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

1Cf. Fannie Mae Charter Act, section 301, to

Freddie Mac Act, section 301.

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.

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 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9155

2Fannie Mae Charter Act, section 301, and

Freddie Mac Act, section 301(b).

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).

8H.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).

9See, e.g., H.R. Rep. 101–54, Part 1, 101st Cong.,

1st Sess. 389 (1989).

10FIRREA, sections 1004 (Comptroller General

study) and 1404 (Treasury study), and 2 U.S.C. 621

note (Treasury study and CBO study).

11H.R. 2900, section 101.

12 Id., at sections 121(n) and 122(l).

13S. 2733, 102d Cong., 2d Sess., sections 502,

504, and 514 (1992).

14Section 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.

15See generally, sections 1331–34.

16See 24 CFR 81.16(d) and 81.17.

17 24 CFR 81.2(l)(3).

18Sections 1332(b), 1333(a)(2), and 1334(b).

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.2

1. The Current Fannie Mae Regulations

In 1978, the Secretary promulgated

regulations governing Fannie Mae.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.4 The regulations also require

Secretarial approval of Fannie Mae’s

underwriting guidelines to implement

fair housing requirements and regulate

equal opportunity in employment.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.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.7

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).’’ 8

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.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.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.

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.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.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 moderateincome goals and to modify provisions

concerning fair housing.13

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.14 FHEFSSA also

granted the Secretary more specific

powers and authorities over the housing

purposes and fair lending

responsibilities of the GSEs.

The Act granted the Secretary the

power to establish, monitor, and enforce

goals for the GSEs’ purchases of

mortgages financing housing for lowand 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.15 Although the authority to

establish goals previously existed under

the Charter Act and was implemented

under the current Fannie Mae

regulations,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 17 that was easier

to achieve.

Generally, the Act authorizes the

Secretary to establish each of the goals

after consideration of certain prescribed

factors relevant to the particular goal.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 moderateincome 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
9156 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

19Sections 1332(d), 1333(d), and 1334(d).

20Sections 1332(d)(1) and 1334(d)(1).

21Section 1333(d) (1) and (2).

22Sections 1332(d)(2)(A) and 1334(d)(2)(A).

23Section 1325(1).

24Section 1325 (2)–(6).

25Section 1322.

26Section 1327.

27See sections 1381 (o and p) and 1382 (r and s).

28Sections 1323 and 1326.

29Sections 1322, 1336, and 1341–49.

30See, e.g., S. Rep. No. 102–282, 102d Cong., 2d

Sess. 10 (1992) (hereinafter cited as ‘‘S. Rep.’’).

31Section 1311.

32See generally, section 1313.

33Sections 1381 (d)(2), (e)(1), and (k), and

1382(e).

34Sections 1381(d)(2) and 1382(e).

35Sections 1361–64.

36Section 1321.

37 56 FR 41022 (1991).

38 58 FR 53048 and 53072 (1993).

39Sections 1332(d)(1) and 1334(d)(1).

40Sections 1332(d)(1) and 1334(d)(1).

41 24 CFR 81.16(d) and 81.17.

42Sections 1332(d)(2)(A) and 1334(d)(2)(A).

43Sections 1332(d)(2)(B) and 1334(d)(2)(B).

44Section 1333 (a)(1), (d)(1), and (d)(2).

45 58 FR 53048 and 53072 (1993).

46 58 FR 53048, 53061 (1993).

47 Id. at 53063.

housing.19 For the transition years, the

Act set targets for both GSEs that lowand 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.20 The Act also set targets for the

special affordable housing goals in the

transition years,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.22

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.’’ 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.24

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.25 The Act affirms the

Secretary’s authority to require reports

from the GSEs 26 and details specific

data and reports that the GSEs must

provide.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.28 The Act also

requires the Secretary to establish

procedures to ensure due process for the

GSEs in exercising the Secretary’s

regulatory authorities.29

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.30 The Act therefore established a

new independent financial regulator for

the GSEs within HUD—the Office of

Federal Housing Enterprise Oversight

(OFHEO) 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.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.33 The Act assigns

authority to approve dividends to the

Director of OFHEO 34 and replaces the

debt-to-capital ratio with a risk-based

capital standard and stress test

administered by the Director of

OFHEO.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) * * *.’’ 36

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.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.

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.38

For the transition period of 1993 and

1994, the Act established annual targets

for the purchases by both GSEs of

mortgages financing housing for lowand moderate-income families and

housing located in central cities.39 The

Act set these targets at 30 percent of the

units financed by mortgage purchases of

the GSEs; 40 the targets were based on

the goals established under HUD’s

Fannie Mae regulations.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.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.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 lowincome families.44 The Secretary

established these goals and

implementation requirements in the

Interim Notice published in October

1993.45

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.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.47

For the year 1993, Fannie Mae exceeded
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9157

48Fannie 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.

49 58 FR 53072, 53085 (1993).

50 Id. at 53088.

51Freddie 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.

52Sections 306(c)(2) of the Freddie Mac Act and

304(c) of the Fannie Mae Charter Act.

53Sections 306(g) of the Freddie Mac Act and

304(d) of the Fannie Mae Charter Act.

54Sections 303(e) of the Freddie Mac Act and

309(c)(2) of the Fannie Mae Charter Act.

55See, e.g., 12 CFR 208, App. A, section III.C.2.

56The 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’’).

57Congressional Budget Office, Controlling the

Risks of Government-Sponsored Enterprises, at 10

(April 1991).

58Fannie Mae Economics Department.

59Commercial 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).

60S. Rep. at 34.

61See, e.g., S. Rep. at 34.

the goal for low- and moderate-income

housing with 35.58 percent and is

performing at a rate for 1994 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.

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 1994.49 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

1994.50 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 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.

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 shareholderowned 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.

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

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 lowand 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.

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
9158 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

62S. Rep. at 34.

63S. Rep. at 11.

64Testimony 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). 65 12 U.S.C. 4562.

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.

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

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 Charterrequired 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 lowerincome families. Given the capacity of

the GSEs, a tradeoff between highincome 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

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:

(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 lowcost 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9159

66Priority: HOME! The Federal Plan to Break the

Cycle of Homeless, 17 (1994).

67See Appendices A–C for the Secretary’s

analysis of these factors.

68 12 U.S.C. 4501.

inadequate housing. Six million lowincome 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

(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 lowincome 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

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
9160 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

69S. Rep. at 35.

70 During the transition period of 1993–1994, the

Act established annual targets for the purchases by

both GSEs of mortgages financing housing for lowand 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.

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

(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-familyhome 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

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9161

71H.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). 72Section 1332.

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.71

The proposed regulation, therefore,

defines terms the same for both GSEs

even where the definitions were

originally provided in the Freddie Mac

Act.

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 owneroccupied 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,72 a
9162 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

73Section 1333.

74Section 1334.

75Section 1331(c).

76Sections 1332(b), 1333(a)(2), and 1334(b). 77See S. Rep. at 38 and 65.

78S. Rep. at 65.

79S. Rep. at 28.

80S. 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’’).

81S. 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’’).

82S. 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).

special affordable housing goal,73 and a

central cities, rural areas and other

underserved areas housing goal.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 moderateincome 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.75 The statute

provides that, in establishing these

goals, the Secretary shall apply certain

prescribed factors, as described in

Appendices A, B, and C.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.

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 moderateincome 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 moderateincome 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 lowincome area), the low- and moderateincome 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 ModerateIncome 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 OMBdefined ‘‘central cities’’ to allow time to

gather data and establish an appropriate

methodology to ‘‘redefine and expand’’

the goal.77 The legislative history also

provides that ‘‘following the transition

period, geographic areas relating to the

goal will be as determined by (the

regulator).’’ 78

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.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.’’ 80

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.’’ 81 Congress noted that

‘‘* * * mortgage discrimination and

redlining have effectively disadvantaged

certain geographic areas, particularly

inner city and rural areas.’’ 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.’’ 83

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.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9163

84See, 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.

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:

• 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

• 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.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.

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 longterm 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
9164 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

85Testimony 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).

86For 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.

87Only lending institutions with offices in

metropolitan statistical areas (MSAs) report

mortgage origination data under HMDA. 12 U.S.C.

2803(a)(1).

88The 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.

89Statement 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.

90Rural 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.

91See U.S. Bureau of the Census, 1990 Census of

Population and Housing: Guide, Part B. Glossary,

16–17 (1993) (hereinafter cited as ‘‘Census

Glossary’’).

it loses much of its distinctive urban

character.85

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 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.

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.87 Other

sources of mortgage flow information,

like the Federal Reserve Call Reports, do

not detail locations of loans.

(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.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,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.

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.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.

(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 ‘‘nonmetropolitan.’’ 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.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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9165

92The 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.

93 42 U.S.C. 1490.

94Cf. 42 U.S.C. 1490 to Census Glossary at 16–

17.

95These 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).

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.92

(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,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.’’ 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.

(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? 95

(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 overlybroad 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
9166 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

96Section 1333(a)(1).

97Section 1333(d)(1)–(2).

98Section 1333(d)(3)(A)(i).

99Section 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.

100Section 1333(d)(3)(A)(ii)(II).

101Section 1333(d)(3)(C).

102Section 1333(d)(3)(B)(i).

103Section 1333(d)(3)(B)(ii).

104See section 1333.

105See section 1333(a).

106Special tabulation derived from Bureau of the

Census, Housing and Household Economic

Statistics Division, 1991 Residential Finance

Survey.

107U.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).

108U.S. Department of Housing and Urban

Development, Office of Policy Development and

Research.

109Section 1333(a).

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.’’ 96

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 lowincome 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.

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

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.

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

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-lowincome renters reflects the severe

shortages of units affordable to them.

Under the proposed regulation, only

those rental units that are affordable to

very low-income families would count

toward the goal rather than all lowincome 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 lowincome 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.

The proposed regulation provides that

for 1995 the special affordable housing

goal will be 11 percent of the total
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9167

110A mortgage originated more than 2 years

before a GSE purchases it is an example of a

mortgage that cannot be readily securitized by

GNMA.

111Mortgages 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. 112Section 1333(b)(1). 113See section 1331(b).

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 owneroccupied 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

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.

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 risksharing arrangements between the

Department and the GSEs. In

determining the level of credit for
9168 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

114 26 U.S.C. 42.

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 lowand 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 owneroccupied 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 lowincome 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,
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9169

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.’’).

117Sections 1332(c)(1) and 1333(c)(1)(A).

118Sections 1332(c) and 1333(c).

119Sections 1332(c)(2) and 1333(c)(2).

120Sections 1332(c)(1)(B) and 1333(c)(1)(B).

121S. Rep. at 35.

122See sections 1332(c) and 1333(c).

123Using 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.

124Sections 1332(c)(2) and 1333(c)(2).

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

(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 owneroccupied dwelling units, consider the

mortgagors’ income as required by the

Act.117

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

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.

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.)

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

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.

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 moderateincome, 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
9170 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

125Similarly, 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.

126Similarly, 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.

127Section 1336(b)(1).

128Section 1336(b)(2).

129Section 1336(b)(3)(A).

130 Id.

131Section 1336(c)(1).

132Section 1336(c)(2).

133 Id.

134Sections 1325(1)–(3).

135Section 1325(4)–(6).

136H. Rep. at 57.

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 twobedroom 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.’’

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 onebedroom 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.

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 nonmetropolitan 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 nonmetropolitan 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.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.

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

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

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

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

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9171

137These 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.’’

138Section 1325(6).

139Fannie Mae Charter Act, section 309(n)(2)(G),

and Freddie Mac Act, section 307(f)(2)(G).

140Section 1325(6).

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 137

and the underwriting and appraisal

guideline review requirements under

the Act.138 The GSEs will develop a

methodology for conducting the

Business Practices Analyses and the

Secretary will review and comment on

the methodology.

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.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.

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.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,
9172 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

141Sections 1325 (2)–(3). 142Section 1325(5).

143 Section 1325(5).

144 42 U.S.C. 3601–19.

145 59 FR 2939 (1994).

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.

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.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.

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 antidiscrimination 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,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.

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.143

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 144 and Executive Order 12,892.145

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9173

146 42 U.S.C. 3608(e)(5).

147Section 1322(b)(2).

148Section 1322(b)(2).

149S. Rep. at 15.

150H. Rep. at 55.

151Section 1322(b)(1).

152Sections 1322(a) of FHEFSSA, 305(c) of the

Freddie Mac Act, and 302(b)(6) of the Fannie Mae

Charter Act.

153S. Rep. at 15.

154Freddie Mac Act, sections 303(d) and

303(c)(9).

155See sections 304(a)(2)(B) of the Fannie Mae

Charter Act and 305(a)(5)(B) of the Freddie Mac

Act.

purposes of the Fair Housing Act.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.

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.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.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).’’ 149

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.’’ 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.151

Each GSE is required to obtain the

approval of the Secretary for any ‘‘new

program’’ before the GSE implements

the program.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.’’)

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.’’ 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.

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.’’ 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.155

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.
9174 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

156 H. Rep. at 55.

157 Section 1322(c)(2).

158 Section 1322(c)(2).

159 Section 1322(c)(2).

160 Section 1322(c)(3).

161See Section 1322(c)(4)(A).

162 Section 1322(c)(4)(B).

163 Section 1324.

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.’’ 156

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.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.

The Secretary shall approve or

disapprove new program requests

within 45 days, or 60 days if additional

information is requested from the

GSE.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.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.160

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.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.

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 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.

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.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.

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9175

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.’’)

165 See, e.g., sections 1324, 1327, 1328, 1381 (o

and p), and 1382 (r and s).

166 Sections 1381(p) and 1382(s).

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.

173 Section 1323(a).

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.164

The Act therefore required detailed

reporting of mortgage data and extensive

annual reporting on GSE housing

activities to both Congress and the

Secretary.165

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-todate 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 singlefamily 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.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.

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.167

The Act also requires the protection of

proprietary information the GSEs

submit to the Secretary.168 In

characterizing the lack of information

on the GSEs’ performance as ‘‘an

information vacuum,’’ 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.’’ 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.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.’’ 172

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,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
9176 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

174 Section 1323(b)(2).

175 59 FR 29514 (1994).

176Section 1326.

177Section 1326(c).

178 5 U.S.C. 552.

179Section 1319F.

180 5 U.S.C. 552(b)(8).

181 5 U.S.C. 552(b)(4).

182 18 U.S.C. 1905. 183 3 CFR 235 (1988).

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.174

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.175 As part of the process for

establishing the public use data base,

the Secretary intends to finalize a

revised order early in 1995.

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.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.177

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) 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.179

Accordingly, where appropriate, the

Secretary may invoke FOIA Exemption

(b)(8) 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.

FOIA Exemption 4 181 allows

confidential business information to be

protected from disclosure, and the

Trade Secrets Act 182 forbids

Government officers and employees

from releasing trade secret and other

confidential business information.

Executive Order No. 12,600 183 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.

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9177

184Sections 1341 and 1345.

185See, e.g., sections 1341–1348.

186Section 1341(a).

187Section 1345(a).

188Section 1345(b).

189 Section 1346(a).

190 Section 1346(c).

191Section 1344(a).

192Section 1343(a).

193 See 31 CFR 306.115 et seq.

194 31 CFR 306.0, n.1.

195 59 FR 54366 (Oct. 28, 1994).

196Fannie Mae Charter Act, sections 301(3) and

(4), and Freddie Mac Act, sections 301(b) (3) and

(4).

197Section 1321.

goals provisions through cease-anddesist orders and to assess civil money

penalties against the GSEs.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.185 Because the Act details

procedural requirements, this subpart

mainly restates and rarely augments

these procedures in the regulations.

Secretarial Enforcement Through Ceaseand-Desist Orders and Civil Money

Penalties

The Secretary may issue a cease-anddesist 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.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.

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.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.188

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.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.190

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.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.192

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.193 Treasury

regulations 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.195 Freddie

Mac currently operates under bookentry regulations (1 CFR part 462) that

it promulgated in 1978.

Virtually all of the GSEs’ debt and

mortgage-backed securities issuances

and trading market depend on bookentry 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.196

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 bookentry 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 bookentry 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.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
9178 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

198FIRREA, section 1216(b), codified as 12 U.S.C.

1833e(b).

199These 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).

reports, the Secretary shall conduct

regulatory examinations of the GSEs

from time to time.

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.198

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 lowand 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? 199

(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?
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9179

200 Section 1333(a)(1).

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 nonmetropolitan 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 nonmetropolitan 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 * * * lowincome 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.

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

Information Number of

respondents

Frequency

of response

Hours required Total hours

Business Practices Analyses ........................................................................................... 2 1 500 1,000

(Note: this is a one-time report, not an annual report.)

Information

Annual

number of

respondents

Frequency of

response

(per year)

Hours

required Total hours

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
9180 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

ANNUAL COSTS TO RESPONDENTS

Information Hours

required

Cost per

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)

Information Hours

required

Cost per

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 owneroccupied 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.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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

§ 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 Governmentsponsored 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.

§ 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.
9182 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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 residentmember 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 owneroccupied 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 taxexempt 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:
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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 owneroccupied 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

§ 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.

§ 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 moderateincome 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 lowand 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
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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.

§ 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-bymortgage 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.

§ 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 owneroccupied housing to meet the thenexisting 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 lowincome 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 lowincome 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,
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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 armslength transaction that is borrowerdriven 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.

§ 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.
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(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 owneroccupied dwelling units toward

achievement of the low- and moderateincome housing goal or the special

affordable housing goal, mortgage

purchases financing such owneroccupied 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 § 81.17.

(f) Counting rental units.—(1) Use of

income, rent.—(i) Generally. For

purposes of counting rental dwelling

units toward achievement of the lowand 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 § 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 § 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.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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.

§ 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 § 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].

§ 81.17 Income level definitions for owneroccupied 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
9188 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

area median income corresponding to

the following family sizes:

Number of persons in family

Percentage of

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:

Number of persons in family

Percentage of

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:

Number of persons in family

Percentage of

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).

§ 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:

Unit size

Percentage of

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:

Unit size

Percentage of

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:

Unit size

Percentage of

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).

§ 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:

Unit size

Percentage of

area median

income

Efficiency .............................. 21

1 bedroom ............................ 22.5

Unit size

Percentage of

area median

income

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:

Unit size

Percentage of

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:

Unit size

Percentage of

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.

§ 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 moderateincome housing, including housing for

first-time home buyers; and
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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.

§ 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.

§ 81.22 Housing plans.

(a) If the Secretary determines, under

§ 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

§ 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
9190 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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.

§ 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 ll 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 ll 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

ll 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.

§ 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

§ 81.42. Thereafter, each GSE shall

conduct such a review and analysis

periodically as requested by the

Secretary.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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-today 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.

§ 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.

§ 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.

§ 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
9192 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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.

§ 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

§ 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.

§ 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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 nonmaterial 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.

§ 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.

§ 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
9194 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

regarding such disapproval. A request

for a hearing must be submitted by a

GSE within 30 days of the Report to

Congress under § 81.53(g). The

procedures for such hearings are

provided in subpart G of this part.

Subpart E—Reporting Requirements

§ 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.

§ 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.

§ 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 § 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 lowand 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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.

§ 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.

§ 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.

§ 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

§ 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.

§ 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 § 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 § 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.

§ 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
9196 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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.

§ 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.

§ 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.

§ 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
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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.

§ 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

§ 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.

§ 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 § 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 §§ 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-anddesist 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 § 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 § 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 § 81.84(l).

§ 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 § 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 §§ 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,
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$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 § 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

§ 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.

§ 81.84 Hearings.

(a) Applicability. The hearing

procedures in this section apply to

hearings on the record to review ceaseand-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 § 81.82; service of the

Notice of Intent to Impose Civil Money

Penalt(ies) under § 81.83; or a request

for a hearing under § 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,
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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 § 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.

§ 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

§§ 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.

§ 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 §§ 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.

§ 81.87 Judicial review.

(a) Commencement. A GSE may

obtain review of any final order issued

under § 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

§ 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

§ 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
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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.

§ 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 bookentry 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.

§ 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 bookentry 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.

§ 81.94 Transfer or pledge.

(a) (1) A transfer or a pledge of bookentry 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 bookentry form under § 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,
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9201

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

Continued

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 bookentry 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.

§ 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.

§ 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.

§ 81.97 Registered bonds and notes.

No formal assignment shall be

required for the conversion to bookentry 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 § 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 llllllllll,

as fiscal agent of [name of the GSE], for

conversion to book-entry [name of the

GSE] securities.’’

§ 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.

§ 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

§ 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).

§ 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 Lowand 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 moderateincome families relative to the size of the

overall conventional conforming mortgage

market; 1
9202 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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.

2HUD 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.

3Tabulations 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.

4Since 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.

5U.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.

7Center 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.

8Tabulations 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.

9Congress defines ‘‘worst case needs’’ for housing

assistance as unassisted renters with incomes below

50 percent of area median income who have

priority problems.

10Worst Case Needs for Housing Assistance in the

United States in 1990 and 1991. HUD–1481–PDR,

June 1994.

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 lowand 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 lowand 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 lowand 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:

• 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.

• Very low-income renters often must pay

an unduly high share of their income for rent.

• 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 singleparent and single-person households.

• 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.

• 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.

• 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.2

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.3

b. Affordability Problems and Worst Case

Housing Needs

Finding affordable housing is by far the

most common housing problem for American

families nationwide.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.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 1991.6 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.7

Although affordability problems affect twofifths 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.8

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.9

According to HUD’s third Congressionallymandated 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.10
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9203

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.

15These 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.

16 Joint Center for Housing Studies of Harvard

University, The State of the Nation’s Housing, 1993,

Table A–4.

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.

18National Association of Home Builders, Profile

of the New Home Buyer Survey, 1991.

19National Association of Realtors, Survey of

Homeowners and Renters, 1991.

20Howard 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.

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.

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 lowincome 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.11 The

Congressional Budget Office estimated a oneday homeless population of approximately

700,000 for 1991.12 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, 1990.13 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.’’ 14

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.15 Recent surveys indicate that lowerincome and minority families who do not

own their homes will make considerable

sacrifices to attain this goal.

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.16

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.17

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.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.19

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-toincome 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.20 Seventy-eight

percent could not afford a home priced at the

tenth percentile. Such affordability problems

are especially pronounced among singleparent 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.

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
9204 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

21W. Gregory Mankiw and David N. Weil, ‘‘The

Baby Boom, the Baby Bust, and the Housing

Market,’’ Regional Science and Urban Economics,

May 1989.

22See, for example, Joint Center for Housing

Studies of Harvard University, The State of the

Nation’s Housing 1994, 1994.

23U.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.

24Chicago Title and Trust Family of Insurers,

Who’s Buying Homes in America, January 1992 and

January 1993.

25Council of Economic Advisers, Economic

Indicators, September 1994 and Economic Report of

the President, February 1994.

26Monthly average refinancing data obtained

from Freddie Mac’s Primary Mortgage Market

Survey.

27U.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.

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.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.22

(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 singleperson 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.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.

(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 firsttime 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.24

Low interest rates during the past two years

apparently enticed even more single renters

to become homeowners.

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, entrylevel, 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.25

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 1993.26

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.

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 1992.27 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9205

28Chicago Title and Trust Family of Insurers,

Who’s Buying Homes in America, January 1992,

January 1993, and January 1994.

29National Association of Realtors, Survey of

Homeowners and Renters, 1991.

30See News Release, ‘‘Housing Affordability

Sustained Despite Rise in Interest Rates’’, National

Association of Realtors, August 9, 1994.

31The most recent surveys for the last weeks of

November showed that interest rates had settled in

the neighborhood of 9.25 percent.

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.

33U.S. Senate, 1992. Report accompanying

S.3031, the National Affordable Housing Act

Amendments of 1992. 102d Congress, 2d Session,

Report 102–232, p. 8.

34Amy Bogdon et al., National Analysis of

Housing Affordability, Adequacy, and Availability,

HUD–1448–PDR, 1994, pp 52–53.

35U.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.

36The record high was 906,200 multifamily units

started in 1972.

37The 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.

percent in 1993.28 The 1992 figure was the

highest percentage for first-time buyers since

the annual Home Buyers Survey was

initiated in 1976.

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 whitecollar 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.29 Thus

there are many potential home buyers among

the 34 million households that are currently

renting.

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

1993.30 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.

In addition to its overall affordability

index, NAR also estimates the ability of firsttime home buyers to purchase a modestlypriced 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 1994.31 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 firsttime 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.

(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 1991.32 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.33

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.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.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.

(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.

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 LowIncome Housing Tax Credits—about 50,000

units in both 1992 and 1993. In addition, an

increasing share is being produced by nontraditional 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
9206 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

38Some mortgage purchases are not eligible for

possible inclusion under the low- and moderateincome 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.

39A portion of the increase from 1993 reflects a

decline in the share of refinancings, which have

been less common among low- and moderateincome families.

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.

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 lowand 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

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 lowand 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 lowand moderate-income families, and the

corresponding figure for Freddie Mac was

36.3 percent. Thus both enterprises have

sharply increased their low- and moderateincome 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.

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]

Income of mortgagor(s) or renter(s) relative to area median income

Fannie Mae Freddie Mac

SinglefamilyMultifamily Total SinglefamilyMultifamily 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 lowand 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 ModerateIncome 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) Singlefamily owner-occupied dwelling units, (b)

single-family owner-occupied, two-to-four

units (called ‘‘2–4’s’’), (c) single-family oneto-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 lowand moderate-income for each of the above

four property types (for example, the

percentage of those single-family owner-
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9207

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.

41Restricting the RFS analysis to 1991 resulted in

only minor changes to the market shares.

42The 51 percent figure was derived by adding

the following: (1) 16.95% (percentage of owneroccupied units [56.5%] times percentage of those

units that are affordable to low- and moderateincome 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 lowand 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%]).

43The HMDA data were mainly needed because

its census tract level information was necessary for

estimating the size of the underserved area market

Continued

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 moderateincome 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.

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

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 lowmod 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 midto 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
9208 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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 lowmod 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.

44Fannie Mae, Freddie Mac, and the Mortgage

Bankers Association have provided HUD with

estimates of 1995 mortgage originations. The singlefamily 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.

45The 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.

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.

47Little 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 lowmod 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 lowmod 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.

48To 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.

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:

(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.

(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 singlefamily owner-occupied, 2 percent for single

family 2–4’s, and 10 percent for single family

1–4’s.

(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

(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

(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 moderateincome families.

The 1992 share of the single-family owneroccupied 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 owneroccupied 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 moderateincome families. Averaging the 1992 and

1993 HMDA data suggests a 52 percent lowmod 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.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.

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 lowmod 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9209

49As noted earlier, loans less than $15,000, those

with loan-to-income ratios that exceed six, and

loans to nonowner-occupants are excluded.

50On 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.

51Restricting 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.

52Estimates 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.

54 Id., pp. 52–53.

55The 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.

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 lowmod 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 1993.49 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.

HUD analysis suggests that the nongeocoded 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-medianincome approach and the metropolitan-areamedian-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 nongeocoded 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-medianincome 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.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.

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.51

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 moderateincome 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 1992.52 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 1992.53

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.54

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.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
9210 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

56Business Week, March 28, 1994, p. 131.

57HUD’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.

58HUD 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.

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.

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, 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.56

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 offbalance 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.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.

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.

• 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.

• The additional loans required to meet

the housing goals are profitable business

under the baseline consensus economics

scenario examined in the RIA.

• Historically, moderate- and middleincome 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 moderateincome goal.

• The potential size of goals-qualifying

purchase pools for single-family owneroccupied 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.58 This same issue also

enhances the credit quality of special
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59Based 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.

60The 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.

affordable loan purchases. In that case, smallsized owner households can qualify as below

60 percent of median income simply because

the dollar threshold is effectively defined for

a three-person household.59

• 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-tovalue 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.

• 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.

• 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.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.

• 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.

• 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.

• 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.

• 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.

• 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 Lowand 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 moderateincome 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. Nontraditional 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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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 lowand 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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61Senate Report 102–282, p. 36.

1FHEFSSA, section 1334(a).

2Senate Report at 38.

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:

• 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 singlefamily purchase mortgages qualified as lowmod versus only 27 percent of its refinance

mortgages.

• 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.

• 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 pentup 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 lowerincome 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.’’ 61

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 lowand 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.’’ 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 nonmetropolitan 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.

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.’’ 2

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:
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3Because 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 lowincome borrowers to demonstrate creditworthiness.

4Prior 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.

5These 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.

6For 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.

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.

8Using 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.

9Analysis 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.

10Holmes 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.

11HUD’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.

12The 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.

• 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.

• 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.3

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.4

Consistent with the redlining hypothesis,

these studies found lower volumes of loans

going to low-income and high-minority

neighborhoods.5 However, such analyses

were criticized because they did not

distinguish between demand and supply

effects 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.

Like early HMDA studies, an analysis of

deed transfer data in Boston found lower

rates of mortgage activity in minority

neighborhoods.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.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.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.’’ 10

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.11

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:

• 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.12

• Census tracts with lower incomes have

higher denial rates and lower origination

rates than higher income tracts. The average

number of mortgage originations in highincome 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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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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13Alicia 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.

14This 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.

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.

16Lenders 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.

17Standard 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 ongoing costs may be too stringent for lower income

households, who typically pay higher shares of

their income for housing than higher income

households.

18Holmes 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.

19Holmes 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 nonracial variables are reasonable proxies for other

prudent lending variables such as wealth and job

stability for which they did not have direct data.

20Schill 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.

21Perle 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.

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).

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.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, selfemployment, age, and family status and

composition. Although almost all highlyqualified applicants of all races were

approved, differential treatment was

observed among borrowers with lesser

qualifications.14

A recent HUD study also found minority

denial rates to be higher in ten metropolitan

areas, even after controlling for credit risk.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.

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 16 and by

underwriting standards that have disparate

effects on minority and lower income

borrowers and neighborhoods.17

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.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.

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.’’ 19

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.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.21

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 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
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23Their 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-tovalue ratio (an inverse indicator). A high rent-tovalue ratio suggests lower expectations of capital

gains on properties in the neighborhood.

24Schill 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.

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.

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.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.

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.’’ 24

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.25 If this were the

case, Schill and Wachter’s conclusions about

the existence of racially induced redlining

would necessarily change.

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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26Section D below will provide additional

reasons why central city location should not be

used as a proxy for underserved areas.

27William 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.

28Shear et al., p. 18.

29See Avery, et al.

30Avery 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.

31Avery, 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.

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

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:

• 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 allHispanic census tracts would have about 7

originations per 100 properties.

• 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.

• 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

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.

Based on their empirical work, Avery,

Beeson and Sniderman reach the following

conclusions:

• The individual applicant’s race exerts a

strong influence on mortgage application and

denial rates. Black applicants, in particular,

have unexplainably high denial rates.

• 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.

• 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.

• 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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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 lowincome 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:

• 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.

• 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.

• 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 owneroccupied 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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32The 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.

33Statement 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.

34Methodological 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.

35Amy 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.

36U.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.

37Rural 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.

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.32

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,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.

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.34

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 nonmetropolitan 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.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.

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.36 In all four

regions, renters living outside of

metropolitan areas least often had worst case

problems.

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.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
9228 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

38The Urban Institute.

39 ‘‘Inner-City Concentrated Poverty and

Neighborhood Distress: 1970 to 1990.’’ Housing

Policy Debate, 4(3): 253–302.

40U.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.

42Margery A. Turner, Raymond J. Struyk, and

John Yinger, Housing Discrimination Study:

Synthesis, Washington, D.C., U.S. Department of

Housing and Urban Development, 1991.

43Margery A. Turner, ‘‘Discrimination in Urban

Housing Markets: Lessons from Fair Housing

Audits,’’ Housing Policy Debate, Vol. 3, Issue 2,

1992, pp. 185–215.

44Susan M. Wachter and Isaac F. Megbolugbe,

‘‘Racial and Ethnic Disparities in Homeownership,’’

Housing Policy Debate, Vol. 3, Issue 2, 1992, pp.

333–370.

counties are concentrated in Appalachia and

in areas with high proportions of minority

residents.

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 noninstitutional sources than homeowners in

metropolitan areas.38

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.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.

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.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.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).

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.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.

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 nonminority 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.43

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:

• 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.44

• Discrimination, while not the only cause,

contributes to the pervasive level of

segregation that persists between Blacks and

Whites in our urban areas.

• 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 nativeborn 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 lowincome 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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45HMDA 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.

a. GSE Performance: 1993 HMDA Data

HMDA data permit examination of the

GSEs’ performance in metropolitan areas.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 highminority, low-income tracts.

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 highminority census tracts with that of the overall

market. Combined, GSE purchases accounted

for a higher percentage of loans in highincome 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 moderateincome 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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46Unlike 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.

47The 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.

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.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.

The multifamily underserved area

percentage (43 percent) is based on 1992 and

1993 HMDA data which, admittedly, is quite

limited.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.

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 moderateincome 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 moderateincome 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 thriftdominated 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 lowincome 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.
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48Office of Management and Budget,

Memorandum M–94–22, May 5, 1994.

49For 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.

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

51HMDA 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, prescreening 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.

52Analysis 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.

53As 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.

54The 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.

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.48

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 appropriatelydefined ‘‘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.49

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.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.

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:51 Application denial rates

and mortgage origination rates per 100

owner-occupied units.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.53 Aggregating

those data is useful for examining denial and

origination rates for broader groupings of

census tracts:

Minority composition (percent) Denial rate

(percent)

Origination

rate

Tract income (percent)Denial rate

(percent)

Origination

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.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.

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
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9235

55The Preamble discusses issues related to the

choice of tracts or counties to define underserved

areas in non-metropolitan sections of the country.

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.55

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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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. Lowminority 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 threefourths 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-medianincome 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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9240 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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).

2S. Rep. No. 102–282, 102d Cong., 2d Sess. 36

(1992).

3Minor revisions were made in Freddie Mac’s

estimates on April 11, 1994. 4Section 1333(a)(1).

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, lowincome 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 lowincome 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 lowincome 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.

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.

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 lowincome 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, lowincome families in low-income areas and

very low-income families.’’4

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 singlefamily) 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 shortterm 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.
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9241

9Low-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.

10Bogdon et al., 1994.

11The 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.

12To 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.

13Tabulations 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.

In 1993, the special affordable purchases of mortgages on owner-occupied housing, including all refinancings, were:

Fannie Mae Freddie Mac

No. units Percent

units No. units Percentunits

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

5Excluding 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

No. units Percent

units No. units Percentunits

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 1993.9 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.

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 LowIncome 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 LowIncome 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.10 Nationally, approximately onefourth 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.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.

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.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.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.
9242 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

14For 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.

15Tabulations 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.

16HUD’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.

18This 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.

19Low-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 owneroccupied 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.

20Affordable 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.

Income as percent of area median income

Renters Owners

Any problems (percent)Priority

problems

(percent)

Any problems (percent)Priority

problems

(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 lowincome 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.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.

b. Needs for Housing Affordable to Very Lowincome 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.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.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.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.

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 moderateincome 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 moderateincome 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 lowincome census tracts; 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.

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 (singlefamily 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.19 This suggests

that 12.8 percent of single-family owneroccupied mortgages and dwelling units are

for very low-income families or low-income

families living in low-income areas.

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.20 For multifamily

unsubsidized rental properties, the

corresponding figures are 41 percent of all
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9243

21The 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.

22Freddie Mac’s multifamily purchases in 1993

were insufficient to provide an accurate measure of

rents for multifamily properties.

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 lowincome 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%]).

24As 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.

25For 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.

26Also 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.

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 newlyconstructed buildings.

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.21 22

This section applies weights for singlefamily 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 owneroccupied 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.23

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 lowincome areas were: 11.8 percent for single

family owner-occupied purchase mortgages

and 6.9 percent for single family owneroccupied 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.24

(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 singlefamily 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.25 These

analyses suggest that the size of the special

affordable market is at least in the 17–20

percent range.26

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—Owneroccupied 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 lowincome 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, twothirds 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.
9244 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

PRIORITY PROBLEMS BY INCOME AS

PERCENT OF MEDIAN INCOME AND

TENURE, 1991

Income (percent) Renters

(percent)

Owners

(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 lowand 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 homepurchase mortgages, the increase in

multifamily activity at the same time that

single-family activity is declining, continued

strong housing demand on the part of firsttime 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.

BILLING CODE 4210–32–P
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 9245

BILLING CODE 4210–32–C
9246 Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules

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 § 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 § 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 coborrower 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;
Federal Register / Vol. 60, No. 32 / Thursday, February 16, 1995 / Proposed Rules 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