherwise exist between a Reserve bank in its individual 
capacity and its depositors concerning any deposits under this 
paragraph. Whenever the book-entry procedure is applied to such GSE 
securities, the Reserve bank is authorized to take all action necessary 
in respect of the book-entry procedure to enable such Reserve bank in 
its individual capacity to perform its obligations as depositary with 
respect to such GSE securities.
    (b) A Reserve bank, as fiscal agent of a GSE, shall apply the book-
entry procedure to GSE securities deposited as collateral pledged to 
the United States under current revisions of Department of the Treasury 
Circulars Nos. 92 and 176 (31 CFR parts 203 and 202), and may apply the 
book-entry procedure, with the approval of the Secretary of the 
Treasury, to any other GSE securities deposited with a Reserve bank, as 
fiscal agent of the United States.
    (c) Any person having an interest in GSE securities that are 
deposited with a Reserve bank (in either its individual capacity or as 
fiscal agent of the United States) for any purpose shall be deemed to 
have consented to their conversion to book-entry GSE securities 
pursuant to the provisions of this subpart and in the manner and under 
the procedures prescribed by the Reserve bank.
    (d) No deposits shall be accepted under this section on or after 
the date of maturity or call of the securities.


Sec. 81.94  Transfer or pledge.

    (a) (1) A transfer or a pledge of book-entry GSE securities to a 
Reserve bank (in its individual capacity or as fiscal agent of the 
United States), or to the United States, or to any transferee or 
pledgee eligible to maintain an appropriate book-entry account in its 
name with a Reserve bank under this subpart, is effected and perfected, 
notwithstanding any provision of law to the contrary, by a Reserve bank 
making an appropriate entry in its records of the securities 
transferred or pledged. The making of such an entry in the records of a 
Reserve bank shall:
    (i) Have the effect of a delivery in bearer form of definitive GSE 
securities;
    (ii) Have the effect of a taking of delivery by the transferee or 
pledgee;
    (iii) Constitute the transferee or pledgee a holder; and
    (iv) If a pledge, effect a perfected security interest therein in 
favor of the pledgee.
    (2) A transfer or pledge of book-entry GSE securities effected 
under paragraph (a) of this section shall have priority over any 
transfer, pledge, or other interest, theretofore or thereafter effected 
or perfected under paragraph (b) of this section or in any other 
manner.
    (b) A transfer or a pledge of transferable GSE securities, or any 
interest therein, that is maintained by a Reserve bank (in its 
individual capacity or as fiscal agent of the United States) in a book-
entry account under this subpart, including securities in book-entry 
form under Sec. 81.93(a)(3), is effected, and a pledge is perfected, by 
any means that would be effective under applicable law to effect a 
transfer or to effect and perfect a pledge of the GSE securities, or 
any interest therein, if the securities were maintained by the Reserve 
bank in bearer definitive form. For purposes of transfer or pledge 
hereunder, book-entry GSE securities maintained by a Reserve bank 
shall, notwithstanding any provision of law to the contrary, be deemed 
to be maintained in bearer definitive form. A Reserve bank maintaining 
book-entry GSE securities either in its individual capacity or as 
fiscal agent of the United States is not a bailee for purposes of 
notification of pledges of those securities under this section, or a 
third person in possession for purposes of acknowledgment of transfers 
thereof under this paragraph. Where transferable GSE securities are 
recorded on the books of a depositary (a bank, [[Page 9201]] banking 
institution, financial firm, or similar party that regularly accepts in 
the course of its business GSE securities as a custodial service for 
customers and maintains accounts in the names of such customers 
reflecting ownership of or interest in such securities) for account of 
the pledgor or transferor thereof, and such securities are on deposit 
with a Reserve bank in a book-entry account hereunder, such depositary 
shall, for purposes of perfecting a pledge of such securities or 
effecting delivery of such securities to a purchaser under applicable 
provisions of law, be the bailee to which notification of the pledge of 
the securities may be given, or the third person in possession from 
which acknowledgment of the holding of the securities for the purchaser 
may be obtained. A Reserve bank will not accept notice or advice of a 
transfer or pledge effected or perfected under this paragraph, and any 
such notice or advice shall have no effect. A Reserve bank may continue 
to deal with its depositor in accordance with the provisions of this 
subpart, notwithstanding any transfer or pledge effected or perfected 
under this section.
    (c) No filing or recording with a public recording office or 
officer shall be necessary or effective with respect to any transfer or 
pledge of book-entry GSE securities or any interest therein.
    (d) A Reserve bank shall, upon receipt of appropriate instructions, 
convert book-entry GSE securities into definitive GSE securities and 
deliver them in accordance with such instructions; no such conversion 
shall affect existing interests in such GSE securities.
    (e) A transfer of book-entry GSE securities within a Reserve bank 
shall be made in accordance with procedures established by the bank not 
inconsistent with this subpart. The transfer of book-entry GSE 
securities by a Reserve bank may be made through a telegraphic transfer 
procedure.
    (f) All requests for transfer or withdrawal must be made prior to 
the maturity or date of call of the securities.


Sec. 81.95  Withdrawal of GSE securities.

    (a) A depositor of book-entry GSE securities may withdraw them from 
a Reserve bank by requesting delivery of like definitive GSE securities 
to itself, or on its order, to a transferee.
    (b) GSE securities that are actually to be delivered upon 
withdrawal may be issued either in registered or in bearer form.


Sec. 81.96  Delivery of GSE securities.

    A Reserve bank that has received GSE securities and effected 
pledges, made entries regarding them, or transferred or delivered them 
according to the instructions of its depositor is not liable for 
conversion or for participation in breach of fiduciary duty, even 
though the depositor had no right to dispose of or take other action in 
respect of the securities. A Reserve bank shall be fully discharged of 
its obligations under this subpart by the delivery of GSE securities in 
definitive form to its depositor or upon the order of such depositor. 
Customers of a member bank or other depositary (other than a Reserve 
bank) may obtain GSE securities in definitive form only by causing the 
depositor of the Reserve bank to order the withdrawal thereof from the 
Reserve bank.


Sec. 81.97  Registered bonds and notes.

    No formal assignment shall be required for the conversion to book-
entry GSE securities of registered GSE securities held by a Reserve 
bank (in either its individual capacity or as fiscal agent of the 
United States) on the effective date of this subpart for any purpose 
specified in Sec. 81.93(a). Registered GSE securities deposited 
thereafter with a Reserve bank for any purpose specified in section 
81.93 shall be assigned for conversion to book-entry GSE securities. 
The assignment, which shall be executed in accordance with the 
provisions of subpart F of 31 CFR part 306, as amended or revised, so 
far as applicable, shall be to ``Federal Reserve Bank of 
____________________, as fiscal agent of [name of the GSE], for 
conversion to book-entry [name of the GSE] securities.''


Sec. 81.98  Servicing book-entry GSE securities; payment of interest, 
payment at maturity or upon call.

    Interest becoming due on book-entry GSE securities shall be charged 
on the interest-due date and remitted or credited in accordance with 
the depositor's instructions. Such securities shall be redeemed and 
charged in the account on the date of maturity or call, and the 
redemption proceeds, principal and interest shall be disposed of in 
accordance with the depositor's instructions. For Fannie Mae, interest 
becoming due on book-entry Fannie Mae securities shall be charged to 
Fannie Mae's account at the New York Federal Reserve Bank.


Sec. 81.99  Treasury Department regulations; applicability to GSEs.

    The provisions of Treasury Department Circular No. 300, 31 CFR part 
306 (other than subpart O), as amended or recodified from time to time, 
shall apply, insofar as appropriate, to GSE obligations for which a 
Reserve bank shall act as Fiscal Agent of the GSE, and to the extent 
that such provisions are consistent with agreements between the GSE and 
the Reserve banks acting as Fiscal Agents of the GSE. Definitions and 
terms used in Treasury Department Circular No. 300 should read as 
though modified to effectuate the application of the regulations to the 
GSEs.

Subpart I--Other Provisions


Sec. 81.101  Equal employment opportunity.

    Fannie Mae and Freddie Mac shall comply with sections 1 and 2 of 
Executive Order 11478 (3 CFR 803 (1966-70 Compilation), as amended by 
Executive Order 12106, 3 CFR 263 (1978)), providing for the adoption 
and implementation of equal employment opportunity, as required by 
section 1216 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (12 U.S.C. 1833e).


Sec. 81.102  Regulatory examinations.

    Each GSE may be examined at any time by the Secretary or any 
contractors, agents, officers, or employees of the Department 
(hereinafter ``the examiners'') to monitor compliance with the 
Secretary's regulatory authorities under these regulations, the Act, or 
the applicable Charter Act. The examiners shall have access, upon 
request to a GSE, to any relevant books, accounts, financial records, 
reports, files, or other papers, things, or property belonging to or in 
use or used by the GSE.

Appendix A--Secretarial Considerations to Establish the Low- and 
Moderate-Income Housing Goal

A. Establishment of Goal

    In establishing the annual low- and moderate-income housing 
goal, the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 requires the Secretary to consider:
    1. National housing needs;
    2. Economic, housing, and demographic conditions;
    3. The performance and effort of the enterprises toward 
achieving the low- and moderate-income housing goal in previous 
years;
    4. The size of the conventional conforming mortgage market 
serving low- and moderate-income families relative to the size of 
the overall conventional conforming mortgage market;<SUP>1

    \1\``Conventional'' mortgages are those which do not carry any 
government guarantee or insurance. That is, conventional mortgages 
exclude FHA, FmHA, and VA loans. ``Conforming'' loans are those 
whose principal amount does not exceed the maximum allowed for 
purchase by Fannie Mae or Freddie Mac. Currently, this limit is 
$203,150 for 1-unit properties, except that it is 50 percent higher 
in Alaska, Hawaii, Guam, and the Virgin Islands. The conforming loan 
limit is adjusted annually based on the October-to-October 
percentage increase in house prices, as determined by the Federal 
Housing Finance Board's Monthly Interest Rate Survey. In practice, 
the conforming loan limit has only been increased since 1990; in the 
case of declines in house prices, the limit has been held constant.
[[Page 9202]]

    5. The ability of the enterprises to lead the industry in making 
mortgage credit available for low- and moderate-income families; and
    6. The need to maintain the sound financial condition of the 
enterprises.

B. Underlying Data

    In considering the factors under the Act to establish these 
goals, the Secretary relied upon data gathered from the American 
Housing Survey, the 1990 Census of Population and Housing, the 1991 
Residential Finance Survey, other government reports, the Home 
Mortgage Disclosure Act (HMDA) reports, and the GSEs. The Secretary 
used data provided by the GSEs to determine their prior performance 
in meeting the needs of low- and moderate-income families and their 
financial condition. These data included loan-level information on 
all mortgages purchased by the GSEs in 1993.
    Section C discusses each of the factors listed above. Section D 
summarizes the Secretary's rationale for selecting the low- and 
moderate-income goals for 1995 and 1996.

C. Consideration of the Factors

    Overview of Sections C.1 and C.2. These sections cover a range 
of topics on housing needs and economic and demographic trends that 
are important for understanding mortgage markets. Certain 
information, such as trends in income inequality, is provided 
because it helps explain problems that the low- and moderate-income 
housing goal is intended to address. Other information, such as 
trends in refinancing activity, is provided because it describes the 
market environment in which the GSEs must operate and is therefore 
useful for gauging the reasonableness of specific levels of the low- 
and moderate-income goal. Finally, information is provided that 
documents the severe housing problems faced by lower income 
families.
    This information has led the Secretary to the following 
conclusions:
    <bullet> Purchasing a home became increasingly difficult for 
lower income and younger families during the 1980s. Low-income 
families with children, who could most benefit from the advantages 
of ownership, bore the brunt of the decline in ownership rates. The 
share of the nation's children living in owner-occupied homes fell 
from 71 percent to 63 percent between 1980 and 1991.
    <bullet> Very low-income renters often must pay an unduly high 
share of their income for rent.
    <bullet> Several demographic changes will affect the demand for 
housing over the next few years. The continued increase in 
immigrants will increase the demand for both rental and owner-
occupied housing. Non-traditional households have become more 
important as overall household formation rates have slowed. With 
later marriage, divorce, and other non-traditional living 
arrangements, the fastest growing household groups are single-parent 
and single-person households.
    <bullet> The volume of mortgage originations is expected to fall 
from its 1993 record level of one trillion dollars to about $600 
billion in 1995. Purchase mortgages, including those for first-time 
homebuyers, will replace refinance mortgages as the dominant 
mortgage type.
    <bullet> The predominance of purchase mortgages, as opposed to 
refinance mortgages, will make it easier for the GSEs to meet a 
given low- and moderate-income goal. Historically, mortgages for 
low- and moderate-income borrowers have represented a larger 
proportion of purchase mortgages than of refinance mortgages.
    <bullet> The recent rise in interest rates from 25 year lows 
could make it more difficult for marginal borrowers to afford 
homeownership. However, interest rates continue to remain lower and 
housing more affordable than was true for any previous extended 
period since 1977. Borrowers will also be helped by the rising 
incomes that accompany economic growth.

1. National Housing Needs

a. Housing Problems Among Low- and Moderate-Income Owners and Renters

    Under the income definitions in the Act, almost three-fifths of 
U.S. households qualified as ``low-'' or ``moderate-''income 
families in 1991. Almost half of all homeowners (49 percent) had 
incomes below their (unadjusted) area median family income, while 71 
percent of renters had income below their area's HUD-adjusted median 
family income.<SUP>2

    \2\HUD is required by statute to adjust median family income in 
developing its official income cutoffs for each Metropolitan 
Statistical Area (MSA) and non-metropolitan county. Income limits 
based on HUD-Adjusted Area Median Family Incomes (HAMFI) are 
adjusted (1) With upper and lower caps for areas with low or high 
ratios of housing costs to income; (2) by setting state 
nonmetropolitan average income as a floor for nonmetropolitan 
counties; and (3) by household size. The adjusted annual estimates 
of area median family income provide the base for the ``50 percent'' 
and ``80 percent'' of HAMFI cutoffs that are assigned to a household 
of four. Household size adjustments then range from 70 percent of 
the base for a 1-person household to 132 percent of the base for an 
8-person household.
---------------------------------------------------------------------------

    Housing needs in 1991 varied sharply with income. One-eighth of 
owners with moderate incomes (income 80 to 100 percent of area 
median) and one-fourth of moderate-income renters had a housing 
problem, compared to 17 percent of low-income owners and 44 percent 
of low-income renters (with income 60 to 80 percent of area median). 
Moreover, two-thirds of the 14 million households with incomes below 
30 percent of median paid more than 30 percent of income for housing 
or lived in inadequate or crowded housing.<SUP>3

    \3\Tabulations of U.S. Departments of Housing and Urban 
Development and Commerce, American Housing Survey for the United 
States in 1991 (April 1993) performed by HUD Office of Policy 
Development and Research.
---------------------------------------------------------------------------

b. Affordability Problems and Worst Case Housing Needs

    Finding affordable housing is by far the most common housing 
problem for American families nationwide.<SUP>4 Between 1979 and 
1991, shares of households paying more than 30 percent of their 
income for housing fluctuated around 42 percent among renters and 
rose from 17 percent to 20 percent among owners.<SUP>5 Over this 
period, the number of low-income renter households spending 50 
percent or more of their income on housing rose from 4.3 million in 
1978 to 6.0 million in 1991.<SUP>6 Poor homeowners also pay high 
proportions of their income for housing costs. Between 1978 and 
1989, the share of poor homeowners spending over 60 percent of 
income on housing rose from 30.6 percent to 33.1 percent.<SUP>7

    \4\Since the early 1980s, ``affordable housing'' has generally 
been interpreted as housing in which the homeowner or renter pays no 
more than 30 percent of family income for housing costs, including 
utilities.
    \5\U.S. Departments of Housing and Urban Development and 
Commerce, American Housing Survey for the United States in 1991, 
April 1993.
    \6\1974-1979 figures from Nelson and Khadduri, ``To Whom Should 
Limited Housing Resources Be Directed,'' 3 Housing Policy Debate 1, 
16, 1992. 1991 figure from Worst Case Needs for Housing Assistance 
in the United States in 1990 and 1991. HUD-1481-PDR, June 1994.
    \7\Center on Budget and Policy Priorities and Low Income Housing 
Service, A Place to Call Home, April 1989; and U.S. Departments of 
Housing and Urban Development and Commerce, American Housing Survey 
for the United States in 1989, July 1991.
---------------------------------------------------------------------------

    Although affordability problems affect two-fifths of low-income 
renters and one-eighth of low-income owners, they are most frequent 
and severe among the very lowest income owners and renters. In 1991, 
when the average gross rent/income ratio for renters with incomes 
above area median income was 23 percent, this ratio was 72 percent 
for renters with incomes below 30 percent of area median income and 
41 percent for renters with incomes between 30 and 49 percent of 
median.<SUP>8

    \8\Tabulations of U.S. Departments of Housing and Urban 
Development and Commerce, American Housing Survey for the United 
States in 1991, April 1993, performed by HUD Office of Policy 
Development and Research.
---------------------------------------------------------------------------

    Priority problems--defined as paying more than half of income 
for rent and utilities, being displaced, or living in severely 
inadequate housing--were heavily concentrated among renters with 
incomes below 50 percent of area median. Half of renters with 
incomes below 30 percent of median, and one-fourth of those with 
incomes 31-50 percent of median, had these severe ``worst case'' 
housing needs.<SUP>9

    \9\Congress defines ``worst case needs'' for housing assistance 
as unassisted renters with incomes below 50 percent of area median 
income who have priority problems.
---------------------------------------------------------------------------

    According to HUD's third Congressionally-mandated study of worst 
case needs, severe affordability problems were not only the 
overwhelming cause of worst case needs but often a family's only 
housing problem.<SUP>10 [[Page 9203]] Fully 94 percent of the 5.3 
million households with worst case needs reported severe rent burden 
as a problem, and for almost three-fourths, severe rent burden was 
their only problem.

    \10\Worst Case Needs for Housing Assistance in the United States 
in 1990 and 1991. HUD-1481-PDR, June 1994.
---------------------------------------------------------------------------

    The number of households with worst case needs increased by 
nearly 400,000 between 1989 and 1991, rising most rapidly among 
families with children. Large families were more likely than smaller 
ones to have priority problems and the need to move to another 
housing unit because of crowding or excessive rent burden. Between 
1989 and 1991, worst case needs among very low-income families with 
three or more children increased from 34.7 percent to 40.2 percent. 
Elderly households were the least likely to have worst case needs.

c. Increasing Numbers of Homeless Individuals and Families

    The homeless clearly have the most acute housing needs. Precise 
counts of homeless individuals are difficult to determine, but a 
study by the Urban Institute estimated that there were between 
496,000 and 600,000 homeless persons in the United States during a 
seven-day period in March 1987, and more than one million persons 
were homeless at some time during that year.<SUP>11 The 
Congressional Budget Office estimated a one-day homeless population 
of approximately 700,000 for 1991.<SUP>12 The Census Bureau 
supplemented its regular 1990 census operations with a special one-
night ``Street and Shelter Night'' count of the homeless, and found 
more than 228,000 homeless individuals at emergency homeless 
shelters and at pre-identified street locations on the night of 
March 20, 1990.<SUP>13 Recent studies of turnover in shelters 
suggest, moreover, that the number ``who experience at least one 
episode of homelessness * * * (over a one to five-year period) may 
exceed the best estimates of single-shot street and shelter counts 
by a factor of ten or more.''<SUP>14

    \11\Interagency Council on the Homeless, Executive Summary: The 
1990 Annual Report of the Interagency Council on the Homeless, 1991.
    \12\Ibid. at 21. This figure was based on a memorandum written 
by the Congressional Budget Office which used the 1987 Urban 
Institute study as its starting point and was updated using a 5 
percent annual growth rate.
    \13\Interagency Council on the Homeless, Fact Sheet, ``How Many 
Homeless People Are There?,'' April 1991, No. 1-1.
    \14\Interagency Council on the Homeless, Priority: Home! The 
Federal Plan to Break the Cycle of Homelessness, 1994, p. 19.
---------------------------------------------------------------------------

d. Unmet Demands for Homeownership

    Homeownership is a key aspiration of most Americans and a basic 
concern of government. Homeownership fosters family responsibility 
and self-sufficiency, expands housing choice and economic 
opportunity, and promotes community stability. Ownership also 
improves access to the larger homes and better neighborhoods 
particularly needed by those families with children. Children of 
homeowners are more likely to graduate from high school, less likely 
to commit crime, and less likely to have children as teenagers than 
children of renters.<SUP>15 Recent surveys indicate that lower-
income and minority families who do not own their homes will make 
considerable sacrifices to attain this goal.

    \15\These tendencies are especially strong for lower income 
households. Children of low-income homeowners are 15 percent more 
likely to stay in school than children of non-homeowners. Michelle 
White and Richard Green, ``Measuring the Benefits of Homeowning: 
Effects on Children,'' University of Chicago, unpublished paper, 
February 1994.
---------------------------------------------------------------------------

    During the 1980s, the goal of homeownership became more elusive 
for low- and moderate-income families. Ownership rates rose 
dramatically in the late 1940s and 1950s, increasing from 43.6 
percent to 61.9 percent between 1940 and 1960. During the 1960s, 
homeownership rates rose more slowly, reaching 62.9 percent by 1970, 
and--after several years of high house price appreciation--an all-
time high of 65.6 percent in 1980. In the early 1980s, historically 
high interest rates, low price appreciation, and a series of deep 
regional recessions caused the homeownership rate to decline to 63.9 
percent by 1985. The rate increased only slightly between 1985 and 
1993.
    Declines in ownership rates during the 1980s were most 
pronounced for younger, lower-income households, particularly 
families with children. Although homeownership rates held steady or 
increased among families where the head of the household was born 
before or shortly after World War II, homeownership rates declined 
among younger households with lower incomes:
    Between 1980 and 1992, homeownership among younger households 
dropped roughly 10 percentage points from 1980 levels, from 43.3 
percent to 33.1 percent for households with the head aged 25 to 29, 
and from 61.1 percent 50.0 percent for households with the head aged 
30 to 34. These declines were concentrated among single-parent 
households and married couples with children.<SUP>16

    \16\Joint Center for Housing Studies of Harvard University, The 
State of the Nation's Housing, 1993, Table A-4.
---------------------------------------------------------------------------

    Homeownership rates fell by 4 percentage points each for 
moderate-income households and low-income households during the 
1980s, and by 3 percentage points for households below 50 percent of 
area median, adjusted for family size. At each income level, 
declines were greatest for families with children. Among very low-
income families with children, homeownership rates dropped by nearly 
a fourth.<SUP>17

    \17\Kathryn Nelson and Jill Khadduri, ``To Whom Should Limited 
Housing Resources Be Directed?'' Housing Policy Debate Vol. 3, 1992, 
pp. 1-55, Table 3.
---------------------------------------------------------------------------

    The stability in ownership after 1985 resulted from increases 
among elderly households and single individuals, offset by further 
declines among families with children. Declines among families with 
children were greatest at incomes 80-100 percent and 30-50 percent 
of unadjusted area median income.
    In sum, the families with children who could most benefit from 
ownership were most adversely affected by declines in ownership. 
Between 1980 and 1991, the dip in total ownership rate from 65.6 to 
64.2 percent translated into a fall of seven percentage points among 
families with children, from an ownership rate of 70.4 percent down 
to 63.4 percent.

e. Obstacles to Increased Homeownership

    Insufficient income, high debt burdens, and limited savings pose 
obstacles for younger families in purchasing a home. As home prices 
skyrocketed during the late 1970s and early 1980s, real incomes 
stagnated, with earnings growth particularly slow for blue collar 
jobs and less educated workers. The combination of relatively high 
interest rates and slow income growth through most of the 1980s made 
homeowner mortgage payments claim larger fractions of family income, 
and increasing rents made saving for home purchase more difficult. 
Thus, fewer households had the financial resources to meet down 
payment requirements, closing costs, and monthly mortgage payments. 
A 1991 survey by the National Association of Home Builders found 
that one-fifth of first-time homeowners had to rely on their 
relatives for most of their down payment.<SUP>18 A survey by the 
National Association of Realtors found that approximately one-third 
of recent first-time homeowners relied on gifts and loans from 
parents.<SUP>19

    \18\National Association of Home Builders, Profile of the New 
Home Buyer Survey, 1991.
    \19\National Association of Realtors, Survey of Homeowners and 
Renters, 1991.
---------------------------------------------------------------------------

    In addition to low income, high debts are a primary reason 
households cannot afford homes. Nearly 53 percent of renter families 
have both insufficient income and excessive debt problems that may 
cause difficulty in financing a home purchase. High debt-to-income 
ratios frequently make potential borrowers ineligible for mortgages 
based on the underwriting criteria established in the conventional 
mortgage market.
    In a recent study, the Census Bureau estimated that in 1991 
nearly 90 percent of renters could not afford a modest home (priced 
at the bottom twenty-fifth percentile) in their Census 
division.<SUP>20 Seventy-eight percent could not afford a home 
priced at the tenth percentile. Such affordability problems are 
especially pronounced among single-parent households. While almost 
76 percent of married-couple renter families could not afford a 
modestly priced home in their area using fixed-rate FHA financing, 
the figure rises to 90.3 percent for single male householders and 96 
percent for households headed by single women.

    \20\Howard Savage and Peter Fronczek, Who Can Afford to Buy A 
House in 1991? U.S. Bureau of the Census, Current Housing Reports 
H121/93-3, July 1993.
---------------------------------------------------------------------------

2. Economic, Housing, and Demographic Conditions

    A number of economic, housing, and demographic considerations 
have influenced the Secretary's determination of housing goals for 
low- and moderate-income families. Increasing income inequality and 
changes in household composition suggest that needs for housing 
affordable to very low-income families will continue to be most 
acute, placing additional pressure on the widespread shortages of 
rental housing [[Page 9204]] affordable to incomes below 30 percent 
of median income. Reacting to high vacancy rates in market-rate 
housing, multifamily starts have been low in the last few years, 
though starts have picked up in 1994. Although volatile interest 
rates strongly influence both starts and mortgage market activity, 
rates that are relatively low by historical standards have improved 
affordability for first-time buyers.

a. Underlying Demographic Conditions

    (1) Household Formations. The demand for housing and mortgages 
depends heavily on household formations. During the 1970s, as the 
leading edge of the baby boom generation (born between 1946 and 
1964) entered adulthood, household formation surged to an annual 
average of 1.7 million. Aided by rising incomes and low real 
interest rates, household heads aged 25-34 purchased homes in record 
numbers. During the 1980s, annual household growth fell slightly to 
an average of 1.5 million. Many in the ``housing upgrade'' group 
(aged 35-44) had benefitted from substantial increases in the prices 
of their first homes, and were able to afford bigger and higher 
quality homes during the 1980s. Household formation is expected to 
drop sharply during the 1990s. The Census Bureau projects that the 
older baby boomers (aged 45 to 54) will be the fastest growing 
population group during this decade.
    The effects of these demographic trends on housing demand have 
been debated in the economics literature for several years. In 1989, 
Gregory Mankiw and David Weil predicted that the aging of the baby 
boomers and the small size of the following ``baby bust'' generation 
would substantially reduce housing demand and cause housing prices 
to collapse during the 1990s.<SUP>21 Other researchers disagree. 
Reductions in housing demand due to aging of the baby boom 
generation could be offset by many factors, including rising 
incomes, pent-up demand for homeownership by those priced out of the 
housing market during the 1980s, and high levels of 
immigration.<SUP>22

    \21\W. Gregory Mankiw and David N. Weil, ``The Baby Boom, the 
Baby Bust, and the Housing Market,'' Regional Science and Urban 
Economics, May 1989.
    \22\See, for example, Joint Center for Housing Studies of 
Harvard University, The State of the Nation's Housing 1994, 1994.
---------------------------------------------------------------------------

    (2) Immigration. The continued increase in immigration during 
the 1990s will help offset declines in the demand for housing caused 
by the aging of the baby boom generation. During the 1980s, there 
were 6 million legal immigrants into the United States, up from 4.2 
million during the 1970s and 3.2 million during the 1960s. The 
Hispanic population residing in the U.S. increased by 50 percent 
during the 1980s, while the Asian population doubled. About one-
quarter of the Hispanics living in the U.S. in 1990 had immigrated 
during the 1980s. Immigration is projected to add even more new 
Americans in the 1990s than it did during the 1980s. Asians and 
Pacific Islanders are expected to be the fastest growing group, with 
annual growth rates that may exceed 4 percent in the 1990s. Total 
population is now projected to rise by 25 million in each of the 
decades from 1991 to 2020. The tendency of immigrants, particularly 
Hispanics, to locate in certain ``gateway'' cities (e.g., Los 
Angeles and Miami) will placed increased demands on the housing 
stock in some major urban areas.
    (3) Non-traditional Households. While overall growth in new 
households has slowed, non-traditional households have become more 
important. With later marriages, divorce, and other non-traditional 
living arrangements, household growth has been fastest among single-
parent and single-person households. The number of single parents 
with one or more children under 18 was 10.5 million in 1992; the 
vast majority of those single parents were women.<SUP>23 About 62 
percent of Black families with children were single-parent families 
in 1992, compared with 34 percent for Hispanics and 24 percent for 
Whites. Since only 35 percent of single-parent households are 
homeowners compared to 74 percent of married couples, their increase 
should spur demand for rental housing and for affordable ownership 
opportunities. In addition, HUD's analysis of the nation's worst 
case housing needs shows that female-headed households suffer some 
of the most severe housing problems.

    \23\U.S. Department of Commerce, Bureau of the Census, How We're 
Changing: Demographic State of the Nation: 1993. Special Studies 
Series, P-23, No. 184, February 1993.
---------------------------------------------------------------------------

    (4) Single Person Households are playing an increasingly 
important role in the housing market. Singles accounted for one-
fourth of all households in 1990. While one-half owned their own 
home, most of these were elderly people with little or no mortgage 
debt and probably no intention of entering the housing market. 
Never-married singles, on the other hand, have been a significant 
factor in the homebuying market in large urban areas, according to 
the annual Home Buyers Survey of the Chicago Title and Trust 
Company. They accounted for a third of first-time homebuyers in 1992 
and 1993, up from slightly over one-quarter of first-time buyers in 
1990 and 1991, and as discussed above, ownership rates among non-
elderly single individuals rose steadily during the 1980s.<SUP>24 
Low interest rates during the past two years apparently enticed even 
more single renters to become homeowners.

    \24\Chicago Title and Trust Family of Insurers, Who's Buying 
Homes in America, January 1992 and January 1993.
---------------------------------------------------------------------------

b. Economic Conditions

    (1) Income Inequality. Growing inequality in the distribution of 
income makes it more difficult for those at the bottom of the income 
distribution to purchase adequate shelter. The share of the nation's 
income received by the richest 5 percent of American families rose 
from 18.6 percent in 1977 to 24.5 percent in 1990, while the share 
received by the poorest 20 percent fell from 5.7 percent to 4.3 
percent. This widening income inequality was due mainly to wage 
rates becoming more unequal--as the economy moved away from 
manufacturing to more advanced computer and knowledge-intensive 
industries, the wages of unskilled, entry-level, and blue collar 
workers have fallen relative to the wages of professional and 
technical workers. The result has been an increase in the working 
poor and a squeezing of the middle class.
    (2) Interest Rates. Volatile interest rates continue to be a 
major determinant of housing and mortgage market activity. As the 
1980s began, mortgage interest rates were above 12 percent and rose 
quickly to over 15 percent. After 1982, they drifted slowly downward 
to the 9 percent range in 1987 before rising to over 10 percent in 
the 1989-1990 period. Rates returned to 9.32 percent in 1991 and 
then fell further to averages of 8.24 percent in 1992 and 7.20 
percent in 1993. The October 1993 rate of 6.80 percent was the 
lowest level in more than twenty years.<SUP>25

    \25\Council of Economic Advisers, Economic Indicators, September 
1994 and Economic Report of the President, February 1994.
---------------------------------------------------------------------------

    During 1992 and 1993, homeowners responded to the record low 
rates by refinancing existing mortgages. While refinancing accounted 
for less than 25 percent of mortgage originations in 1989-90 when 
interest rates exceeded 10 percent, the sharp decline in interest 
rates led refinancings to account for over 50 percent of all 
mortgage originations in 1992 and 1993.<SUP>26 Because of the heavy 
refinancing activity, single-family mortgage originations surged 
from less than $500 billion in 1990 to record levels of $894 billion 
in 1992 and over $1 trillion in 1993.

    \26\Monthly average refinancing data obtained from Freddie Mac's 
Primary Mortgage Market Survey.
---------------------------------------------------------------------------

    Single-family housing starts have also responded to interest 
rates, with record low volumes in 1981 and 1982, peaks in 1986 and 
1987, and less severe lows in 1990 and 1991. Low interest rates and 
economic recovery in 1992 and 1993 made homeownership more 
affordable and helped turned the housing market around. Single-
family starts increased from less than 900,000 during the 
recessionary years of 1990 and 1991 to 1.030 million in 1992 and 
1.126 million in 1993. Volume in 1993 was almost 35 percent higher 
than 1991's recessionary low of 840,000.
    (3) First-time Home Buyers. First-time home buyers have been the 
driving force in the recovery of the nation's housing market in the 
past two years. First-time homebuyers are typically people in the 
25-34 year-old age group that purchase modestly priced houses. As 
the post-World War II baby boom generation ages, the percentage of 
Americans in this age group has shrunk, from 28.3 percent of those 
over age 25 in 1980 to 25.4 percent in 1992.<SUP>27 Nonetheless, as 
reported in a series of annual Home Buyers Surveys conducted by the 
Chicago Title and Trust Company, first-time homebuyers have bucked 
these demographic trends to increase their share of home sales. 
During the 1980s, first-time buyers accounted for about 40 percent 
of home sales; this figure rose to 45 percent in 1991, 48 percent in 
1992, and 46 [[Page 9205]] percent in 1993.<SUP>28 The 1992 figure 
was the highest percentage for first-time buyers since the annual 
Home Buyers Survey was initiated in 1976.

    \27\U.S. Department of Commerce, Bureau of the Census, Money 
Income of Households, Families, and Persons in the United States: 
1992, Special Studies Series P-60, No. 184, Table B-25, October 
1993.
    \28\Chicago Title and Trust Family of Insurers, Who's Buying 
Homes in America, January 1992, January 1993, and January 1994.
---------------------------------------------------------------------------

    Among the active first-time buyers was a record contingent of 
single-individual households. As noted above, the 1992 and 1993 Home 
Buyers Surveys found that approximately 30 percent of first-time 
buyers in these years were single, compared to 21 percent in 1991. 
The more affluent, move-up home buyers, on the other hand, have 
recently played a smaller role. A sluggish economy, uncertain 
outlooks for many white-collar jobs, and slow house price 
appreciation apparently have kept many trade-up buyers out of the 
housing market.
    Reflecting these trends, the average income for recent home 
buyers has fallen. In 1991, one of every three buyers had a family 
income of $50,000 or less; in 1993, those earning less than $50,000 
accounted for 44 percent of all home buyers. Apparently, two years 
of low interest rates induced many renters who had previously been 
priced out of the market to try homeownership. A strong pent-up 
demand to own a home should not be surprising given the large 
reductions in homeownership rates experienced by several groups 
during the 1980s (see Section C.1.d above). A recent survey of 
renters by the National Association of Realtors (NAR) indicated that 
only one-third prefer to remain renters for the foreseeable 
future.<SUP>29 Thus there are many potential home buyers among the 
34 million households that are currently renting.

    \29\National Association of Realtors, Survey of Homeowners and 
Renters, 1991.
---------------------------------------------------------------------------

c. Housing Conditions

    (1) Affordability of Home Purchase. Potential home buyers in 
1992 and 1993 enjoyed the most affordable market in almost twenty 
years. The National Association of Realtors (NAR) tracks housing 
affordability by measuring the degree to which an average family can 
afford monthly mortgage payments on a typical house, assuming that 
the family has enough cash for a 20 percent down payment. 
Specifically, NAR's composite affordability index measures the ratio 
of median family income to the income required to qualify for a 
conventional loan on a median-priced house. After averaging slightly 
over 110 between 1986 and 1991, the index jumped to 125 in 1992 and 
137 in 1993.<SUP>30 The 1993 figure indicates that the U.S median 
family income was 37 percent more than was needed to qualify for a 
mortgage on the nation's median priced house. The South and North 
Central census regions were the most affordable for homebuyers, with 
affordability indexes of 141 and 176, respectively, in 1993. 
Affordability remained much more of a problem in the Northeast and 
West, where NAR's indexes were around 110 to 117.

    \30\See News Release, ``Housing Affordability Sustained Despite 
Rise in Interest Rates'', National Association of Realtors, August 
9, 1994.
---------------------------------------------------------------------------

    In addition to its overall affordability index, NAR also 
estimates the ability of first-time home buyers to purchase a 
modestly-priced home. When this index equals 100, the typical first-
time buyer can afford the typical starter home under existing 
financial conditions with a 10 percent down payment. NAR's first-
time home buyer index increased from 75 to 89 between 1991 and 1993. 
The fact that this index remained below 100 indicates that the 
monthly mortgage payment continued to place a significant burden on 
first-time home buyers even during a period of record low interest 
rates. The recent jump in interest rates reduced housing 
affordability slightly. According to Freddie Mac' primary market 
survey, interest rates for conventional, 30-year, fixed rate 
mortgages increased from a 25 year low of 7.05 percent in the fourth 
quarter of 1993 to 8.46 percent in the third quarter of 1994.<SUP>31 
This increase can be expected to make it more difficult for 
potential first-time home buyers to qualify for conventional 
mortgages, as reflected in the third dip in NAR's composite 
affordability index from 142 in the fourth quarter of 1993 to 128 in 
the third quarter of 1994. The first-time home buyer's index dropped 
from 92.3 to 83.0 during this period. Both indexes would have fallen 
further if incomes had not risen to partially offset the effects of 
increased interest rates. However, interest rates continue to remain 
lower and housing more affordable than was true for any previous 
extended period since 1977. Moreover, as the economic recovery 
continues, rising incomes should continue to offset the effects of 
higher interest rates.

    \31\The most recent surveys for the last weeks of November 
showed that interest rates had settled in the neighborhood of 9.25 
percent.
---------------------------------------------------------------------------

    (2) Declines in the Number of Low Rent Units in the Housing 
Stock. The rental housing stock considered affordable to poor 
families (the number of units with rents less than $300 per month, 
in constant 1989 dollars) fell from 9.9 million units in 1974 to 9.5 
million units in 1985, and to 9.2 million units in 1991.<SUP>32 Such 
declines in the number of low-rent units, combined with sharp 
increases in the number of poor families, underlie Congressional 
concerns about the need to expand the supply of affordable rental 
housing.<SUP>33

    \32\1974 and 1985 figures from Joint Center for Housing Studies 
of Harvard University, The State of the Nation's Housing, 1992, p. 
35. The 1991 figure is calculated from Exhibit 21 of the 1994 Joint 
Center report on The State of the Nation's Housing.
    \33\U.S. Senate, 1992. Report accompanying S.3031, the National 
Affordable Housing Act Amendments of 1992. 102d Congress, 2d 
Session, Report 102-232, p. 8.
---------------------------------------------------------------------------

    Such shortages of rental units relative to renters occur mainly 
among units affordable to renters with incomes below 30 percent of 
area median. Analysis of Census data shows that nationally there 
were only four units for every five renters with incomes below 30 
percent of area median in 1990, while for renters with incomes below 
50 percent of median nationally there was a surplus--1.24 units for 
every renter.<SUP>34 Similarly, at the state level, 30 states had 
shortages of units affordable below 30 percent of median, while only 
3 had shortages of units affordable below 50 percent of 
median.<SUP>35 Such shortages were strongly correlated with the 
incidence of worst case needs by state. The combined effects of a 
declining low-rent housing stock and the demand for rental units by 
young families that are locked out of the homeownership market have 
kept rents high for poor renter families.

    \34\Amy Bogdon et al., National Analysis of Housing 
Affordability, Adequacy, and Availability, HUD-1448-PDR, 1994, pp 
52-53.
    \35\U.S. Department of Housing and Urban Development, Worst Case 
Needs for Housing Assistance in the United States in 1990 and 1991, 
HUD-1481-PDR, 1994, Table 8.
---------------------------------------------------------------------------

    (3) Multifamily Production and Finance. This section discusses 
three important trends in the multifamily industry, including recent 
shifts in construction levels, projections for the mortgage market, 
and shifts in financing trends. Peaks and troughs have characterized 
multifamily construction since 1959. The most recent peak year was 
1985, in which 576,000 multifamily units were started.\36\ The 
downturn from this peak was particularly severe, and resulted from 
lower net household growth and the loss of favorable tax treatment 
due to the Tax Reform Act of 1986. For the last 3 years, multifamily 
housing production has been at the lowest levels recorded since the 
Government began collecting these data 35 years ago. In 1993 only 
131,200 multifamily units were started, far below the annual average 
of 435,000 units from 1964 through 1992.

    \36\The record high was 906,200 multifamily units started in 
1972.
---------------------------------------------------------------------------

    While multifamily production will probably continue at below-
average rates for the next few years, signs indicate that this 
sector of the housing industry has begun a modest recovery in 1994. 
Much of what is being produced now is because of Low-Income Housing 
Tax Credits--about 50,000 units in both 1992 and 1993. In addition, 
an increasing share is being produced by non-traditional developers, 
particularly community-based, nonprofit developers. Although current 
production levels do not meet the demand for low-cost rental 
housing, housing affordable to moderate income families is capturing 
a large share of the multifamily units that are being produced.
    Multifamily mortgage originations have paralleled the patterns 
of multifamily construction starts. Conventional mortgage 
originations peaked at $41 billion in 1986 (a year after the peak in 
construction starts), and then declined every year to a trough of 
about $25 billion in 1991 and 1992, while the 1993 level rose to 
almost $29 billion. The 1994 level is projected to be about $33 
billion, with an increase to the $35-$40 billion range for 1995 and 
1996.
    The decline in total multifamily lending in the late 1980s 
accompanied a change in the structure of the market.\37\ In 1985, 
thrift institutions originated a peak of 42 percent of multifamily 
mortgages. However, their holdings have decreased by $41 billion 
since 1988, due to defaults and write-offs, failure of institutions 
and refinancing of thrift-held mortgages. Multifamily mortgages 
remained close to 8.5 percent of total thrift assets from 1985 to 
1992, but the high failure rate of these institutions has reduced 
their total assets. The decline of thrift multifamily lending is 
part of a larger pattern of more concentration in the multifamily 
finance market. An additional pattern is the decline of long-term 
and fixed rate financing. Over 60 percent of outstanding multifamily 
debt either carries a variable interest rate, or will have a balloon 
payment due in less than 10 years.

    \37\The following discussion is drawn from The Hamilton 
Securities Group Inc, The National Multi Housing Council, and The 
National Apartment Association, ``A Report on the Multifamily 
Mortgage Industry,'' 1994.
---------------------------------------------------------------------------

    The lack of a strong secondary market for multifamily loans has 
made it more difficult to obtain debt financing for multifamily 
housing. In 1993, Fannie Mae purchased $4.6 billion in multifamily 
mortgages, while Freddie Mac purchased $191 million. This compares 
to almost $29 billion in total multifamily mortgage originations in 
that year. Thus, the GSEs' purchases amounted to about 17 percent of 
originations. Given that some of the GSEs' purchases were seasoned 
loans, their share of the current market is even smaller. Freddie 
Mac had been out of the multifamily business completely for nearly 
five years, and only began in December 1993 to fully re-enter the 
market. In 1993, Fannie Mae and Freddie Mac held or had securitized 
about 10 percent of outstanding multifamily mortgage debt. State and 
local housing finance agencies and insurance companies each held 
another 10 percent of the outstanding debt. Depository institutions 
held 36 percent, but as mentioned earlier, thrifts have decreased 
holdings considerably in recent years. GNMA held 12 percent, pension 
funds held 2 percent, and the remainder was spread in small shares 
over a number of sources. The decline in direct federal subsidies 
and the collapse of the thrift industry decreased the lending 
sources for affordable multifamily housing. The country needs an 
established secondary market for multifamily mortgages which has the 
depth and resiliency of the single-family system to bring new 
sources of primary financing into the market.

3. Performance and Effort of the GSEs Toward Achieving the Goal in 
Previous Years

    Each GSE submitted data on its 1993 performance to the 
Secretary, in formats specified by the Department, and based on the 
procedures specified by the Department in the Notice of Interim 
Housing Goals published in the Federal Register on October 13, 1993. 
This is the first time that such detailed information has been made 
available on the GSEs' activities, which in 1993 involved the 
purchase of 2.97 million mortgages on 3.24 million dwelling units by 
Fannie Mae and the purchase of 2.32 million mortgages on 2.38 
million dwelling units by Freddie Mac. Each GSE also submitted 
detailed loan level data on each loan it purchased in 1993. HUD has 
done extensive analyses to verify the GSEs' stated performance and 
to measure aspects of their mortgage purchase activities in 1993 not 
contained in the tables they submitted to the Department.
    Fannie Mae's data for 1993 show that 31.8 percent of single 
family dwelling units, 95.4 percent of multifamily dwelling units, 
and 35.6 percent of total units financed by its mortgage purchases 
were affordable to low- and moderate-income families. Thus there was 
a significant increase in the low- and moderate-income percentage 
from 28 percent in 1992, and Fannie Mae's performance substantially 
exceeded the 30 percent goal established for Fannie Mae by the 
Secretary.\38\ [[Page 9206]] 

    \38\Some mortgage purchases are not eligible for possible 
inclusion under the low- and moderate-income goal, such as federally 
guaranteed mortgages, second mortgages, mortgages on second homes, 
and mortgages originated prior to January 1, 1993 that were missing 
relevant borrower income or rent data. Such mortgages were excluded 
from both the numerator and the denominator in calculating the low-
mod percentage. These exclusions amounted to 14 percent of Fannie 
Mae's purchases and 9 percent of Freddie Mac's purchases.
---------------------------------------------------------------------------

    Freddie Mac's data for 1993 show that 28.9 percent of single 
family dwelling units, 94.3 percent of multifamily dwelling units, 
and 29.2 percent of total units financed by its mortgage purchases 
were affordable to low- and moderate-income families. Thus there was 
a significant increase in the low- and moderate-income percentage 
from 24 percent in 1992, and Freddie Mac's performance exceeded the 
28 percent goal established for Freddie Mac by the Secretary.
    On November 29, 1994 both enterprises reported on their 
purchases for the first three quarters of the year. Fannie Mae 
stated that 43.3 percent of its purchases were for low- and 
moderate-income families, and the corresponding figure for Freddie 
Mac was 36.3 percent. Thus both enterprises have sharply increased 
their low- and moderate-income purchases above the 1993 level, and 
both are running well above the 1994 goal of 30 percent.\39\ For all 
periods, performance would be somewhat higher utilizing the scoring 
provisions of this regulation, in contrast to those spelled out in 
the Federal Register on October 13, 1993.

    \39\A portion of the increase from 1993 reflects a decline in 
the share of refinancings, which have been less common among low- 
and moderate-income families.
---------------------------------------------------------------------------

    For both enterprises, although they surpassed their low- and 
moderate-income goals in 1993, more than 50 percent of their single-
family purchases and their total purchases were for families with 
incomes in excess of 120 percent of area median income, as indicated 
in the following table:

       Distribution of Dwelling Units in Total GSE Purchases by Income Class of Mortgagor or Renter, 1993       
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                           Fannie Mae                      Freddie Mac          
 Income of mortgagor(s) or renter(s) relative  -----------------------------------------------------------------
             to area median income               Single-     Multi-               Single-     Multi-            
                                                  family     family     Total      family     family     Total  
----------------------------------------------------------------------------------------------------------------
0%-60%........................................        6.3       43.3        8.7        5.3       71.2        5.6
60%-80%.......................................       11.1       43.8       13.2       10.3       19.5       10.4
80%-100%......................................       14.2        8.3       13.9       14.0        3.7       14.0
100%-120%.....................................       14.5        1.8       13.7       14.7        2.2       14.6
Exceeds 120%..................................       53.8        2.8       50.6       55.7        3.4       55.4
                                               -----------------------------------------------------------------
      Total...................................      100.0      100.0      100.0      100.0      100.0      100.0
----------------------------------------------------------------------------------------------------------------

This indicates that achievement of the low- and moderate-income goal 
in 1993 did not deter the GSEs from buying many mortgages on 
properties purchased by higher income families.

4. Size of the Conventional Conforming Mortgage Market Serving Low- 
and Moderate-Income Families Relative to the Overall Conventional 
Conforming Market

    This section explains the Secretary's methodology for estimating 
the low- and moderate-income (``low-mod'') share of the mortgage 
market. Ideally, computing this share would be straightforward, 
consisting of three steps:
    (1) Projecting the size of the four major property types 
included in the conventional conforming mortgage market: (a) Single-
family owner-occupied dwelling units, (b) single-family owner-
occupied, two-to-four units (called ``2-4's''), (c) single-family 
one-to-four investment units (called ``1-4's''), and (d) multifamily 
units (properties with more than 4 units). Property types (b), (c), 
and (d) consist of rental units. As noted below, property types (b) 
and (c) must sometimes be combined due to data limitations; in this 
case, they are referred to as ``single-family 1-4 rental units''.
    (2) Projecting the percentage that are low- and moderate-income 
for each of the above four property types (for example, the 
percentage of those single-family owner- [[Page 9207]] occupied 
dwelling units financed by mortgages in a particular year that are 
occupied by households with incomes below the area median).
    (3) Multiplying the four percentages in (2) by their 
corresponding market shares in (1), thus arriving at an estimate 
(weighted average) of the overall share of dwelling units financed 
by mortgages that are occupied by low- and moderate-income families.
    The four property types are analyzed separately because of their 
differences in low-mod occupancy; rental properties tend to have 
much higher percentages of low-income occupants than owner-occupied 
properties. It is often necessary to distinguish between purchase 
and refinance mortgages because purchase mortgages are more apt to 
finance units occupied by low-income occupants.
    Unfortunately, complete and consistent mortgage data are not 
readily available to easily carry out the above three steps. 
Therefore, HUD had to combine information from several data sources 
in order to estimate the market shares. Two approaches were taken--
one based on American Housing Survey and Residential Finance Survey 
data and one based on 1993 HMDA data and projections of the mortgage 
market for 1995 and 1996. HUD also relied on the mortgage purchase 
data for 1993 supplied by the GSEs. The following sections explain 
HUD's methodology and present results of several sensitivity 
analyses of the estimated size of the low-mod market.

a. American Housing Survey/Residential Finance Survey Method

    To obtain an overall perspective of the mortgage market, data 
from the American Housing Surveys for 1985, 1987, 1989, and 1991 
were analyzed. This data showed that, overall, 30 percent of those 
families who recently purchased or refinanced their homes, and who 
obtained conventional mortgages below the conforming loan limits, 
had incomes below the area median. Restricting the American Housing 
Survey (AHS) analysis to 1991 (the latest year that for which data 
is available) yields about the same estimate (31 percent) for the 
low-mod share of single-family owner-occupied properties.
    The AHS does not include data on mortgages for rental properties 
(1-4 properties including (b) and (c) above and multifamily); 
rather, it includes data on the characteristics of the existing 
housing stock and recently completed rental properties. Current data 
on the income of prospective or actual tenants has also not been 
readily available for rental properties. Where such income 
information is not available, the Act provides that a rent level is 
affordable if it does not exceed 30 percent of the maximum income 
level for the low-income or moderate-income category, with 
appropriate adjustments for unit size as measured by the number of 
bedrooms.
    Analysis of the same four American Housing Surveys shows that 
for 1-4 unit unsubsidized rental properties ((b) and (c) properties 
are combined], 90 percent of all units, and 69 percent of units 
constructed in the preceding three years had gross rent (contract 
rent plus the cost of all utilities) less than or equal to 30 
percent of area median family income. For multifamily unsubsidized 
rental properties, the corresponding figures are 92 percent of all 
units, and 83 percent of units constructed in the preceding three 
years. Restricting the analysis to 1991 gave similar results--91 
percent and 68 percent for 1-4 properties and 92 percent and 83 
percent for multifamily properties. It should be noted that data for 
recently completed units probably underestimate the low- and 
moderate-income percentage of rental housing under the Act's 
definition, because they exclude purchase and refinance transactions 
on older buildings, which generally charge lower rents than newly-
constructed buildings.
    The GSEs' 1993 purchase data for rental properties also provides 
a useful reference point. Freddie Mac's data suggest a 66 percent 
low-mod share for rental 1-4 properties and Fannie Mae's data 
suggest a 73 percent low-mod share.\40\ The GSE percentages are 
similar to the AHS low-mod share (69 percent) for recently completed 
1-4 properties. On the multifamily side, Fannie Mae's data suggest a 
95 percent low-mod share which is about the same as the AHS estimate 
for existing properties. Freddie Mac's multifamily business is too 
small to provide reliable data.

    \40\Disaggregating the rental 1-4 category into its two 
components, Freddie Mac's data showed a 54 percent low-mod share for 
rental 2-4's and a 85 percent low-mod share for 1-4 investment 
properties. Fannie Mae's data showed a 62 percent low-mod share for 
rental 2-4's and a 86 percent low-mod share for 1-4 investment 
properties. The low-mod percentages were practically the same for 
purchase and refinance mortgages.
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    To calculate the size of the potential market for mortgages 
financing housing for low- and moderate-income families, data on the 
number of owner-occupied dwelling units, rental units in 1-4 unit 
properties, and rental units in multifamily properties are 
necessary. In determining the proportions of dwelling units in these 
three different types of properties, HUD used data from the 
Residential Finance Survey (RFS) on the number of properties with 
conventional conforming mortgages acquired during the 1987-91 
period, and the total number of dwelling units for each type of 
property, derived from the same source. Based on this data, HUD 
estimated that, of total dwelling units in properties financed by 
recently acquired conventional conforming mortgages, 56.5 percent 
were owner-occupied units, 17.9 percent were in 1-4 family rental 
properties, and 25.6 percent were located in multifamily rental 
properties.\41\ Applying the AHS percentages of affordable dwelling 
units (30 percent of owner-occupied dwelling units, 69 percent of 
single-family recently completed rental units, and 83 percent of 
recently completed multifamily rental units) to these percentages of 
properties results in an estimate that 51 percent of the dwelling 
units secured by conventional mortgages, eligible for purchase by 
the GSEs, are affordable to low- and moderate-income families.\42\

    \41\Restricting the RFS analysis to 1991 resulted in only minor 
changes to the market shares.
    \42\The 51 percent figure was derived by adding the following: 
(1) 16.95% (percentage of owner-occupied units [56.5%] times 
percentage of those units that are affordable to low- and moderate-
income families [30%]); (2) 12.35% (percentage of rental units in 1-
4 family properties [17.9%] times percentage of those units that are 
affordable to low- and moderate-income families [69%]); and (3) 
21.25% (percentage of rental units in multi-family properties 
[25.6%] times percentage of those units that are affordable to low- 
and moderate-income families [83%]).
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    The 51 percent figure is based on the percentage estimates for 
newly-constructed affordable rental units rather than the higher 
estimates for all affordable rental units and GSE purchases. Using 
the AHS low-mod estimates for the existing stock (90 percent for 1-4 
properties and 92 percent for multifamily properties) increases the 
low-mod share to 57 percent. Using the low-mod percentages of Fannie 
Mae's 1993 rental purchases (75 percent for 1-4 properties and 95 
percent for multifamily properties) suggests a 54 percent low-mod 
share.
    One concern with the Residential Finance Survey data is the 
seemingly high percentage share of multifamily units, given that 
multifamily mortgage originations have declined from their high 
levels in the mid- to late-1980s. Between 1987 and 1991, annual 
multifamily conventional mortgage originations averaged $32 billion, 
representing 8.8 percent of total conventional mortgage 
originations. In 1993, conventional multifamily originations stood 
at $28.5 billion and, because of the record trillion dollars in 
single-family mortgage originations, the multifamily share had 
dropped to 3 percent. Based on estimates provided by the GSEs, 
multifamily originations are expected to be about 7 percent of 
conventional mortgage originations in 1995 and 1996. This increase 
in the multifamily share for 1995 and 1996 is mainly due to the 
projected decline in single family originations caused by the 
collapse of the refinance market. Conventional multifamily 
originations are expected to be about $35 billion in 1995 and 1996.
    Sensitivity analysis can show the effect of shifting the 
relative market importance of the different property categories. For 
example, reducing the multifamily weight from 25.6 percent to 20 
percent, and assuming the owner category is 65 percent and the 
rental 1-4 category is 15 percent, yields the following estimates of 
the low-mod share of the market: 46 percent using AHS data for 
recently completed rental properties, 51 percent using AHS data for 
existing rental properties, and 50 percent using Fannie Mae data to 
estimate the low-mod shares for rental 1-4 and multifamily 
properties.

b. HMDA/Market Projection Method

    HUD's second approach for estimating the low-mod share more 
explicitly considers the relative importance of the various property 
types in the 1995 and 1996 mortgage market. This second approach 
uses 1993 HMDA data and projections of mortgage originations for 
1995 and 1996 including shifts in the mortgage market, such as a 
reduction in refinance activity.\43\ The mortgage origination 
[[Page 9208]] projections are based on HUD's Survey of Mortgage 
Lending Activity (SMLA). The HMDA data are expressed in terms of 
number of loans rather than number of units, thus undercounting 
single-family 1-4's and multifamily units. SMLA data are also 
expressed in dollar terms rather than in terms of the number of 
dwelling units. Neither data source distinguishes between single-
family owner-occupied one-unit properties and single-family owner-
occupied rental properties. Therefore, several assumptions must be 
made to derive low-mod estimates for the conforming conventional 
market. The following six steps outline how the low-mod share was 
estimated under this approach:

    \43\The HMDA data were mainly needed because its census tract 
level information was necessary for estimating the size of the 
underserved area market in Appendix B. However, HMDA data also 
provide income information for single-family borrowers; thus, it was 
decided to use these data as an alternative to the AHS data for 
estimating the low-mod share in this Appendix and for estimating the 
very low-income share in Appendix C. Unfortunately, HMDA does not 
provide any useful income information for rental properties. The 
data used in the analysis exclude loans less than $15,000, those 
with loan-to-income ratios that exceed six, and loans to non-owner 
occupants.
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    (1) Single-family (1-4) mortgage originations for 1995 are 
estimated to be $615 billion, a reduction of $395 billion from the 
record setting $1,010 billion in 1993.\44\ The reduction is due to 
the decline in refinance activity which is projected to fall from 
almost 60 percent of originations in 1993 to 15 percent in 1995.

    \44\Fannie Mae, Freddie Mac, and the Mortgage Bankers 
Association have provided HUD with estimates of 1995 mortgage 
originations. The single-family and multifamily origination data 
reported in this section are based on the projections of these 
organizations and the Department. Except for a slightly higher 
estimate for multifamily originations, the 1996 market is expected 
to be similar to the 1995 market. Therefore, the discussion focuses 
on the 1995 market. The various market estimates for the 1995 market 
reported in Appendices A, B, and C serve as a proxy for the 1996 
market.
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    (2) To derive single-family unit projections, the following 
assumptions were made:\45\ the average conventional loan amount 
equals $107,000; conforming originations equal 81 percent of the 
conventional market; units per 2-4 rental property equal 2.25; and 
units per 1-4 investment property equal 1.35. Property shares for 
the 1995 single-family, conventional conforming mortgage market are 
assumed to be 88 percent for single-family owner-occupied, 2 percent 
for single family 2-4's, and 10 percent for single family 1-4's.

    \45\The average loan amount is derived from the Federal Housing 
Finance Board's monthly survey of major lenders which reports 
mortgage terms and conditions. The proportions of conventional 
originations that are conforming is derived from the Residential 
Finance Survey, and is consistent with GSE estimates.
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    (3) Multifamily originations are projected to increase from $30 
billion in 1993 to $33 billion in 1995. The average per unit loan 
amount is projected to be $32,500; sensitivity analysis was 
conducted for lower amounts.\46\

    \46\In 1993, Fannie Mae's per unit multifamily loan amount was 
$24,679 and Freddie Mac's was $17,695. Both agencies project about 
$26,000 for 1995. Given the uncertainty about the correct market 
average per loan amount, sensitivity analysis was done using an 
average of $30,000 for the market. This had the effect of raising 
the estimated low-mod market share in step (6) by less than one 
percentage point.
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    (4) Under the above ``base case'' assumptions, shares of 
dwelling units to be financed in the 1995 mortgage market are 
projected to be 68 percent for single family owner-occupants, 4 
percent for single family 2-4's, 10 percent for single family 1-4's, 
and 18 percent for multifamily.
    (5) Estimates of the percentage of dwelling units occupied by 
low- and moderate-income families were as follows: 38.2 percent for 
single family owner-occupied purchase mortgages and 29.3 percent for 
single family owner-occupied refinance mortgages--both estimates are 
based on 1993 HMDA data; and 62 percent for single family 2-4's, 91 
percent for single family 1-4's, and 93 percent for multifamily. The 
low-mod percentages for the three rental categories were based on 
1993 GSE data and 1991 AHS data.\47\

    \47\Little data exists on the low-mod shares for the two single-
family rental property types; for this reason, it was necessary to 
use the GSE data. Fannie Mae's low-mod percentages for 2-4 and 1-4 
properties were 62 percent and 87 percent, respectively. Freddie 
Mac's were somewhat lower at 54 percent and 85 percent, 
respectively. The American Housing Survey, which combines these two 
property categories shows a 69 percent low-mod share for recently 
build 1-4 rental units and a 91 percent low-mod share for the 
existing stock. The 2-4 low-mod share (63 percent) is based on 
Fannie Mae's data which is probably a conservative estimate for the 
overall 2-4 market. The 1-4 low-mod share (91 percent) is consistent 
with both the AHS and GSE data. The multifamily low-mod share (93 
percent) is consistent with both the AHS and Fannie Mae's data.
---------------------------------------------------------------------------

    (6) Applying the above low-mod shares to the property type 
weights in (4) suggests that 54 percent of the dwelling units 
financed by conventional conforming mortgages in 1995 will be 
occupied by low- and moderate-income families.
    The 1992 share of the single-family owner-occupied mortgage 
market accounted for by low- and moderate-income borrowers was less 
than the 1993 share reported above. According to 1992 HMDA data, 
33.5 percent (25.1 percent) of single-family owner-occupied purchase 
(refinance) mortgages were taken out by low-mod borrowers. 
Substituting these 1992 figures for the 1993 HMDA data (38.2 percent 
and 29.3 percent, respectively) in step (5) suggests that 50 percent 
of the dwelling units financed by conventional conforming mortgages 
in 1995 will be occupied by low- and moderate-income families. 
Averaging the 1992 and 1993 HMDA data suggests a 52 percent low-mod 
share for the market.
    When conducting this market analysis, an issue arose concerning 
interpretation of the above HMDA estimates of the low-mod market. 
The low-mod shares are derived by comparing individual borrower 
incomes reported on the mortgage application with the median income 
of the metropolitan area where the borrower lives. If the borrower's 
income is less than metropolitan area median income, the borrower's 
loan is classified as a low-mod loan. Unfortunately, the median 
income for individual metropolitan areas are only available from the 
decennial censuses; estimates are required for the years between the 
censuses. HUD provides area median income projections that are used 
both by the Federal Reserve Board to classify HMDA loans and by the 
GSEs to classify their loans for purposes of the low-mod and special 
affordable housing goals.<SUP>48 Recently available Census data on 
1993 median income for the nation as a whole suggest that HUD 
overestimated 1993 area median incomes by about seven percent, on 
average. Comparing actual borrower incomes to overestimated area 
median incomes leads to an overestimate of the percentage of low-mod 
borrowers in the GSE and HMDA data bases. Rerunning the 1993 HMDA 
data but reducing area median incomes by seven percent causes the 
low-mod share of purchase mortgages to decline from 38.2 percent to 
32.8 percent, and the low-mod share of refinance mortgages to fall 
from 29.3 percent to 24.2 percent. Substituting these lower, 
adjusted percentages into steps (5) and (6) above reduces the low-
mod share for the overall market to 50 percent.

    \48\To obtain annual estimates of area median incomes, HUD 
starts with area median incomes from the 1990 census and projects 
them forward based on trends in national median income which is 
available annually on a lagged basis. These metropolitan area income 
projections, which are also used in HUD's rental assistance programs 
to define eligibly for subsidy, must be made prior to the program 
year in which they apply. They are made in the quarter preceding the 
applicable program year and are based on national Census data 
available at that time. For example, the 1993 income projections 
were made in the fourth quarter of 1992 and they were based on 
Census median income data from a March 1992 survey that measured 
mid-1991 income levels for the nation as a whole. HUD used the 
survey data to project metropolitan area income estimates from the 
1990 Census to mid-1991, and then applied a four percent annual 
income growth rate to derive a 1993 income estimate for each 
metropolitan area. For further information, see ``FY93 Income Limits 
Briefing Material'' which is available from HUD.
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    Because of uncertainty about the property type weights, 
additional sensitivity analyses were conducted for the market 
importance of each property type as well as for the low-mod shares 
of each property type. For example, the property weights in (4) for 
the three rental categories are less than those referenced earlier 
based on the Residential Finance Survey data. Because the rental 
property types exhibit a higher low-mod share, increasing their 
weights increases HUD's estimate of the mortgage market's low-mod 
share. The single-family rental property low-mod shares based on GSE 
data are less than those reported earlier based on AHS data. 
Therefore, substituting the AHS data for the GSE data increases the 
overall estimate of the low-mod share of the market.
    HUD also conducted several sensitivity analyses of assumptions 
made in steps (1)-(3); in most instances, the estimated low-mod 
share was in the 50-55 percent range.

c. Caveat: Low-Mod Market Share Estimate May Be Lower Than Market Share

    The above estimate of the low-mod market will continue to be 
refined as more data become available to HUD. However, two caveats 
about the 50 percent estimate should be kept in mind. First, the 
low-mod market may be greater than 50 percent because it was 
[[Page 9209]] necessary to exclude certain HMDA loans that may be 
more targeted to low-income borrowers than those loans included in 
HUD's analysis. Second, the 50 percent estimate does not take into 
account the fact that small, second loans may qualify as low-mod in 
1995 and 1996. This section explains these issues.
    (1) HMDA Data. The above analysis of HMDA data is limited to 
those cases where geocoded information is available on the 1993 HMDA 
file (that is, information is available to identify the census tract 
and the metropolitan area of the mortgaged property). There were 
approximately 804,000 conventional conforming loans in the HMDA file 
without enough information to identify the metropolitan area (or the 
census tract) where the property was located. These loans 
represented 13.2 percent of all conventional conforming loans in 
1993.<SUP>49 The relative income of the borrower (i.e., borrower 
income relative to the median income of the metropolitan area) could 
not be computed for these non-geocoded loans.

    \49\As noted earlier, loans less than $15,000, those with loan-
to-income ratios that exceed six, and loans to nonowner-occupants 
are excluded.
---------------------------------------------------------------------------

    HUD analysis suggests that the non-geocoded loans are more 
likely to be loans for low-income borrowers than the geocoded loans 
used earlier to determine the low-mod market share. HUD repeated its 
analysis of the geocoded loans but, instead of using the 
metropolitan area median income as the base for each borrower's 
income, HUD used the national metropolitan median income as the base 
income. The national-metro-median-income approach and the 
metropolitan-area-median-income approach suggested somewhat similar 
low-mod shares for the conventional conforming market in 1993, 31.9 
percent and 29.6 percent, respectively. The incomes of borrowers 
taking out non-geocoded loans were then analyzed using the national-
metro-median-income approach. This suggested a 45.2 percent low-mod 
share for non-geocoded loans, which is greater than the 31.9 percent 
obtained for the geocoded loans using the national-metro-median-
income approach. Therefore, not including the non-geocoded loans in 
the analysis leads to an underestimate of the market's low-mod 
share.
    (2) Eligibility of Second Mortgages. This regulation might allow 
the GSEs to count second mortgages for partial credit because they 
play a role in the financing of rehabilitation in underserved 
areas.<SUP>50 In 1993, the GSEs purchased only a small number of 
second mortgages: Fannie Mae purchased 641 seconds, representing 
$28.5 million, and Freddie Mac purchased 27 seconds, representing 
$1.4 million. It is unclear how the GSEs would react to the fact 
that seconds might be eligible under the goals. One scenario might 
involve a substantial increase in their purchases of small home 
improvement loans in inner city areas which would increase their 
performance under the goals. Another scenario might involve only 
incremental changes to their current business which would only 
marginally increase their performance under the goals. It is also 
unclear how to delineate the overall market in which the GSEs might 
be operating, because their past purchases have been so small. 
Admittedly, they could purchase second mortgages in all segments of 
the market (from inner city low-income loans to suburban high-income 
loans); however, given their current small share of the overall 
market, it might not be appropriate to assume their purchases would 
cover the entire market.

    \50\On the other hand, second mortgages may be used for purposes 
totally unrelated to housing, such as making other purchases, paying 
off debts, etc. Because the rates on seconds are often below other 
consumer borrowing rates (especially those on credit card debt) and 
because interest on second mortgages is tax-deductible, there are 
strong incentives to use second mortgages for purposes other than 
housing rehabilitation.
---------------------------------------------------------------------------

    The HMDA data does include information on home improvement loans 
(HILs). In 1993, 620,000 home improvement loans were originated, 
with an average loan amount of $20,700. Using RFS data, for the 
period 1989-1991, the average loan amount for HILs was $26,700. The 
loan distribution for all HILs shows that 59 percent of these loans 
were for amounts less than $15,000. Compared with purchase 
mortgages, HILs are more targeted to lower income borrowers. Almost 
47 percent of conforming conventional owner-occupied HILs went to 
low-mod borrowers, compared with 31 percent for purchase 
mortgages.<SUP>51

    \51\Restricting the analysis to purchase mortgages over $15,000, 
as was done in the earlier calculation of the low-mod market, gives 
a 38.2 percent share for borrowers with less than the area median 
income.
---------------------------------------------------------------------------

    In 1993, GSE purchases accounted for only 5.7 percent of the HIL 
market. Fannie Mae bought 21,100 (3.4 percent) of HILs and Freddie 
Mac bought 14,300 (2.3 percent) of these mortgages. The distribution 
of HILs purchased by the GSEs differed from the distribution of the 
total market. Only 31 percent of the GSEs' HILs went to low-mod 
borrowers, compared with 47 percent for the market as a whole. But 
54 percent of the HILs bought by both GSEs were for borrowers with 
incomes over 120 percent of area median income; this compares with 
40 percent for the market as a whole.

d. Conclusions

    Based on the above findings as well as numerous sensitivity 
analyses, the Secretary concludes that 50 percent is a conservative 
estimate of the mortgage market's low-mod share for 1995 and 1996.

5. GSEs' Ability to Lead the Industry

    The Secretary believes that in light of the benefits that Fannie 
Mae and Freddie Mac receive from their Charter Acts and the 
``implicit guarantee'' of their obligations resulting from their 
agency status, the GSEs can and should provide the leadership that 
is needed to encourage the mortgage finance industry to better serve 
low- and moderate-income borrowers. The GSEs' ability to lead the 
industry depends on their dominant role in the mortgage market, 
their ability--through their underwriting standards and new programs 
and products--to influence the types of loans that private lenders 
are willing to make, their utilization of cutting edge technology, 
their highly competent and well-trained staffs, and their financial 
resources.

a. Dominant Role in Market

    Fannie Mae and Freddie Mac together purchased approximately 71 
percent of all conventional conforming single-family mortgages in 
1993--up from 17 percent in 1980, 33 percent in 1985, 52 percent in 
1991, and 65 percent in 1992.<SUP>52 Most of the mortgages purchased 
by both GSEs are securitized, but sizable amounts are held in 
portfolio--in fact Fannie Mae and Freddie Mac have the first- and 
fourth-largest mortgage portfolios, respectively, of all mortgage 
lenders in the United States. The GSEs now hold or securitize about 
30 percent of the total dollar volume of mortgages outstanding, 
compared to about 7 percent in 1980, and they have accounted for 
over 40 percent of the net increase in mortgages outstanding between 
1980 and 1992 and over 70 percent of the net increase between 1989 
and 1992.<SUP>53

    \52\Estimates provided by Fannie Mae's Economics Department, 
1993.
    \53\John C. Weicher, ``The New Structure of the Housing Finance 
System,'' Federal Reserve Bank of St. Louis Review, July/August 
1994, pp. 51-52.
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    The dominant position of the GSEs is reinforced by their 
relationship to other market institutions. Banks and savings and 
loans are both their competitors and their customers--they compete 
as portfolio lenders, but at the same time they sell mortgages to 
the GSEs and buy mortgage securities from them, and also buy the 
debt securities that the GSEs use to finance their 
portfolios.<SUP>54

    \54\Id., pp. 52-53.
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b. Set Underwriting Standards for Market

    The GSEs' underwriting guidelines are followed by virtually all 
mortgage originators, including lenders who do not sell many of 
their mortgages to Fannie Mae or Freddie Mac.<SUP>55 The guidelines 
are also commonly followed in underwriting ``jumbo'' mortgages, 
which exceed the maximum principal amount which can be purchased by 
the GSEs (the conforming loan limit), because such mortgages might 
eventually be sold to the GSEs as the principal balance is amortized 
and the conforming loan limit is increased. By setting the credit 
standards against which lower income families will be judged, the 
GSEs can influence the rate at which mortgage funds will flow to 
low-income borrowers and underserved neighborhoods. Congress 
realized the crucial role played by the GSEs' underwriting 
guidelines and it required each enterprise to submit a study on its 
guidelines to the Secretary, the Committee on Banking, Finance and 
Urban Affairs of the House of Representatives, and the Committee on 
[[Page 9210]] Banking, Housing, and Urban Affairs of the Senate in 
October 1993. In addition, the Secretary is required to periodically 
review the GSEs' underwriting and appraisal guidelines.

    \55\The underwriting guidelines published by the two GSEs are 
not identical, but they are very similar in most aspects. And since 
November 30, 1992, Fannie Mae and Freddie Mac have provided lenders 
the same Uniform Underwriting and Transmittal Summary (Fannie Mae 
Form 1008/Freddie Mac Form 1077), which is used by originators to 
collect certain mortgage information that they need for data entry 
when mortgages are sold to either GSE.
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c. Leading Edge Technology

    With regard to technology, both GSEs have been in the forefront 
of new developments. For example, Fannie Mae has developed 
FannieMaps<Register>, a computerized mapping service offered to 
lenders, nonprofit organizations, and state and local governments to 
help them implement community lending programs in underserved areas. 
Both enterprises have been developing automated underwriting systems 
designed to reduce the time required to process loan applications.

d. Staff Resources

    Both enterprises are well-known throughout the mortgage industry 
for the expertise of their staffs in carrying out their current 
programs, researching and developing improvements to the mortgage 
market in general, developing innovative new programs, and 
conducting research which may lead to new programs in the future. 
Their key executives frequently testify before Congressional 
committees on a wide range of housing issues, and both GSEs have 
developed extensive working relationships with a broad spectrum of 
mortgage market participants including various nonprofit groups and 
government housing authorities.

e. Financial Strength

    The benefits that accrue to the GSEs because of their agency 
status have made them two of the nation's most profitable 
businesses. Fannie Mae's profits have increased from $807 million in 
1989 to $1.2 billion in 1990, $1.4 billion in 1991, $1.6 billion in 
1992, and $1.9 billion in 1993, and for the first three quarters of 
1994 they were accruing at an annual rate of $2.1 billion. Fannie 
Mae's return on equity averaged 28.9 percent over the 1989-93 
period--far above the rates achieved by most financial corporations. 
In addition, Fannie Mae's dividends per share more than quadrupled 
over this period, rising from $0.43 in 1989 to $1.84 in 1993.
    Freddie Mac has shown similar trends. Freddie Mac's profits have 
increased from $414 million in 1990 to $555 million in 1991, $622 
million in 1992, and $786 million in 1993, and for the first three 
quarters of 1994 they were accruing at an annual rate of $975 
million. Freddie Mac's return on average equity averaged 22.5 
percent over the 1989-93 period--also well above the rates achieved 
by most financial corporations. Freddie Mac's dividends per share 
rose 66 percent over this period, rising from $0.53 in 1989 to $0.88 
in 1993.
    One measure of the strength of the GSEs was provided by a recent 
Business Week ranking of American corporations. This survey found 
that Fannie Mae was second of all companies in total assets and 
Freddie Mac ranked 23rd; with regard to total profits, Fannie Mae 
ranked 14th and Freddie Mac ranked 55th.<SUP>56

    \56\Business Week, March 28, 1994, p. 131.
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    Under the 1992 Act, beginning with the second quarter of 1994, 
the GSEs must meet fully phased-in minimum core capital requirements 
of 2.5 percent of on-balance sheet assets and 0.45 percent of 
outstanding mortgage-backed securities and other off-balance sheet 
obligations, except as adjusted by the Director of OFHEO. For the 
transition period ending in the first quarter of 1994, the 
corresponding percentages were 2.25 percent and 0.40 percent 
respectively. The Director has found both GSEs adequately 
capitalized as of June 30, 1993, September 30, 1993, December 31, 
1993, and March 31, 1994. For the last period, both GSEs also 
exceeded the fully phased-in capital requirements.

f. Conclusions About Leading the Market

    In light of these factors, the Secretary has determined that the 
GSEs have the ability to lead the industry in making mortgage credit 
available for low- and moderate-income families. However, as 
discussed in Section D, HUD is concerned about the current level of 
the GSEs' assistance to the lower-income end of the market. Existing 
data indicate that there is room for the GSEs to improve their 
performance--low- and moderate-income units are estimated to 
comprise at least 50 percent of the conventional conforming market, 
while in 1993 the GSEs performed at rates of 29 percent (Freddie 
Mac) and 36 percent (Fannie Mae). The low- and moderate-income goals 
that HUD sets in Section D (38 percent in 1995 and 40 percent in 
1996) are intended to move the GSEs closer to the market standard. 
By using their immense resources to improve their performance and 
meet these goals, the GSEs will be making a good first step toward 
closing their current market gap.

6. The Need To Maintain the Sound Financial Condition of the GSEs

    Congress directed the Secretary of HUD to consider the safety 
and soundness of the GSEs, along with the five other factors, in 
formulating the level and direction of the housing goals.<SUP>57 As 
part of these regulations, HUD has prepared a Regulatory Impact 
Analysis (RIA) that examines the costs and benefits of the housing 
goals. The detailed RIA provides a complete discussion of the issues 
summarized below as well as quantitative estimates of the impact of 
the goals on the GSEs. Based on that analysis, HUD concludes that 
achieving the housing goals described in the proposed rule will 
result in limited, if any, net increase in risk to the sound 
financial condition of the GSEs' operations.

    \57\HUD's independent Office of Federal Housing Enterprise 
Oversight (OFHEO) has the primary responsibility for monitoring the 
safety and soundness of the GSEs. OFHEO is currently building the 
stress-test models necessary for analyzing the capital strength of 
the GSEs and establishing appropriate capital levels. HUD expects 
that OFHEO will take into account in its required capital levels the 
GSEs' housing-goal-related purchases.
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    The RIA examines the extent to which the three housing goals 
will affect the capital levels of the GSEs. The RIA does this by 
assessing the extent to which achieving the housing goals will 
affect the profitability of the GSEs. Profitability is used as an 
approximation for sound financial condition, since losses could 
reduce the GSEs' level of capital. The principal cost from mortgage 
loan purchases of any kind is that of loan default, or credit risk. 
Below is a summary of the RIA's main findings regarding the 
potential credit costs of meeting the three goals.
    <bullet> Goals-oriented purchases are already made by the GSEs 
in the course of their ongoing operations. The relevant question is 
the impact of additional units required in order to meet regulatory 
targets. The goals are not mutually exclusive, so that loan 
purchases required to meet them are not additive. Thus the required 
level of additional purchases is not as great as it would be if each 
goal were unique to itself. HUD finds that, under a variety of 
potential GSE strategies, the dollar amounts of additional loan 
purchases are small relative to the total volume of business being 
undertaken by the GSEs. For example, baseline projections show 
Fannie Mae purchasing over $170 billion of loans in 1995. The amount 
of additional purchases required for it to meet the regulatory 
targets will likely be less than $1.5 billion. Because its past 
goals-oriented purchases have been less than Fannie Mae's, Freddie 
Mac will likely require a larger degree of additional targeted 
purchasing to meet the goals. HUD's baseline purchase volume 
projection for Freddie Mac in 1995 is about $130 billion, and 
additional purchase requirements to satisfy the goals could be as 
high as $6 billion, depending on Freddie Mac's business strategy.
    <bullet> The additional loans required to meet the housing goals 
are profitable business under the baseline consensus economics 
scenario examined in the RIA.
    <bullet> Historically, moderate- and middle-income loans have 
the lowest overall default rates of all borrower income cohorts. If 
the GSEs continue their 1993 purchase patterns, loans required to 
meet the low- and moderate-income goal will be primarily from loans 
to households with incomes in the ``moderate'' 80-100 percent of 
median cohort. Therefore, there is unlikely to be any significant 
increase in credit risk exposure associated with the low- and 
moderate-income goal.
    <bullet> The potential size of goals-qualifying purchase pools 
for single-family owner-occupied property loans is enlarged by the 
statutory definition of median income used for these rules. HUD must 
use median family income, unadjusted for household size, to 
determine eligibility under the housing goals. The median-family 
income figures then used to determine goals qualification are 
roughly equal to the median incomes of three-person households. As a 
result, many smaller-sized households with above median income--when 
adjusted for family size--will count as below median for purposes of 
meeting the housing goals.<SUP>58 This same issue also enhances the 
credit quality of special [[Page 9211]] affordable loan purchases. 
In that case, small-sized owner households can qualify as below 60 
percent of median income simply because the dollar threshold is 
effectively defined for a three-person household.<SUP>59

    \58\HUD adjustments for family size cost-of-living factors would 
reduce the effective median income measure for 1-person households 
by 22 percent, that of 2-person households by 11 percent, and would 
increase that of 4-person households by 20 percent.
    \59\Based on national income distributions, there are 4.2 
million one- and two-person households who qualify as below median 
income according to the housing goals, but whose real income is 
above median when adjustments for size are factored in. Likewise, 
there are 2.85 million four-to-six person households who do not 
qualify as having below median income for goals purposes, but whose 
incomes are below median when adjusted for household size. On net, 
then, using an overall family median income has the potential for 
increasing the pool of potentially goals-qualifying mortgage loans 
for GSE purchase.
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    <bullet> Under the special affordable housing goal, the GSEs 
will increase their purchases of very low-income loans. 
Historically, these loan purchases have primarily had loan-to-value 
ratios below 80 percent, so that credit risk is minimal. In 1993, 
about 75 percent of the very low-income loans purchases by the GSEs 
had downpayments in excess of 20 percent.
    <bullet> Under an economic downturn, such as the 1980s-type 
economics scenario in the RIA, additional goals-oriented loan 
purchases only have projected losses on Freddie Mac single family 
special affordable loans. These would be more than offset by 
remaining profits on other loans. Because of its much heavier use of 
a retained portfolio, Fannie Mae would have a much larger cushion 
against losses in an economic downturn.
    <bullet> The GSEs have the ability to purchase loans with higher 
default risk without commensurately higher credit risk. They can do 
this through combinations of requiring deeper mortgage insurance 
coverage and charging higher guarantee fees.<SUP>60 Resulting price 
increases to lower-income borrowers could be more than offset by 
other innovations which are now driving down the cost of mortgage 
originations for all borrowers.

    \60\The limits to this in the competitive mortgage originations 
market are not yet known, but both GSEs recently increased the depth 
of mortgage insurance required on low downpayment loans.
---------------------------------------------------------------------------

    <bullet> As a group, multifamily loans have a higher default 
potential than do single-family loans. Appropriately underwritten 
multifamily loans also earn higher guarantee fees for the GSEs, 
offsetting their higher credit risk. Yet the analysis developed in 
the RIA shows a discernable risk-return tradeoff with respect to 
multifamily lending: Higher profit margins under stable economic 
conditions, but larger potential losses in economic downturns. 
Fannie Mae has virtually eliminated this loss potential by holding a 
much larger percentage of multifamily loan purchases in retained 
portfolio. Freddie Mac could follow much the same strategy as it 
increases its multifamily business. The housing goals are structured 
such that the GSEs can meet the goals without significantly 
increasing their credit risk from multifamily purchases much beyond 
that imbedded in current baseline multifamily purchase targets for 
1995 and 1996.
    <bullet> Guarantee fee income from securitized loans is 
sufficient to cover the expected credit costs of any additional 
goals-oriented purchases under baseline consensus economics. The 
much larger profit margins on their retained portfolios allow the 
GSEs to compete on guarantee fee prices, and still provide financial 
cushions against potential economic downturns.
    <bullet> Increased retention in portfolio of additional, 
targeted loans purchased to help satisfy the housing goals is one 
possible way to hedge any increased credit risk. HUD's analysis 
finds that guarantee fees alone are insufficient to provide the 
earnings necessary to prevent losses on these loans in the event of 
a severe economic downturn. Portfolio earnings are five-to-eight 
times as large as guarantee fee income, as a percent of dollar loan 
volumes. The increase in total portfolio holdings required to fully 
protect against credit risk in the economic downturn scenario 
developed by HUD is so small as to not raise concerns about exposing 
the GSEs to any greater interest-rate risk.
    <bullet> Lenders, the GSEs, and private mortgage insurers are 
implementing changes in mortgage marketing and underwriting that 
extend homeownership opportunities to below-median-income households 
without measurably increasing credit risk. These changes are 
increasing the pool of potential loan purchases that are both sound 
investments and qualify under the regulatory goals.
    <bullet> These same risk-mitigation measures and alternative 
underwriting criteria should increase loan originations in minority 
and low-income neighborhoods and directly increase the GSEs' 
abilities to meet the central cities, rural areas, and other 
underserved areas goal. In addition, about 60 percent of underserved 
area home buyers have incomes above median income, which strengthens 
the credit quality of targeted purchases in these areas.

D. Determination of the 1995 and 1996 Low- and Moderate-Income Housing 
Goals

    The annual goal for 1995 for each GSE's purchases of mortgages 
financing housing for low- and moderate-income families is 
established at 38 percent of the total number of dwelling units 
financed by each GSE's mortgage purchases. The 1996 goal is 
established at 40 percent. These goals represent an increase over 
the 1994 goal of 30 percent. Several considerations, many of which 
have been reviewed in earlier sections of this Appendix, led to the 
choice of these goals.

1. Housing Need

    Almost three-fifths of American households qualify as low- and 
moderate-income under the Act's definitions--half of owners and 70 
percent of renters. Data from the Census and from the American 
Housing Surveys demonstrate that housing problems and needs for 
affordable housing are indeed substantial among low- and moderate-
income families. These households, particularly those with very low 
incomes, are burdened by high rent payments and will likely continue 
to face serious housing problems, given the dim prospects for 
earnings growth in entry-level occupations.
    With respect to homeownership, many younger, minority, and lower 
income families did not realize their goal of homeownership during 
the 1980s due to the slow growth of earnings, high real interest 
rates, and continued house price increases. Recently, low interest 
rates and low inflation have improved affordability conditions and 
first-time homeowners have become a major driving force in the home 
purchase market. A large pent-up demand for homeownership exists on 
the part of low-income families closed out of the market during the 
1980s, particularly families with children in need of larger units 
and better neighborhoods.
    Several demographic changes will put strains on the housing 
finance system during the 1990s. The continued increase in 
immigrants will increase demand for both rental and owner-occupied 
housing. Non-traditional households have become more important as 
overall household formation rates have slowed. With later marriages, 
divorce, and other non-traditional living arrangements, the fastest 
growing household groups are single-parent and single-person 
households.

2. GSE Performance Shows Mixed Results

    The Charter Acts require that the GSEs provide ongoing 
assistance to the secondary market including mortgages for low- and 
moderate-income families. The GSEs certainly have been assisting the 
overall secondary market, increasing their share of purchases of 
conventional conforming single family mortgage origination from 42 
percent in 1989 to 70 percent in 1993. In fact, most industry 
observers would agree that the recent growth in the secondary market 
was the reason the decline of the thrift industry had only minor 
effects on the nation's housing finance system.
    However, the Secretary is concerned about the GSEs' assistance 
to the lower income end of the market. Figure A.1 presents the 
distribution of the GSEs' single-family mortgage purchases by income 
category. In 1993, homeowners with incomes less than 60 percent of 
median represented only 5 percent of GSE purchases, and those with 
incomes less than 80 percent of median represented only 15 percent 
of GSE purchases. Families with incomes over 120 percent of median, 
on the other hand, accounted for over 55 percent of single-family 
mortgages purchased by the GSEs.
    The market is originating many more loans for lower income 
homebuyers than the GSEs are purchasing. (See Figure A.2, which 
compares GSE performance with the market). The GSEs, based on 1993 
HMDA data, purchased a much smaller proportion of conforming 
mortgages originated for very low-income homebuyers than of 
mortgages originated for high-income homebuyers (41 percent versus 
55 percent). The HMDA data suggest that there is room in the lower 
income end of the homebuyer market for the GSEs to improve their 
performance.
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BILLING CODE 4210-32-C [[Page 9214]] 
    The Secretary is particularly concerned about the level of 
Freddie Mac's activity in the multifamily area. In 1993, Freddie Mac 
purchased $191 million in multifamily mortgages, compared with 
almost $5 billion in purchases by Fannie Mae. Given the 
affordability problems faced by renters and the need for a well-
functioning secondary market for multifamily loans, it is imperative 
that Freddie Mac's multifamily business be increased. The 1995 and 
1996 low-mod goals are intended to encourage Freddie Mac's expansion 
of its multifamily activities.

3. Market Feasibility and Changing Market Conditions

    The potential size of the market for low- and moderate-income 
mortgages is a major determinant of the GSEs' agencies' ability to 
reach a specific low-mod goal. As detailed in Section C.4, the low-
mod mortgage market is quite large, accounting for at least 50 
percent of dwelling units financed by conventional conforming 
mortgages. Figure A.3 compares recent GSE performance, the 1995 and 
1996 goals, and the size of the low-mod market. Given the size of 
the market, the 1995 and 1996 goals are feasible.
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BILLING CODE 4210-32-C [[Page 9216]] 
    The GSEs' performance under the housing goals will be heavily 
influenced by overall housing market activity in 1995 and 1996. Low 
interest rates caused 1993 to be a record year for mortgage 
originations as refinancings accounted for about 70 percent of the 
GSEs' business. First-time home buyers were the driving force on the 
home-purchase side of the market. As explained above, the 1995 and 
1996 market is expected to be quite different. Single-family 
mortgage originations are projected to decline by almost 40 percent 
between 1993 and 1995, from one trillion dollars to $615 billion. 
This market fall-off is due entirely to the collapse of the 
refinance market which is expected to decline from over 55 percent 
of mortgage activity in 1992 and 1993 to below 20 percent in 1995 
and 1996. HUD considered these expected market changes when setting 
housing goals for 1995 and 1996. HUD's analysis suggested the 
following effects:
    <bullet> The projected market shift from refinance to purchase 
mortgages should increase the low- and moderate-income proportion of 
mortgage market activity because purchase mortgages are more apt to 
be obtained by lower-income borrowers than are refinance mortgages. 
For instance, in 1993, 33 percent of Fannie Mae's single-family 
purchase mortgages qualified as low-mod versus only 27 percent of 
its refinance mortgages.
    <bullet> The substantial decline in single-family mortgage 
originations, combined with the GSEs' stated intentions to increase 
purchases of multifamily mortgages, should increase the low- and 
moderate-income proportion of each GSE's business because 
practically all multifamily units qualify as low-mod under the Act's 
definitions. Section C.4 provided estimates of the increase in the 
multifamily share of the market in 1995 and 1996.
    <bullet> The recent rise in interest rates from 25 year lows 
could make it more difficult for lower-income borrowers to qualify 
for mortgages underwritten according to GSE guidelines. However, 
interest rates continue to remain lower and housing more affordable 
than was true for any previous extended period since 1977. Higher 
interest rates should be partially offset by other demand factors 
such as rising incomes during the economic recovery and a continued 
strong first-time homebuyer market due to the pent-up demand for 
homeownership on the part of renters left out of the market during 
the 1980s. Furthermore, lenders, the GSEs, and private mortgage 
insurers are implementing changes in mortgage marketing and 
underwriting that will extend homeownership opportunities to lower-
income households. These changes are increasing the pool of 
potential loan applicants that qualify under the low-mod goal.

4. Parity Between the GSEs

    The Secretary is establishing identical goals for both Fannie 
Mae and Freddie Mac. Freddie Mac consistently lags behind Fannie Mae 
on the housing goals. In part, this is due to Freddie Mac's limited 
multifamily activity--their 1993 multifamily mortgage purchases 
accounted for only 1.6 percent of their overall low-mod performance 
(versus 16 percent for Fannie Mae). Freddie Mac has used the past 
four years to rebuild its multifamily operations and has recently 
brought on new staff, developed new systems, and is pursuing an 
aggressive acquisition strategy. On the single-family side, Freddie 
Mac serves the same lenders and offers the same products as Fannie 
Mae. Therefore, it should be able to match Fannie Mae's performance 
in achieving the goals. Moreover, the legislative history supports 
the idea of parity after the transition period, noting that 
``because the enterprises have essentially equal opportunities, 
their respective annual goals should generally be set at comparable 
levels.''<SUP>61

    \61\Senate Report 102-282, p. 36.
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5. Conclusions

    To conclude, the Secretary has determined that the 1995 and 1996 
goals set forth above address national housing needs and current 
economic, housing, and demographic conditions, and that they take 
into account the GSEs' performance in the past in purchasing low- 
and moderate-income mortgages, as well as the size of the 
conventional mortgage market serving low- and moderate-income 
families. Moreover, the Secretary has considered the GSEs' ability 
to lead the industry as well as the GSEs' financial condition. The 
Secretary has determined that the goals are necessary and 
achievable.
    Based on a consideration of the factors, the Secretary proposes 
to establish all three goals for 1997 and 1998 so that the goals 
will move the GSEs steadily over a reasonable period of years, 
including these two years, to a level of mortgage purchases where 
the GSEs will be leading the industry in purchasing mortgages 
meeting the goals. In carrying out this objective, the Secretary 
proposes to establish the goals for 1997 and 1998 at levels ranging 
from the same amounts established for 1996 to higher levels. The 
purpose of any higher levels would be to continue to move the GSEs 
toward purchasing a greater proportion of targeted mortgages 
originated by the market.

Appendix B--Secretarial Considerations To Establish the Central Cities, 
Rural Areas, and Other Underserved Areas Housing Goal

A. Establishment of Goal

    The Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (FHEFSSA) requires the Secretary to establish an annual 
goal for the purchase of mortgages on housing located in central 
cities, rural areas, and other underserved areas.
    In establishing this annual housing goal, the Act requires the 
Secretary to consider:
    1. Urban and rural housing needs and the housing needs of 
underserved areas;
    2. Economic, housing, and demographic conditions;
    3. The performance and effort of the enterprises toward 
achieving the central cities, rural areas, and other underserved 
areas housing goal in previous years;
    4. The size of the conventional mortgage market for central 
cities, rural areas, and other underserved areas relative to the 
size of the overall conventional mortgage market;
    5. The ability of the enterprises to lead the industry in making 
mortgage credit available throughout the United States, including 
central cities, rural areas, and other underserved areas; and
    6. The need to maintain the sound financial condition of the 
enterprises.
    As described in Section 1334(d) of the Act, the annual target 
for this goal for the 1993-94 transition period was that 30 percent 
of units financed by mortgages purchased by each enterprise should 
be located in ``central cities,'' as designated by the Office of 
Management and Budget. Starting in 1995, this interim target is to 
be replaced with a goal targeting areas with relatively poor access 
to credit in ``central cities, rural areas, and other underserved 
areas.''<SUP>1 The Secretary has defined ``central city'' as the 
underserved area of any political subdivision designated as a 
central city by OMB. The Secretary has defined ``rural area'' as any 
underserved area located outside of any metropolitan statistical 
area (MSA) designated by OMB. The Secretary has determined that 
``underserved areas'' are defined as census tracts or non-
metropolitan counties where: Minorities comprise 30 percent or more 
of the residents and the median income of families does not exceed 
120 percent of the area median income; or where the median income of 
families does not exceed 80 percent of the area median income.

    \1\FHEFSSA, section 1334(a).
---------------------------------------------------------------------------

    Section B reports findings on access to mortgage credit and 
Section C addresses the six factors listed above. Section D 
summarizes the Secretary's rationale for selecting the goals for 
central cities, rural areas, and other underserved areas for 1995 
and 1996.

B. Underlying Data and Identifying Underserved Areas

1. Introduction and Overview

    For the post-transition period, the Secretary was charged with 
redefining and expanding this goal from the transition target of 
``central cities'' to include ``rural areas and other underserved 
areas.'' The legislative history shows that Congress intended that 
the goal target geographic areas with ``relatively poor'' or 
``inadequate'' access to mortgage credit and areas suffering from 
``the vestiges of redlining.''<SUP>2

    \2\Senate Report at 38.
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    Data on mortgage credit flows are far from perfect, and issues 
regarding the identification of areas with inadequate access to 
credit are both complex and controversial. For this reason, before 
considering housing needs, past enterprise performance, and the size 
of the conventional market in ``underserved'' areas, it is essential 
to define ``underserved areas'' as accurately as possible from 
existing data. To provide essential background for understanding the 
Secretary's proposed definition of underserved areas for this goal, 
this section carefully reviews the evolving literature investigating 
access to credit and reports findings from HUD's analysis of 1993 
HMDA data.
    Two main points are made in this section: [[Page 9217]] 
    <bullet> The existence of substantial geographic disparities in 
mortgage credit is well documented. Research has demonstrated that 
areas with lower incomes and higher shares of minority population 
consistently have poorer access to mortgage credit, with higher 
mortgage denial rates and lower origination rates for mortgages. 
Thus, the income and minority composition of an area is a good proxy 
for determining whether that area is being underserved by the 
mortgage market.
    <bullet> The research strongly supports a targeted definition of 
underserved areas. Studies conclude that characteristics of the 
applicant and the neighborhood where the property is located are the 
major determinants of mortgage denials and origination rates. Once 
these characteristics are accounted for, other influences such as 
central city location play only a minor role in explaining 
disparities in mortgage lending.

2. Evidence About Access to Credit

    The viability of neighborhoods--whether urban, rural, or 
suburban--depends on the access of their residents to mortgage 
capital to purchase and improve houses. While neighborhood problems 
are caused by a wide range of factors, including substantial 
inequalities in the distribution of the nation's income and wealth, 
there is increasing agreement that imperfections in the nation's 
housing and mortgage markets are hastening the decline of distressed 
neighborhoods. Disparate denial of credit based on geographic 
criteria can lead to disinvestment and neighborhood decline. There 
is growing evidence that discrimination and other factors, such as 
inflexible and restrictive underwriting guidelines, limit access to 
mortgage credit and leave potential borrowers in certain areas 
underserved.<SUP>3

    \3\Because of concern about these problem issues, Federal 
agencies have formed an Interagency Task Force on Fair Lending to 
establish a uniform policy against discriminatory lending. At the 
same time, both Fannie Mae and Freddie Mac have made efforts to make 
their underwriting guidelines more flexible to allow alternative 
mechanisms for low-income borrowers to demonstrate creditworthiness.
---------------------------------------------------------------------------

a. Early Credit Flow Studies

    Most studies of geographical disparities have used Home Mortgage 
Disclosure Act (HMDA) data. A number of studies using the early HMDA 
data sought to test for the existence of geographical redlining, 
which is the refusal of lenders to make loans in certain 
neighborhoods regardless of the creditworthiness of the individual 
applicant.<SUP>4 Consistent with the redlining hypothesis, these 
studies found lower volumes of loans going to low-income and high-
minority neighborhoods.<SUP>5 However, such analyses were criticized 
because they did not distinguish between demand and supply 
effects<SUP>6--that is, whether loan volume was low because people 
in high-minority and low-income areas were unable to afford home 
ownership and therefore were not applying for mortgage loans, or 
because lenders refused to make loans in these areas. Moreover, the 
early HMDA data were incomplete because non-depository lenders 
(e.g., mortgage bankers, who originate most FHA loans) were not 
included.

    \4\Prior to 1990, HMDA data showed only the total number and 
aggregate dollar volume of loans made in each census tract for 
depository institutions; no information was reported on individual 
borrowers or on applications denied.
    \5\These studies, which were conducted at the census tract 
level, typically involved regressing the number of mortgage 
originations (relative to the number of properties in the census 
tract) on characteristics of the census tract including its minority 
composition. A negative coefficient estimate for the minority 
composition variable was often interpreted as suggesting redlining. 
For a discussion of these models, see Eugene Perle, Kathryn Lynch, 
and Jeffrey Horner, ``Model Specification and Local Mortgage Market 
Behavior,'' Journal of Housing Research, Volume 4, Issue 2, 1993, 
pp. 225-243.
    \6\For critiques of the early HMDA studies, see Andrew Holmes 
and Paul Horvitz, ``Mortgage Redlining: Race, Risk, and Demand,'' 
The Journal of Finance, Volume 49, No. 1, March 1994, pp. 81-99; and 
Michael H. Schill and Susan M. Wachter, ``A Tale of Two Cities: 
Racial and Ethnic Geographic Disparities in Home Mortgage Lending in 
Boston and Philadelphia,'' Journal of Housing Research, Volume 4, 
Issue 2, 1993, pp. 245-276.
---------------------------------------------------------------------------

    Like early HMDA studies, an analysis of deed transfer data in 
Boston found lower rates of mortgage activity in minority 
neighborhoods.<SUP>7 The discrepancies held even after controlling 
for income, house values and other economic and non-racial factors 
that might explain differences in demand and housing market 
activity.<SUP>8 In addition, a larger percentage of transactions in 
such neighborhoods were financed by the seller or other non-
traditional institutional lenders (e.g., credit unions, governments, 
universities, business leaders, real estate trusts, and pension 
funds). Greater seller financing may suggest unmet demand for 
mortgages, since it is not likely that minority sellers prefer, more 
than whites, to finance the sale of their homes rather than being 
paid in cash.<SUP>9 The study concluded that ``the housing market 
and the credit market together are functioning in a way that has 
hurt Black neighborhoods in the city of Boston.''<SUP>10

    \7\Katherine L. Bradbury, Karl E. Case, and Constance R. Dunham, 
``Geographic Patterns of Mortgage Lending in Boston, 1982-1987,'' 
New England Economic Review, September/October 1989, pp. 3-30.
    \8\Using an analytical approach similar to that of Bradbury, 
Case, and Dunham, Anne Shlay found evidence of fewer mortgage loans 
originated in black census tracts in Chicago and Baltimore. See Anne 
Shlay, ``Not in That Neighborhood: The Effects of Population and 
Housing on the Distribution of Mortgage Finance within the Chicago 
SMSA,'' Social Science Research, Volume 17, No. 2, 1988, pp. 137-
163; and ``Financing Community: Methods For Assessing Residential 
Credit Disparities, Market Barriers, and Institutional Reinvestment 
Performance in the Metropolis,'' Journal of Urban Affairs, Volume 
11, No. 3, 1989, pp. 201-223.
    \9\Analysis of 1985 American Housing Survey data also showed a 
greater reliance on non-institutional financing by low- and 
moderate-income owners in both metropolitan and rural areas. See the 
Urban Institute.
    \10\Holmes and Horvitz, and Schill and Wachter conduct more 
rigorous tests of the redlining hypothesis that control for several 
characteristics of the neighborhood, including credit risk. Their 
findings are reviewed in Section 2.e below.
---------------------------------------------------------------------------

b. Improved HMDA Data--Wider Coverage and Mortgage Denial Rates

    HMDA reporting was expanded in 1990 to provide information on 
the disposition of loan applications (originated, approved but not 
accepted by the borrower, denied, withdrawn, or not completed), to 
include the activity of large independent mortgage companies, and to 
provide information on the race and income of individual loan 
applicants. An additional expansion in 1993 covered mortgage 
companies that originated 100 or more home purchase loans in the 
preceding calendar year. HUD's analysis using the expanded HMDA data 
for 1993 shows that high-minority and low-income census tracts have 
both higher loan application denial rates and lower loan origination 
rates.<SUP>11

    \11\HUD's previous analysis of 1992 HMDA produced comparable 
results. For a similar analysis based on 1992 HMDA data, see Glenn 
B. Canner, Wayne Passmore, and Dolores S. Smith, ``Residential 
Lending to Low-Income and Minority Families: Evidence from the 1992 
HMDA Data,'' Federal Reserve Bulletin, Volume 80, February 1994, pp. 
79-108.
---------------------------------------------------------------------------

    Table B.1 presents denial and origination rates by the minority 
composition and median income of census tracts for metropolitan 
areas. The tract minority and income data are grouped by deciles. 
Two patterns are clear:
    <bullet> Census tracts with higher percentages of minority 
residents have higher mortgage denial rates and lower mortgage 
origination rates than all-white or substantially-white tracts. For 
example, the denial rate for census tracts that are over 80 percent 
minority is about two-and-a-half times that for census tracts with 
less than 10 percent minority.<SUP>12

    \12\The denial rates in Table B.1 are for purchase mortgages. 
Denial rates are several percentage points lower for refinance loans 
than for purchase loans, but denial rates follow the same pattern 
for both types of loans: Rising with minority concentration and 
falling with increasing income.
---------------------------------------------------------------------------

    <bullet> Census tracts with lower incomes have higher denial 
rates and lower origination rates than higher income tracts. The 
average number of mortgage originations in high-income census tracts 
(i.e., tracts with a median income over 120 percent of area median) 
was 12.7 per 100 owner-occupants; this compares with a range of 3.6 
to 6.6 originations for the census tract deciles with income less 
than 80 percent of area median.
    Denial rates increase in increments ranging from 1.6 to 3.0 
percent as one moves from low-minority to 60-percent-minority 
tracts. They decline in decrements ranging from 1.0 to 3.4 percent 
as tract income increases from 60 percent of area median to over 120 
percent of area median.
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BILLING CODE 4210-32-C [[Page 9219]] 
    Table B.2 aggregates the data in Table B.1 into six minority and 
income combinations that exhibit very different credit flows. The 
low-minority (less than 30 percent minority), high-income (over 120 
percent of area median) group had a denial rate of 8.4 percent and 
an origination rate of 18.0. The high-minority (over 50 percent), 
low-income (under 80 percent of area median) group has a denial rate 
of 26.6 percent and an origination rate of only 4.7. The other 
groupings fall between these two extremes.
    The advantages of HUD's underserved area definition can be seen 
by examining the minority-income combinations highlighted in Table 
B.2. The sharp differences in denial rates and origination rates 
between the underserved and remaining served categories illustrate 
that HUD's definition delineates areas that have significantly less 
success in receiving mortgage credit. Underserved areas have almost 
twice the average denial rate of served areas (22.0 percent versus 
11.9 percent) and half the average origination rate (7.0 versus 
14.1). HUD's definition does not include high-income (over 120 
percent of area median) census tracts even if they meet the minority 
threshold. The mortgage origination rate (14.2) for high-income 
tracts with a minority share of population over 30 percent is 
slightly above the average (14.1) for all served areas.
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BILLING CODE 4210-32-C [[Page 9221]] 

c. Recent HMDA Studies--Controlling for Applicant Credit Risk

    An important question is whether variations in denial rates 
reflect lender bias against certain kinds of neighborhoods and 
borrowers, or simply the credit quality of the mortgage (as 
indicated by the applicant's available assets, credit rating, 
employment history, etc.). The technical improvements offered by 
recent studies of credit disparities have attempted to control for 
credit risk factors that might influence a lender's decision to 
approve a loan. Without fully accounting for the creditworthiness of 
the borrower, racial differences in denial rates cannot be 
attributed to lender bias. The best example of accounting for credit 
risk is the study by researchers at the Federal Reserve Bank of 
Boston, which analyzed mortgage denial rates.<SUP>13 To control for 
credit risk, the Boston Fed researchers included 38 borrower and 
loan variables indicated by lenders to be critical to loan 
decisions. They found that minorities' higher denial rates could not 
be explained fully by income and credit risk factors. Blacks and 
Hispanics were about 60 percent more likely to be denied credit than 
Whites, even after controlling for credit risk characteristics such 
as credit history, employment stability, liquid assets, self-
employment, age, and family status and composition. Although almost 
all highly-qualified applicants of all races were approved, 
differential treatment was observed among borrowers with lesser 
qualifications.<SUP>14

    \13\Alicia H. Munnell, Lynn E. Browne, James McEneaney, and 
Geoffrey M. B. Tootell, ``Mortgage Lending in Boston: Interpreting 
HMDA Data,'' Federal Reserve Bank of Boston, Working Paper Series, 
No. 92-7, October 1992.
    \14\This study was the subject of substantial criticism with 
regard to data quality and model specification, but even after 
accounting for these problems, the race conclusions were found to 
persist in a re-estimation of the model by Fannie Mae. See James H. 
Carr and Isaac F. Megbolugbe, ``The Federal Reserve Bank of Boston 
Study on Mortgage Lending Revisited,'' Journal of Housing Research, 
Volume 4, Issue 2, 1993, pp. 277-313. Other criticisms, however, 
have also been mentioned. For instance, the fact that the credit 
risk variables included in the model are correlated with the 
minority variable suggests that the latter may be picking up the 
effects of still other credit risk variables omitted from the model. 
See John Straka, ``Boston Federal Reserve Study of Mortgage 
Discrimination,'' Secondary Mortgage Markets, Volume 10, No. 1, 
Winter 1993, pp. 8-9, for a useful discussion of other aspects of 
the Boston Fed study.
---------------------------------------------------------------------------

    A recent HUD study also found minority denial rates to be higher 
in ten metropolitan areas, even after controlling for credit 
risk.<SUP>15 In addition, the higher denial rates observed in 
minority neighborhoods were not purely a reflection of the higher 
denial rates experienced by minorities. Whites experienced higher 
denial rates in some minority neighborhoods than in some 
predominantly white neighborhoods.

    \15\ICF Incorporated, Ann B. Schnare, and Stuart A. Gabriel, 
``The Role of FHA in the Provision of Credit to Minorities,'' 
prepared for the U.S. Department of Housing and Urban Development, 
April 25, 1994.
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    The Boston Fed and HUD studies concluded that the effect of 
borrower race on mortgage rejections persists even after controlling 
for legitimate determinants of lenders' credit decisions. Thus, they 
give some legitimacy to denial rate comparisons such as those in 
Tables B.1 and B.2. However, the independent race effect identified 
in these studies is still difficult to interpret. In addition to 
lender bias, access to credit can be limited by loan characteristics 
that reduce profitability<SUP>16 and by underwriting standards that 
have disparate effects on minority and lower income borrowers and 
neighborhoods.<SUP>17

    \16\Lenders are discouraged from making smaller loans in older 
neighborhoods. Since upfront loan fees are frequently determined as 
a percentage of the loan amount, such loans generate lower revenue 
and thus are less profitable to lenders.
    \17\Standard underwriting practices may exclude lower income 
families that are, in fact, creditworthy. Such families tend to pay 
cash, leaving them without a credit history. In addition, the usual 
front-end and back-end ratios applied to applicants' housing 
expenditures and other on-going costs may be too stringent for lower 
income households, who typically pay higher shares of their income 
for housing than higher income households.
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d. Recent HMDA Studies--Controlling for Neighborhood Risk and Demand 
and Tests of the Redlining Hypothesis

    Two recent statistical studies sought to test the redlining 
hypothesis by more completely controlling for differences in 
neighborhood risk and demand. These studies do not support claims of 
racially induced mortgage redlining--the explanatory power of 
neighborhood race is reduced to the extent that the effects of 
neighborhood risk and demand are accounted for. However, these 
studies cannot reach definitive conclusions about redlining because 
of the correlation of neighborhood race with other explanatory 
variables included in their models.
    First, Andrew Holmes and Paul Horvitz used 1988-1991 HMDA data 
to examine the flow of conventional mortgage originations across 
census tracts in Houston.<SUP>18 Their regression model included as 
explanatory variables the economic viability of the loan and 
residents of the tract (e.g., house value, income, age distribution 
and education level), measures of demand (e.g., recent movers and 
change in owner units between 1980 and 1990), and measures of credit 
risk (defaults on government-insured loans and change in tract house 
values between 1980 and 1990). To determine the existence of racial 
redlining, the model also included as explanatory variables the 
percentages of Black and Hispanic residents in the tract and the 
increase in the tract's minority percentage between 1980 and 1990. 
Most of the neighborhood risk and demand variables were significant 
determinants of the flow of conventional loans in Houston. The 
coefficients of the racial composition variables were insignificant 
which led Holmes and Horvitz to conclude that allegations of 
redlining could not be supported, at least in the Houston market.

    \18\Holmes and Horvitz also analyzed the flow of government-
insured loans and obtained what are now standard results in the 
literature--compared with conventional loans, government-insured 
loans are more targeted to lower income and risky neighborhoods.
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    One of their more interesting findings, however, was that the 
racial composition variables became significant and negative, thus 
suggesting the existence of redlining, when they re-estimated their 
model twice, once without the credit risk variables and once without 
the demand variables. This finding is consistent with earlier credit 
flow studies that concluded that redlining exists. Holmes and 
Horvitz caution against relying on findings from these earlier 
studies because they did not adequately account for differences in 
neighborhood risk and demand. The authors conclude that ``a claim of 
racially based geographic discrimination in mortgage lending must be 
based on a consideration of race after (emphasis added) taking 
account of variables that are rationally connected with the 
economics of the mortgage lending process.''<SUP>19

    \19\Holmes and Horvitz, page 97. The authors recognize that many 
of the risk and demand variables in their model are rather highly 
correlated with the racial composition variables also included in 
their model. Thus, one could argue that their risk and demand 
variables are serving, to a certain extent, as proxies for race, 
which would mean that their results suggest a high degree of 
redlining in the Houston market. Holmes and Horvitz dismiss this 
argument by stating that several of their non-racial variables are 
reasonable proxies for other prudent lending variables such as 
wealth and job stability for which they did not have direct data.
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    In the second study, Michael Schill and Susan Wachter attempt to 
improve on earlier studies of redlining by examining whether 
mortgage denials are related to neighborhood racial 
composition.<SUP>20 Schill and Wachter argue that HMDA data on 
mortgage rejections, first released in 1990, allow researchers to 
address perhaps the major shortcoming of earlier credit flow 
studies--the inability to separate demand influences from supply 
influences. Analyzing information on whether lenders accept or 
reject individual loan applicants permits Schill and Wachter to 
study the determinants of the supply decision separately.<SUP>21

    \20\Schill and Wachter. Although its methodology and findings 
are similar to those of studies discussed in the next section, it is 
informative to review Schill and Wachter's study in detail because 
it illustrates issues that must be dealt with before one can reach 
definitive conclusions about redlining.
    \21\Perle also agrees that micro-based models of mortgage denial 
rates are more appropriate for studying redlining than macro-based 
credit flow models that fail to separate demand and supply effects.
---------------------------------------------------------------------------

    In their empirical work, Schill and Wachter focused on loan 
acceptances rather than denials. Their model posits that the 
probability that a lender will accept a specific mortgage 
application depends on characteristics of the individual loan 
application<SUP>22 and characteristics of the neighborhood where the 
property collateralizing the loan is located. Because they rely on 
public data, Schill and Wachter do not have information on several 
loan and property risk variables, such as loan-to-value ratio, that 
are known to affect the mortgage [[Page 9222]] decision. To 
compensate for the lack of these variables, the study includes 
neighborhood risk proxies that are likely to affect the future value 
of the properties.<SUP>23 Finally, to test for the existence of 
racially-induced lending patterns across census tracts, Schill and 
Wachter include the percentage of persons in the census tract that 
are Black and Hispanic.

    \22\Individual loan characteristics include loan size (economies 
of scale cause lenders to prefer large loans to small loans) and all 
individual borrower variables included in the HMDA data (the 
applicant's income, sex, and race).
    \23\Their neighborhood risk proxies include median income and 
house value (inverse indicators of risk), percent of households 
receiving welfare, median age of houses, homeownership rate (an 
inverse indicator), vacancy rate, and the rent-to-value ratio (an 
inverse indicator). A high rent-to-value ratio suggests lower 
expectations of capital gains on properties in the neighborhood.
---------------------------------------------------------------------------

    The authors tested their model for conventional mortgages in 
Philadelphia and Boston. They first estimated their model including 
as explanatory variables only the individual loan and racial 
composition variables. The applicant race variables--whether the 
applicant is Black or Hispanic--showed significant negative effects 
on the probability that a loan will be accepted. Schill and Wachter 
state that this finding does not provide evidence of individual race 
discrimination because applicant race is most likely serving as a 
proxy for credit risk variables omitted from their model (e.g., 
credit history, wealth and liquid assets). In this first analysis, 
the percentage of the census tract that is Black also shows a 
significant and negative coefficient, a result that is consistent 
with redlining. However, when the neighborhood risk proxies are 
included in the model along with the individual loan variables, the 
percentage of the census tract that is Black becomes insignificant. 
Thus, similar to Holmes and Horvitz, Schill and Wachter state that 
``once the set of independent variables is expanded to include 
measures that act as proxies for neighborhood risk, the results do 
not reveal a pattern of redlining.''<SUP>24

    \24\Schill and Wachter, page 271. Munnell, et al. reached 
similar conclusions in their study of Boston. They found that the 
race of the individual mattered, but that once individual 
characteristics were controlled, racial composition of the 
neighborhood was insignificant.
---------------------------------------------------------------------------

    In their conclusion, however, Schill and Wachter state that 
while their results do not support the hypothesis of redlining, they 
cannot say definitively that neighborhood race is unrelated to 
lenders' decisions to accept or reject loan applications. One reason 
for their hesitancy is that many of their individual loan variables 
(as well as their neighborhood risk variables) are correlated with 
the racial composition of the census tract. For instance, the 
applicant's race variable (i.e., whether the applicant is Black or 
Hispanic) remains highly significant and negative in all their 
estimations. Because of the high degree of racial segregation that 
exists in urban areas, the applicant race variable is positively 
correlated with the census tract race variable. It may be that the 
applicant race variable is picking up effects that should properly 
be attributed to the census tract race variable.<SUP>25 If this were 
the case, Schill and Wachter's conclusions about the existence of 
racially induced redlining would necessarily change.

    \25\In their study of individual loan denial rates, Avery, 
Beeson, and Sniderman obtain significant and positive coefficients 
for the individual applicant's race. Unlike Schill and Wachter, they 
found that denial rates were higher in low-income tracts even after 
controlling for the effects of the applicant's race and income. 
Although denial rates were not higher overall for purchase and 
refinance loans in minority tracts after controlling for the race of 
the applicant, denial rates were higher in minority tracts for white 
applicants. In other words, minorities have higher denial rates 
wherever they attempt to borrow, but whites face higher denials when 
they attempt to borrow in areas dominated by minorities. In 
addition, denial rates were higher in minority areas for home-
improvement loans. See Robert B. Avery, Patricia E. Beeson, and Mark 
S. Sniderman, ``Underserved Mortgage Markets: Evidence from HMDA 
Data,'' Working Paper Series 94-16, Federal Reserve Bank of 
Cleveland, October 18, 1994.
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e. Geographic Dimensions of Underserved Areas--Targeted Versus Broad 
Approaches

    An important issue for the GSE regulations is whether geographic 
areas under this goal should be broadly or narrowly defined. Is 
central city location an adequate proxy for lack of access to 
mortgage credit? What is gained by more targeted neighborhood-based 
definitions of underserved areas? This section reports findings from 
three studies that address these questions. All three support 
defining underserved areas in terms of the minority and/or income 
characteristics of census tracts, rather than in terms of a broad 
definition such as all areas of all central cities.
    HUD's Analysis. Tables B.1 and B.2 documented the relatively 
high denial rates and low mortgage origination rates in underserved 
areas as defined by HUD. This section extends that analysis by 
comparing underserved and served areas within central cities and 
suburbs. Figure B.1 shows that HUD's definition targets central city 
neighborhoods that are experiencing problems obtaining mortgage 
credit. The 22.2 percent denial rate in underserved areas of central 
cities is twice the 11.2 percent denial rate in the remaining areas 
of central cities. Similarly, the average mortgage origination rate 
(per 100 owner occupants) in underserved areas of central cities is 
6.2, much lower than the average of 13.1 for the remaining areas of 
central cities.
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BILLING CODE 4210-32-C [[Page 9224]] 
    A broad, inclusive definition of ``central city'' that includes 
all areas of all central cities would include the ``remaining'' 
portions of central cities. Figure B.1 shows that these areas, which 
account for approximately half of the central city population, 
appear to be well served by the mortgage market. They are not 
experiencing problems obtaining access to mortgage credit.\26\

    \26\Section D below will provide additional reasons why central 
city location should not be used as a proxy for underserved areas.
---------------------------------------------------------------------------

    HUD's definition also targets in the suburbs as well as in 
central cities--for example, the average denial rate in underserved 
suburban areas is almost twice that in the remaining areas of the 
suburbs. Low-income and high-minority suburban tracts appear to have 
credit problems similar to their central city counterparts. These 
suburban tracts, which account for 23 percent of the suburban 
population, should also be included in the definition of underserved 
areas. Thus, the advantage of HUD's targeted definition of 
underserved areas is illustrated by sharp differences in measures of 
mortgage access between served and underserved areas within both 
central cities and suburbs.
    William Shear, James Berkovec, Ann Dougherty, and Frank Nothaft, 
economists at Freddie Mac, recently completed an analysis of 
mortgage flows and application acceptance rates in 32 metropolitan 
areas that also supported a targeted definition of underserved 
areas.\27\ These researchers regressed the number of mortgage 
originations per 100 properties in the census tract on several 
independent variables that are intended to account for some, but 
admittedly not all, of the demand and supply (i.e., credit risk) 
influences at the census tract level. Examples of the demand and 
supply variables at the census tract level include: Tract income 
relative to the area median income, the increase in house values 
between 1980 and 1990, the percentage of units boarded up, and the 
age distributions of households and housing units. The tract's 
minority composition and central city location were included to test 
if these characteristics are associated with underserved 
neighborhoods after controlling for the demand and supply variables. 
Several of their findings relate to the issue of defining 
underserved areas:

    \27\William Shear, James Berkovec, Ann Dougherty, and Frank 
Nothaft, ``Unmet Housing Needs: The Role of Mortgage Markets,'' 
presented at mid-year meeting of the American Real Estate and Urban 
Economics Association, June 1, 1994. See also Susan Wharton Gates, 
``Defining the Underserved,'' Secondary Mortgage Markets, 1994 
Mortgage Market Review Issue, pp. 34-48.
---------------------------------------------------------------------------

    <bullet> Black and Hispanic census tracts have lower rates of 
applications, originations, and acceptance rates. For instance, the 
regression estimates suggest that all-White census tracts would have 
an average 10.5 originations per 100 properties, while all-Black and 
all-Hispanic census tracts would have about 7 originations per 100 
properties.
    <bullet> Tract income influences mortgage flows--tracts at 80 
percent of median income are estimated to have 8.6 originations per 
100 owners as compared with 10.8 originations for tracts over 120 
percent of median income.
    <bullet> Once census tract influences are accounted for, central 
city location has only a minimal effect on credit flows.
    Shear, Berkovec, Dougherty, and Nothaft recognized that it is 
difficult to interpret their estimated minority effects--the effects 
may indicate lender discrimination, supply and demand effects not 
included in their model but correlated with minority status, or some 
combination of these factors. They explain the implications of their 
results for measuring underserved areas as follows:

    * * * While it is not at all clear how we might rigorously 
define, let alone measure, what it means to be underserved, it is 
clear that there are important housing-related problems associated 
with certain location characteristics, and it is possible that, in 
the second or third best world in which we live, mortgage markets 
might be useful in helping to solve some of these problems. We then 
might use these data to help single out important areas or at least 
eliminate some bad choices. * * * The regression results indicate 
that income and minority status are better indicators of areas with 
special needs than central city location.\28\

    \28\Shear et al., p. 18.
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    Robert Avery, Patricia Beeson, and Mark Sniderman of the Federal 
Reserve Bank of Cleveland recently presented a paper specifically 
addressing the issue of underserved areas in the context of the GSE 
legislation.\29\ Their study examines variations in application 
rates and denial rates for all individuals and census tracts 
included in the 1990 and 1991 HMDA data base. They seek to isolate 
the differences that stem from the characteristics of the 
neighborhood itself rather than the characteristics of the 
individuals that apply for loans in the neighborhood or lenders that 
happen to serve them. Similar to the two studies of redlining 
reviewed in the previous section, Avery, Beeson and Sniderman 
hypothesize that variations in mortgage application and denial rates 
will be a function of several risk variables such as the income of 
the applicant and changes in neighborhood house values; they test 
for independent racial effects by adding to their model the 
applicant's race and the racial composition of the census tract. 
Econometrics are used to separate individual applicant effects from 
neighborhood effects.

    \29\See Avery, et al.
---------------------------------------------------------------------------

    Based on their empirical work, Avery, Beeson and Sniderman reach 
the following conclusions:
    <bullet> The individual applicant's race exerts a strong 
influence on mortgage application and denial rates. Black 
applicants, in particular, have unexplainably high denial rates.
    <bullet> Once individual applicant and other neighborhood 
characteristics are controlled for, overall denial rates for 
purchase and refinance loans were only slightly higher in minority 
census tracts than non-minority census tracts.\30\ For white 
applicants, on the other hand, denial rates were significantly 
higher in minority tracts.\31\ That is, minorities have higher 
denial rates wherever they attempt to borrow but whites face higher 
denials when they attempt to borrow in minority neighborhoods. In 
addition, Avery et al. found that home improvement loans had 
significantly higher denial rates in minority neighborhoods. Given 
the very strong effect of the individual applicant's race on denial 
rates, Avery et al. note that since minorities tend to live in 
segregated communities, a policy of targeting minority neighborhoods 
may be warranted.

    \30\Avery et al. find very large unadjusted differences in 
denial rates between white and minority neighborhoods, and although 
the gap is greatly reduced by controlling for applicant 
characteristics (such as race and income) and other census tract 
characteristics (such as house price and income level), a 
significant difference between white and minority tracts remains 
(for purchase loans, the denial rate difference falls from an 
unadjusted level of 16.7 percent to 4.4 percent after controlling 
for applicant and other census tract characteristics, and for 
refinance loans, the denial rate difference falls from 21.3 percent 
to 6.4 percent). However, when between-MSA differences are removed, 
the gap drops to 1.5 percent and 1.6 percent for purchase and 
refinance loans, respectively. See Avery, et al., p. 16.
    \31\Avery, et al., page 19, note that, other things equal, a 
black applicant for a home purchase loan is 3.7 percent more likely 
to have his/her application denied in an all-minority tract than in 
an all-white tract, while a white applicant from an all-minority 
tract would be 11.5 percent more likely to be denied.
---------------------------------------------------------------------------

    <bullet> The median income of the census tract had strong 
effects on both application and denial rates of purchase and 
refinance loans, even after other variables were accounted for.
    <bullet> There is little difference in overall denial rates 
between central cities and suburbs, once individual applicant and 
census tract characteristics are controlled for.
    Avery, Beeson and Sniderman conclude that a tract-level 
definition would be a more effective way to define underserved areas 
in the GSE regulation than using central city as a proxy.
    Insights Gained About Underserved Areas. HUD's analysis of 1993 
HMDA data has led it to propose a targeted definition of central 
cities, rural areas, and other underserved areas based on the income 
and minority characteristics of the census tract. The studies by 
Shear, et al. and Avery, Beeson, and Sniderman support a targeted 
approach to defining underserved areas. HUD recognizes that the 
mortgage origination and denial rates that served as the basis for 
determining the tract income and minority thresholds in its 
definition of underserved areas are the result of a multitude of 
risk, demand and supply factors operating at the individual 
applicant and neighborhood levels that analysts have yet to 
completely disentangle and interpret. Like the above researchers, 
HUD believes that this technical concern, although important, does 
not negate the fact that there are widespread and pervasive 
differences in mortgage credit flows between neighborhoods and that 
these differences suggest a targeted rather than a broad approach 
for defining underserved areas. The next section will also document 
that there are equally widespread and pervasive differences in 
socioeconomic conditions across neighborhoods, which also supports a 
targeted definition of central [[Page 9225]] cities, rural areas, 
and other underserved areas.

f. Mortgage Access Problems and Socioeconomic Distress

    To this point the discussion has focused on the credit problems 
of minority and low-income neighborhoods. However, there has also 
been a great deal of concern about poor living conditions in the 
nation's distressed neighborhoods. This section brings these two 
issues together, showing that lack of access to credit markets is 
closely related to distressed living conditions.
    HUD's analysis of underserved census tracts shows that they are 
substantially more distressed than served tracts:
    <bullet> Poor persons are highly concentrated in underserved 
areas. In metropolitan areas, 64 percent of all poor people live in 
underserved areas. The share is even higher in central cities, with 
76 percent of poor persons in underserved areas.
    <bullet> Table B.3 shows that residents in underserved areas 
have higher poverty rates, higher minority concentration, lower 
incomes, and higher unemployment rates. For instance, underserved 
areas show a poverty rate of 23 percent, compared with only 7 
percent in served areas.
    <bullet> In terms of housing, Table B.3 shows that underserved 
areas have a larger percentage of renters, more boarded-up units, 
more older housing, and more low-valued housing than do served 
areas. The average value of owner-occupied housing in underserved 
areas was $81,681, compared with $127,423 in served areas.
    The socioeconomic differences between underserved and served 
census tracts hold when the comparisons are made separately for 
central cities and suburban areas. These findings further support 
the targeting approach and point to the usefulness of the minority 
and income variables as proxies for underserved conditions.
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BILLING CODE 4210-32-C [[Page 9227]] 

g. Identifying Underserved Locations in Rural Areas

    Evaluating which rural locations are underserved in terms of 
access to mortgage credit cannot be done with HMDA data, the source 
used for most of the studies of credit needs summarized here, 
because these data do not provide geographic identifiers on mortgage 
activity outside of metropolitan statistical areas. Moreover, there 
are few careful current studies on access to mortgage credit in 
rural locations. A 1990 study by the Urban Institute, for example, 
found little evidence of a national rural home credit shortage, and 
attributed low mortgage activity in some local markets to lack of 
demand in weak local economies.<SUP>32

    \32\The Urban Institute, 1990. The Availability and Use of 
Mortgage Credit in Rural Areas examined data on ownership, mortgage 
terms and conditions, and Federal program coverage, particularly for 
moderate-income homebuyers.
---------------------------------------------------------------------------

    To address issues about defining underserved areas in rural 
contexts, the Department consulted with researchers from academia, 
the Department of Agriculture, the Census Bureau, the Housing 
Assistance Council, the Congressional Budget Office, public-interest 
groups, and the GSEs. Researchers participating in a forum on these 
issues agreed that available studies do not show that rural areas 
have endemic problems with access to credit, although this 
conclusion may stem from lack of adequate data. Yet there is much 
anecdotal evidence that underserved areas in rural communities have 
less access to credit and particularly to the secondary market. 
According to the Housing Assistance Council (HAC), access to 
mortgage credit worsens as distance from metropolitan centers 
increases,<SUP>33 while Department of Agriculture representatives 
judge that communities with population below 2,500 or 5,000 most 
often lack access to lenders. In general, the forum participants 
agreed that, as found for cities and suburbs, rural communities with 
low income or minority concentrations were those more likely to be 
underserved.

    \33\Statement of Moises Loza, Executive Director of HAC, July 
21, 1994, to the Subcommittee on Environment, Credit, and Community 
Development of the House Committee on Agriculture.
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3. Conclusions From HUD's Analysis and the Economics Literature 
About Underserved Areas

    The implications of studies by HUD and others for defining 
underserved areas can be summarized briefly. First, the existence of 
large geographic disparities in mortgage credit is well documented. 
HUD's analysis of 1993 HMDA data shows that low-income and minority 
neighborhoods receive substantially less credit than other 
neighborhoods and, by most reasonable criteria, fit the definition 
of being underserved by the nation's credit markets.
    Second, researchers are beginning to test models that more fully 
account for the various risk, demand, and supply factors that 
determine the flow of credit to urban neighborhoods. The studies by 
Holmes and Horvitz and Schill and Wachter are good examples of this 
recent research. Their attempts to test the redlining hypothesis 
show the analytical insights that can be gained by more rigorous 
modeling of this issue. However, as those two studies show, the fact 
that our urban areas are highly segregated means that the various 
loan, applicant, and neighborhood characteristics currently being 
used to explain credit flows are often highly correlated with each 
other which makes it difficult to reach definitive conclusions about 
the relative importance of any single variable such as neighborhood 
racial composition. Thus, the need continues for further research on 
the underlying determinants of geographic disparities in mortgage 
lending.<SUP>34

    \34\Methodological and econometric challenges that researchers 
will have to deal with are discussed in Mitchell Rachlis and Anthony 
Yezer, ``Serious Flaws in Statistical Tests for Discrimination in 
Mortgage Markets,'' Journal of Housing Research, Volume 4, 1993, pp. 
315-336.
---------------------------------------------------------------------------

    Finally, the research strongly supports a targeted definition of 
underserved areas. Studies by Shear, et al. and Avery, Beeson, and 
Sniderman conclude that characteristics of both the applicant and 
the neighborhood where the property is located are the major 
determinants of mortgage denials and origination rates--once these 
characteristics are controlled for, other influences such as central 
city location play only a minor role in explaining disparities in 
mortgage lending. HUD's analysis shows that both credit and 
socioeconomic problems are highly concentrated in underserved areas 
within central cities and suburbs. The remaining, high-income 
portions of central cities and suburbs appear to be well served by 
the mortgage market.

C. Consideration of the Factors

    As the above review shows, the most thorough studies available 
provide strong evidence that in metropolitan areas low income and 
minority composition identify neighborhoods that are underserved by 
the mortgage market. Experts on rural housing concur that these 
dimensions also influence credit availability in rural and non-
metropolitan areas. As this section discusses, geographical 
differentials in housing, social, and economic problems and past 
discrimination against minorities confirm that problems are greater 
throughout the nation in the areas identified as underserved under 
the Secretary's proposed definition. Section C.1. describes housing 
needs in urban and rural areas generally, after which the extreme 
social and economic problems of distressed neighborhoods are noted. 
Section C.2. discusses discrimination and other housing problems 
faced by minorities. Although few studies have yet analyzed the 
specific geographic areas targeted by the proposed definition, the 
segregation of minorities within the nation's inner cities and 
poorer rural counties makes this information pertinent to analysis 
of underserved areas and to the goal set by the Secretary.

1. Housing Needs in Urban and Rural Areas

a. Regional and Urban/Rural Differences in Housing Needs

    The incidence of housing problems and severe housing problems 
varies markedly by location. At almost every income level in 1990, 
both renters and owners were most likely to have housing problems in 
the West, and residents of central cities more often had problems 
than those in suburbs or outside metropolitan areas.<SUP>35 In each 
type of location, affordability problems were most common. Although 
households in non-metropolitan areas, for example, were less likely 
than those in cities or suburbs to pay more than 30 percent of 
income for housing in 1991, affordability problems (25 percent) were 
still much more common for them than physically inadequate housing 
(10 percent). Three-quarters of non-metropolitan housing units are 
in the South and the Midwest. These households have a relatively 
high incidence of substandard housing, but affordability is less of 
a problem than elsewhere in the nation. Housing conditions are worst 
in the South, where over one-fourth of non-metropolitan units have 
some type of physical deficiency.

    \35\Amy Bogdon, Joshua Silver, and Margery A. Turner, National 
Analysis of Housing Affordability, Adequacy, and Availability: A 
Framework for Local Housing Strategies, HUD-1448-PDR, 1994.
---------------------------------------------------------------------------

    Very low-income renters similarly were more likely to have worst 
case problems in the West and Northeast than in the Midwest and 
South. Nationally, over half of worst case households lived in 
central cities, while a third lived in the suburbs.<SUP>36 In all 
four regions, renters living outside of metropolitan areas least 
often had worst case problems.

    \36\U.S. Dept. of Housing and Urban Development, 1992. The 
Location of Worst Case Needs in the Late 1980s: A Report to 
Congress. HUD-1387-PDR.
---------------------------------------------------------------------------

    Although ``non-metropolitan,'' as defined by OMB is often 
considered equivalent to ``rural,'' as defined by the Census Bureau, 
almost half of rural households live in metropolitan areas. 
Moreover, over one-third of non-metropolitan households live in 
communities the Census Bureau classifies as urban. Thus, any 
discussion of rural and urban housing needs must define terms 
carefully. Analysis of 1991 American Housing Survey data reveals 
that rural households in metropolitan areas actually have higher 
ownership rates and fewer housing problems than either urban or 
rural residents of non-metropolitan areas. Furthermore, in non-
metropolitan counties, housing problems are more frequent and more 
often severe, for urban than for rural residents.
    The Economic Research Service of the Department of Agriculture 
shows that urban proximity is important: economic conditions and 
housing problems tend to be worse in counties most remote from 
metropolitan areas or smaller cities.<SUP>37 In particular, counties 
with ``persistent low-income,'' which are disproportionately more 
rural and remote, have had little recent economic activity, 
stagnation in real family income during the 1980s, and continue to 
have the highest incidence of housing lacking complete plumbing. 
These high poverty [[Page 9228]] counties are concentrated in 
Appalachia and in areas with high proportions of minority residents.

    \37\Rural Conditions and Trends, Volume 4, No. 3, Fall 1993, a 
special 1990 census issue, documents differences among counties in 
population, education, employment, income, poverty, and housing.
---------------------------------------------------------------------------

    Higher proportions of rural households are homeowners than those 
in urban areas (79 percent versus 60 percent), in part because of 
wider availability of mobile homes. Because of lower mobility and 
higher shares of elderly householders who have paid off their 
mortgages, rural homeowners are less likely to have mortgages than 
urban homeowners (46 versus 64 percent). Those that do have 
mortgages are more reliant on non-institutional sources than 
homeowners in metropolitan areas.<SUP>38

    \38\The Urban Institute.
---------------------------------------------------------------------------

b. Housing Needs in Distressed Neighborhoods

    Although analysis of housing problems in areas defined as 
underserved by the Secretary is still underway, over the past three 
decades evidence of growing poverty concentrations has caused 
mounting concern about poor living conditions in the nation's 
distressed neighborhoods. John Kasarda has focused on trends in the 
neighborhood concentration of poverty and measures of the 
``underclass'' population such as school dropouts, unemployed and 
underemployed adult males, single-parent families, and families 
dependent upon welfare.<SUP>39 Kasarda has not only documented the 
extreme deprivation that exists in minority and low-income 
neighborhoods throughout our major urban areas, but he has also 
shown that neighborhood distress and concentrations of residents in 
tracts with high poverty worsened during the 1980s.

    \39\``Inner-City Concentrated Poverty and Neighborhood Distress: 
1970 to 1990.'' Housing Policy Debate, 4(3): 253-302.
---------------------------------------------------------------------------

    Analysis within 44 major metropolitan areas showed that in the 
late 1980s renters were most likely to have worst case needs in the 
poorest neighborhoods.<SUP>40 Although only one-tenth of households 
lived in neighborhoods with poverty rates above 20 percent, those 
poorest neighborhoods housed almost one-fourth of worst case 
renters. These poorest zones closely resemble tracts identified as 
poor ghettos or underclass areas. They contained older, smaller 
units that were more often physically inadequate and crowded than 
other housing in the metropolitan areas studied.<SUP>41 As discussed 
earlier, the tracts qualifying as underserved under HUD's definition 
have similar socioeconomic problems and are substantially worse off 
than other parts of metropolitan areas in terms of both social and 
housing problems (see Table B.3).

    \40\U.S. Dept. of Housing and Urban Development, 1992. The 
Location of Worst Case Needs in the Late 1980s: A Report to 
Congress. HUD-1387-PDR.
    \41\Kathryn P. Nelson, 1993. ``Intra-urban Mobility and Location 
Choice in the 1980s,'' pp. 53-95 in Thomas Kingsley and Margery 
Turner, eds., Housing Markets and Residential Mobility, Washington, 
DC: The Urban Institute Press.
---------------------------------------------------------------------------

2. Economic, Housing, and Demographic Conditions

a. Discrimination in the Housing Market

    In addition to discrimination in the lending market, substantial 
evidence exists of discrimination in the housing market. The Housing 
Discrimination Study sponsored by HUD and conducted in 1989 found 
that minority home buyers encounter some form of discrimination 
about half the time when they visit a rental or sales agent to ask 
about advertised housing.<SUP>42 The incidence of discrimination was 
higher for Blacks than for Hispanics and for homebuyers than for 
renters. For renters, the incidence of discrimination was 46 percent 
for Hispanics and 53 percent for Blacks. The incidence among buyers 
was 56 percent for Hispanics and 59 percent for Blacks.

    \42\Margery A. Turner, Raymond J. Struyk, and John Yinger, 
Housing Discrimination Study: Synthesis, Washington, D.C., U.S. 
Department of Housing and Urban Development, 1991.
---------------------------------------------------------------------------

    While discrimination is rarely overt, minorities are more often 
told the unit of interest is unavailable, shown fewer properties, 
offered less attractive terms, offered less financing assistance, or 
provided less information than similarly situated non-minority 
homeseekers. Some evidence indicates that properties in minority and 
racially-diverse neighborhoods are marketed differently from those 
in White neighborhoods. Houses for sale in non-White neighborhoods 
are rarely advertised in metropolitan newspapers, open houses are 
rarely held, and listing real estate agents are less often 
associated with a multiple listing service.<SUP>43

    \43\Margery A. Turner, ``Discrimination in Urban Housing 
Markets: Lessons from Fair Housing Audits,'' Housing Policy Debate, 
Vol. 3, Issue 2, 1992, pp. 185-215.
---------------------------------------------------------------------------

b. Housing Problems of Minorities and their Neighborhoods

    Because they face discrimination in access to housing or 
lending, minorities and their neighborhoods face severe housing 
problems:
    <bullet> Discrimination in the housing and lending markets is 
evidenced by racial disparities in homeownership. In 1991, the 
homeownership rate was 68 percent for Whites, 43 percent for Blacks, 
and 39 percent for Hispanics. Although differences in income, 
wealth, and family structure explain much of the differences, racial 
disparities persist after accounting for these factors.<SUP>44

    \44\Susan M. Wachter and Isaac F. Megbolugbe, ``Racial and 
Ethnic Disparities in Homeownership,'' Housing Policy Debate, Vol. 
3, Issue 2, 1992, pp. 333-370.
---------------------------------------------------------------------------

    <bullet> Discrimination, while not the only cause, contributes 
to the pervasive level of segregation that persists between Blacks 
and Whites in our urban areas.
    <bullet> Hispanics are the group most likely to have worst case 
needs for housing assistance, but least likely to receive 
assistance; in 1991, only 21 percent of very low-income Hispanics 
lived in public or assisted housing. The 1989 to 1991 increase in 
worst case needs was the largest for Hispanic households, rising 
from 39.2 to 44.4 percent of very low-income Hispanic renters.
    The housing problems of minorities and the neighborhoods where 
they live are of growing importance, in part, because minorities, 
particularly Hispanics, are becoming an increasingly large share of 
the U.S. population. In Los Angeles and Miami, with rapid growth in 
Hispanic immigrant population and slow growth in the native-born 
non-Hispanic White population, minorities already represent more 
than half the total population.
    Homeownership rates vary consistently by neighborhood 
characteristics. As Table B.4 shows, on average homeownership rates 
decrease as the minority concentration in census tracts increases, 
and as income falls relative to the area median. These patterns are 
consistent with the demographic patterns described earlier, that 
minorities and low-income households have lower homeownership rates. 
An exception to this pattern occurs in tracts with incomes below 50 
percent of the area median, in which homeownership rates rise with 
minority concentration in some cases. However, only a very small 
proportion of households live in these tracts.

3. Previous Performance and Effort of the GSEs In Connection With 
the Central Cities, Rural Areas and Other Underserved Areas Goal

    The central cities, rural areas, and other underserved areas 
goal will be in effect for the first time in 1995, replacing the 
central city goal. Because it is a new goal, the GSEs did not 
provide specific reports to HUD regarding their 1993 performance in 
connection with underserved areas. HUD did examine the GSEs' 
performance in the areas covered by the newly defined goal using 
1993 HMDA data and the loan-level data submitted by the GSEs to HUD 
for 1993 mortgage purchases.
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BILLING CODE 4210-32-C
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a. GSE Performance: 1993 HMDA Data

    HMDA data permit examination of the GSEs' performance in 
metropolitan areas.<SUP>45 According to 1993 HMDA data, 13.1 percent 
of Fannie Mae's single-family business was in underserved areas. Of 
its total underserved business, 23.8 percent was in low-income 
tracts (i.e., tracts with income not exceeding 80 percent of area 
median but with minority population less than 30 percent), 49.8 
percent was in high-minority tracts (i.e., tracts with minority 
population greater than or equal to 30 percent and with incomes 
between 80 and 120 percent of the area median), and 26.4 percent was 
in high-minority, low-income tracts.

    \45\HMDA data are not useful for examining rural performance. 
However this, by itself, will have little effect on the estimate of 
performance because the GSEs do only a small portion of their 
business in non-metropolitan areas. Share of metropolitan business 
in underserved areas will be very close to share of total business 
in underserved areas. Metropolitan underserved share is only an 
underestimate of total underserved share if the rural business is 
much more highly targeted to underserved areas than is the 
metropolitan business.
---------------------------------------------------------------------------

    Based on 1993 HMDA data 13.6 percent of Freddie Mac's single-
family business was in underserved areas. Of its underserved 
business, 23.1 percent was in low-income tracts, 50.0 percent was in 
high-minority tracts, and 27.0 percent was in high-minority, low-
income tracts.
    HMDA data can also be used to compare GSE performance in low-
income and high-minority census tracts with that of the overall 
market. Combined, GSE purchases accounted for a higher percentage of 
loans in high-income census tracts than in low-income census tracts. 
GSEs purchased 44 percent of the loans in under-50-percent income 
tracts, 47 percent of the loans in 50-80-percent income tracts, 51 
percent of the loans in 80-100-percent income tracts, and 59 percent 
in the above-median income tracts. The GSE purchase share declined 
sharply relative to the market in very-high-minority tracts (over 90 
percent).

b. GSE Performance: 1993 GSE Data

    Table B.5 summarizes GSE purchases in underserved areas using 
the 1993 loan-level data that Fannie Mae and Freddie Mac submitted 
to HUD. In 1993, 15.9 percent of Fannie Mae's business and 14.4 
percent of Freddie Mac's business was in underserved areas. The 
share of GSE business in underserved areas varies rather 
dramatically by property type; for example, about 13 percent of 
Fannie Mae's single-family owner purchases were in underserved areas 
compared with over 30 percent for the three rental property types 
given in Table B.5.
    As Table B.6 shows, approximately 40 percent of GSE purchases in 
underserved areas were mortgages of low- and moderate-income 
households. Thus above-median income households accounted for 60 
percent of the mortgages that the GSEs purchased in underserved 
areas which suggests these areas are quite diverse. In central 
cities, one-third of the GSEs' low-mod purchases were in underserved 
areas, whereas in the suburbs, only 16 percent were. This reflects 
the much greater concentration of poverty in central cities.
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BILLING CODE 4210-32-C [[Page 9233]] 

4. Size of the Conventional Mortgage Market for Central Cities, 
Rural Areas, and Other Underserved Areas Relative to the Overall 
Conventional Conforming Market

    Section C.4 of Appendix A describes HUD's two approaches for 
estimating the size of the low- and moderate-income market. The 
first approach cannot be used for underserved areas because American 
Housing Survey data are not available at the census tract level. The 
analysis of underserved areas follows the second approach, which is 
based on HMDA data and projections of the 1995 mortgage market. The 
methodology involves estimating for each of the various property 
types (single family owner, single family investment, etc.) the 
percentage of dwelling units financed by mortgages that are located 
in underserved census tracts and, then, computing the overall market 
share for underserved areas by weighting these underserved area 
percentages by the mortgage originations for each property type in 
the 1995 market.
    This approach follows the same six steps as outlined in Section 
C.4.b of Appendix A. In steps (5) and (6), underserved area shares 
are substituted for low-mod shares:
    (5) Estimates of the percentage of dwelling units financed by 
mortgages that are located in underserved areas were: 15.4 percent 
for single-family owner-occupied purchase mortgages and 14.1 percent 
for single-family owner-occupied refinance mortgages (both figures 
based on 1993 HMDA data); and 45 percent for single-family 2-4's, 35 
percent for single-family 1-4's, and 43 percent for multifamily 
(discussed below).
    (6) Applying the above underserved area percentages to the 
property type weights given in step (4) of Section C.4.b of Appendix 
A gives an overall estimated underserved area share for 1995 of 23.4 
percent.
    Sensitivity analyses were conducted for the market importance of 
each property type and for the underserved area shares of each 
property type, as discussed in Appendix A. Using 1992 HMDA data for 
the single-family owner-occupied shares in step (5) gave almost 
identical results. Sensitivity analysis was more important for the 
three rental categories where data on underserved areas are not 
readily available. The percentages (45 percent and 35 percent) of 
single-family rental mortgages located in underserved areas were 
based on GSE data--the percentages of Fannie Mae's mortgage 
purchases in underserved areas for 2-4 and 1-4 properties were 45 
percent and 35 percent, respectively, and the corresponding 
percentages for Freddie Mac were 43 percent and 36 percent, 
respectively.<SUP>46 1993 (1992) HMDA data on mortgages to 
properties with non-occupant owners were consistent with the GSE 
data for 1-4 properties--HMDA reports that almost 32 percent (35 
percent) of those mortgages were for properties located in 
underserved areas.

    \46\Unlike the low- and moderate-income percentages reported in 
Appendix A, the likelihood of the GSEs' mortgages being located in 
an underserved area did not differ much between purchase and 
refinance mortgages.
---------------------------------------------------------------------------

    The multifamily underserved area percentage (43 percent) is 
based on 1992 and 1993 HMDA data which, admittedly, is quite 
limited.<SUP>47 The only other source is Fannie Mae data, because 
Freddie Mac's purchases of multifamily mortgages in 1993 were 
limited. In 1993, about 35 percent of Fannie Mae's multifamily 
business was in underserved areas. Dropping the multifamily 
percentage from 43 percent to 40 (35) percent would reduce the 
estimated market share for underserved areas to 22.9 (21.9) percent. 
These and other analyses leads the Secretary to conclude that the 
size of the underserved area market is at least in the 21-23 percent 
range.

    \47\The 1992 HMDA data included only $9 billion of the $25 
billion in conventional multifamily mortgages originated during 
1992. Similarly, the 1993 HMDA data included $11 billion of the 
total $29 billion in conventional multifamily mortgages originated 
in 1993.
---------------------------------------------------------------------------

5. Ability To Lead the Industry

    This factor is the same as the fifth factor considered under the 
goal for mortgage purchases on housing for low- and moderate-income 
families. Accordingly, see Section C.5 of Appendix A for discussion 
of this factor.

6. Need To Maintain the Sound Financial Condition of the 
Enterprises

    This factor is the same as the sixth factor considered under the 
goal for mortgage purchases on housing for low- and moderate-income 
families. Accordingly, see Section C.6 of Appendix A for discussion 
of this factor.

D. Determination of the 1995 and 1996 Central Cities, Rural Areas, and 
Other Underserved Areas Goal

    This section summarizes the Secretary's rationale for choosing 
targeted definitions of central cities, rural areas, and other 
underserved areas, compares the characteristics of served and 
underserved areas, and addresses other issues related to determining 
the underserved area goals. The section draws heavily from earlier 
sections which have reported findings from HUD's analyses of 
mortgage credit needs as well as findings from other research 
studies investigating access to mortgage credit.

1. Market Failure

    The nation's housing finance market is a highly efficient system 
where most homebuyers can put down relatively small amounts of cash 
and obtain long-term funding at relatively small spreads above the 
lender's borrowing costs. Indeed, the growth of the secondary 
mortgage market during the 1980s integrated a previously thrift-
dominated mortgage market with the nation's capital markets so that 
mortgage funds are more readily available and mortgage costs are 
more closely tied to movements in Treasury interest rates.
    Unfortunately, this highly efficient financing system does not 
work everywhere or for everyone. Access to credit all to often 
depends on improper evaluation of characteristics of the mortgage 
applicant and the neighborhood in which the applicant wishes to buy. 
HUD's analysis of 1993 HMDA data shows that mortgage credit flows 
are substantially lower in minority and low-income neighborhoods and 
mortgage denial rates are much higher for minority applicants.
    Admittedly, disagreement exists in the economics literature 
regarding the underlying causes of these disparities in access to 
mortgage credit, particularly as related to the roles of 
discrimination, ``redlining'' of specific neighborhoods, and the 
barriers posed by underwriting guidelines to potential minority and 
low-income borrowers. Because the mortgage system is quite complex 
and involves numerous participants, it will take more data and 
research to gain a fuller understanding of why these disparities 
exist. Still, studies reviewed in Section B of this Appendix found 
that the individual's race and the racial and income composition of 
neighborhoods influence mortgage access even after accounting for 
demand and risk factors that may influence borrowers' decisions to 
apply for loans and lenders' decisions to make those loans. 
Therefore, the Secretary concludes that lending disparities are 
glaring and persistent and that minority and low-income communities 
are underserved by the mortgage system.

2. Selection of Targeted Approach

    For 1993 and 1994, the Secretary was required to use the OMB 
list of ``central cities'' for the geographic targeting goal; the 
OMB definition of central city was a temporary measure to allow time 
for analysis to define a better targeting standard. HUD, along with 
the GSEs, Congress, and community groups, recognized that central 
cities as defined by OMB do not satisfactorily measure cities that 
are underserved by the mortgage market. There are several reasons 
for this.
    First, major portions of central cities house upper-income 
families and neighborhoods that are well served by the mortgage 
market. New York's Upper East Side, Chicago's ``Gold Coast,'' 
Washington's Georgetown and other wealthy areas within central 
cities across the nation do not fit into any reasonable definition 
of an ``underserved area.'' The fact that not all parts of central 
cities lack access to mortgage credit was demonstrated earlier in 
Figure B.1. Compared to underserved central city census tracts, the 
remaining ``served'' tracts have half the denial rate. Mortgage 
origination rates (per 100 owner occupants) in the served portions 
of central cities are double the origination rates in the 
underserved portions of central cities. Thus, central city areas 
that are not included in HUD's underserved area definition appear to 
be obtaining mortgage credit. These areas, which account for about 
half of the central city population, are well served by the mortgage 
market.
    Second, many urban areas not defined as ``central cities'' by 
OMB are highly distressed and not well served by the mortgage 
market. Examples of highly distressed urban areas located outside 
central cities include East Orange and Paterson, New Jersey and 
Compton, California. Highly distressed Compton, with a poverty rate 
of 25 percent, is not on OMB's list, but Palo Alto, California, with 
a poverty rate of only 2 percent, is on OMB's list.
Third, OMB states that:

    In cases where there is no statutory requirement and an agency 
elects to use the (Metropolitan Area (MA)) definitions in a 
nonstatistical program, it is the sponsoring agency's responsibility 
to ensure that the definitions are appropriate for such use.<SUP>48

    [[Page 9234]] \48\Office of Management and Budget, Memorandum M-
94-22, May 5, 1994.
---------------------------------------------------------------------------

Strictly speaking, this OMB statement applies only to MAs, but by 
logical extension it also applies to the central cities within these 
MAs. The Secretary has examined OMB's definition of central cities, 
in accordance with this memorandum, and concluded that it alone does 
not provide a satisfactory definition of all (or a part) of 
appropriately-defined ``underserved areas.''

    Finally, there is substantial regional variation in the portion 
of state urban populations that are included within central cities. 
In the Southern and Western parts of the United States, cities have 
often expanded by annexing adjacent territory. This option was 
generally not available to cities in the Northeast, which have 
retained their historical boundaries. Thus, a substantially greater 
portion of the population lives in central cities in South and West 
than in the more urbanized Northeastern states. Central cities 
accounted for more than 50 percent of both GSEs' 1993 purchases in 
Arizona, New Mexico, and North Dakota. In New Jersey, on the other 
hand, central cities accounted for only 4 percent of GSE 
purchases.<SUP>49

    \49\For more discussion of this issue, see James A. Johnson, 
Chairman and Chief Executive Officer, Fannie Mae, testimony before 
the Committee on Banking, Finance, and Urban Affairs Subcommittee on 
General Oversight, Investigations and the Resolution of Failed 
Financial Institutions, U. S. House of Representatives, April 20, 
1994, p. 16.
---------------------------------------------------------------------------

    For 1995 and beyond, Congress directed that the transition 
``central cities goal'' be changed to better emphasize underserved 
areas. Although Congress did not define ``underserved areas,'' it 
indicated that they are locations with relatively poor access to 
mortgage credit. Thus the goal should target those parts of central 
cities and those parts of rural areas with poor access to mortgage 
credit, as well as any other areas with problems with access to 
credit.
    Ideally, the definition of areas with poor access to mortgage 
credit would be based on a clear determination of areas that do not 
receive the level of mortgage credit they require. Section B 
reported HUD's analysis of 1993 HMDA data and the main findings of 
several studies of mortgage lending conducted by community groups, 
government agencies, and academic researchers. While there is much 
research left to be done to fully understand mortgage access for 
different types of persons and neighborhoods, one finding remains 
clear--minority and low-income neighborhoods have higher mortgage 
denial rates and lower mortgage origination rates than other 
neighborhoods.
    As mentioned earlier, studies that have controlled for borrower 
and neighborhood risk characteristics find that racial differentials 
in denial rates and mortgage flows persist. Recent studies have 
concluded that characteristics of the applicant and the neighborhood 
where the property is located are the major determinants of mortgage 
denials and originations--once these characteristics are accounted 
for, other influences such as central city location play only a 
minor role in explaining disparities in mortgage lending.<SUP>50 
These studies, as well as HUD's own analysis, provide strong support 
for a targeted approach to identifying underserved areas. In 
addition, they point to two useful proxy variables for measuring 
access to mortgage credit--a neighborhood's minority composition and 
its level of income.

    \50\Shear, et al., and Avery, et al.
---------------------------------------------------------------------------

3. Identifying Underserved Areas

    To identify areas underserved by the mortgage market, HUD 
focused on two traditional measures used in a number of HMDA 
studies:<SUP>51 Application denial rates and mortgage origination 
rates per 100 owner-occupied units.<SUP>52 Tables B.1 and B.2 in 
Section B presented detailed data on denial and origination rates by 
the racial composition and median income of census tracts for 
metropolitan areas.<SUP>53 Aggregating those data is useful for 
examining denial and origination rates for broader groupings of 
census tracts:

    \51\HMDA data have been expanded in 1993 to cover independent 
mortgage companies that originated 100 or more home purchase loans 
in the preceding calendar year. HMDA provides no useful information 
on rural areas. In addition, although HMDA data now include 
applications to provide some measure of overall loan demand, pre-
screening discrimination can discourage would-be homebuyers from 
applying for a mortgage, leading to an underestimation of demand. 
Nevertheless, the HMDA data, while not necessarily definitive, are 
still useful in helping to define underserved areas.
    \52\Analysis of application rates are not reported here. 
Although application rates are sometimes used as a measure of 
mortgage demand, they provide no additional information beyond that 
provided by looking at both denial and approval (origination) rates. 
Although denial rates vary by census tract characteristics, the 
patterns observed for application rates are still very similar to 
those observed for approval rates.
    \53\As discussed in Section B, no sharp breaks occur in the 
denial and origination rates across the minority and income deciles 
given in Table B.1--mostly, the increments are somewhat similar as 
one moves across the various deciles that account for the major 
portions of mortgage activity.

----------------------------------------------------------------------------------------------------------------
    Minority composition       Denial rate   Origination                               Denial rate   Origination
          (percent)             (percent)       rate        Tract income (percent)      (percent)       rate    
----------------------------------------------------------------------------------------------------------------
0-30........................            12          13.4  Less than 80..............            23           5.9
30-50.......................            19          10.1  80-120....................            15          11.3
50-100......................            24           6.6  Greater than 120..........             9          17.7
----------------------------------------------------------------------------------------------------------------

Two points stand out from these data. First, census tracts with 
higher percentages of minority residents have higher denial and 
lower origination rates. Tracts that are over 50 percent minority 
have twice the denial rate and half the origination rate of tracts 
that are under 30 percent minority.<SUP>54 Second, census tracts 
with lower incomes have higher denial rates and lower origination 
rates than higher income tracts. Tracts with income less than or 
equal to 80 percent of area median have almost three times the 
denial rate and one-third the origination rate of tracts with income 
over 120 percent of area median.

    \54\The differentials in denial rates are due, in part, to 
differing risk characteristics of the prospective borrowers in 
different areas. However, use of denial rates is supported by the 
findings in the Boston Fed study which found denial rate 
differentials to persist, even after controlling for risk of the 
borrower. See Section B for a review of that study.
---------------------------------------------------------------------------

    HUD chose over 30-percent minority and under 80-percent income 
as the thresholds for defining underserved areas. There are three 
advantages to HUD's definition. First, the cutoffs produce sharp 
differentials in denial and origination rates between served and 
underserved areas. For instance, the overall denial rate (22.0 
percent) in underserved areas is almost double that (11.9 percent) 
in served areas; and the mortgage origination rate (5.4 per 100 
owner occupants) in underserved areas is about half that (10.3 per 
100 owner occupants) in served areas. Thus, an advantage of a 
targeted definition of underserved areas is illustrated by sharp 
differences in measures of mortgage access between served and 
underserved areas. The less-than-80-percent income cutoff in HUD's 
definition has the further advantage of consistency with the 
Community Reinvestment Act (CRA) definition that applies to 
depository institutions.
    A second advantage is that the minority and income cutoffs are 
useful for defining mortgage problems in the suburbs as well as in 
OMB-defined central cities. Underserved areas account for 23 percent 
of the suburban population, compared with 51 percent of the central 
city population. The average denial rate in underserved suburban 
areas is almost twice that in the remaining areas of the suburbs. 
(See Figure B.1 in Section B.) Thus, the minority and income 
thresholds in HUD's definition identify those suburban tracts that 
seem to be experiencing mortgage credit problems.
    A third advantage is that the minority and income cutoffs 
identify tracts that resemble distressed neighborhoods. The 
socioeconomic characteristics of underserved areas are discussed in 
the next section.

4. Characteristics of Underserved Areas

    The Secretary's definition of central cities, rural areas, and 
other underserved areas includes 17,337 of the 44,447 census tracts 
in [[Page 9235]] metropolitan areas, covering 36 percent of the 
metropolitan population, 51 percent of the OMB-defined central city 
population, and 23 percent of the suburban population. In rural 
(non-metropolitan) areas, the underserved area definition includes 
3,160 tracts, or 21 percent of the total 15,045 rural tracts, which 
covers 21 percent of the rural population.<SUP>55

    \55\The Preamble discusses issues related to the choice of 
tracts or counties to define underserved areas in non-metropolitan 
sections of the country.
---------------------------------------------------------------------------

    Underserved tracts are substantially more distressed than served 
tracts. Poor persons are highly concentrated in underserved areas--
64 percent of the metropolitan area poor live in underserved areas 
as do 76 percent of the central city poor. Underserved areas have 
higher poverty rates, higher minority concentration, lower incomes, 
and higher unemployment rates. For instance, the average poverty 
rate in underserved areas is 23 percent, compared with only 7 
percent in served areas. Underserved areas also have more boarded-up 
units, older housing, and lower valued housing than do served areas. 
The average value of owner-occupied housing in underserved areas was 
$81,681, compared with $127,423 in served areas. (See Table B.3 in 
Section B.)
    Table B.7 shows that the Secretary's definition covers most of 
the population of the nation's most distressed OMB-defined central 
cities: Newark (99 percent), Detroit (94 percent), Hartford (95 
percent), Baltimore (85 percent), and Cleveland (80 percent). The 
nation's five largest cities also contain large concentrations of 
underserved areas: New York (60 percent), Los Angeles (68 percent), 
Chicago (72 percent), Houston (66 percent), and Philadelphia (69 
percent). It should be noted that HUD's definition of underserved 
excludes high minority tracts with median income above 120 percent 
of area median income. As shown in Table B.8, these tracts, which 
represent about two percent of metropolitan area population, appear 
to be relatively well off: they have low levels of poverty (7 
percent), high house values ($185,000), and incomes almost 50 
percent greater than area median. The high income minority tracts 
are concentrated in a few metropolitan areas: 10 percent of Los 
Angeles' population lives in them; the corresponding figures are 6% 
for New York, 24% for Miami, 26% for Honolulu, and 10% for San 
Antonio. By contrast, most relatively distressed metropolitan areas 
have few households in such areas--for example, Cleveland and 
Detroit (1%); and Memphis, Milwaukee, and Philadelphia (0%).
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[[Page 9238]]

    Among other issues considered in setting the underserved 
definition included setting the income threshold to the area median 
income, to include more moderate income areas. This alternative 
would add tracts with incomes between 80 and 100 percent of the area 
median. However, it should be noted that minority tracts (over 30 
percent minority) at this income level are included in the 
underserved definition described above, and raising the income limit 
to the area median would add only tracts with low minority 
concentration (below 30 percent). These areas represent 8296 Census 
tracts, and comprise 19 percent of metropolitan population.
    Low-minority moderate-income tracts have denial rates almost 30 
percent below those of tracts that meet HUD's underserved definition 
(16 versus 22 percent). By contrast, minority moderate-income tracts 
have a denial rate almost identical to the overall underserved 
denial rate. The origination rate in moderate-income low-minority 
tracts (9.7) is noticeably higher than that in underserved tracts 
(7.0).
    Table B.8 compares socio-economic conditions in low-minority 
moderate income tracts to those in underserved tracts. Low-minority 
moderate-income tracts appear much better off than underserved 
tracts. While they have housing prices that are only slightly higher 
than those in underserved tracts, they have unemployment and poverty 
rates that are half those in tracts meeting HUD's underserved 
definition.

5. Other Issues

a. GSE Funding in Central Cities, Rural Areas, and Underserved Areas

    In 1993, 15.9 percent of Fannie Mae's business was in 
underserved areas as was 14.4 percent of Freddie Mac's business. The 
share of GSE business in underserved areas varies rather 
dramatically by property type; about 13 percent of single-family 
owner purchases were in underserved areas compared with over 30 
percent for the three rental property types (single-family 2-4's and 
1-4's and multifamily). Thus, one reason for Freddie Mac's 
relatively low share is its low level of multifamily purchases in 
1993.
    The fact that underserved areas have much lower incomes than 
other areas does not mean that most of their mortgage activity 
derives from lower income families. In 1993, above-median income 
households accounted for 60 percent of the mortgages that the GSEs 
purchased in underserved areas. This suggests these areas are quite 
diverse.

b. GSE Performance Relative to the Market

    As explained in Section C.4, the Secretary estimates that 
underserved areas account for about 21-23 percent of the 
conventional conforming market. GSE performance in 1993 was about 15 
percent, or less than three-fourths of the market share for 
underserved areas. HMDA data suggests that the GSEs are particularly 
underperforming in lower income census tracts. In 1993, GSE 
purchases accounted for 44 percent of the conventional conforming 
market in under-50-percent income tracts and 47 percent in 50-80-
percent income tracts; in above-median-income tracts, on the other 
hand, they accounted for 59 percent of the market.
    The profitability of the GSEs, their sophisticated systems for 
purchasing loans, and the size of the underserved market suggest 
that the GSEs can improve their performance. The Secretary has 
therefore set annual goals of 18 percent for 1995 and 21 percent for 
1996, which will encourage the GSEs to improve their performance 
relative to the market. Figure B.2 presents these goals in relation 
to the GSEs' past performance and the size of the market.
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BILLING CODE 4210-32-C [[Page 9240]] 

6. Conclusion

    The Secretary has determined that the 1995 and 1996 goals will 
require the GSEs to address the unmet credit needs of central 
cities, rural areas, and other underserved areas, and take into 
account the GSEs' performance in the past in purchasing mortgages in 
these areas, as well as the size of the mortgage market. Moreover, 
the Secretary has considered the GSEs' ability to lead the industry 
as well as their financial condition. The Secretary has determined 
that this goal is necessary and achievable.
    Based on a consideration of the factors, the Secretary proposes 
to establish all three goals for 1997 and 1998 so that the goals 
will move the GSEs steadily over a reasonable period of years, to a 
level of mortgage purchases where the GSEs will be leading the 
industry in purchasing mortgages meeting the goals. In carrying out 
this objective, the Secretary proposes to establish the goals for 
1997 and 1998 at levels ranging from the same amounts established 
for 1996 to higher levels. The purpose of any higher levels would be 
to continue to move the GSEs toward purchasing a greater proportion 
of mortgages originated by the market.

Appendix C--Secretarial Considerations To Establish the Special 
Affordable Housing Goal

A. Establishment of Goal

    The Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (FHEFSSA) requires the Secretary to establish a special 
annual goal designed to adjust the purchase of mortgages on rental 
and owner-occupied housing to meet the unaddressed needs of, and 
affordable to, low-income families in low-income areas and very low-
income families.
    In establishing the special affordable housing goal, the Act 
requires the Secretary to consider:
    1. Data submitted to the Secretary in connection with the 
special affordable housing goal for previous years;
    2. The performance and effort of the enterprises toward 
achieving the special affordable housing goal in previous years;
    3. National housing needs of low-income families in low-income 
areas and very low-income families;
    4. The ability of the enterprises to lead the industry in making 
mortgage credit available for low-income and very low-income 
families; and
    5. The need to maintain the sound financial condition of the 
enterprises.

B. Underlying Data

    In considering the factors under the Act to establish the 
special affordable housing goal, the Secretary relied upon data 
gathered from the American Housing Survey, the Residential Finance 
Survey, the 1990 Census of Population and Housing, other government 
reports, Home Mortgage Disclosure Act (HMDA) reports, and the GSEs. 
The Secretary used loan-level data provided by the GSEs to determine 
their prior performance in meeting the needs of low-income families 
in low-income areas and very low-income families.
     Section C discusses the factors listed above and estimates the 
size of the conventional conforming market for special affordable 
mortgages. Section D gives the Secretary's rationale for 
establishing the special affordable goals.

C. Consideration of the Factors

1. and 2. Data Submitted to the Secretary in Connection With the 
Special Affordable Housing Goal for Previous Years and Previous 
Performance and Effort of the GSEs

    The discussions of these two factors have been combined because 
they overlap to a significant degree. The proposed regulation would 
revise the special affordable housing goal based on the experience 
of HUD and the GSEs in the transition period, in accordance with 
FHEFSSA and the legislative history of the Act.\1\ For the 1993-94 
transition period, the goal requires purchases of special affordable 
mortgages of at least $2 billion for Fannie Mae and $1.5 billion for 
Freddie Mac, evenly divided between single family mortgages and 
multifamily mortgages, and the Senate report states that such 
amounts shall be ``above and beyond existing performance and 
commitments.''\2\ In order to determine existing performance, the 
Secretary required the GSEs to submit good faith estimates of their 
mortgage purchases that would have qualified for the special 
affordable goal in 1992. Fannie Mae estimated that such transactions 
amounted to $5.85 billion in single family purchases and $1.34 
billion in multifamily purchases. Freddie Mac estimated that such 
transactions amounted to $5.19 billion in single family purchases 
and $0.02 billion in multifamily purchases. The Department doubled 
these estimates of 1992 purchases and added the increments specified 
by the Act to obtain the 1993-94 minimum single family special 
affordable housing goals; $16.40 billion for Fannie Mae, of which at 
least $12.71 billion was required to be purchases of mortgages on 
single family housing and $3.68 billion was required to be purchases 
of mortgages on multifamily housing; and $11.92 billion for Freddie 
Mac, of which at least $11.13 billion was required to be purchases 
of mortgages on single family housing and $0.79 billion was required 
to be purchases of mortgages on multifamily housing.

    \1\``After the experience of the first two years, the 
(regulator) may redesign the categories to target more effectively 
low-income family needs and reflect any gaps in GSE performance.'' 
S. Rep. No. 102-282, 102d Cong., 2d Sess. 37 (1992).
    \2\S. Rep. No. 102-282, 102d Cong., 2d Sess. 36 (1992).
---------------------------------------------------------------------------

     On March 1, 1994 Fannie Mae reported that qualifying mortgage 
purchases in 1993 amounted to $8.84 billion single family and $2.06 
billion multifamily; thus in 1993 Fannie Mae achieved 70 percent and 
56 percent respectively of the two-year goals. On March 1, 1994, 
Freddie Mac reported that qualifying mortgage purchases in 1993 
amounted to $6.60 billion single family and $0.02 billion 
multifamily.\3\ Thus in 1993 Freddie Mac achieved 59 percent and 3 
percent respectively of the two-year goals. Freddie Mac's low 
multifamily performance in 1993 was due to its prolonged absence 
from the multifamily market to restructure its multifamily 
operations. Freddie Mac fully completed reentry into the multifamily 
business in December 1993. Total performance toward the 1993-94 
special affordable goals will be determined after the GSEs report on 
their 1994 special affordable purchases on March 1, 1995.

    \3\Minor revisions were made in Freddie Mac's estimates on April 
11, 1994.
---------------------------------------------------------------------------

    After the 1993-94 transition period, the Act states that this 
goal shall be established at not less than one percent of the dollar 
amount of the mortgage purchases by the enterprise for the previous 
year. Because the Senate report on the 1992 Act states that one of 
the purposes of the goal is to increase the GSE's purchases of 
mortgages serving low-income families ``above and beyond'' their 
existing performance, these one percent minimum goals serve as a 
floor for the setting of the 1995-96 goals.
    The 1992 Act requires the Secretary to ``establish a special 
annual goal designed to adjust the purchase by each enterprise of 
mortgages on rental and owner-occupied housing to meet the then-
existing unaddressed needs of, and affordable to, low-income 
families in low-income areas and very low-income families.''\4\

    \4\Section 1333(a)(1).
---------------------------------------------------------------------------

    For 1995 and thereafter, the special affordable housing goal is 
evenly divided between:
    (1) Owner-occupied units affordable to very low-income families 
or to low-income families in low-income areas; and
    (2) Rental units (multifamily or single-family) affordable to 
very low-income families.
    The Department has simplified the multifamily special affordable 
housing subgoal, as described in the Interim Notice, substantially, 
while closely adhering to the language of the 1992 Act.
    The Department is also proposing to revise the Interim Notices' 
treatment of refinancings of loans from the existing enterprises' 
portfolios. Under this provision of the Notices, the Department has 
not allowed any credit toward the special affordable housing goal 
during the transition period. This has imposed significant 
compliance burdens on the enterprises, requiring time-consuming and 
costly examinations of their mortgage purchases to screen out such 
refinancings or to estimate the volume of refinancings from the 
GSEs' portfolios. And this provision is contrary to the common 
method of financing multifamily properties by relatively short-term 
balloon mortgages, which by their nature must be refinanced 
frequently to maintain project viability.
    With regard to single family loans, it has been argued that 
refinancings of mortgages from the GSEs' portfolios add no new 
financing for affordable housing. But, to the extent that this is 
the case, it is true for all refinancings, not solely refinancings 
from the GSEs' portfolios. Clearly Congress could have excluded all 
refinancings from receiving credit toward the special affordable 
housing goal, but it chose not to do so.
    Thus in measuring past performance, the relevant data is the 
GSEs' special affordable purchases without excluding estimated 
refinancings from their own portfolios.
    In 1993, the special affordable purchases of mortgages on owner-
occupied housing, including all refinancings, were:

------------------------------------------------------------------------
                             Fannie Mae                Freddie Mac      
                     ---------------------------------------------------
                                     Percent                   Percent  
                       No. units      units      No. units      units   
------------------------------------------------------------------------
Low-income families                                                     
 in low-income                                                          
 areas\5\...........       25,130          0.9       19,870          0.9
Very low-income                                                         
 families\6\........      129,622          4.6       95,056          4.4
                     ---------------------------------------------------
      Subtotal......      154,752          5.5      114,926          5.3
                     ===================================================
      Total                                                             
       eligible\7\..    2,798,351        100.0    2,161,223        100.0
------------------------------------------------------------------------
\5\Excluding very low-income families in low-income areas.              
\6\Including very low-income families in low-income areas.              
\7\Mortgages eligible to qualify as low- and moderate-income.           

    In 1993, the GSEs' purchases of mortgages on rental units 
affordable to very low-income families, including all refinancings, 
were:

------------------------------------------------------------------------
                             Fannie Mae                Freddie Mac      
                     ---------------------------------------------------
                                     Percent                   Percent  
                       No. units      units      No. units      units   
------------------------------------------------------------------------
Units in 2-4 unit                                                       
 owner-occupied                                                         
 properties\8\......       15,680          0.6       10,035          0.5
Rental units in 1-4                                                     
 unit investor-owned                                                    
 properties.........       19,296          0.7       13,236          0.6
Rental units in                                                         
 multifamily                                                            
 properties.........       67,437          2.4        7,853          0.4
                     ---------------------------------------------------
      Subtotal......      102,413          3.7       31,151          1.4
                     ===================================================
      Total eligible    2,798,351        100.0    2,161,223        100.0
------------------------------------------------------------------------
\8\Including owner-occupied units.                                      

    Thus in 1993, Fannie Mae's mortgage purchases financed 257,165 
dwelling units that would have counted toward the goal, as proposed 
in this regulation--these units represented 9.2 percent of the total 
units financed by Fannie Mae in 1993.<SUP>9 And Freddie Mac's 
mortgage purchases financed 146,077 dwelling units that would have 
counted toward the goal, as proposed in this regulation--these units 
represented 6.8 percent of the total units financed by Freddie Mac 
in 1993. [[Page 9241]] 

    \9\Low-mod eligible units have been used as the denominator 
because total units include cases with missing information, which 
are expected to be virtually eliminated in 1995 and subsequent 
years.
---------------------------------------------------------------------------

    Loan-level data for 1994 to date is not available for the 
special affordable goal as proposed to be redefined herein. However, 
data for the first three quarters of 1994 indicate that Fannie Mae's 
special affordable purchases were more than 14 percent of total 
purchases, and that Freddie Mac's special affordable purchases were 
more than 9 percent of total purchases--additional increases are 
likely as Freddie Mac further steps up its multifamily activities. 
Thus the 1994 purchase data make it likely that the GSEs will be 
able to meet the special affordable goals established by the 
Secretary for 1995 and 1996.

3. National Housing Needs of Low-Income Families in Low-Income 
Areas and Very Low-Income Families

    Detailed analyses of the housing problems and demographic trends 
for lower income families were contained in Section C of Appendix A. 
This section focuses on very low-income families with the greatest 
needs.

a. Housing Problems Among Very Low-Income Families

    Data from the 1990 Census and from the 1989 and 1991 American 
Housing Surveys demonstrate that housing problems and needs for 
affordable housing are more pressing in the lowest-income categories 
than among moderate-income families. Analyses of special tabulations 
of the 1990 Census prepared for use in developing Comprehensive 
Housing Affordability Strategies (the CHAS database) show clearly 
that sharp differentials by income characterized all regions of the 
nation as well as their city, suburban, and nonmetropolitan 
portions.<SUP>10 Nationally, approximately one-fourth of moderate-
income renters and owners experienced one or more housing problems, 
compared to nearly three-fourths of very low-income renters and 
nearly half of very low-income owners.<SUP>11 Severe cost burdens--
paying more than half of income for housing and utilities--varied 
even more markedly by income, troubling fewer than 5 percent of 
moderate-income households, but more than half of the 7 million 
renters and 4 million owners with incomes below 30 percent of area 
median income.

    \10\Bogdon et al., 1994.
    \11\The problems covered by the Census include paying over 30 
percent of income for housing, lacking complete kitchen or plumbing, 
and overcrowding. See Appendix Tables 18A and 19A of Bogdon et al.
---------------------------------------------------------------------------

    Census counts of inadequate housing are incomplete, and the CHAS 
tabulations are based on HUD-adjusted median income for both owners 
and renters, rather than on unadjusted median income for owners, as 
the 1992 Act specifies.<SUP>12 But tabulations of the 1991 AHS using 
the GSE income definitions reveal the same pattern of problems for 
lower-income families. As the following table details, for both 
owners and renters, housing problems are much more frequent for the 
lowest-income groups.<SUP>13 Priority problems of severe cost burden 
or severely inadequate housing are even more noticeably concentrated 
among renters and owners with incomes below 30 percent of area 
median income.

    \12\To determine eligibility for Section 8 and other HUD 
programs, the Department adjusts income limits derived from the 
median family income for household size. The ``very low'' and 
``low'' income limits at 50 percent and 80 percent of median apply 
to 4-person households. Relative to the income limits for a 4-person 
household, the limit is 70 percent for a 1-person household, 80 
percent for a 2-person household, 90 percent for a 3-person 
household, 108 percent for a 5-person household, 116 percent for a 
6-person household, etc.
    \13\Tabulations of the 1991 American Housing Survey by HUD's 
Office of Policy Development and Research. The results in the table 
categorize renters reporting housing assistance as having no housing 
problems. Almost one-third of renters with incomes 0-30 percent of 
median and one-fifth of those with incomes 30-50 percent of median 
are assisted.

                                                                        
[[Page 9242]]                                                           
------------------------------------------------------------------------
                               Renters                   Owners         
                     ---------------------------------------------------
Income as percent of      Any        Priority       Any        Priority 
 area median income     problems     problems     problems     problems 
                       (percent)    (percent)    (percent)    (percent) 
------------------------------------------------------------------------
Less than 30........           67           48           66           37
30-50...............           67           27           31            9
50-60...............           61           11           20            5
60-80...............           44            6           17            5
80-100..............           26            3           12            3
------------------------------------------------------------------------

    Comparisons by income reveal that low-income owners and renters 
(those with incomes 60-80 percent of area median) resemble moderate-
income households in seldom having priority problems. Priority 
problems are heavily concentrated among households with incomes 
below 50 percent of median.<SUP>14 In 1991, 5.3 million unassisted 
renter households with incomes below 50 percent of area median 
income had ``worst case'' housing needs. This total does not include 
homeless persons and families, although they also qualify for 
preference. For three-fourths of the renter families with worst case 
problems, the only problem was affordability--they do not have 
problems with housing adequacy or crowding.

    \14\For all housing programs of HUD (other than the GSE goals) 
and the Department of Agriculture, ``very low-income'' is defined as 
not exceeding 50 percent of area median income.
---------------------------------------------------------------------------

b. Needs for Housing Affordable to Very Low-income Families

    It is important to note that the existing housing stock 
satisfies the physical needs of most very low-income renters. In 
most cases families are able to find adequate housing. The problem 
is that much of this housing is not affordable to very low-income 
families--i.e., these families must pay more than 30 percent of 
their income for housing. The main exception to this generalization 
occurs among extremely low-income families with three or more 
children, 44 percent of whom live in crowded housing. A certain 
amount of variation in need exists, by region and degree of 
urbanization. Although 18 percent of worst case renters need other 
housing (because of crowding or severe inadequacy), this figure 
varies from 11 percent in the Northeastern suburbs to 30 percent in 
the South's nonmetro areas. Shortages of housing units are greatest 
and vacancy rates lowest in California.
    The relative decline in inexpensive dwelling units has been 
concentrated among the least expensive rental units--those with 
rents affordable to families with incomes below 30 percent of area 
median income. In 1979, the number of units in this rent range was 
28 percent less than the number of renters with incomes below 30 
percent of area median income; by 1989, the gap had widened to 39 
percent, a shortage of 2.7 million units.<SUP>15 This shortage 
appears to be a problem particularly at the extremely low end of the 
rent distribution. Both nationally and in most states, there are 
surpluses of rental housing affordable to families with incomes 
between 30 and 50 percent of area median income and to those in the 
50-80 percent range.<SUP>16 Furthermore, in most states, vacancy 
rates were high in 1990 among units with rents affordable to 
families with incomes at or below 50 percent of median.<SUP>17 Thus, 
like housing problems, unmet needs for affordable housing are 
heavily concentrated in rent ranges affordable to renters with 
incomes below 30 percent of area median income.

    \15\Tabulations by HUD's Office of Policy Development and 
Research, based on U.S. Departments of Housing and Urban Development 
and Commerce, American Housing Survey for the United States in 1989, 
July 1991.
    \16\HUD's Office of Policy Development and Research, Worst Case 
Needs for Housing Assistance in the United States in 1990 and 1991, 
1994, Table 8.
    \17\Id., Table 6.
---------------------------------------------------------------------------

4. Ability To Lead the Industry

    This factor is the same as the fifth factor considered under the 
goal for mortgage purchases on housing for low- and moderate-income 
families. Accordingly, see Section C.5 of Appendix A for a 
discussion of this factor.

5. Need To Maintain the Sound Financial Condition of the 
Enterprises

    This factor is the same as the sixth factor considered under the 
goal for mortgage purchases on housing for low- and moderate-income 
families. Accordingly, see Section C.6 of Appendix A for discussion 
of this factor.

6. Size of the Conventional Mortgage Market for Special Affordable 
Mortgages Relative to the Overall Conventional Conforming Market

    This section presents estimates of the special affordable 
portion of the conventional conforming mortgage market for 1995.
    The special affordable goal consists of: (1) single-family 
owner-occupied dwelling units which are occupied by very low-income 
families or low-income families in low-income census tracts;<SUP>18 
and (2) rental units which are occupied by very low-income families. 
The analysis suggests that the special affordable market is at least 
17-20 percent of the conventional conforming market. Section D below 
provides HUD's rationale for the specific goals selected for 1995 
and 1996.

    \18\This definition includes all very low-income families plus 
families who have incomes between 60 and 80 percent of area median 
income and who also live in census tracts with a median income less 
than 80 percent of area median income.
---------------------------------------------------------------------------

    Section C.4 of Appendix A describes HUD's two methodologies for 
estimating the size of the low- and moderate-income market. 
Essentially the same methodology is employed here except that the 
focus is on the very low-income and low-income markets. The basic 
approach involves estimating for each of the various property types 
(single-family owner, single-family rental 2-4's and 1-4's, and 
multifamily) the share of dwelling units financed by mortgages in a 
particular year that are occupied by very low-income (VLI) families 
or by low-income families in low-income areas. As explained in 
Appendix A, HUD has combined mortgage information from several data 
sources in order to estimate the market shares. Two approaches were 
taken--one based on American Housing Survey (AHS) and Residential 
Finance Survey (RFS) data, and one based on 1993 HMDA data and 
projections of the mortgage market for 1995 and 1996.

a. American Housing Survey/Residential Finance Survey Approach

    Data from the American Housing Surveys for 1985, 1987, 1989, and 
1991 indicate that 11 percent of those families who recently 
purchased or refinanced their homes, and who obtained conventional 
conforming mortgages, had incomes below 60 percent of the area 
median. It is estimated that 1.8 percent of single-family mortgages 
will be for families who have incomes between 60 and 80 percent of 
area median and who also live in low-income census tracts.<SUP>19 
This suggests that 12.8 percent of single-family owner-occupied 
mortgages and dwelling units are for very low-income families or 
low-income families living in low-income areas.

    \19\Low-income census tracts are defined as tracts with a median 
income less than or equal to 80 percent of the area median. 1993 
HMDA data show that 1.9 (1.3) percent of single-family owner-
occupied purchase (refinance) mortgages were for families with 
incomes in the 60-80 percent range and also living in low-income 
tracts. Applying 85/15 percent purchase/refinance shares gives the 
1.8 percent value cited in the text.
---------------------------------------------------------------------------

    As Appendix A explains, information is not available from the 
American Housing Survey on mortgages for rental properties; for this 
reason, the analysis focuses on the income and rent characteristics 
of the existing and recently completed rental stock. Analysis of the 
same four American Housing Surveys shows that for 1-4 unit 
unsubsidized rental properties, 54 percent of all units, and 20 
percent of units constructed in the preceding three years had rent 
affordable to very low-income families.<SUP>20 For multifamily 
unsubsidized rental properties, the corresponding figures are 41 
percent of all [[Page 9243]] units and 9 percent of units 
constructed in the preceding three years. The data for recently 
completed units underestimate the affordable percentage of rental 
housing because they exclude purchase and refinance transactions 
involving older buildings, which generally charge lower rents than 
newly-constructed buildings.

    \20\Affordable to VLI families is defined as less than or equal 
to 30 percent of 60 percent of area median family income--that is, 
less than 18 percent of area median family income, with adjustments 
for unit size as measured by the number of bedrooms.
---------------------------------------------------------------------------

    The other pertinent data for examining this issue were the GSEs' 
purchase data for rental properties. GSE data for all 1-4 unit 
properties (i.e., combining 2-4 units and investment 1-4 units) 
suggest a VLI share of slightly over 20 percent, which is similar to 
the figure (20 percent) from the AHS for the recently completed 
stock. On the multifamily side, Fannie Mae's data suggest a 42 
percent VLI share, which is consistent with the AHS estimate for 
existing properties.<SUP>2122

    \21\The very low-income shares were calculated separately for 
the GSEs' 1993 refinance and purchase mortgages. The estimates for 
1995 were derived by assuming a 18 percent refinance share for small 
rental properties. The estimates were not very sensitive to 
reasonable variations in the refinance share.
    \22\Freddie Mac's multifamily purchases in 1993 were 
insufficient to provide an accurate measure of rents for multifamily 
properties.
---------------------------------------------------------------------------

    This section applies weights for single-family rental and 
multifamily properties to the above estimates of the VLI share.
    To calculate the size of the potential market for mortgages 
financing housing for VLI families, data on the number of owner-
occupied dwelling units, rental units in 1-4 unit properties, and 
rental units in multifamily properties are necessary. As Appendix A 
explains, HUD utilized data from the 1991 Residential Finance Survey 
on the number of properties with conventional conforming mortgages 
acquired during the 1987-91 period, and the total number of dwelling 
units for each type of property, derived from the same source. Based 
on this data, it was estimated that, of total dwelling units in 
properties with recently acquired conventional conforming mortgages, 
56.5 percent were owner-occupied units, 17.9 percent were in 1-4 
unit rental properties, and 25.6 percent were located in multifamily 
rental properties. Applying the percentages of affordable dwelling 
units from the AHS (12.9 percent for owner-occupied dwelling units, 
20 percent for the recently-completed stock of rental 1-4 units, and 
41 percent for multifamily rental units) to these percentages of 
properties results in an estimate that 21.4 percent of the dwelling 
units secured by conforming conventional mortgages are affordable to 
very low-income families or low-income families in low-income 
areas.<SUP>23

    \23\21.4 percent was derived by adding the following: (1) 7.3% 
(percentage of owner-occupied units [56.5%] times percentage of 
those units that are affordable to very low-income families or low-
income families in low-income areas [12.5%]); (2) 3.6% (percentage 
of rental units in 1-4 family properties [17.9%] times percentage of 
those units that are affordable to very low income families [20%]); 
and (3) 10.5% (percentage of rental units in multifamily properties 
[25.6%] times percentage of those units that are affordable to very 
low income families [41%]).
---------------------------------------------------------------------------

    Appendix A notes that one concern with the Residential Finance 
Survey data is the seemingly high percentage share of rental 
properties, given that multifamily mortgage originations have 
declined from their high levels in the mid- to late-1980s. This is 
important because of the relatively high VLI share for multifamily 
properties. Sensitivity analysis is used to show the effect of 
shifting the relative importance of the different property 
categories. Reducing the multifamily weight from 25.6 percent to 20 
percent, and assuming the owner category is 65 percent and the 
rental 1-4 category is 15 percent reduces the estimate of the size 
of the special affordable market to 19 percent. As noted earlier, 
the 20 percent estimate of the VLI share for rental 1-4 units is 
probably too low because it is based on AHS data for the recently 
completed stock. Assuming a 30 percent VLI share increases the 
special affordable market share from 19 to almost 21 percent. Using 
the AHS figure (54 percent) for the existing stock further increases 
the special affordable market share to 24 percent.

b. HMDA/Market Projection Approach

    This approach follows the same six steps as outlined in Section 
C.4 of Appendix A. In steps (5) and (6), the low-mod shares are 
adjusted as follows:
    (5) Estimates of the percentage of dwelling units occupied by 
very low-income (VLI) families or low-income families in low-income 
areas were: 11.8 percent for single family owner-occupied purchase 
mortgages and 6.9 percent for single family owner-occupied refinance 
mortgages based on 1993 HMDA data; and 20 percent for single family 
2-4's, 30 percent for single family 1-4's, and 42 percent for 
multifamily. The VLI percentages for the single-family rental 
categories were based on 1993 GSE data and the VLI percentage for 
multifamily properties was based on 1993 Fannie Mae data and AHS 
data for the existing multifamily stock.<SUP>24

    \24\As Appendix A explains, there is little data on the 
affordable shares for the two single-family rental property types, 
which necessitated using the GSE data. Assuming a 18 percent 
refinance share, Fannie Mae's 1993 data suggest VLI percentages for 
2-4 and 1-4 properties of 21 percent and 28 percent, respectively. 
Freddie Mac's data suggest VLI percentages of 18 percent and 30 
percent, respectively. The American Housing Survey, which combines 
these two categories, shows a 20 percent VLI share for recently 
built 1-4 rental units and a 54 percent VLI share for the existing 
stock. In step (5) the 2-4 VLI share (20 percent) and the 1-4 VLI 
share (30 percent) are based on GSE data, which are probably 
conservative estimates for the overall 2-4 market. The multifamily 
VLI percentage (42 percent) is consistent with both the AHS and 
Fannie Mae's data.
---------------------------------------------------------------------------

    (6) Applying the above VLI shares to the property type weights 
given in step (4) of Section C.4.b of Appendix A suggests that 19 
percent of mortgage originations in 1995 will be on housing for very 
low-income families or low-income families in owner-occupied housing 
located in low-income census tracts.
    Sensitivity analyses similar to those reported in Appendix A for 
the low-mod goal were also conducted for the special affordable 
goal. Substituting the lower single-family owner-occupied shares 
from 1992 HMDA data--9.5 percent for purchase mortgages and 5.3 
percent for refinance mortgages--reduced the special affordable 
market share from 19.1 percent to 17.5 percent. Adjusting 1993 HMDA 
data for HUD's overprojection of 1993 area median incomes (see 
Appendix A for explanation) also produced a 17.4 percent market 
share.

c. Conclusions

    Sensitivity analyses were conducted for the market shares of 
each property type, for the VLI shares of each property type, and 
for various assumptions in the market projection model, as discussed 
in Appendix A.<SUP>25 These analyses suggest that the size of the 
special affordable market is at least in the 17-20 percent 
range.<SUP>26

    \25\For example, reducing the average per unit multifamily loan 
amount from $32,500 to $30,000 and raising the VLI share of the 
rental 1-4's from 30 percent to 40 percent increases the special 
affordable market share estimate from 19.1 percent to 20.4 percent.
    \26\Also see Appendix A, for a discussion of why the HMDA data 
reported in this section may be underestimating the size of the 
lower income market.
---------------------------------------------------------------------------

D. Determination of the Special Affordable Housing Goal

    The annual goal for 1995 for each GSE's purchases of 
conventional mortgages under the special affordable goal is 
established at 11 percent of the total number of dwelling units 
financed by each GSE's mortgage purchases. The 1996 goal is 
established at 12 percent. Each annual goal is to be split equally 
between:
    (a) Owner-Occupied Units--Owner-occupied units which are 
occupied by very low-income families or households who are low 
income and also live in low-income census tracts. This portion of 
the goal will be 5.5 percent in 1995 and 6.0 percent in 1996.
    (b) Rental Units--Rental units which are occupied by very low-
income families. No distinction is made between single-family and 
multifamily rental units because both provide affordable housing to 
lower income families. This portion of the goal will be 5.5 percent 
in 1995 and 6.0 percent in 1996.
    The special affordable goal provides the opportunity for the 
Department to focus the GSEs on a sector where they have been 
underperforming--the low- and very low-income portion of the housing 
market where housing needs are great. Several considerations, many 
of which have been reviewed in earlier sections of this Appendix, 
led to the choice of these goals.

1. Severe Housing Problems

    The data presented in Section C.3 demonstrate that housing 
problems and needs for affordable housing are much more pressing in 
the lowest income categories than among moderate-income families. 
The high incidence of severe problems among the lowest-income 
renters reflects severe shortages of units affordable to those 
renters. At incomes below 30 percent of median, two-thirds of owners 
and 70 percent of renters pay more than 30 percent of their income 
for housing, live in inadequate housing, or are crowded. As the 
following table shows, priority problems--paying more than half of 
income for housing or living in severely inadequate housing--are 
heavily concentrated among renters with incomes below 50 percent of 
median.

                                                                        
[[Page 9244]]                                                           
Priority Problems by Income as Percent of Median Income and Tenure, 1991
------------------------------------------------------------------------
                                                 Renters       Owners   
               Income (percent)                 (percent)     (percent) 
------------------------------------------------------------------------
<30..........................................           48           37 
30-50........................................           27            9 
50-60........................................           11            5 
60-80........................................            6            5 
80-100.......................................            3            3 
------------------------------------------------------------------------

    Lack of housing is particularly severe among very low-income 
families with three or more children, 44 percent of whom live in 
crowded housing. The relative decline in low-rent dwelling units has 
been concentrated among the least expensive rental units--those with 
rents affordable to families with incomes below 30 percent of median 
income. In 1979 the number of units in this rent range was 28 
percent less than the number of renters with incomes below 30 
percent of area median income, but by 1989 the gap had widened to 39 
percent, a shortage of 2.7 million units.

2. GSE Performance and the Market

    Limitations of the Low-Mod Goal. The low- and moderate-income 
goal has not been an effective tool for targeting GSE activity to 
very low-income families. The bulk of the GSEs' low- and moderate-
income mortgage purchases are for the higher income portion of the 
low-mod category. The lowest income borrowers accounted for a very 
small percentage of each GSE's purchases. Only 5 percent of the 
GSEs' 1993 mortgage purchases financed homes for single-family 
homeowners with incomes below 60 percent of area median. (See Figure 
A.1 in Appendix A.)
    GSE Performance Lags the Market's Performance. Analysis of both 
American Housing Survey and HMDA data show that the GSEs are 
purchasing much smaller proportions of very low-income loans 
produced by the market than they are of higher-income loans. (See 
Figure A.2 in Appendix A.) For example, in 1993 the GSEs 
collectively purchased only 41 percent of mortgages originated for 
borrowers under 60 percent of median income, but 55 percent of 
mortgages originated for borrowers over 120 percent of median 
income. This suggests that there is room in the very low-income end 
of the homebuyer market for the GSEs to improve their performance.
    As explained in Section C.6, the Secretary has determined that 
the very low-income market for both single family and multifamily 
mortgages is at least 17-20 percent of the overall conventional 
conforming market. Figure C.1 compares recent GSE performance, the 
1995 and 1996 special affordable goals, and the size of the very low 
income market. In 1993, both Fannie Mae and Freddie Mac fell far 
short of the 17 percent market share for special affordable 
mortgages--Fannie Mae by 8 percentage points and Freddie Mac by 10 
percentage points. The goals that the Secretary has established for 
1995 and 1996 are intended to move the GSEs closer to the market.
    Freddie Mac's Multifamily Performance. Nowhere has GSE 
performance lagged more than Freddie Mac's multifamily performance. 
Freddie Mac's 1993 multifamily purchases totaled only $191 million, 
compared with $4.6 billion for Fannie Mae and $28.5 billion for the 
conventional market. HUD is concerned about the pace of Freddie 
Mac's re-entry into the multifamily market.
    Changing Market Conditions. As Section D in Appendix A notes, 
several market factors will tend to increase the share of GSE 
purchases benefitting lower income households: the shift from 
refinance to home-purchase mortgages, the increase in multifamily 
activity at the same time that single-family activity is declining, 
continued strong housing demand on the part of first-time 
homebuyers, and rising incomes due to economic growth. These market 
factors will offset other market changes, such as higher interest 
rates, that tend to reduce the share of GSE purchases going to lower 
income families.
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[GRAPHIC][TIFF OMITTED]TP16FE95.013


BILLING CODE 4210-32-C [[Page 9246]] 

3. Conclusion

    To conclude, the Secretary has determined that the 1995 and 1996 
special affordable goals set forth above address national housing 
needs within the income categories specified for this goal, while 
accounting for the GSEs' performance in the past in purchasing very 
low-income mortgages, as well as the size of the conventional 
mortgage market serving very low-income families. Moreover, the 
Secretary has considered the GSEs' ability to lead the industry as 
well as their financial condition. This goal will necessitate an 
increase in the GSEs' purchases targeted to very low-income 
families. The Secretary has determined that this goal is necessary 
and achievable.
    Based on a consideration of the factors, the Secretary proposes 
to establish all three goals for 1997 and 1998 so that the goals 
will move the GSEs steadily over a reasonable period of years, 
including these two years, to a level of mortgage purchases where 
the GSEs will be leading the industry in purchasing mortgages 
meeting the goals. In carrying out this objective, the Secretary 
proposes to establish the goals for 1997 and 1998 at levels ranging 
from the same amounts established for 1996 to higher levels. The 
purpose of any higher levels would be to continue to move the GSEs 
toward purchasing a greater proportion of mortgages originated by 
the market.

Appendix D--Mortgage Reports

    As required under Subpart E of this regulation, the GSEs are 
required to provide to the Secretary the loan level mortgage data 
listed in this Appendix D.
    (a) Loan level data on single family mortgage purchases. Each 
GSE's submission of loan level data shall include the following 
information for each single family mortgage purchased by the GSE:
    (1) Loan number--a unique numerical identifier for each mortgage 
purchased;
    (2) U.S. postal state--the two-digit numerical state code used 
in the most recent decennial census by the Bureau of the Census;
    (3) U.S. postal zip code--the five digit zip code for the 
property;
    (4) MSA code--the four-digit numerical code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA;
    (5) Place code--the five-digit numerical Federal Information 
Processing Standard (FIPS) code;
    (6) County--the county, as designated in the most recent 
decennial census by the Bureau of the Census, in which the property 
is located;
    (7) Census tract--the tract number as used in the most recent 
decennial census by the Bureau of the Census;
    (8) Census tract geographic designation--a numeric code that 
specifies whether the census tract is entirely within a central 
city, entirely outside a central city, or a split tract, i.e., 
partially in a central city and partially outside a central city;
    (9) Central city flag 1--for split census tracts, the proportion 
of a census tract that is located in one geographic area, such as a 
central city;
    (10) Central city flag 2--for split census tracts, the 
proportion of a census tract that is located in another geographic 
area, such as another central city;
    (11) 1990 census tract--percent minority--the percentage of a 
census tract's population that is minority based on the most recent 
decennial census by the Bureau of the Census;
    (12) 1990 census tract--median income--the median family income 
for the census tract;
    (13) 1990 local area median income--the median income for the 
area;
    (14) Tract income ratio--the ratio of the 1990 census tract--
median income to the 1990 local area median income;
    (15) Borrower(s) annual income--the combined income of all 
borrowers;
    (16) Area median family income--the current median family income 
for a family of four for the area as established by the Secretary;
    (17) Borrower income ratio--the ratio of borrower(s) annual 
income to area median family income;
    (18) Acquisition UPB--the unpaid principal balance (UPB) in 
whole dollars of the mortgage when purchased by the GSE; where the 
mortgage purchase is a participation, the acquisition UPB reflects 
the participation percentage;
    (19) Loan-to-Value Ratio at Origination--the loan-to-value (LTV) 
ratio of the mortgage at the time of origination;
    (20) Date of Mortgage Note--the date the mortgage note was 
created;
    (21) Date of Acquisition--the date the GSE purchased the 
mortgage;
    (22) Purpose of Loan--indicates whether the mortgage was a 
purchase money mortgage, a refinancing, a second mortgage;
    (23) Cooperative Unit Mortgage--indicates whether the mortgage 
is on a dwelling unit in a cooperative housing building;
    (24) Refinancing Loan From Own Portfolio--indicates, where the 
GSE has purchased a refinanced mortgage, whether the GSE owned the 
previous mortgage on the same property;
    (25) Special Affordable, Seasoned Loan Proceeds Recycled--for 
purposes of the special affordable housing goal, indicates whether 
the mortgage purchased by the GSE meets the requirements in 
Sec. 81.14(h)(1)(B);
    (26) Product Type--indicates the product type of the mortgage, 
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated 
payment mortgage (GPM) or growing equity mortgages (GEM), reverse 
annuity mortgage, or other;
    (27) Federal guarantee--a numeric code that indicates whether 
the mortgage has a federal guarantee from: the Federal Housing 
Administration (FHA) or the Department of Veterans Affairs (VA); the 
Farmers Home Administration's Guaranteed Rural Housing Loan program; 
or other federal guarantee;
    (28) RTC/FDIC--for purposes of the special affordable housing 
goal, indicates whether the mortgage purchased by the GSE meets the 
requirements in Sec. 81.14(h)(1)(C);
    (29) Term of Mortgage at Origination--the term of the mortgage 
at the time of origination in months;
    (30) Amortization Term--for amortizing mortgages, the 
amortization term of the mortgage in months;
    (31) Lender Institution--the name and unique numerical 
identifier of the institution that loaned the money for the 
mortgage;
    (32) Type of Seller Institution--the type of institution that 
sold the mortgage to the GSE, i.e., mortgage company, Savings 
Association Insurance Fund (SAIF) insured depositary institution, 
Bank Insurance Fund (BIF) insured depositary institution, National 
Credit Union Association (NCUA) insured credit union, or other 
seller;
    (33) Number of borrowers--the number of borrowers;
    (34) First-time home buyer--a numeric code that indicates 
whether the mortgagor(s) are first-time home buyers; second 
mortgages and refinancings are treated as not first-time home 
buyers;
    (35) Mortgage Purchased under GSE's Community Lending Program--
indicates whether the GSE purchased the mortgage under its community 
lending program;
    (36) Acquisition Type--indicates whether the GSE acquired the 
mortgage with cash or by swap;
    (37) GSE Real Estate Owned--indicates whether the mortgage is on 
a property that was in the GSE's real estate owned (REO) inventory;
    (38) Public Subsidy Program--indicates whether the mortgage 
property is involved in a public subsidy program and which level(s) 
of government are involved in the subsidy program, i.e., Federal 
government only, state or local government only, other and private 
subsidy only, Federal government and either state or local 
government, Federal government and other, state or local government 
and other, and Federal, state, or local government and other;
    (39) Borrower race or national origin--a numeric code that 
indicates whether the borrower is: An American Indian or Alaskan 
Native; an Asian or Pacific Islander; black; hispanic; white; or 
other;
    (40) Co-borrower race or national origin--a numeric code that 
indicates whether the co-borrower is: An American Indian or Alaskan 
Native; an Asian or Pacific Islander; black; hispanic; white; or 
other
    (41) Borrower gender--a numeric code that indicates whether the 
borrower is male or female;
    (42) Co-borrower gender--a numeric code that indicates whether 
the co-borrower is male or female
    (43) Age of borrower;
    (44) Age of co-borrower;
    (45) Family size of borrower--the number of individuals in the 
borrower's family including the borrower;
    (46) Family size of co-borrower--the number of individuals in 
the co-borrower's family including the co-borrower;
    (47) Occupancy Code--indicates whether the mortgaged property is 
an owner-occupied principal residence, a second home, or a rental/
investment property;
    (48) Number of Units--indicates the number of units in the 
mortgaged property;
    (49) Number of Bedrooms--where the property contains non-owner-
occupied dwelling units, the number of bedrooms in each of those 
units;
    (50) Owner-Occupied--where the property has two to four units, 
indicates whether each of those units are owner-occupied; 
[[Page 9247]] 
    (51) Affordability Category--where the property contains non-
owner-occupied dwelling units, indicates under which, if any, of the 
special affordable goals the units qualified;
    (52) Reported Rent Level--where the property contains non-owner-
occupied dwelling units, the rent level for each unit in whole 
dollars;
    (53) Reported Rent Plus Utilities--where the property contains 
non-owner-occupied dwelling units, the rent level plus the utility 
cost for each unit in whole dollars;
    (54) Low- and moderate-income housing goal flag--indicates 
whether the GSE counted the mortgage purchase toward the low- and 
moderate-income goal;
    (55) Special affordable housing goal flag--indicates whether the 
GSE counted the mortgage purchase toward the special affordable goal 
and under which part of the goal;
    (56) Central cities, rural areas, and other underserved areas 
goal flag--indicates whether the GSE counted the mortgage purchase 
toward the central cities, rural areas, and other underserved goal.
    (b) Loan level data on multifamily mortgage purchases. Each 
GSE's submission of loan level data shall include the following 
information for each multifamily mortgage purchased by the GSE:
    (1) Loan number--a unique numerical identifier for each mortgage 
purchased;
    (2) U.S. postal state--the two-digit numerical state code used 
in the most recent decennial census by the Bureau of the Census;
    (3) U.S. Postal Zip Code--the five digit zip code for the 
property;
    (4) MSA code--the four-digit numerical code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA;
    (5) Place code--the five-digit numerical Federal Information 
Processing Standard (FIPS) code;
    (6) County--the county, as designated in the most recent 
decennial census by the Bureau of the Census, in which the property 
is located;
    (7) Census tract--the tract number as used in the most recent 
decennial census by the Bureau of the Census;
    (8) 1990 census tract--percent minority--the percentage of a 
census tract's population that is minority based on the most recent 
decennial census by the Bureau of the Census;
    (9) 1990 census tract--median income--the median family income 
for the census tract;
    (10) 1990 local area median income--the median income for the 
area;
    (11) Tract income ratio--the ratio of the 1990 census tract--
median income to the 1990 local area median income;
    (12) Area median family income--the current median family income 
for a family of four for the area as established by the Secretary;
    (13) Affordability Category--indicates under which, if any, of 
the special affordable goals the property qualified;
    (14) Acquisition UPB--the unpaid principal balance (UPB) in 
whole dollars of the mortgage when purchased by the GSE; where the 
mortgage purchase is a participation, the acquisition UPB reflects 
the participation percentage;
    (15) Participation Percent--where the mortgage purchase is a 
participation, the percentage of the mortgage that the GSE 
purchased;
    (16) Date of Mortgage Note--the date the mortgage note was 
created;
    (17) Date of Acquisition--the date the GSE purchased the 
mortgage;
    (18) Purpose of Loan--indicates whether the mortgage was a 
purchase money mortgage, a refinancing, a new construction mortgage, 
a mortgage financing property rehabilitation;
    (19) Cooperative Project Loan--indicates whether the mortgage is 
a project loan on a cooperative housing building;
    (20) Refinancing Loan from Own Portfolio--indicates, where the 
GSE has purchased a refinanced mortgage, whether the GSE owned the 
previous mortgage on the same property;
    (21) Special Affordable, Seasoned Loans: Proceeds Recycled?--for 
purposes of the special affordable housing goal, indicates whether 
the mortgage purchased by the GSE meets the requirements in section 
81.14(h)
    (1) (ii);
    (22) Mortgagor Type--indicates the type of mortgagor, i.e., an 
individual, a for-profit entity such as a corporation or 
partnership, a nonprofit entity such a corporation or partnership, a 
public entity, or other type of entity;
    (23) Term of Mortgage at Origination--the term of the mortgage 
at the time of origination in months;
    (24) Loan Type--indicates the type of the loan, i.e., fixed 
rate, adjustable rate mortgage (ARM), balloon, or graduated payment 
mortgage (GPM);
    (25) Amortization Term--for amortizing mortgages, the 
amortization term of the mortgage in months;
    (26) Lender Institution--the name and unique numerical 
identifier of the institution that loaned the money for the 
mortgage;
    (27) Type of Seller Institution--the type of institution that 
sold the mortgage to the GSE, i.e., mortgage company, Savings 
Association Insurance Fund (SAIF) insured depositary institution, 
Bank Insurance Fund (BIF) insured depositary institution, National 
Credit Union Association (NCUA) insured credit union, or other 
seller;
    (28) Government insurance--indicates whether any part of the 
mortgage has government insurance;
    (29) Acquisition Type--indicates whether the GSE acquired the 
mortgage with cash, by swap, other, with a credit enhancement, a 
bond or debt purchase, or a real estate mortgage investment conduit 
(REMIC);
    (30) GSE Real Estate Owned--indicates whether the mortgage is on 
a property that was in the GSE's real estate owned (REO) inventory;
    (31) Public Subsidy Program--indicates whether the mortgage 
property is involved in a public subsidy program and which level(s) 
of government are involved in the subsidy program, i.e., Federal 
government only, state or local government only, other only, Federal 
government and either state or local government, Federal government 
and other, state or local government and other, and Federal, state, 
or local government and other;
    (32) Total Number of Units--indicates the number of dwelling 
units in the mortgaged property;
    (33) Special Affordable--45 Percent--for the special affordable 
Interim Housing Goal for 1993-94, the dollar amount of the mortgage 
that counted toward achievement of the goal (based on dwelling units 
affordable to low-income families);
    (34) Special Affordable--55 Percent--for the special affordable 
Interim Housing Goal for 1993-94, the dollar amount of the mortgage 
that counted toward achievement of the goal (based on properties 
where at least 20 percent of the dwelling units were affordable to 
especially low-income families or at least 40 percent of the 
dwelling units were affordable to very low-income families);
    (35) The following data apply to unit types in a particular 
mortgaged property. The unit types are defined by the GSEs for each 
property and are differentiated based on the number of bedrooms in 
the units and on the average contract rent for the units. The 
maximum number of unit types in any one property is ten and a unit 
type must be included for each bedroom size category represented in 
the property:
    (A) Unit Type XX--Number of Bedroom(s)--the number of bedrooms 
in the unit type;
    (B) Unit Type XX--Number of Units--the number of units in the 
property within the unit type;
    (C) Unit Type XX--Average Reported Rent Level--the average rent 
level for the unit type in whole dollars;
    (D) Unit Type XX--Average Reported Rent Plus Utilities--the 
average reported rent level plus the utility cost for each unit in 
whole dollars; and
    (E) Unit Type XX--Affordability Level--the ratio of the average 
reported rent plus utilities for the unit type to the adjusted area 
median income;
    (36) Low- and moderate-income housing goal flag--indicates 
whether the GSE counted the mortgage purchase toward the low- and 
moderate-income goal;
    (37) Special affordable housing goal flag--indicates whether the 
GSE counted the mortgage purchase toward the special affordable goal 
and under which part of the goal;
    (38) Central cities, rural areas, and other underserved areas 
goal flag--indicates whether the GSE counted the mortgage purchase 
toward the central cities, rural areas, and other underserved goal.

Appendix E--Proprietary Information--[Reserved]

    Dated: December 23, 1994.
Henry G. Cisneros,
Secretary.
[FR Doc. 95-3474 Filed 2-13-95; 8:45 am]
BILLING CODE 4210-32-P