29592 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

1 1992 Act, section 1313(b)(1) (12 U.S.C.

4513(b)(1)).

2See 1992 Act, sections 1331–38 (12 U.S.C. 4561–

67, 4562 note).

3See section 306(h)(2), Federal Home Loan

Mortgage Corporation Act (12 U.S.C. 1455(h)(2)),

and section 304(b), Federal National Mortgage

Association Charter Act (12 U.S.C. 1719(b)).

4See, e.g., 12 U.S.C. 24 (seventh) (authorizing

unlimited investment by national banks in

obligations of or issued by the Enterprises); 12

U.S.C. 1455(g), 1719(d), 1723c (exempting securities

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

12 CFR Part 1270

RIN 2550–AA02

Office of Federal Housing Enterprise

Oversight; Risk-Based Capital

AGENCY: Office of Federal Housing

Enterprise Oversight, HUD.

ACTION: Notice of Proposed Rulemaking.

SUMMARY: Title XIII of the Housing and

Community Development Act of 1992,

known as the Federal Housing

Enterprises Financial Safety and

Soundness Act of 1992 (1992 Act),

requires the Office of Federal Housing

Enterprise Oversight (OFHEO) to

develop a risk-based capital regulation

for the Federal National Mortgage

Association (Fannie Mae) and the

Federal Home Loan Mortgage

Corporation (Freddie Mac) (collectively,

the Enterprises). The regulation will

specify a risk-based capital stress test

(stress test) that, when applied to the

Enterprises, determines the amount of

capital that an Enterprise must hold to

maintain positive capital throughout a

10-year period of economic stress. On

February 8, 1995, OFHEO published an

Advance Notice of Proposed

Rulemaking (ANPR), which solicited

public comment on a variety of issues

concerning the development of the riskbased capital regulation. In light of the

complex issues and decisions that

OFHEO must address prior to issuing

proposed risk-based capital standards

and the challenge of developing the

risk-based capital stress test, OFHEO

has decided to issue the proposed riskbased capital regulation in two parts.

This first Notice of Proposed

Rulemaking (NPR) addresses two key

components of the stress test. The first

is OFHEO’s proposal of the procedures

for establishing the ‘‘benchmark loss

experience,’’ which is the basis for

determining the extent of Enterprise

credit losses during the stress test. This

NPR describes the methodology and

rationale OFHEO used to identify the

proposed benchmark loss experience,

responds to relevant ANPR comments,

and describes how the benchmark loss

experience will influence the risk-based

capital stress test. In this NPR, OFHEO

also proposes to use its House Price

Index (HPI) in the stress test to estimate

changes over time in the values of

single-family properties securing

Enterprise mortgages.

A second NPR will: specify the timing

and content of risk-based capital reports

to be submitted by the Enterprises;

specify all of the remaining aspects of

the risk-based capital stress test; and

describe how the stress test will be used

to determine the Enterprises’ risk-based

capital requirements.

DATES: Comments regarding this NPR

must be received in writing on or before

September 9, 1996.

ADDRESSES: Send written comments to

Anne E. Dewey, General Counsel, Office

of General Counsel, Office of Federal

Housing Enterprise Oversight, 1700 G

Street, NW., Fourth Floor, Washington,

DC 20552.

FOR FURTHER INFORMATION CONTACT:

David J. Pearl, Director, Office of

Research, Analysis and Capital

Standards; or Gary L. Norton, Deputy

General Counsel, Office of General

Counsel, Office of Federal Housing

Enterprise Oversight, 1700 G Street,

NW., Fourth Floor, Washington, DC

20552, telephone (202) 414–3800 (not a

toll-free number).

SUPPLEMENTARY INFORMATION: The

Supplementary Information is organized

according to this table of contents:

Background

Statutory Requirements for Risk-Based

Capital

Credit Losses in the Stress Test

Interest Rates in the Stress Test

New Business, Other Activities, and

Considerations

Management and Operations Risk

Regulation Development

General Approach

Advance Notice of Proposed Rulemaking

Notice of Proposed Rulemaking

Benchmark Loss Experience

Definitions, Data, and Procedures

1. Definitions

2. Data

3. Procedures

Characterization of the Benchmark Loss

Experience Implications of the

Benchmark Loss Experience for the

Stress Test Issues, Alternatives

Considered, and Comments Received

1. Data Sources Used to Define the

Benchmark Loss Experience

2. Loan and Property Types Included in the

Benchmark Analysis

3. Determination of a Single Benchmark

State/Origination Year Combination or a

Separate Area and Period for Each

Enterprise

4. Role of Severity Data in Identifying the

Benchmark Loss Experience

5. Definition of ‘‘Default Rate’’

a. In General

b. Interpretation of ‘‘Years’’

c. Definition of ‘‘Defaulted Loans’’

6. Definitions of ‘‘Severity Rate’’ and

‘‘Losses’’

7. Definition of ‘‘Contiguous Areas’’

8. Procedures for Accounting for Different

LTV Ratios

9. Procedures for Combining Data from

Different States and Years in Computing

Default and Severity Rates

10. Procedures for Combining Default and

Severity Rates of the Two Enterprises

11. Number of Origination Years in the

Benchmark Loss Experience

House Price Indexes

Introduction

Using An Index to Adjust for Seasoning

Description of the HPI

Issues, Alternatives Considered, and

Comments Received

1. Use of the HPI versus the CQHPI and

Other Alternatives

2. Geographic Aggregation

3. Bias and Volatility in the HPI

4. Statistical Methodology

Background

Title XIII of the Housing and

Community Development Act of 1992,

Pub. L. No. 102–550, known as the

Federal Housing Enterprises Financial

Safety and Soundness Act of 1992,

established OFHEO. OFHEO is an

independent office within the

Department of Housing and Urban

Development (HUD) with responsibility

for ensuring that Fannie Mae and

Freddie Mac are adequately capitalized

and operating in a safe and sound

manner. Included among the express

statutory authorities of the Director of

OFHEO (Director) is the authority to

issue regulations establishing minimum

and risk-based capital standards.1

Fannie Mae and Freddie Mac are

Government-sponsored enterprises with

important public purposes.2 These

include providing liquidity to the

residential mortgage market and

increasing the availability of mortgage

credit benefiting low-and moderateincome families and areas that are

underserved by lending institutions.

The Enterprises engage in two principal

businesses: Investing in residential

mortgages and guaranteeing residential

mortgage securities. The securities they

guarantee and the debt instruments they

issue are not backed by the full faith and

credit of the United States.3 However,

financial market participants perceive

that the United States Government

would not permit the Enterprises to fail.

This perception principally arises from

the public purposes of the Enterprises,

their Congressional charters, their

potential direct access to Treasury

funds, and the statutory exemptions of

their debt and mortgage-backed

securities from otherwise mandatory

investor protection provisions.4
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29593

from oversight from federal regulators); 15 U.S.C.

77r–1(a) (preempting state law that would treat

Enterprise securities differently from obligations of

the United States for investment purposes); 15

U.S.C. 77r–1(c) (exempting Enterprise securities

from state blue sky laws).

5Section 1364 of the 1992 Act (12 U.S.C. 4614)

requires the Director of OFHEO to determine the

capital classification of each Enterprise not less

than quarterly.

6 12 U.S.C. 4612.

7 1992 Act, section 1361 (12 U.S.C. 4611).

8For purposes of the risk-based capital standard,

the term ‘‘capital’’ means ‘‘total capital’’ as defined

under section 1303(18) of the 1992 Act (12 U.S.C.

4502(18)) to mean the sum of the following:

(A) The core capital of the enterprise;

(B) A general allowance for foreclosure losses,

which—

(i) shall include an allowance for portfolio

mortgage losses, an allowance for nonreimbursable

foreclosure costs on government claims, and an

allowance for liabilities reflected on the balance

sheet for the enterprise for estimated foreclosure

losses on mortgage-backed securities; and

(ii) shall not include any reserves of the

enterprise made or held against specific assets.

(C) Any other amounts from sources of funds

available to absorb losses incurred by the

enterprise, that the Director by regulation

determines are appropriate to include in

determining total capital. The term ‘‘core capital’’

is defined under section 1303(4) of the 1992 Act (12

U.S.C. 4502(4)) to mean the sum of the following

(as determined in accordance with generally

accepted accounting principles):

(A) The par or stated value of outstanding

common stock.

(B) The par or stated value of outstanding

perpetual, noncumulative preferred stock.

(C) Paid-in capital.

(D) Retained earnings.

The core capital of an enterprise shall not include

any amounts that the enterprise could be required

to pay, at the option of investors, to retire capital

instruments.

9 1992 Act, section 1361(a)(1) (12 U.S.C.

4611(a)(1)).

10 In this document, the word ‘‘benchmark,’’

when used as an adjective, refers to the benchmark

loss experience.

11Section 1361(a)(2) (12 U.S.C. 4611(a)(2)).

12Section 1361(a)(2)(B) (12 U.S.C. 4611(a)(2)(B)).

13Section 1361(a)(2)(C) (12 U.S.C. 4611(a)(2)(C)).

14Section 1361(a)(2)(E) (12 U.S.C. 4611(a)(2)(E)).

Furthermore, the insolvency of either of

the Enterprises would have serious

consequences for the nation’s housing

markets and financial system.

OFHEO was created as the safety and

soundness regulator of the Enterprises

to reduce the risk of their failure.

OFHEO’s principal responsibilities

include conducting examinations and

establishing and enforcing compliance

with capital standards. At least

quarterly, OFHEO ascertains the amount

of capital maintained by each

Enterprise, computes its capital

requirements, and determines its capital

classification.5

Capital provides a cushion to absorb

financial losses resulting from adverse

economic conditions and other

problems at the Enterprises. The 1992

Act prescribes that to be classified as

adequately capitalized, an Enterprise

must meet both a minimum capital

standard and a risk-based capital

standard.

Section 1362 of the 1992 Act

prescribes the minimum capital

standard for the Enterprises.6 The

minimum capital requirements are

computed from ratios that are applied to

the assets and specific categories of offbalance sheet obligations of the

Enterprises. The minimum capital

requirement for an Enterprise represents

an amount of capital needed to provide

protection against risk in general. The

minimum capital standard is not

designed to address specific credit risk

exposures or exposure to interest rate

risk. It does not represent the amount

needed by an Enterprise to operate

safely and soundly under all

circumstances.

OFHEO published a proposed rule

regarding minimum capital on June 8,

1995. Until 1 year after the effective date

of a final rule on risk-based capital, an

Enterprise need only meet the minimum

capital standard in order to be classified

as adequately capitalized.

Statutory Requirements for Risk-Based

Capital

In contrast to the minimum capital

requirement, the risk-based capital

standard required by the 1992 Act

addresses specific risk exposures. This

standard determines the amount of

capital necessary for an Enterprise to

withstand adverse credit conditions and

large interest rate movements

simultaneously during a 10-year period,

plus an additional amount to cover

management and operations risk.7 This

10-year period is referred to as the

‘‘stress period.’’ The level of capital

required under this standard for an

Enterprise will reflect that Enterprise’s

specific risk profile.8 This NPR proposes

two key components of the risk-based

capital regulation.

Credit Losses in the Stress Test

The 1992 Act requires that the stress

test subject each Enterprise to very large

credit losses on mortgages it owns or

guarantees. The frequency and severity

of those losses must be reasonably

related to the highest rate of default and

severity of mortgage losses experienced

during a period of at least 2 consecutive

years in contiguous areas of the United

States that together contain at least 5

percent of the total U.S. population.9

This provision requires OFHEO to

identify a ‘‘benchmark loss experience,’’

which is the default and severity

behavior of mortgage loans, in a place

and time meeting statutory

requirements, that resulted in the

highest loss rate for any such place and

time.10 In this context, default and

severity behavior means the frequency,

timing, and severity of losses on

mortgage loans, given the specific

characteristics of those loans and the

economic circumstances affecting those

losses.

Interest Rates in the Stress Test

The 1992 Act prescribes two interest

rate risk scenarios, one with rates falling

and the other with rates rising.11 The

1992 Act further describes the path of

the 10-year constant maturity Treasury

(CMT) yield for each scenario, and

directs OFHEO to establish the yields on

Treasury instruments of other maturities

in a manner reasonably related to

historical experience.

In the falling rate scenario, the 10-year

CMT yield decreases during the first

year of the stress period, and then

remains constant at the lesser of: (a) 600

basis points below the average yield

during the 9 months preceding the

stress period or (b) 60 percent of the

average yield during the 3 years

preceding the stress period. The 1992

Act further limits the decrease in yield

to a yield no less than 50 percent of the

average yield in the 9 months preceding

the stress period.12

In the rising rate scenario, the 10-year

CMT yield increases during the first

year of the stress period, and then

remains constant at the greater of: (a)

600 basis points above the average yield

during the 9 months preceding the

stress period or (b) 160 percent of the

average yield during the 3 years

preceding the stress period. The 1992

Act further limits the increase in yield

to a yield no more than 175 percent of

the average yield over the 9 months

preceding the stress period.13 The 1992

Act recognizes that interest rates can

affect credit risk, specifically requiring

that credit losses be adjusted for a

correspondingly higher rate of general

price inflation if application of the

stress test assumes an increase of more

than 50 percent in the 10-year CMT

yield.14

New Business, Other Activities, and

Considerations

The 1992 Act requires an assumption

that the Enterprises conduct no new

business within the stress period, except

to fulfill contractual commitments to

purchase mortgages or issue securities.

The 1992 Act states that OFHEO may,

4 years after the final risk-based capital

regulation is issued, incorporate

assumptions about additional new

business conducted during the stress
29594 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

15Section 1361(a)(3)(C) and (D) (12 U.S.C.

4611(a)(3)(C) and (D)).

16Sections 1361(b) and (d)(2) (12 U.S.C. 4611(b)

and (d)(2)).

17 1992 Act, section 1361(c)(2) (12 U.S.C.

4611(c)(2)).

period.15 In doing so, OFHEO must take

into consideration the results of studies

conducted by the Congressional Budget

Office and the Comptroller General of

the United States on the advisability

and appropriate forms of new business

assumptions. The 1992 Act requires that

the studies be completed within the first

year after issuance of the regulation.

The stress test must take into account

distinctions among mortgage product

types and current loan-to-value (LTV)

ratios, and may take into account any

other factors that the Director deems

appropriate. The 1992 Act does not

require a specific adjustment for any of

these factors, allowing the Director to

determine how best to account for them.

Likewise, the 1992 Act requires the

Director to determine losses and gains

on Enterprise activities not specifically

addressed, and all other characteristics

of the stress period not explicitly

defined in the 1992 Act, on the basis of

available information, in a manner

consistent with the stress period.16

These stress period characteristics could

include, among others, mortgage

prepayment rates and Enterprise

funding policies, operating expenses,

and dividend policies.

Management and Operations Risk

To supplement the amount of capital

that would permit an Enterprise to meet

the requirements of the stress test, each

Enterprise must maintain an additional

30 percent of this amount to protect

against management and operations

risk.17

Regulation Development

General Approach

The mission of OFHEO is to protect

the taxpayer by ensuring that the

Enterprises are adequately capitalized

and operating in a safe and sound

manner. The principal objective of the

risk-based capital standard is to reduce

the risk of Enterprise insolvency.

However, effective capital standards

should promote prudent business

practices and strategies and the

maintenance of the financial health

necessary to fulfill the Enterprises’

public purposes. Although the stress

test produces a single capital

requirement, it effectively creates

marginal capital requirements—

incremental requirements for each

additional dollar of business—for every

type of product the Enterprises

guarantee or hold in portfolio. Marginal

capital requirements for mortgages held

in portfolio will vary depending on the

risk, as reflected in the stress test, of an

Enterprise’s funding strategy. These

marginal capital requirements will have

significant bearing on how the

Enterprises choose to conduct their

businesses.

OFHEO will seek to design the stress

test so that the incentives it creates

closely reflect the relative risks inherent

in the Enterprises’ different activities.

To this end, OFHEO will incorporate, to

the extent feasible, consistent

relationships between the economic

environment of the stress period and the

Enterprises’ businesses. Doing so will

require modeling the Enterprises’ assets,

liabilities, and off-balance sheet

positions at a sufficient level of detail to

capture important risk characteristics.

However, as the level of detail of a

stress test increases, so does its

complexity, together with the time and

other resources required to develop it.

There are also practical limits to the

number of variables that can be modeled

from existing data. OFHEO, therefore,

seeks to establish a level of complexity

and realism in the stress test that

appropriately weighs the associated

benefits and costs.

OFHEO’s stress test is composed of a

number of components, some that

correspond to subjects specifically cited

in the 1992 Act and others that

represent the infrastructure that makes

the stress test operational. Figure 1

illustrates these components and their

interrelationships. The infrastructure

components—database, cashflows, and

financial reports—are shaded gray. The

unshaded components implement the

specific requirements of the 1992 Act, as

well as the many other aspects of the

stress test that the 1992 Act either

requires or permits OFHEO to

determine.

Each of the components of the stress

test involves one or more projects of

varying complexity, resource intensity

and expected duration. The diagram

highlights in bold the completed

components of the stress test that

OFHEO proposes and describes in this

NPR—the benchmark loss experience

and a house price index.

BILLING CODE 4220–01–P
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29595

Figure 1

BILLING CODE 4220–01–C
29596 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

18Risk-Based Capital, ANPR, 60 FR 7468.

19Risk-Based Capital, Extension of Public

Comment Period for ANPR, 60 FR 25174 (May 11,

1995).

20Section 1361(d)(1) (12 U.S.C. 4611(d)(1)). This

usage in the 1992 Act should not be confused with

the usage of the same term in the mortgage industry.

Within this industry, seasoning is synonymous with

aging, which has important implications for

patterns of both prepayments and defaults. See

Linda Lowell, Mortgage Pass-Through Securities, in

Handbook of Mortgage-Backed Securities 59, 78 (F.

Fabozzi ed., 3rd ed., Probus 1992) (prepayments);

Standard and Poor’s, Residential Mortgages:

Criteria, Statistics, Credit Week, Oct. 25, 1993, at 29

(defaults).

Advance Notice of Proposed

Rulemaking

On February 8, 1995, OFHEO

published an ANPR18 as its first step in

developing the risk-based capital

regulation. The ANPR announced

OFHEO’s intention to develop and

publish a risk-based capital regulation

and solicited public comment on a

variety of issues relating to that

regulation.

The comment period for the ANPR

ended on May 9, 1995, and was

extended through June 8, 1995.19

OFHEO received 15 comments on the

ANPR from a variety of interested

parties. Commenters included two

Executive Branch Departments

(Department of Housing and Urban

Development and Department of

Veterans Affairs), one financial

institution regulatory agency (Office of

Thrift Supervision), the Enterprises

(Fannie Mae and Freddie Mac), four

trade groups (Mortgage Bankers

Association of America, America’s

Community Bankers, National

Association of Realtors, and Mortgage

Insurance Companies of America), two

mortgage banking firms (PNC Mortgage

Corporation of America and Norwest

Mortgage, Inc.), one rating agency

(Standard and Poor’s Ratings Group),

one thrift institution (World Savings

and Loan Association), one private

mortgage research firm (Mortgage Risk

Assessment Corporation), and one

individual (Professor Anthony Yezer of

George Washington University).

The responses to the ANPR ranged

from a comment on only one or two

specific risk-based capital issues to an

extensive analysis of every question or

issue raised. OFHEO has been

considering these comments in the

development of its risk-based capital

regulation.

Notice of Proposed Rulemaking

OFHEO will issue two separate NPRs

before issuing a final risk-based capital

regulation. This NPR addresses two key

aspects of that regulation. The first is

OFHEO’s methodology for identifying

and measuring the benchmark loss

experience. The benchmark loss

experience will be the basis for

determining credit losses that the

Enterprises will experience during the

stress period. This NPR describes: (1)

The proposed methodology (definitions,

data, and procedures) that is used to

identify the benchmark loss experience;

(2) characteristics of the benchmark loss

experience that was identified and

proposed using this methodology; and

(3) in general terms, the implications of

the benchmark loss experience for

mortgage losses in the risk-based capital

test. OFHEO seeks comment on the

methodology it used to determine the

benchmark loss experience.

In the second key aspect of the

regulation addressed in this NPR,

OFHEO also proposes to use a weighted

repeat transactions house price index,

the HPI produced by OFHEO, rather

than the Constant Quality Home Price

Index (CQHPI), published by the

Secretary of Commerce, referenced in

the 1992 Act, to measure differences in

seasoning of single-family mortgages in

the stress test. The 1992 Act defines

‘‘seasoning’’ as the change over time in

the LTV ratio of a mortgage.20 Such

changes result from changes in principal

balance and changes in the value of the

property. OFHEO proposes to use the

HPI as the basis for estimating changes

in property values and seeks comment

about its choice of index.

At a later date OFHEO will issue a

second NPR which will: (1) Specify and

propose for public comment all of the

remaining aspects of the risk-based

capital stress test, (2) describe how the

stress test will be used to determine the

Enterprises’ risk-based capital

requirements, and (3) respond to all

ANPR comments not addressed in this

NPR. OFHEO will consider comments

received in response to both NPRs in the

final risk-based capital regulation.

OFHEO decided to publish two NPRs

for several reasons. They include the

complex issues and decisions that

OFHEO must address prior to

completing its proposal for the riskbased capital regulation and the

challenge of developing the stress test

infrastructure. Further, the development

of the risk-based capital standard

comprises multiple projects, most of

which will not be concluded until later

this year. Rather than delay in order to

present an entire proposal, OFHEO

believes the public interest is best

served by publishing the results of

completed projects that can be

considered independently of the rest of

the regulation. OFHEO’s analysis, which

identified the location, time and

magnitude of the highest mortgage

losses, may also be of public interest

apart from the development of the riskbased capital regulation.

In the sections titled ‘‘Issues,

Alternatives Considered, and Comments

Received,’’ this NPR discusses the

ANPR comments that related directly to

the benchmark loss experience and

house price index topics. There were

certain other issues, such as the

potential impact of improved

underwriting standards on credit losses,

the application of a regional recession to

the Enterprises’ books of business, and

the impact of recent loss mitigation

programs that were raised by ANPR

commenters in discussing the credit

stress benchmark. OFHEO believes that

those issues are more appropriately

addressed in the second NPR, which

will discuss how, or whether, to account

for these factors in the risk-based capital

stress test.

Benchmark Loss Experience

Definitions, Data, and Procedures

OFHEO proposes to use the

methodology (definitions, data, and

procedures) described in this section to

identify the benchmark loss experience.

Alternatives OFHEO considered and the

reasons for OFHEO’s choices are

discussed below in the section titled

‘‘Issues, Alternatives Considered, and

Comments Received.’’

1. Definitions

The 1992 Act requires OFHEO to

determine the highest rate of default and

severity of mortgage losses in

contiguous areas containing 5 percent or

more of the U.S. population for a period

of 2 or more years. OFHEO defined

‘‘contiguous areas’’ as all the areas

within a state or a group of two or more

states sharing common borders, and

interpreted ‘‘year’’ to mean the calendar

year in which a loan is originated

(origination year). Thus, OFHEO’s

proposed methodology is designed to

identify the combination of states and

origination years from which mortgages

had a higher loss rate than mortgages

from any other qualifying state/year

combination.

OFHEO defined ‘‘defaulted loans’’ as

loans that, within 10 years following

their origination, (1) resulted in preforeclosure sale, (2) completed

foreclosure, (3) resulted in real estate

owned (REO), or (4) resulted in a credit

loss to an Enterprise. For any group of

loans, OFHEO defined the ‘‘default rate’’

as the ratio of the aggregate original

principal balance of the defaulted loans

in the group to the aggregate original

principal balance of all loans in the
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29597

21The financing costs associated with properties

acquired through foreclosure from the time of

foreclosure through property disposition were

calculated using the average from 1982 through

1992 of the 12-month Federal Agency constant

maturity yield computed by Bank of America.

22Available data did not permit inclusion of loans

on which credit losses occurred as a result of loan

restructurings, interest rate buydowns, or preforeclosure sales.

23These combinations of states and origination

years are referred to as ‘‘candidate state/year

combinations’’ or ‘‘candidates.’’

group. OFHEO defined ‘‘losses’’ on

defaulted loans in categories 1, 2, or 3

above as the difference between: (1) The

sum of the principal and interest owed

when the borrower lost title to the

property securing the mortgage; REO

financing costs 21 through the date of

property disposition; and cash expenses

incurred during the foreclosure process,

REO holding period, and property

liquidation process; and (2) the sum of

the property sales price and any other

liquidation proceeds (except those

resulting from private mortgage

insurance proceeds or other third-party

credit enhancements). Losses on

defaulted loans not in categories 1, 2, or

3 above were defined as the amount of

the financial loss to the Enterprise. For

any group of defaulted loans, the

‘‘severity rate’’ was defined as the

aggregate losses on those loans divided

by the aggregate original principal

balance of all loans in the group. ‘‘Loss

rate’’ for a group of loans was defined

as the product of the default rate for

those loans and the severity rate for all

defaulted loans in that group for which

loss data are available.

2. Data

OFHEO used the proposed

methodology to identify the benchmark

loss experience using historical loanlevel data from each of the two

Enterprises. OFHEO’s analysis was

based entirely on fixed-rate mortgages or

‘‘FRMs’’ (which were defined as

conventional, 30-year, fixed-rate loans

secured by first liens) on ‘‘single-family

properties’’ (which were defined as

single-unit, owner-occupied, detached

properties) that were originated from

1979 to 1993. Detached properties were

defined as single-family properties

excluding condominiums, planned

urban developments (PUDs), and

cooperatives. The data included only

loans that were purchased by an

Enterprise within 12 months after loan

origination and loans for which the

Enterprise had no recourse to the

lender.

Table 1 lists by year the number of

loans, by Enterprise, used in the

analysis. Fannie Mae’s loan totals in

most years are lower than Freddie

Mac’s, because Fannie Mae’s data set

does not include data on securitized

loans. That Enterprise has not retained

such data in a form that permits

historical analysis.

TABLE 1.—NUMBER OF LOANS USED IN ANALYSIS

Origination year Freddie

Mac

Fannie

Mae Total

1979 .............................................................................................................................................................. 81,507 66,499 148,006

1980 .............................................................................................................................................................. 41,551 23,572 65,123

1981 .............................................................................................................................................................. 17,922 41,017 58,939

1982 .............................................................................................................................................................. 30,005 39,094 69,099

1983 .............................................................................................................................................................. 107,406 33,099 140,505

1984 .............................................................................................................................................................. 85,829 14,381 100,210

1985 .............................................................................................................................................................. 165,966 32,833 198,799

1986 .............................................................................................................................................................. 674,684 111,878 786,562

1987 .............................................................................................................................................................. 365,580 63,058 428,638

1988 .............................................................................................................................................................. 214,299 55,265 269,564

1989 .............................................................................................................................................................. 353,687 72,026 425,713

1990 .............................................................................................................................................................. 268,877 71,081 339,958

1991 .............................................................................................................................................................. 447,731 120,182 567,913

1992 .............................................................................................................................................................. 641,929 203,672 845,601

1993 .............................................................................................................................................................. 845,052 313,537 1,158,589

OFHEO separately analyzed default

and severity data from each Enterprise.

Default rates were calculated from loan

records meeting the criteria specified

above. Severity rates were calculated

from the subset of defaulted loans for

which loss data were available.22

3. Procedures

OFHEO calculated each Enterprise’s

cumulative 10-year default rate for a

combination of contiguous states and

consecutive origination years (state/year

combination) by grouping all of the

Enterprise’s loans originated in that

state/year combination. For origination

years with less than 10 years of default

experience, cumulative-to-date default

rates were used. The two Enterprise

default rates were then averaged,

yielding an ‘‘average default rate’’ for

that state/year combination.

An ‘‘average severity rate’’ for each

state/year combination was determined

in the same manner as the average

default rate; for each Enterprise, the

aggregate severity rate was first

calculated for all loans in the relevant

state/year combination. The ‘‘loss rate’’

for each candidate state/year

combination examined was calculated

by multiplying the average default rate

for that state/year combination by the

average severity rate for that

combination. The default and severity

behavior of loans in the candidate with

the highest loss rate constitutes the

benchmark loss experience.

Characterization of the Benchmark Loss

Experience

To identify the state/year combination

with the highest loss rate, OFHEO

examined individual state data on

defaults and severity for each Enterprise

from 1979 through 1985. Based on that

examination, OFHEO selected more

than 250 potential benchmark areas

with at least 5 percent of the U.S.

population that appeared to have

unusually high loss rates for periods of

2 or more consecutive origination

years. 23 For each potential benchmark

area, OFHEO calculated loss rates for

each consecutive combination of 2-, 3-

, and 4-origination years during the time

span examined, making a total of nearly

4,000 candidate state/year

combinations.
29598 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

24An Actuarial Review for Fiscal Year 1994 of the

FHA’s Mutual Mortgage Insurance Fund: Final

Report, Appendix F, May 8, 1995.

25Losses experienced by the Enterprises on loans

with LTV ratios of more than 80 percent were

reduced considerably from the loss rates shown in

the table by proceeds of mortgage insurance.

Overall, mortgage insurance proceeds offset more

than one-quarter of the losses on benchmark loans.

See discussion of mortgage insurance in the stress

test in the section ‘‘Implications of the Benchmark

Loss Experience for the Stress Test’’ below.

OFHEO also analyzed possible

candidate state/year combinations that

involved mortgage origination years

with less than 10 years of loss

experience (1986 through 1993), and

compared their cumulative-to-date loss

rates with comparable cumulative loss

rates for candidate state/year

combinations involving earlier mortgage

originations. None of the candidates

involving recent mortgage originations

had cumulative loss rates exceeding

those of candidates including 10 years

of loan histories.

Using the proposed methodology,

OFHEO identified the candidate with

the highest loss rate. OFHEO will

monitor new loss data for loans

originated in more recent years. If

OFHEO determines at a future time that

there is a more recent candidate with a

higher loss rate than the one described

below, OFHEO may establish a new

benchmark loss experience.

Table 2 shows some of the principal

characteristics of the benchmark loss

experience identified using the

proposed procedures described above.

TABLE 2.— BENCHMARK LOSS

EXPERIENCE

States ........................ Arkansas, Louisiana,

Mississippi, and

Oklahoma

Percentage of U.S.

Population.* .

5.3%

Origination Years ...... 1983 and 1984

Loss Rate .................. 9.4%

TABLE 2.— BENCHMARK LOSS

EXPERIENCE—Continued

Average 10-Year Default Rate.14.9%

Average 10-Year Severity Rate.63.3%

*Based on the percentage of 1985 U.S.

population as estimated by the Bureau of the

Census.

Table 3 describes the aggregate data

for each Enterprise used in calculating

the rates in Table 2. Table 3 also shows

each Enterprise’s default and severity

rates. A ranking of results for the 500

candidates with the highest loss rates

appears in the supplementary table at

the end of the section titled ‘‘Benchmark

Loss Experience.’’

TABLE 3.—DATA ON LOANS DETERMINNIG THE BENCHMARK LOSS EXPERIENCE

Freddie

Mac Fannie Mae

Original Balance of All Loans used in Default Rate Analysis (000s) .............................................................................. $316,930 $242,296

Original Balance of Defaulted Loans used in Default Rate Analysis (000s) ................................................................... $35,742 $44,910

Default Rate ..................................................................................................................................................................... 11.28% 18.54%

Original Balance of Defaulted Loans used in Severity Rate Analysis (000s) ................................................................. $14,107 $30,749

Losses on Defaulted Loans used in Severity Rate Analysis (000s) ............................................................................... $8,597 $20,166

Severity Rate .................................................................................................................................................................... 60.94% 65.58%

Some comparisons with other loss

experiences help put these results in

perspective. Texas loans originated in

the early 1980s are sometimes

considered a reference point for high

loss experiences. Using the

methodology and data to identify the

proposed benchmark loss experience,

the worst loss rate for Texas was 7.3

percent for loans originated in 1982 and

1983. Loss rates within the state were

very uneven, however. In the 2-digit ZIP

Code including Houston, Beaumont,

and Bryan (77xxx), the loss rate for

those years was 11.0 percent. Similarly,

in the El Paso and West Texas area

(79xxx), the loss rate was 9.8 percent.

The loss rate of benchmark loans is

much higher than a normal or typical

rate. The aggregate loss rate for the

contiguous 48 states and the District of

Columbia for all origination years from

1979 through 1985 was 2.1 percent,

which is less than one-quarter of the

rate for benchmark loans. The

benchmark loss experience can also be

compared with Federal Housing

Administration (FHA) experience. The

10-year cumulative default rate for FHA

loans originated in all states and the

District of Columbia in 1981 was 19.1

percent, more than one-quarter higher

than the average default rate of the

benchmark loss experience.24

The LTV ratios of loans are good

indicators of the likelihood of default

and the severity of losses on defaulted

loans. Table 4 shows average default,

severity, and loss rates from the

benchmark loss experience. These rates

further characterize the benchmark loss

experience.25

TABLE 4.—DEFAULT, SEVERITY, AND

LOSS RATES OF BENCHMARK LOANS

BY LTV AT ORIGINATION*

LTV range

Average

default

rate

Average

severity rate

Loss

rate

≤60% ................. 2.2% 43.5% 1.0%

>60%, ≤70% ...... 3.5% 46.2% 1.6%

>70%, ≤75% ...... 7.9% 50.1% 3.9%

>75 ≤80 ............. 9.4% 58.9% 5.5%

>80%, ≤85% ...... 12.0% 55.0% 6.6%

>85%, ≤90% ...... 17.7% 60.2% 10.7%

TABLE 4.—DEFAULT, SEVERITY, AND

LOSS RATES OF BENCHMARK LOANS

BY LTV AT ORIGINATION*—Continued

LTV range

Average

default

rate

Average

severity rate

Loss

rate

>90% ................. 26.4% 69.0% 18.2%

*In addition to the benchmark loans classified by LTV range to produce these results, a

large portion (roughly half) of the loans provided by one Enterprise have no LTV information available. The average default rate on

those loans was 12.2 percent.

To place these rates in a broader

context, they can be compared with the

loss coverage requirements established

by the rating agencies for the rating of

securitized mortgage pools that are not

guaranteed by the Enterprises. To

receive a given rating, the security

structure must incorporate protection

against credit losses, with higher ratings

requiring greater loss protection. Each

rating agency has its own methodology

for determining loss coverage

requirements (the required loss

protection as a percentage of the total

loan principal at the time a pool is

formed), but all are based in some way

on stress tests or default models

calibrated to various severe historical

episodes. Different loss rates have
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29599

26See issue 2. ‘‘Data’’ under section ‘‘Definitions,

Data, and Procedures’’ above.

27The term ‘‘single-family FRM’’ is used to mean

an FRM secured by a single-family property.

28The 1992 Act, section 1361(d)(2), defines ‘‘type

of mortgage product’’ to mean a classification of

mortgages based upon characteristics that include:

(1) the type of property securing the mortgages (e.g.,

single-family, PUD, etc.), (2) the interest rate type

(fixed, adjustable, balloon, etc.), (3) the priority of

the liens securing the mortgages, and (4) the terms

of the mortgages (15 years, 30 years, etc.) (12 U.S.C.

4611(d)(2)).

become associated in the industry with

different ratings, which in turn have

been associated with hypothetical or

actual historical experiences of varying

severity by the rating agencies in their

publications.

The rating agency loss coverage

requirements are a relevant industry

point of reference from which to gauge

the mortgage credit losses of the

benchmark loss experience. A rating

agency’s loss coverage requirement

represents a projected cumulative loss

experience of a fixed pool of mortgage

loans. Once the loans in a fixed pool are

identified, none is replaced and no

additional loans are added to the pool;

the pool dwindles over time as loans

mature, prepay, or default. The

benchmark loss experience is, in effect,

the average experience of two fixed

pools, one for each Enterprise.

Four rating agencies are active in the

rating of mortgage pools: Standard and

Poor’s Ratings Group (S&P), Moody’s

Investors Service (Moody’s), Fitch

Investors Service, Inc. (Fitch), and Duff

& Phelps Credit Rating Co. (Duff &

Phelps). Although their methodologies

differ, they are sufficiently similar to

permit a comparison of the benchmark

results with each of the four rating

scales. In all cases, the published ‘‘base

case’’ loss coverage requirements apply

to a large, nationally diverse pool of

good-quality, newly-originated, 30-year,

fixed-rate loans on owner-occupied,

single-family dwellings; and the loss

coverage requirements vary based on the

distribution of LTV ratios in the pool.

For purposes of comparison, Table 5

shows the required loss coverage

requirements, by rating agency and

rating, for a hypothetical pool of newlyoriginated FRMs 26 with a given

distribution of LTV ratios. These

coverage requirements are indicative of

rating agency requirements derived from

agency publications. Requirements for

actual pools are adjusted to take into

account a variety of factors other than

LTV ratios, such as different mortgage

products, underwriting standards,

servicing practices, and regional

economic considerations.

Applying the LTV-specific loss rates

of the benchmark loss experience

(shown in Table 4) to a pool with the

hypothetical LTV distribution shown in

the note to Table 5 yields an overall loss

rate of 6.2 percent, a rate roughly

comparable to the loss coverage

requirements for double A rated

securities backed by such a pool.

TABLE 5.— LOSS COVERAGE REQUIREMENTS FOR A POOL WITH A HYPOTHETICAL LTV DISTRIBUTION, BY RATING LEVEL

AND RATING AGENCY*

Rating level S&P Moody’s Fitch Duff &

Phelps

Triple A ............................................................................................................................................................ 9.2% n.a. 9.1% 8.0%

Double A ......................................................................................................................................................... 5.7% **7.0% 6.0% 4.9%

Single A ........................................................................................................................................................... 4.1% n.a. n.a. 2.7%

n.a. = not available.

Weighted Loss Rate, Benchmark Loss

Experience, Using the Same

Hypothetical LTV Distribution—6.2%

* Derived by OFHEO from numerical

requirements published by the rating

agencies, for a large, nationally diverse pool

of newly-originated, single-family, 30-year,

fixed-rate mortgages with LTV ratios of loans

distributed as follows:

LTV range

Percent

of loans

in pool

0%<LTV≤60% ............................... 15

60%<LTV≤70% ............................. 15

70%<LTV≤75% ............................. 15

75%<LTV≤80% ............................. 15

80%<LTV≤85% ............................. 15

85%<LTV≤90% ............................. 15

90%<LTV≤95% ............................. 10

Loss coverage requirements for specific pools

may reflect many pool characteristics other

than LTV distribution. In this table, Fitch

coverage rates are based on medians of

individual Metropolitan Statistical Areas

requirements; Moody’s and Duff & Phelps

rates are based on rates for mortgages with

intermediate risk characteristics (those that

receive a risk factor of one). For the

underlying LTV-specific requirements and

for further details, see S&P, Residential

Mortgages: Criteria, Statistics, Credit Week,

Oct. 25, 1993; Moody’s, Moody’s Approach

to Rating Residential Mortgage PassThroughs, Structured Finance Research and

Commentary: Special Report (1995); Fitch,

Fitch Mortgage Default Model, Fitch

Research, June 28, 1993; and Duff & Phelps

Residential Mortgage-Backed Securities

Group, The Rating of Residential MortgageBacked Securities, Oct. 1995.

** Moody’s has informed OFHEO that its

current practice differs from that described in

its 1991 publication. The coverage

requirement for ‘‘AA’’ rating, consistent with

the assumptions of the table, now would be

5.6%.

Implications of the Benchmark Loss

Experience for the Stress Test

The stress test subjects the Enterprises

to severe credit losses and extreme

interest rate changes. The benchmark

loss experience will be the basis for

determining mortgage credit losses that

the Enterprises will experience during

the stress period. Although the

benchmark loss experience relates most

directly to single-family FRMs,27 losses

on other mortgage assets and guarantees

also will be related to the benchmark

experience in the stress test in a manner

that reflects the different risk

characteristics of other mortgages

compared with those of single-family

FRMs.

The projection of credit losses on an

Enterprise’s loans in the stress period

will not involve direct application of the

loss rate of the benchmark loss

experience. That experience reflects the

specific characteristics of the

benchmark loans and the economic

circumstances affecting the default and

severity behavior of those loans. The

characteristics of an Enterprise’s loans

during any application of the stress test

(stress test loans) will differ from those

of benchmark loans in a number of

important ways. In addition to

differences in mortgage product type,28

differences in the mix of LTV ratios may

be especially important, and OFHEO

will design the stress test to take

account of them. These differences in

LTV ratios will reflect differences

between the original LTVs of benchmark

loans and those of an Enterprise’s stress

test loans. LTV ratios of stress test loans

also will differ from those of benchmark
29600 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

29 1992 Act, section 1361(a)(2)(E) (12 U.S.C.

4611(a)(2)(E)).

loans because most stress test loans will

not be newly-originated loans. The LTV

ratios of stress test loans will reflect

house price changes subsequent to

origination. Many will have lower LTV

ratios than they originally did, but some

will be higher, and a few will have LTV

ratios that are higher than the highest

original LTV ratios of benchmark loans.

OFHEO is also considering whether and

in what manner to incorporate the effect

of a loan’s age on the likelihood and

timing of default in the stress test. Loan

age is another factor that will

distinguish some stress test loans from

those in the benchmark loss experience,

because some of the stress test loans

will be older than the oldest benchmark

loans.

To incorporate properly the effects of

differences in LTV ratios, age of loans,

and mortgage product type in the stress

test, OFHEO is examining the effects of

these factors on the default and severity

behavior of a broader sample of loans

than those of the benchmark loss

experience.

Differences between the economic

environment of the stress test and the

environment affecting benchmark loans

might also be expected to affect loan

performance. The levels and patterns of

change in interest rates will differ

considerably among alternative interest

rate scenarios and will not match the

interest rate history of the time period

affecting benchmark loans. Such

differences in interest rates might

reasonably be associated with

differences in prepayments and house

prices, which could have a significant

impact on credit losses. OFHEO is

considering whether or to what extent to

take into account in the stress test the

effect of interest rates on prepayments

and house prices. In doing so, the stress

test must incorporate the statutory

requirement that the stress test take into

account the effect of a correspondingly

higher rate of general price inflation, if

the 10-year CMT yield is assumed to

increase more than 50 percent during

the stress period.29

The purpose of incorporating the

effects of some or all of these factors

(and possibly others) is to make the

stress test better reflect the risks, under

stress test conditions, of loans owned or

guaranteed by the Enterprises. OFHEO

plans to design the test so that losses on

loans with characteristics matching

those of the benchmark loans would be

projected, under economic

circumstances matching those affecting

the benchmark loans, to occur at the

same rate of default and severity as the

benchmark loans. However, as

discussed above, projected credit losses

will differ from benchmark losses to

reflect key differences in risk affecting

each Enterprise’s stress test loans. The

stress test will also take into account, for

example, offsetting receipts from

mortgage insurance, recourse, and other

credit enhancements. OFHEO will

present the specific methodology for

determining credit losses in the stress

test in the second NPR.

Issues, Alternatives Considered, and

Comments Received

OFHEO encountered a number of

methodological issues in identifying the

benchmark loss experience. Many of

these issues were mentioned

specifically in the ANPR. In this section,

OFHEO addresses the issues, discusses

alternative methodologies it considered,

and responds to related comments

received on the ANPR.

OFHEO chose procedures best

designed to identify the worst loss

experience (meeting statutory time,

contiguity, and population

requirements) for mortgage loans with

characteristics similar to those

purchased or guaranteed by both

Enterprises. In choosing among

alternatives, OFHEO sought approaches

that were most appropriate for setting

capital standards. Because capital

standards should be clear and

predictable, OFHEO favored

straightforward approaches over those

that might require needlessly complex

computations or frequent adjustments or

changes to the benchmark loss

experience. Wherever appropriate for

setting capital standards, OFHEO

resolved issues in ways that were

consistent with analytical practices

within or related to the residential

mortgage industry. In particular,

OFHEO looked to the practices of credit

rating agencies and how the rating

agencies analyze the credit risk of

securitized mortgage pools, as credit

rating agency practices often are

published and readily available. OFHEO

also considered practices of the

Enterprises, mortgage insurers, and, as

appropriate, the regulators of portfolio

lenders. OFHEO also favored

approaches that would make best use of

the data available for analysis.

1. Data Sources Used to Define the

Benchmark Loss Experience

The ANPR requested comment on

whether OFHEO should use data from

sources other than the Enterprises to

identify the benchmark loss experience.

After considering the issue, OFHEO is

proposing to use only Enterprise data.

OFHEO has concluded that the two

Enterprise data sets are the most

relevant sources currently available for

determining a benchmark loss

experience for use in a risk-based

capital stress test. The choice is

consistent with the general practice of

banking and thrift industry regulators

and the credit rating agencies, which

use data on the loss experience of the

relevant industry in determining capital

adequacy.

Non-Enterprise mortgage default and

severity data are necessarily less

representative of the experience of loans

owned or guaranteed by these large

secondary mortgage market companies.

FHA data, for example, reflect the very

different market focus of that agency. A

large portion of FHA loans would not

have met Enterprise underwriting

guidelines, and would, therefore, be

expected to exhibit risk characteristics

different from those of the loans that the

Enterprises purchased or guaranteed.

OFHEO was in a unique position to

obtain and analyze extensive data on the

loss experience of individual Enterprise

loans. This data included information

on a large portion of loans originated

and purchased since 1979. Severity data

were available for a majority of the

defaulted loans, which was sufficient

for OFHEO’s analysis.

The majority of comment letters

supported the exclusive use of

Enterprise data. One commenter,

America’s Community Bankers (ACB),

however, suggested that it would be

inconsistent with the 1992 Act to rely

solely on Enterprise data if, as a result,

a relatively recent period of severe

losses might be overlooked. The same

commenter stated that ‘‘[t]he Federal

Housing Administration and credit

bureau data that are identified as

supplementary sources [in the ANPR]

should also be accompanied by private

mortgage insurance data.’’ For the

reasons cited above, OFHEO believes

that the exclusive use of Enterprise data

to identify the benchmark loss

experience is the most reasonable

approach. OFHEO agrees that if using

only Enterprise data would cause a

recent period of severe losses to be

overlooked, other data should be

included in the analysis. However, the

quantity and detail of the Enterprise

data are such that those data reflect

losses in recent periods as well as or

better than data from any other sources.

2. Loan and Property Types Included in

the Benchmark Analysis

OFHEO proposes to use single-family

FRMs in the benchmark analysis. The

analysis excludes other loan types, such

as adjustable-rate and balloon mortgages

and loans secured by other property
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29601

30Congressional Budget Office, Controlling the

Risks Of Government-Sponsored Enterprises, at 125

(April 1991).

31 Government-Sponsored Enterprises Financial

Safety and Soundness Act of 1991, H.R. Rep. No.

206, 102d Cong., 1st Sess. 66 (1991).

32 Id.

33Federal Housing Enterprises Regulatory Reform

Act of 1992, S. Rep. No. 282, 102d Cong., 2d Sess.

21 (1992).

34Fitch and Moody’s note that they reduce the

risk of 15-year mortgages in their mortgage default

models, implying that single-family FRMs are the

standard. See, e.g., Fitch, Fitch Mortgage Default

Model, Fitch Research, June 28, 1993, at 9; and

Moody’s, Moody’s Approach to Rating Residential

Mortgage Pass-Throughs, Structured Finance

Research and Commentary: Special Report (1995),

at 10–14. However, S&P and Duff & Phelps

explicitly note that 30-year FRMs are the standard.

S&P, Residential Mortgages: Criteria, Statistics,

Credit Week, Oct. 25, 1993, at 20; and Duff &

Phelps, The Rating of Residential Mortgage-Backed

Securities, Oct. 1995, at 15.

types such as multi-unit and 2- to 4-unit

structures, condominiums, PUDs, or

cooperatives.

OFHEO believes it is appropriate to

identify the benchmark loss experience

on the basis of single-family FRMs

because of the homogeneity of these

mortgages and their preponderance in

the Enterprises’ portfolios and mortgagebacked securities, especially in the early

1980s. Data on these mortgages are

available from both Enterprises in all

regions for loans originated in 1979 and

subsequently. Single-family FRMs

accounted for over three-quarters of the

total dollar volume of Enterprise

mortgages purchased between 1981 and

1985 and nearly two-thirds of mortgages

purchased between 1986 and 1990.30

OFHEO’s proposed approach is

supported by the legislative history of

the 1992 Act. The House and Senate

Committee reports both suggested that

OFHEO should rely on single-family

FRMs in identifying the benchmark loss

experience. The House report explained

that:

Conventional, 30-year, fixed-rate, singlefamily mortgages account for about twothirds of the mortgages purchased by Fannie

Mae and Freddie Mac in each year. The most

reliable loan performance data the

enterprises possess pertain to such loans.31

The House report also stated that:

The bill would require the Director to

measure rates of default in a manner that was

reasonably related to prevailing industry

practice.

Prevailing industry practice at this time, as

reflected by the practices of Fannie Mae,

Freddie Mac, mortgage insurers and rating

agencies, is to utilize estimated lifetime

default rates of a group of mortgages with

similar characteristics, e.g. product type and

loan-to-value ratio, originated over a specific

time period.32

The Senate report counseled that:

The Director is only required to use data

from the Benchmark origination years on

rates of default and loss severity for the most

common type or types of mortgages held or

guaranteed during that period. Loss rates on

other types of mortgages should be related to

loss rates on the ‘‘standard’’ mortgage types

according to prevailing practice * * *.33

The use of data on single-family FRMs

from a historically stressful period to

establish a standard for evaluating

potential future credit losses is also

consistent with credit rating agency

practice. For example, single-family

FRMs constitute the benchmark

mortgage product type for the four

rating agencies.34 Lack of data on other

mortgage product types is likely a major

reason for this practice. As noted above,

the volume of Enterprise loans secured

by other mortgage product types during

the early and middle 1980s was very

small relative to the volume of singlefamily FRMs purchased or guaranteed

by the Enterprises. These small sample

sizes were an additional factor in

OFHEO’s decision not to include

different mortgage types in its analysis.

For purposes of the stress test, OFHEO

will estimate the risk characteristics

(and, ultimately, project the loss rates)

of other Enterprise mortgage product

types using all relevant historical data.

This part of the stress test analysis will

be discussed in detail in the second

NPR.

All of the ANPR comments that

discussed the issue of which mortgage

product type(s) to include in the

benchmark analysis were consistent

with OFHEO’s general approach of

analyzing only the most common

mortgage product types purchased by

the Enterprises. While agreeing with

OFHEO’s general approach, Fannie Mae

suggested a minor variation: to base the

single benchmark loss experience on

‘‘fixed rate, 30-year, conventional

mortgages on single-family, owneroccupied, primary residences,’’ thus

implicitly including condominiums,

PUDs, and cooperatives. OFHEO

considered this option, but concluded

that loans secured by condominiums,

PUDs, and cooperatives should not be

included, because they are significantly

different types of properties and involve

fees and contractual agreements with

third parties that may cause the default

and severity experience of the loans to

differ from that of single-family

mortgages. OFHEO decided not to

include multifamily loans in the

identification of the benchmark loss

experience because, as highlighted in

the ANPR and reinforced by many

comments, multifamily loans and the

properties underlying these loans

present significantly different credit,

market, and institutional risks to the

Enterprises than do single-family

mortgages.

3. Determination of a Single Benchmark

State/Origination Year Combination or a

Separate Area and Period for Each

Enterprise

The ANPR also suggested that OFHEO

might combine, in some fashion, data

from the two Enterprises before

determining the state/origination year

combination with the worst joint loss

experience, or, alternatively, that

OFHEO might determine the worst

experience for each Enterprise

separately. If the latter approach were

adopted, the ANPR suggested the

possibility of using a simple or weighted

average of default rates to derive the

single benchmark loss experience to

apply to both Enterprises in the stress

test.

OFHEO is proposing to identify the

benchmark loss experience on the basis

of a single benchmark state/origination

year combination representing the worst

combined loss experience on mortgages

owned or guaranteed by the Enterprises.

All the comments were consistent with

this proposal.

4. Role of Severity Data in Identifying

the Benchmark Loss Experience

The ANPR suggested that, as an

alternative to identifying a specific area

and time period that experienced the

highest overall loss rate, OFHEO might

need to use severity data from different

sources, time periods, or areas than

those used to determine the average

default rates in the benchmark loss

experience. OFHEO was concerned at

the time the ANPR was published that

the quality or quantity of severity data

might be inadequate to derive

benchmark loss rates. Subsequently,

OFHEO obtained severity data from the

Enterprises that were adequate to

determine severity experience from all

potential benchmark areas and

origination years. Severity data were

available for 58% of defaulted loans and

in higher percentages for later

origination years. OFHEO, therefore,

proposes to identify the benchmark loss

experience on the basis of the worst loss

experience of Enterprise loans, rather

than only the worst default experience.

This approach is consistent with all

comments on the issue.

Some commenters apparently

concluded that OFHEO was considering

identifying separately the states and

origination years with the highest

default rate and the states and

origination years with the highest

severity rate, and then combining them
29602 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

35See H.R. Rep. No. 206, at 65–6, and S. Rep. No.

282, at 21.

36See issue 6. ‘‘Definitions of ‘‘Severity Rate’’ and

‘‘Losses’.’’

37See, e.g., S&P, Study Tracks MBS Loss and

Default Experience, Credit Week, June 19, 1995

(credit rating agency practice); Moody;s, Residential

Mortgage-Backed Securities Credit Indices Update:

Are Slipping ARM Delinquencies Another Signal of

Consumer Debt Problems?, Structured Finance

Credit Index, Dec. 15, 1995 (same). See also

Mortgage Information Corp., The Market Pulse,

Sept. 1995 (securities industry practice).

38H.R. Rep. No. 206, at 66.

39S. Rep. No. 282, at 20.

to establish the overall benchmark loss

rates. OFHEO did not intend to suggest

such a synthesis of two different

historical experiences. In OFHEO’s

view, such an approach would be

inconsistent with the provisions of the

1992 Act and its legislative history; first,

because it could result in an overall

benchmark loss rate not ‘‘reasonably

related’’ to any actual historical loss

experience and, second, because the

House and Senate reports consistently

describe ‘‘experience’’ in the singular.35

5. Definition of ‘‘Default Rate’’

a. In General. OFHEO defined the

default rate of a group of loans as the

ratio of the aggregate original principal

balance of the defaulted loans in the

group to the aggregate original principal

balance of all loans in the group.

Although default rates are sometimes

defined as the number of defaulted

loans divided by the number of loans in

the group, the dollar values more

accurately describe the economic

impact if large and small loans default

at different rates.

The Enterprise data used in the

default analysis did not include

balances at the date of last paid

installment (LPI). In some

circumstances, the best measurement of

default rates using dollar values would

be based upon principal balances at the

LPI date, rather than the original

principal balance. However, that is not

so in this case, because the ultimate

focus of the analysis was loss rates, not

default rates, and loss rates are a

product of default and severity rates.36

b. Interpretation of ‘‘Years’’. OFHEO

considered two approaches to analyzing

default rates, one based upon

origination years (origination year

approach) and one based upon exposure

years (exposure year approach). Under

an origination year approach, mortgage

loans originated during specified years

are tracked as a group until maturity or

some intermediate term. Default rates

for that group of loans over the specified

term are expressed as the cumulative

defaulted loan balances divided by the

sum of the original balances of all the

loans in the group. Exposure year

default rates, in contrast, are calculated

for ‘‘exposure years,’’ which are the

years in which the loans are subject to

default. Exposure year default rates are

expressed as the aggregate balances on

all loans (from all origination years) that

defaulted during a given period of

consecutive exposure years divided by

the unpaid balances of all loans active

at the start of that period.

OFHEO proposes to identify the

benchmark loss experience using an

origination year approach. OFHEO

favors the origination year standard

because (1) it is consistent with industry

practice; (2) it is the approach that was

anticipated in the legislative history;

and (3) using an exposure year approach

would have required annual

information on unpaid balances, which

was not included in the Enterprises’’

data on individual loans and would

have required reliance on estimates.

Industry practice is to measure default

and loss rates based on origination year

data. Moody’s Residential MortgageBacked Securities Credit Indices are

broken out by origination year, as are

S&P’s surveillance reviews.37 The

Congressional Committees that

considered the 1992 Act understood

that prevailing industry practice was to

measure rates of loss based on

origination years. The House report

states: ‘‘Prevailing industry practice at

this time, as reflected by the practices of

Fannie Mae, Freddie Mac, mortgage

insurers and rating agencies, is to utilize

estimated lifetime default rates of a

group of mortgages with similar

characteristics, e.g. product type and

loan-to-value ratio, originated over a

specific time period.’’ 38 Similarly, the

Senate report provides: ‘‘Currently, the

prevailing practice in the Committee’s

judgment is to examine losses by

origination year, that is, losses on

mortgages purchased by the

[Enterprises] in a particular year.’’ 39

Although loans purchased in a

particular year include some loans that

were not originated in that year, this

recommendation is consistent with

OFHEO’s general approach.

Most commenters, including the

Department of Veterans Affairs, both

Enterprises, and two trade associations,

the Mortgage Bankers Association of

America (MBA) and the National

Association of Realtors (NAR), favored

the origination year approach. These

commenters viewed that approach as

the most consistent with industry

practice. For instance, MBA noted that,

because of its predictive value, the

origination year approach is used by

Fannie Mae, Freddie Mac, and the

lending industry.

Without stating a clear preference,

HUD stated that an exposure year

approach would be more appropriate for

a stress test that assumes no new

business. The comment may reflect a

view that the loss experience of a

mixture of old and new loans would be

a more appropriate benchmark

experience than the experience of

newly-originated loans, because the

Enterprises would be purchasing

relatively few new loans during the

stress period. ACB was the only

commenter clearly preferring the

exposure year approach. Its suggestion

that an exposure year approach

dovetails better with what it described

as the ‘‘foreclosure/disposition

orientation’’ of the 1992 Act appears to

be based on similar reasoning. OFHEO

believes that HUD’s and ACB’s concern

will be dealt with in the stress test,

which will take into account seasoning,

age, amortization, and other factors that

are found to affect losses on loans. Thus,

the stress test will not necessarily

project the same loss rate for two loans

of different ages that are otherwise

similar.

c. Definition of ‘‘Defaulted Loans’’.

OFHEO defined ‘‘defaulted loans’’ as

loans that, within 10 years following

their origination, (1) resulted in preforeclosure sale, (2) completed

foreclosure, (3) resulted in REO, or (4)

resulted in a credit loss to an Enterprise.

The Enterprises’’ data provided little

information on loss mitigation

techniques such as sales prior to

completion of foreclosure, loan

restructurings, or interest rate

buydowns. Although one Enterprise’s

data did identify loans that resulted in

pre-foreclosure sales, it was not possible

to include any other loans that were

subject to loss mitigation efforts unless

they resulted in a completed foreclosure

or in REO. Data sufficient to determine

loans on which these techniques were

applied and the amounts of loss

involved exist only for very recent

years.

OFHEO’s definition only includes

defaults that occurred within 10 years

after origination, which facilitated

comparisons of data from different

origination years. Although OFHEO

could have estimated lifetime default

rates for all groups of loans, that

approach would have required

assumptions and extrapolations. It

would be unlikely to yield a different

benchmark experience because the data

indicate that the vast majority of

mortgage defaults occur within 10 years

of origination. Further, a 10-year rate is
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29603

40The financing costs associated with properties

acquired through foreclosure from the time of

foreclosure through property disposition were

calculated using the average from 1982 through

1992 of the 12-month Federal Agency constant

maturity yield computed by Bank of America.

41See, e.g., Duff & Phelps, The Rating of

Residential Mortgage-Backed Securities, Oct. 1995,

at 18; Moody’s, Moody’s Approach to Rating

Residential Mortgage Pass-Throughs, Structured

Finance Research and Commentary: Special Report

(1995), at 9, 13; and S&P, Residential Mortgages:

Criteria, Statistics, Credit Week, Oct. 25, 1993, at 18.

42Section 1361(a)(1) (12 U.S.C. 4611 (a)(1)).

43 Duff & Phelps, The Rating of Residential

Mortgage-Backed Securities, Oct. 1995, at 31; and

Moody’s, Moody’s Approach to Rating Residential

Mortgage Pass-Throughs, Structured Finance

Research and Commentary: Special Report (1995),

at 19.

44S. Rep. No. 282, at 20.

consistent with the 10-year time span of

the stress test.

All commenters who addressed the

issue supported OFHEO’s general

approach to defining default. OFHEO

agreed with the thrust of all these

comments, which were concerned with

avoiding counting as ‘‘defaults’’ loans

that are brought current or rehabilitated

without loss to the Enterprises.

ACB would have adjusted OFHEO’s

definition of default to account for the

effects of loss mitigation, because

foreclosure is not the only outcome

under which the Enterprises may suffer

loss. OFHEO agrees with this comment.

However, as noted above,

comprehensive information on most

types of loss mitigation is unavailable in

the historical data available to OFHEO.

6. Definitions of ‘‘Severity Rate’’ and

‘‘Losses’’

For any group of defaulted loans, the

‘‘severity rate’’ was defined as the

aggregate losses on those loans divided

by the aggregate original principal

balance of all loans in the group.

OFHEO defined ‘‘losses’’ on defaulted

loans in categories 1, 2, or 3 of the

definition of defaulted loans as the

difference between: (1) The sum of the

principal and interest owed when the

borrower lost title to the property

securing the mortgage; REO financing

costs 40 through the date of property

disposition; and cash expenses incurred

during the foreclosure process, REO

holding period, and property

liquidation process; and (2) the sum of

the property sales price and any other

liquidation proceeds (except those

resulting from private mortgage

insurance proceeds or other third-party

credit enhancements). Losses on

defaulted loans not in categories 1, 2, or

3 of the definition were defined as the

amount of the financial loss to the

Enterprise.

This definition is consistent with

industry practice. Duff & Phelps,

Moody’s, and S&P include all of these

items in their respective definitions of

severity. Proceeds from mortgage

insurance are sometimes included;

however, as discussed below, OFHEO

did not include mortgage insurance

proceeds for purposes of determining

the benchmark loss experience.41 Some

accounting definitions of loss do not

include lost interest on the loans or REO

financing costs because these costs are

reflected elsewhere in a company’s

financial statements. OFHEO

determined that its definition better

reflects the economic losses on

defaulted loans and is, therefore, more

appropriate.

Consistent with the calculation of

default rate discussed above, OFHEO

calculated severity rate as a percentage

of the original balance, rather than the

balance at the LPI date of the defaulted

loans. Loss rates are the product of the

default and severity rates. Because the

balances of defaulted loans appear in

the numerator of default rate

calculations and in the denominator of

severity rate calculations, errors in

measuring those balances will tend to be

offsetting when the two rates are

multiplied in the calculation of loss

rates. If it were possible, it would have

been more accurate to use balances of

defaulted loans at LPI date for both

rates, but using original balances for

both should have little effect on loss

rates.

Fannie Mae’s ANPR comment

suggested that OFHEO should define

‘‘losses’’ to incorporate the proceeds of

mortgage insurance. OFHEO is

proposing to exclude the impact of

mortgage insurance and other thirdparty credit enhancements from

consideration in identifying the

benchmark loss experience because the

1992 Act requires OFHEO to identify

the highest credit losses on mortgages,

not the highest net credit losses to the

Enterprises. Moreover, third-party

sources of credit support vary in scope,

terms and type of coverage, and can

change (and have changed) over time.

OFHEO intends to propose in the

second NPR how the stress test will take

into account the impact of third-party

credit enhancements on mortgage

losses.

7. Definition of ‘‘Contiguous Areas’’

The 1992 Act requires that the

benchmark loss experience must have

‘‘occurred in contiguous areas of the

United States containing an aggregate of

not less than 5 percent of the total

population of the United States

* * *.’’ 42 In determining the

appropriate level of geographic

aggregation to employ in identifying the

benchmark area, OFHEO considered

using entire states or using substate

areas based on the first two or three

digits of ZIP Codes. After considering

the various options, OFHEO decided to

use states as the lowest level of

aggregation. OFHEO will consider using

substate areas in the future, taking into

account changing geographic patterns of

loss as well as any new developments

in data aggregation technology, if

appropriate.

OFHEO found that states are the most

logical, efficient, and reasonable

geographic units from which to

construct a benchmark area. Although

rating agencies conduct studies at

various levels of aggregation, analysis at

the state level is common practice. For

example, Moody’s has established

diversification criteria for loan pools

based on loan distribution by state, and,

in stress tests, both Moody’s and Duff &

Phelps have projected mean times to

foreclosure based on state locations.43

The level of geographic aggregation

has a significant impact on the level of

potential benchmark loss rates. In

general, the smaller the geographic units

used, the higher the loss rates that can

be identified. By connecting pockets of

severe losses with narrow parcels of

land, OFHEO could create an area with

extremely high loss rates.

However, such a result is not

consistent with the intent of the

legislation, which envisioned that the

benchmark area would be ‘‘reasonably

compact.’’ 44 Furthermore, use of areas

defined by ZIP Code would have greatly

complicated the process of identifying

the benchmark area by enormously

increasing the number of candidates

requiring consideration.

Commenters who addressed this issue

unanimously supported the use of states

as the smallest geographic unit in the

benchmark analysis. MBA suggested

that a contiguous area based on smaller

units could look ‘‘gerrymandered’’ and

that ‘‘[f]inding the exact combination [of

counties and metropolitan statistical

areas] to produce the most severe loss

results * * * should not be the goal.’’

Freddie Mac observed that ‘‘using finer

geographic areas [than states] would

present significant computational

difficulties in aggregating to five percent

of the population.’’

8. Procedures for Accounting for

Different LTV Ratios

LTV ratios are highly correlated with

mortgage losses. Therefore, the different

distributions of LTV ratios in candidate

state/year combinations have an impact
29604 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

on the relative loss rates of those

candidates. In the ANPR, OFHEO

suggested it would consider grouping

loans by LTV ratio, computing separate

default or loss rates for loans in each

LTV range, and computing overall

default or loss rates by assuming some

standard distribution of LTV ratios and

weighting the LTV-specific loss rates

according to this distribution. After

further evaluation, OFHEO has decided

to compute loss rates for candidates on

a dollar weighted basis, that is, based on

loan balances without regard to LTV

ratios.

OFHEO selected the simpler approach

for three reasons. First, in many

candidate state/year combinations there

are too few loans in some LTV ranges

for meaningful analysis. Second,

OFHEO has found no acceptable basis to

justify using any specific LTV weights

to identify the benchmark loss

experience. Finally, weighting loss rates

by LTV category would be inconsistent

with the intent of the 1992 Act that

OFHEO determine the worst actual

mortgage loss experience. Although the

effects on mortgage losses of different

LTV distributions are not controlled for

in the identification of the benchmark

loss experience, those effects will be

accounted for in the stress test.

Fannie Mae commented that in

comparing candidates, loss rates

‘‘should be constructed from LTVspecific default and severity rates,

weighted by the proportions of loans

outstanding in the current book of

business.’’ The rationale for this

approach is that, because distributions

of LTV ratios at origination in candidate

state/year combinations will differ from

the Enterprises’ current LTV

distribution, loss rates of candidates

should be normalized (weighted by the

current book of business) to provide the

most relevant measure of risk exposure.

For the reasons discussed above,

OFHEO believes Fannie Mae’s suggested

weighting approach is inappropriate in

the benchmark analysis. Further,

because LTV distributions change

constantly and changing LTV

weightings will alter loss figures for

candidate state/year combinations,

Fannie Mae’s approach would

necessitate the frequent reconsideration

of candidates, increasing the

unpredictability and regulatory burden

of the risk-based capital regulation.

9. Procedures for Combining Data from

Different States and Years in Computing

Default and Severity Rates

In computing default and severity

rates for specific candidate state/year

combinations, OFHEO treated loans

from different states and different

origination years within that

combination equally, producing a single

aggregate default rate and a single

aggregate severity rate for each

Enterprise. OFHEO adopted this

approach because it is a straightforward

and simple way to derive aggregate

default and severity rates. Moreover, the

Enterprise data sets, especially in the

early 1980s, are not sufficiently

complete to reflect accurately the

distribution by origination year and

state of Enterprise purchases of loans.

OFHEO’s approach more accurately

reflects the actual loss experience of

loans owned or guaranteed by the

Enterprises in candidate state/year

combinations than other approaches

OFHEO considered.

Fannie Mae recommended that

OFHEO calculate state-level loss rates

and that ‘‘benchmark loss rates * * * be

built by constructing populationweighted averages of state loss rates

* * * to meet the five percent or greater

standard.’’ Freddie Mac also suggested

this approach, and stated that ‘‘[t]his

method would appropriately weight

economic events rather than

emphasizing an Enterprise’s market

share in each state during the relevant

time period.’’ Freddie Mac

recommended extending this approach

by calculating separate state loss rates

for each origination year and averaging

them for each state before population

weighting the resulting average state

loss rates.

OFHEO disagrees that the appropriate

goal in identifying the benchmark loss

experience is to reflect the underlying

economic circumstances on a

population- and time-weighted basis.

Rather, OFHEO believes it is

appropriate to reflect the actual loss

experience of a relevant group of

mortgages. The 1992 Act specifies that

the benchmark loss experience should

be identified based on the highest rates

of loss, not the highest rates that would

have occurred if loans had been

distributed across states according to

population and evenly across

origination years. Enterprise purchases

are not made evenly on a per capita

basis, and some years have much higher

levels of mortgage lending than others.

OFHEO, therefore, has no basis to

conclude that population weighting and

annual averaging would yield accurate

estimates of either Enterprise’s default

or severity rates for candidate state/year

combinations.

Furthermore, population weighting

and averaging across origination years

would place heavy reliance on very

small amounts of data from some states

for some years. Freddie Mac suggested

that OFHEO should ‘‘[e]stablish a

minimum acceptable number of

observations or dollar volume for each

state/origination-year combination for

each Enterprise, to ensure that there are

sufficient data from which to make valid

inferences * * *. ’’ Although such an

approach would address Freddie Mac’s

concern, it would do so at the cost of

eliminating large portions of the

available data set, sharply restricting the

range of state/year combinations that

could be considered. Instead, OFHEO

considered the available data from less

populous states, and avoided placing

undue emphasis on small loan samples

by pooling data from all states and

origination years of a candidate before

calculating default and severity rates.

10. Procedures for Combining Default

and Severity Rates of the Two

Enterprises

OFHEO calculated the default and

severity rates for each Enterprise

separately for candidate state/year

combinations, then averaged the results.

The proposed methodology takes

account of the significant differences in

the mortgage loan purchases of the two

Enterprises in the early 1980s, which

are reflected in their respective data

sets. The loans in each data set differ by

predominant purpose of purchase

(securitization or portfolio holding), mix

of lender types (such as thrifts or

mortgage banks), geographic

distributions, and default rates (Fannie

Mae’s were consistently higher in that

period). These differences reflect

historical differences in the business

strategies, customers, and markets of the

Enterprises.

Since the early 1980s, the Enterprises’

business activities, markets, and credit

risk profiles have become more similar.

For example, during that time, Fannie

Mae primarily bought loans and held

them in portfolio, while Freddie Mac

securitized all but a few loans it

purchased. Currently, both Enterprises

have extensive portfolio investments in

mortgages and also guarantee an even

larger volume of securities backed by

mortgages.

In OFHEO’s judgment, each of the two

data sets constitutes an equally relevant

historical experience. Merging the data

of the two Enterprises without averaging

would cause the experience of one or

the other Enterprise’s loans to dominate

the resulting combined loan sample for

many candidates. The proposed

methodology avoids that result by

giving equal weight to the two equally

relevant experiences.

Both Freddie Mac and Fannie Mae

suggested that OFHEO base the

selection of the benchmark loss

experience on a simple average of the
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29605

45Section 1361(a)(1) (12 U.S.C. 4611(a)(1)).

two Enterprises’ experiences. Fannie

Mae stated that ‘‘loss rates should equal

the average of Fannie Mae and Freddie

Mac experience.’’ Freddie Mac agreed,

stating that ‘‘[t]aking the simple average

of the historical experience of the

[Enterprises] would help smooth such

institutional differences, thereby

emphasizing the macroeconomic

aspects of historical experience.’’

In its comment, HUD stated that

‘‘[t]he language of Section 1361(a)(1) [of

the 1992 Act] seems to constrain

OFHEO to using historical weights

based on the [Enterprises’] respective

market shares in averaging Fannie [Mae]

and Freddie [Mac] default rates.’’ As

discussed above, OFHEO believes an

equal weighting of the two Enterprises’

default and severity rates experiences is

more appropriate at this time. Enterprise

historical data from the late 1970s and

early 1980s do not provide an accurate

estimate of the relative number of

single-family FRMs actually purchased

or guaranteed by each Enterprise from

specific origination years or geographic

areas (including the nation as a whole).

Therefore, market share weighting using

that data would be difficult and

imprecise.

The 1992 Act provides broad

discretion to the Director to use any

reasonable weighting or averaging

method in the identification of the

benchmark loss experience.45 The

proposed approach, which gives equal

weight to the default and severity

experience of each Enterprise’s loans in

identifying the benchmark loss

experience, is within the Director’s

discretion. Loss data for loans

originating in more recent years than

those in the currently identified

benchmark loss experience have been

and should continue to be more

complete. As OFHEO monitors future

data, it will consider whether the new

data would provide a basis for a

different method of weighting, such as

market share weighting. In the event an

alternative method of weighting is

appropriate, OFHEO would propose an

amendment to the regulation to

incorporate that different methodology.

11. Number of Origination Years in the

Benchmark Loss Experience

The 1992 Act requires the

identification of a benchmark loss

experience with the highest loss rate on

mortgage loans, consistent with the

relevant statutory requirements,

including the requirement that the

period be at least 2 years. The

benchmark loss experience should

include more than 2 origination years

only if the candidate with the highest

loss rate covers more than 2 origination

years. OFHEO evaluated potential

benchmark areas over 2-, 3-, and 4-

origination year periods. The candidate

state/year combination with the highest

mortgage loss rate, the proposed

benchmark loss experience, is based on

loans originated during a 2-year period.

Fannie Mae suggested that more than

2 origination years should be used,

presumably to lower the benchmark loss

rate, if the shorter period would ‘‘push

prices outside the range that the market

would accept * * *.’’ Presumably,

‘‘prices’’ refers to the guarantee fees the

Enterprises charge and the prices they

pay for mortgages. OFHEO does not

believe Fannie Mae’s suggestion is

consistent with the requirements of the

1992 Act. Furthermore, the proposed

benchmark loss experience is consistent

with the establishment of an appropriate

risk-based capital standard.

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

1 1983/1984 AR, LA, MS, OK ............................ 5.29 60.94 65.58 63.26 11.28 18.54 14.91 9.43

2 1981/1982 IA, ID, ND, NE, OR, SD, UT, WY 5.00 56.86 59.18 58.02 9.71 22.06 15.88 9.22

3 1981/1982 IA, ID, MT, ND, NE, OR, UT, WY 5.05 56.86 59.20 58.03 9.39 22.00 15.69 9.11

4 1983/1984 IA, KS, MT, ND, NE, OK, WY ....... 5.09 63.25 64.52 63.89 8.92 19.53 14.23 9.09

5 1981/1982 IA, ID, MT, ND, NE, OR, SD, UT,

WY ............................................. 5.35 56.86 59.20 58.03 9.33 21.91 15.62 9.07

6 1981/1982 IA, ID, MT, NE, OR, SD, UT, WY 5.06 56.86 59.13 57.99 9.23 21.90 15.56 9.03

7 1983/1984 IA, KS, ND, NE, OK, SD, WY ....... 5.04 63.10 64.55 63.83 8.95 19.33 14.14 9.03

8 1982/1984 AR, LA, MS, OK ............................ 5.31 60.23 65.78 63.00 11.34 16.95 14.14 8.91

9 1982/1984 IA, KS, MT, ND, NE, OK, WY ....... 5.20 62.50 65.45 63.97 8.99 18.69 13.84 8.85

10 1982/1984 IA, KS, ND, NE, OK, SD, WY ....... 5.16 62.38 65.47 63.93 9.04 18.58 13.81 8.83

11 1981/1984 AR, LA, MS, OK ............................ 5.31 60.52 65.28 62.90 11.16 16.46 13.81 8.69

12 1981/1984 IA, KS, MT, ND, NE, OK, WY ....... 5.20 62.36 65.68 64.02 8.86 18.27 13.56 8.68

13 1981/1984 IA, KS, ND, NE, OK, SD, WY ....... 5.16 62.25 65.71 63.98 8.91 18.20 13.55 8.67

14 1981/1982 IA, KS, ND, NE, OK, SD, UT, WY 5.80 60.43 66.06 63.25 9.96 17.46 13.71 8.67

15 1981/1982 IA, KS, NE, OK, UT, WY ............... 5.21 60.43 66.06 63.25 9.94 17.47 13.70 8.67

16 1981/1982 AR, KS, ND, NE, OK, SD, UT, WY 5.53 60.51 66.23 63.37 10.05 17.29 13.67 8.66

17 1981/1982 IA, KS, NE, OK, SD, UT, WY ........ 5.52 60.43 66.06 63.25 9.90 17.44 13.67 8.65

18 1981/1982 AR, KS, NE, OK, SD, UT, WY ...... 5.24 60.51 66.24 63.37 10.00 17.27 13.64 8.64

19 1982/1983 IA, KS, ND, NE, OK, SD, WY ....... 5.16 58.61 64.84 61.72 9.40 18.59 13.99 8.64

20 1982/1983 IA,KS, MT, ND, NE, OK, WY ........ 5.20 58.55 64.83 61.69 9.29 18.66 13.98 8.62

21 1981/1982 AR, KS, MT, ND, NE, OK, UT, WY 5.57 60.51 66.19 63.35 9.88 17.30 13.59 8.61

22 1981/1982 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 60.51 66.20 63.36 9.88 17.28 13.58 8.60

23 1981/1982 AR, IA, KS, NE, OK, UT, WY ........ 6.22 60.51 66.21 63.36 9.86 17.29 13.58 8.60

24 1981/1982 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 60.43 66.02 63.22 9.76 17.44 13.60 8.60
29606 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

25 1981/1982 IA, KS, MT, NE, OK, UT, WY ....... 5.56 60.43 66.02 63.23 9.74 17.45 13.59 8.59

26 1981/1982 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 60.51 66.19 63.35 9.85 17.27 13.56 8.59

27 1982/1983 AR, LA, MS, OK ............................ 5.31 57.93 63.59 60.76 11.93 16.34 14.13 8.59

28 1981/1982 AR, KS, MT, NE, OK, UT, WY ...... 5.28 60.51 66.19 63.35 9.83 17.28 13.56 8.59

29 1981/1982 AR, IA, KS, NE, OK, SD, UT, WY 6.52 60.51 66.21 63.36 9.83 17.26 13.55 8.58

30 1981/1982 IA, KS, MT, NE, OK, SD, UT, WY 5.86 60.43 66.02 63.23 9.71 17.42 13.56 8.58

31 1981/1982 AR, KS, MT, NE, OK, SD, UT, WY 5.59 60.51 66.19 63.35 9.80 17.25 13.53 8.57

32 1982/1983 AR, KS, ND, NE, OK, SD, UT, WY 5.53 60.11 63.70 61.91 9.78 17.87 13.83 8.56

33 1981/1982 AR, IA, KS, MT, ND, NE, OK, UT,

WY ............................................. 6.86 60.51 66.16 63.33 9.72 17.29 13.51 8.55

34 1982/1983 AR, KS, MT, ND, NE, OK, UT, WY 5.57 60.05 63.70 61.87 9.68 17.94 13.81 8.54

35 1981/1982 AR, IA, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.16 60.51 66.16 63.33 9.70 17.26 13.48 8.54

36 1982/1983 AR, KS, NE, OK, SD, UT, WY ...... 5.24 60.11 63.69 61.90 9.71 17.86 13.79 8.53

37 1981/1982 AR, IA, KS, MT, NE, OK, UT, WY 6.57 60.51 66.16 63.34 9.67 17.27 13.47 8.53

38 1982/1983 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 60.05 63.70 61.87 9.68 17.88 13.78 8.53

39 1982/1983 AR, KS, MT, NE, OK, UT, WY ...... 5.28 60.05 63.68 61.87 9.61 17.92 13.77 8.52

40 1981/1982 AR, IA, KS, MT, NE, OK, SD, UT,

WY ............................................. 6.87 60.51 66.16 63.34 9.65 17.24 13.44 8.51

41 1982/1983 AR, AZ, ND, NM, OK, SD, UT,

WY ............................................. 5.56 60.72 62.56 61.64 9.66 17.94 13.80 8.51

42 1982/1983 AR, KS, MT, NE, OK, SD, UT, WY 5.59 60.05 63.68 61.87 9.62 17.87 13.74 8.50

43 1982/1983 AR, AZ, MT, ND, NM, OK, UT,

WY ............................................. 5.61 60.65 62.56 61.61 9.56 18.00 13.78 8.49

44 1981/1982 IA, ID, KS, NE, OK, UT, WY ......... 5.63 59.45 65.70 62.58 9.84 17.28 13.56 8.49

45 1982/1983 IA, KS, ND, NE, OK, SD, UT, WY 5.80 60.09 63.86 61.98 9.34 18.04 13.69 8.49

46 1980/1982 IA, ID, ND, NE, OR, SD, UT, WY 5.00 55.21 56.97 56.09 10.01 20.24 15.13 8.49

47 1981/1982 AR, ID, KS, NE, OK, UT, WY ....... 5.35 59.54 65.87 62.70 9.93 17.12 13.53 8.48

48 1982/1983 AR, AZ, NM, OK, SD, UT, WY ...... 5.28 60.72 62.55 61.63 9.59 17.93 13.76 8.48

49 1981/1983 IA, KS, ND, NE, OK, SD, WY ....... 5.16 58.69 65.23 61.96 9.20 18.17 13.69 8.48

50 1981/1982 ID, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 5.28 59.45 65.68 62.57 9.84 17.26 13.55 8.48

51 1982/1983 IA, KS, NE, OK, UT, WY ............... 5.21 60.09 63.85 61.97 9.27 18.08 13.67 8.47

52 1980/1981 IA, ID, ND, NE, OR, SD, UT, WY 5.00 51.85 55.66 53.75 10.79 20.70 15.75 8.46

53 1982/1983 AR, AZ, MT, NM, OK, UT, WY ..... 5.32 60.65 62.54 61.60 9.49 17.99 13.74 8.46

54 1981/1983 IA, KS, MT, ND, NE, OK, WY ....... 5.20 58.64 65.21 61.92 9.10 18.22 13.66 8.46

55 1982/1983 IA, KS, NE, OK, SD, UT, WY ........ 5.52 60.09 63.85 61.97 9.27 18.03 13.65 8.46

56 1982/1983 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 60.03 63.85 61.94 9.25 18.06 13.65 8.46

57 1982/1983 AR, AZ, MT, NM, OK, SD, UT,

WY ............................................. 5.62 60.65 62.54 61.60 9.49 17.94 13.72 8.45

58 1982/1983 IA, KS, MT, NE, OK, UT, WY ....... 5.56 60.03 63.84 61.93 9.18 18.09 13.64 8.45

59 1981/1983 AR, KS, ND, NE, OK, SD, UT, WY 5.53 58.90 64.06 61.48 9.74 17.73 13.74 8.44

60 1982/1983 AZ, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.25 60.67 62.70 61.69 9.54 17.83 13.69 8.44

61 1981/1983 AR, LA, MS, OK ............................ 5.31 58.55 63.51 61.03 11.67 15.98 13.83 8.44

62 1982/1983 IA, KS, MT, NE, OK, SD, UT, WY 5.86 60.03 63.84 61.93 9.19 18.04 13.61 8.43

63 1982/1983 AZ, IA, ND, NM, OK, SD, UT, WY 5.84 60.70 62.69 61.69 9.23 18.09 13.66 8.43

64 1982/1983 AZ, MT, ND, NE, NM, OK, UT,

WY ............................................. 5.29 60.60 62.70 61.65 9.44 17.89 13.67 8.42

65 1981/1982 ID, KS, ND, NE, OK, OR, SD, UT,

WY ............................................. 6.10 59.44 65.18 62.31 9.69 17.35 13.52 8.42

66 1981/1983 AR, KS, MT, ND, NE, OK, UT, WY 5.57 58.85 64.04 61.45 9.64 17.78 13.71 8.42

67 1981/1982 ID, KS, NE, OK, OR, UT, WY ....... 5.50 59.44 65.18 62.31 9.67 17.36 13.52 8.42

68 1981/1983 AR, KS, NE, OK, SD, UT, WY ...... 5.24 58.90 64.04 61.47 9.68 17.72 13.70 8.42

69 1981/1983 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 58.85 64.04 61.45 9.64 17.73 13.68 8.41

70 1981/1982 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.38 58.28 64.99 61.64 10.50 16.78 13.64 8.41

71 1981/1982 ID, KS, NE, OK, OR, SD, UT, WY 5.81 59.44 65.18 62.31 9.65 17.33 13.49 8.40

72 1981/1982 AR, KS, LA, NE, OK, UT, WY ....... 6.79 58.28 64.99 61.63 10.48 16.78 13.63 8.40

73 1982/1983 AZ, IA, NM, OK, SD, UT, WY ....... 5.55 60.70 62.67 61.68 9.16 18.08 13.62 8.40

74 1982/1983 AZ, IA, MT, ND, NM, OK, SD, UT,

WY ............................................. 6.19 60.63 62.68 61.66 9.15 18.10 13.63 8.40

75 1982/1983 AZ, MT, NE, NM, OK, UT, WY ..... 5.00 60.60 62.68 61.64 9.38 17.88 13.63 8.40

76 1981/1983 AR, KS, MT, NE, OK, UT, WY ...... 5.28 58.85 64.03 61.44 9.58 17.76 13.67 8.40

77 1981/1982 AZ, IA, ND, NM, OK, SD, UT, WY 5.84 61.09 63.52 62.30 9.04 17.92 13.48 8.40
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29607

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

78 1981/1982 AR, AZ, ND, NM, OK, SD, UT,

WY ............................................. 5.56 61.16 63.66 62.41 9.12 17.79 13.45 8.39

79 1981/1982 AR, KS, LA, NE, OK, SD, UT, WY 7.09 58.28 64.99 61.63 10.45 16.76 13.61 8.39

80 1982/1983 AZ, MT, NE, NM, OK, SD, UT,

WY ............................................. 5.31 60.60 62.68 61.64 9.38 17.83 13.61 8.39

81 1981/1983 AR, KS, MT, NE, OK, SD, UT, WY 5.59 58.85 64.03 61.44 9.58 17.72 13.65 8.38

82 1981/1982 ID, KS, MT, ND, NE, OK, OR, UT,

WY ............................................. 6.14 59.44 65.15 62.29 9.56 17.35 13.45 8.38

83 1981/1983 IA, KS, ND, NE, OK, SD, UT, WY 5.80 58.89 64.22 61.55 9.33 17.90 13.61 8.38

84 1981/1982 AZ, IA, NM, OK, SD, UT, WY ....... 5.55 61.09 63.51 62.30 8.99 17.91 13.45 8.38

85 1982/1983 AZ, IA, MT, NM, OK, SD, UT, WY 5.90 60.63 62.67 61.65 9.08 18.09 13.59 8.38

86 1981/1982 AR, AZ, NM, OK, SD, UT, WY ...... 5.28 61.16 63.66 62.41 9.07 17.77 13.42 8.37

87 1981/1982 IA, ID, KS, NE, OK, OR, UT, WY 6.79 59.44 65.17 62.31 9.53 17.35 13.44 8.37

88 1981/1982 AR, ID, KS, ND, NE, OK, OR, SD,

UT, WY ...................................... 7.11 59.52 65.34 62.43 9.63 17.19 13.41 8.37

89 1981/1983 IA, KS, NE, OK, UT, WY ............... 5.21 58.89 64.21 61.55 9.27 17.93 13.60 8.37

90 1981/1982

AR,

ID, KS, NE, OK, OR, UT, WY ....... 6.51 59.52 65.34 62.43 9.61 17.20 13.40 8.37

91 1981/1982 ID, KS, MT, ND, NE, OK, OR, SD,

UT, WY ...................................... 6.44 59.44 65.15 62.29 9.53 17.33 13.43 8.37

92 1982/1983 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 60.15 63.63 61.89 9.22 17.80 13.51 8.36

93 1981/1982 ID, KS, MT, NE, OK, OR, UT, WY 5.85 59.44 65.15 62.29 9.51 17.34 13.42 8.36

94 1981/1982 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.43 58.28 64.97 61.63 10.34 16.78 13.56 8.36

95 1982/1983 ID, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 5.28 58.40 63.82 61.11 9.72 17.63 13.67 8.36

96 1981/1982 AR, AZ, MT, ND, NM, OK, UT,

WY ............................................. 5.61 61.16 63.64 62.40 8.99 17.79 13.39 8.36

97 1981/1983 IA, KS, NE, OK, SD, UT, WY ........ 5.52 58.89 64.21 61.55 9.27 17.88 13.57 8.35

98 1981/1982 AR, IA, KS, LA, NE, OK, UT, WY 8.08 58.28 64.98 61.63 10.33 16.78 13.56 8.35

99 1982/1983 AR, IA, KS, MT, ND, NE, OK, UT,

WY ............................................. 6.86 60.09 63.62 61.85 9.14 17.86 13.50 8.35

100 1982/1983 AR, IA, KS, NE, OK, UT, WY ........ 6.22 60.15 63.61 61.88 9.15 17.84 13.49 8.35

101 1981/1982 AR, AZ, IA, ND, NM, OK, SD, UT,

WY ............................................. 6.85 61.16 63.68 62.42 8.99 17.77 13.38 8.35

102 1981/1983 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 58.84 64.20 61.52 9.24 17.90 13.57 8.35

103 1981/1982 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.73 58.28 64.97 61.63 10.31 16.77 13.54 8.34

104 1981/1982 AZ, IA, MT, ND, NM, OK, SD, UT,

WY ............................................. 6.19 61.09 63.50 62.30 8.89 17.90 13.39 8.34

105 1981/1982 AR, KS, LA, MT, NE, OK, UT, WY 7.14 58.28 64.97 61.62 10.30 16.77 13.54 8.34

106 1981/1982 AR, IA, KS, LA, NE, OK, SD, UT,

WY ............................................. 8.38 58.28 64.98 61.63 10.30 16.77 13.53 8.34

107 1981/1983 IA, KS, MT, NE, OK, UT, WY ....... 5.56 58.84 64.19 61.52 9.18 17.93 13.55 8.34

108 1982/1983 AR, IA, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.16 60.09 63.62 61.85 9.14 17.81 13.48 8.34

109 1981/1982 IA, ID, KS, MT, ND, NE, OK, OR,

UT, WY ...................................... 7.42 59.44 65.14 62.29 9.42 17.34 13.38 8.34

110 1982/1983 AR, IA, KS, NE, OK, SD, UT, WY 6.52 60.15 63.61 61.88 9.16 17.78 13.47 8.34

111 1981/1982 AR, AZ, MT, NM, OK, UT, WY ..... 5.32 61.16 63.64 62.40 8.94 17.77 13.36 8.34

112 1981/1983 AR, AZ, ND, NM, OK, SD, UT,

WY ............................................. 5.56 59.13 62.52 60.83 9.48 17.92 13.70 8.33

113 1981/1982 AR, AZ, IA, NM, OK, SD, UT, WY 6.56 61.16 63.67 62.41 8.94 17.75 13.35 8.33

114 1981/1982 AR, ID, KS, MT, ND, NE, OK, OR,

UT, WY ...................................... 7.15 59.52 65.31 62.42 9.50 17.19 13.35 8.33

115 1981/1982 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.44 58.28 64.97 61.62 10.27 16.75 13.51 8.33

116 1981/1982 IA, KS, ND, NE, OK, SD, WY ....... 5.16 60.54 66.92 63.73 8.72 17.42 13.07 8.33

117 1981/1982 AR, IA, ID, KS, ND, NE, OK, OR,

SD, UT, WY ............................... 8.39 59.52 65.33 62.43 9.50 17.18 13.34 8.33

118 1982/1983 AZ, ID, MT, ND, NM, OK, UT, WY 5.01 59.02 62.65 60.84 9.59 17.78 13.69 8.33

119 1982/1983 AR, IA, KS, MT, NE, OK, UT, WY 6.57 60.09 63.60 61.85 9.07 17.85 13.46 8.32

120 1981/1982 AZ, IA, MT, NM, OK, SD, UT, WY 5.90 61.09 63.50 62.29 8.84 17.88 13.36 8.32

121 1981/1983 IA, KS, MT, NE, OK, SD, UT, WY 5.86 58.84 64.19 61.52 9.18 17.88 13.53 8.32

122 1982/1983 AR, AZ, IA, ND, NM, OK, SD, UT,

WY ............................................. 6.85 60.75 62.51 61.63 9.12 17.88 13.50 8.32
29608 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

123 1981/1982 AR, AZ, MT, NM, OK, SD, UT,

WY ............................................. 5.62 61.16 63.64 62.40 8.92 17.75 13.33 8.32

124 1981/1982 IA, ID, KS, MT, ND, NE, OK, OR,

SD, UT, WY ............................... 7.73 59.44 65.14 62.29 9.40 17.32 13.36 8.32

125 1982/1983 AR, AZ, NE, NM, OK, UT, WY ...... 5.66 60.72 62.51 61.62 9.34 17.66 13.50 8.32

126 1981/1982 IA, ID, KS, MT, NE, OK, OR, UT,

WY ............................................. 7.14 59.44 65.14 62.29 9.38 17.32 13.35 8.32

127 1980/1982 IA, ID, MT, ND, NE, OR, UT, WY 5.05 55.09 57.02 56.06 9.51 20.16 14.83 8.32

128 1981/1982 AR, ID, KS, MT, ND, NE, OK, OR,

SD, UT, WY ............................... 7.45 59.52 65.31 62.42 9.47 17.17 13.32 8.31

129 1981/1983 AR, AZ, MT, ND, NM, OK, UT,

WY ............................................. 5.61 59.09 62.51 60.80 9.39 17.95 13.67 8.31

130 1982/1983 AZ, ID, MT, ND, NM, OK, SD, UT,

WY ............................................. 5.32 59.02 62.65 60.84 9.60 17.73 13.67 8.31

131 1981/1982 AR, ID, KS, MT, NE, OK, OR, UT,

WY ............................................. 6.86 59.52 65.31 62.41 9.45 17.18 13.31 8.31

132 1982/1983 AR, IA, KS, MT, NE, OK, SD, UT,

WY ............................................. 6.87 60.09 63.60 61.85 9.08 17.80 13.44 8.31

133 1981/1983 AR, AZ, NM, OK, SD, UT, WY ...... 5.28 59.13 62.51 60.82 9.42 17.90 13.66 8.31

134 1981/1982 AZ, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.25 61.15 63.44 62.30 9.01 17.67 13.34 8.31

135 1981/1982 AR, IA, ID, KS, NE, OK, OR, SD,

UT, WY ...................................... 8.10 59.52 65.33 62.43 9.45 17.16 13.31 8.31

136 1982/1983 AZ, MS, ND, NM, OK, SD, UT,

WY ............................................. 5.67 59.83 62.34 61.09 9.47 17.71 13.59 8.30

137 1981/1982 IA, ID, KS, MT, NE, OK, OR, SD,

UT, WY ...................................... 7.44 59.44 65.14 62.29 9.35 17.30 13.33 8.30

138 1981/1982 AR, AZ, IA, MT, ND, NM, OK, SD,

UT, WY ...................................... 7.20 61.16 63.66 62.41 8.84 17.75 13.30 8.30

139 1982/1983 AR, AZ, IA, MT, ND, NM, OK, SD,

UT, WY ...................................... 7.20 60.68 62.51 61.59 9.05 17.89 13.47 8.30

140 1982/1983 AR, AZ, IA, NM, OK, SD, UT, WY 6.56 60.75 62.50 61.62 9.06 17.87 13.46 8.30

141 1981/1983 AR, AZ, MT, NM, OK, UT, WY ..... 5.32 59.09 62.50 60.79 9.33 17.94 13.64 8.29

142 1981/1983 ID, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 5.28 57.48 64.03 60.76 9.67 17.62 13.64 8.29

143 1982/1983 AZ, ID, MT, NM, OK, SD, UT, WY 5.03 59.02 62.64 60.83 9.53 17.72 13.63 8.29

144 1980/1982 IA, ID, MT, ND, NE, OR, SD, UT,

WY ............................................. 5.35 55.09 57.02 56.06 9.48 20.09 14.78 8.29

145 1982/1983 AZ, MS, MT, ND, NM, OK, UT,

WY ............................................. 5.71 59.78 62.34 61.06 9.38 17.76 13.57 8.29

146 1981/1982 AR, IA, ID, KS, MT, ND, NE, OK,

OR, UT, WY ............................... 8.43 59.52 65.29 62.41 9.37 17.19 13.28 8.29

147 1981/1982 IA, KS, MT, ND, NE, OK, WY ....... 5.20 60.54 66.87 63.70 8.57 17.42 12.99 8.28

148 1981/1983 AR, AZ, MT, NM, OK, SD, UT,

WY ............................................. 5.62 59.09 62.50 60.79 9.33 17.90 13.62 8.28

149 1981/1982 AR, AZ, IA, MT, NM, OK, SD, UT,

WY ............................................. 6.91 61.16 63.65 62.41 8.80 17.73 13.27 8.28

150 1982/1983 AZ, MS, NM, OK, SD, UT, WY ..... 5.38 59.83 62.33 61.08 9.41 17.69 13.55 8.28

151 1981/1982 AR, IA, ID, KS, MT, ND, NE, OK,

OR, SD, UT, WY ........................ 8.74 59.52 65.29 62.41 9.35 17.16 13.25 8.27

152 1981/1983 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 58.94 64.05 61.50 9.21 17.68 13.45 8.27

153 1980/1981 IA, ID, MT, ND, NE, OR, UT, WY 5.05 51.74 55.73 53.73 10.22 20.57 15.39 8.27

154 1982/1983 AR, AZ, IA, MT, NM, OK, SD, UT,

WY ............................................. 6.91 60.68 62.49 61.59 8.98 17.88 13.43 8.27

155 1981/1982 AZ, MT, ND, NE, NM, OK, UT,

WY ............................................. 5.29 61.15 63.43 62.29 8.88 17.67 13.28 8.27

156 1980/1983 IA, KS, ND, NE, OK, SD, WY ....... 5.16 57.74 64.56 61.15 9.26 17.78 13.52 8.27

157 1981/1983 AZ, IA, ND, NM, OK, SD, UT, WY 5.84 59.12 62.64 60.88 9.11 18.05 13.58 8.27

158 1981/1982 AR, IA, ID, KS, MT, NE, OK, OR,

UT, WY ...................................... 8.15 59.52 65.29 62.41 9.33 17.17 13.25 8.27

159 1981/1982 AZ, IA, ND, NE, NM, OK, SD, UT,

WY ............................................. 6.54 61.15 63.46 62.30 8.88 17.65 13.27 8.27

160 1981/1983 AZ, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.25 59.12 62.56 60.84 9.36 17.80 13.58 8.26

161 1982/1983 AZ, MS, MT, NM, OK, UT, WY ..... 5.42 59.78 62.32 61.05 9.32 17.75 13.53 8.26

162 1982/1983 AZ, IA, ND, NE, NM, OK, SD, UT,

WY ............................................. 6.54 60.70 62.65 61.67 9.02 17.77 13.40 8.26

163 1981/1983 AR, IA, KS, NE, OK, UT, WY ........ 6.22 58.94 64.04 61.49 9.15 17.71 13.43 8.26
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29609

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

164 1981/1982 AZ, IA, NE, NM, OK, UT, WY ....... 5.94 61.15 63.45 62.30 8.86 17.66 13.26 8.26

165 1981/1982 AR, AZ, NE, NM, OK, UT, WY ...... 5.66 61.22 63.60 62.41 8.93 17.53 13.23 8.26

166 1981/1983 AR, IA, KS, MT, ND, NE, OK, UT,

WY ............................................. 6.86 58.90 64.03 61.47 9.13 17.73 13.43 8.26

167 1982/1983 AR, ID, KS, NE, OK, UT, WY ....... 5.35 58.51 63.58 61.05 9.62 17.42 13.52 8.25

168 1981/1982 AZ, ID, MT, ND, NM, OK, UT, WY 5.01 60.10 63.25 61.68 9.00 17.77 13.38 8.25

169 1982/1984 IA, KS, NE, OK, UT, WY ............... 5.21 60.49 64.45 62.47 8.53 17.90 13.21 8.25

170 1981/1982 AZ, MT, NE, NM, OK, UT, WY ..... 5.00 61.15 63.42 62.28 8.83 17.66 13.25 8.25

171 1982/1983 AZ, MS, MT, NM, OK, SD, UT,

WY ............................................. 5.73 59.78 62.32 61.05 9.32 17.70 13.51 8.25

172 1982/1983 AZ, IA, NE, NM, OK, UT, WY ....... 5.94 60.70 62.63 61.67 8.95 17.80 13.38 8.25

173 1982/1984 IA, KS, ND, NE, OK, SD, UT, WY 5.80 60.41 64.47 62.44 8.60 17.82 13.21 8.25

174 1981/1983 AR, IA, KS, NE, OK, SD, UT, WY 6.52 58.94 64.04 61.49 9.15 17.67 13.41 8.25

175 1980/1982 IA, ID, MT, NE, OR, SD, UT, WY 5.06 55.22 9.34 56.09 9.34 20.07 14.70 8.25

176 1981/1982 AZ, LA, ND, NM, OK, SD, UT, WY 6.41 58.76 63.42 61.09 9.70 17.30 13.50 8.25

177 1981/1982 AZ, IA, NE, NM, OK, SD, UT, WY 6.25 61.15 63.45 62.30 8.83 17.64 13.23 8.25

178 1981/1983 AZ, IA, NM, OK, SD, UT, WY ....... 5.55 59.12 62.63 60.87 9.04 18.04 13.54 8.24

179 1982/1984 IA, KS, MT, NE, OK, UT, WY ....... 5.56 60.54 64.44 62.49 8.49 17.90 13.19 8.24

180 1980/1981 IA, ID, MT, ND, NE, OR, SD, UT,

WY ............................................. 5.35 51.74 55.73 53.73 10.18 20.50 15.34 8.24

181 1981/1983 AZ, MT, ND, NE, NM, OK, UT,

WY ............................................. 5.29 59.07 62.55 60.81 9.28 17.84 13.56 8.24

182 1981/1982 AR, AZ, ID, NM, OK, UT, WY ....... 5.39 60.18 63.42 61.80 9.04 17.63 13.34 8.24

183 1981/1983 AR, IA, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.16 58.90 64.03 61.47 9.13 17.68 13.41 8.24

184 1981/1983 AZ, IA, MT, ND, NM, OK, SD, UT,

WY ............................................. 6.19 59.08 62.63 60.85 9.03 18.05 13.54 8.24

185 1981/1982 AZ, ID, MT, ND, NM, OK, SD, UT,

WY ............................................. 5.32 60.10 63.25 61.68 8.97 17.74 13.36 8.24

186 1982/1984 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 60.46 64.46 62.46 8.56 17.81 13.19 8.24

187 1983/1984 AR, AZ, LA, NM, OK ..................... 6.15 59.53 64.60 62.07 9.23 17.31 13.27 8.24

188 1982/1983 AZ, IA, NE, NM, OK, SD, UT, WY 6.25 60.70 62.63 61.67 8.95 17.76 13.36 8.24

189 1981/1982 AZ, MT, NE, NM, OK, SD, UT,

WY ............................................. 5.31 61.15 63.42 62.28 8.81 17.63 13.22 8.24

190 1982/1984 AR, KS, MT, ND, NE, OK, UT, WY 5.57 60.01 64.36 62.18 8.83 17.65 13.24 8.23

191 1981/1983 AR, IA, KS, MT, NE, OK, UT, WY 6.57 58.90 64.02 61.46 9.07 17.71 13.39 8.23

192 1981/1982 AZ, IA, ID, NM, OK, SD, UT, WY 5.97 60.10 63.28 61.69 8.95 17.73 13.34 8.23

193 1981/1982 AZ, LA, NM, OK, SD, UT, WY ...... 6.12 58.76 63.42 61.09 9.66 17.28 13.47 8.23

194 1981/1982 AR, KS, MS, ND, NE, OK, SD,

UT, WY ...................................... 6.64 59.80 65.04 62.42 9.41 16.94 13.18 8.23

195 1982/1983 AZ, IA, MT, NE, NM, OK, UT, WY 6.29 60.63 62.63 61.63 8.88 17.81 13.34 8.22

196 1982/1983 AR, AZ, ID, NM, OK, UT, WY ....... 5.39 59.13 62.46 60.80 9.50 17.56 13.53 8.22

197 1981/1982 AR, KS, MS, NE, OK, UT, WY ...... 6.05 59.80 65.04 62.42 9.39 16.95 13.17 8.22

198 1982/1983 AR, KS, MS, ND, NE, OK, SD,

UT, WY ...................................... 6.64 59.29 63.22 61.26 9.47 17.37 13.42 8.22

199 1981/1982 AZ, ID, MT, NM, OK, SD, UT, WY 5.03 60.10 63.25 61.67 8.92 17.73 13.33 8.22

200 1981/1983 AZ, MT, NE, NM, OK, UT, WY ..... 5.00 59.07 62.54 60.81 9.21 17.82 13.52 8.22

201 1982/1984 IA, KS, NE, OK, SD, UT, WY ........ 5.52 60.42 64.46 62.44 8.53 17.80 13.16 8.22

202 1980/1983 IA, KS, MT, ND, NE, OK, WY ....... 5.20 57.64 64.54 61.09 9.10 17.81 13.45 8.22

203 1981/1983 AR, IA, KS, MT, NE, OK, SD, UT,

WY ............................................. 6.87 58.90 64.02 61.46 9.07 17.67 13.37 8.22

204 1981/1983 AZ, IA, MT, NM, OK, SD, UT, WY 5.90 59.08 62.62 60.85 8.97 18.04 13.50 8.22

205 1981/1982 AR, AZ, IA, NE, NM, OK, UT, WY 6.95 61.22 63.61 62.42 8.81 17.52 13.16 8.22

206 1980/1981 IA, ID, MT, NE, OR, SD, UT, WY 5.06 51.82 55.73 53.77 10.06 20.49 15.28 8.21

207 1982/1983 AZ, IA, MT, NE, NM, OK, SD, UT,

WY ............................................. 6.59 60.63 62.63 61.63 8.88 17.77 13.32 8.21

208 1981/1982 AR, AZ, LA, ND, NM, OK, SD, UT,

WY ............................................. 7.42 58.84 63.53 61.18 9.64 17.20 13.42 8.21

209 1982/1984 AR, KS, ND, NE, OK, SD, UT, WY 5.53 59.88 64.38 62.13 8.87 17.56 13.21 8.21

210 1982/1984 IA, KS, MT, NE, OK, SD, UT, WY 5.86 60.47 64.45 62.46 8.49 17.80 13.14 8.21

211 1981/1982 AZ, ID, ND, NM, OK, OR, SD, UT,

WY ............................................. 6.13 60.07 62.92 61.50 8.90 17.80 13.35 8.21

212 1981/1982 AZ, IA, MT, NE, NM, OK, UT, WY 6.29 61.15 63.44 62.29 8.72 17.64 13.18 8.21

213 1982/1983 AR, KS, MS, NE, OK, UT, WY ...... 6.05 59.29 63.20 61.25 9.40 17.41 13.40 8.21

214 1982/1983 AR, KS, MS, MT, ND, NE, OK,

UT, WY ...................................... 6.68 59.24 63.21 61.22 9.38 17.44 13.41 8.21

215 1981/1983 AZ, MT, NE, NM, OK, SD, UT,

WY ............................................. 5.31 59.07 62.54 60.81 9.21 17.78 13.50 8.21
29610 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

216 1981/1982 AZ, LA, MT, ND, NM, OK, UT, WY 6.45 58.76 63.41 61.09 9.57 17.30 13.44 8.21

217 1981/1982 AR, AZ, LA, NM, OK, UT, WY ...... 6.83 58.84 63.52 61.18 9.63 17.20 13.41 8.21

218 1981/1982 AZ, ID, NM, OK, OR, UT, WY ....... 5.54 60.07 62.91 61.49 8.88 17.81 13.34 8.21

219 1981/1983 AR, ID, KS, NE, OK, UT, WY ....... 5.35 57.57 63.87 60.72 9.58 17.44 13.51 8.20

220 1982/1984 AR, KS, MT, NE, OK, UT, WY ...... 5.28 60.01 64.35 62.18 8.75 17.64 13.19 8.20

221 1981/1982 AR, KS, MS, NE, OK, SD,UT WY 6.35 59.80 65.04 62.42 9.36 16.92 13.14 8.20

222 1981/1983 AZ ID, MT, ND, NM, OK, UT, WY 5.01 57.75 62.49 60.12 9.43 17.86 13.64 8.20

223 1982/1984 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 59.94 64.37 62.16 8.82 17.56 13.19 8.20

224 1982/1983 AZ, LA, ND, NM, OK, SD, UT, WY 6.41 59.21 62.16 60.68 10.02 17.00 13.51 8.20

225 1981/1984 IA, KS, NE, OK, UT, WY ............... 5.21 59.73 64.67 62.20 8.56 17.81 13.18 8.20

226 1981/1984 IA, KS, ND, NE, OK, SD, UT, WY 5.80 59.67 64.69 62.18 8.62 17.74 13.18 8.20

227 1981/1982 AR, AZ, LA, NM, OK, SD, UT, WY 7.13 58.84 63.52 61.18 9.60 17.19 13.40 8.20

228 1981/1982 AZ, IA, MT, NE, NM, OK, SD, UT,

WY ............................................. 6.59 61.15 63.44 62.29 8.69 17.62 13.16 8.19

229 1982/1983 AR, KS, MS, MT, ND, NE, OK,

SD, UT, WY ............................... 6.99 59.24 63.21 61.22 9.38 17.39 13.38 8.19

230 1982/1983 AR, KS, MS, NE, OK, SD, UT, WY 6.35 59.29 63.20 61.25 9.40 17.36 13.38 8.19

231 1981/1982 AZ, ID, NM, OK, OR, SD, UT, WY 5.85 60.07 62.91 61.49 8.86 17.79 13.32 8.19

232 1981/1982 AZ, LA, MT, NM, OK, UT, WY ...... 6.17 58.76 63.41 61.09 9.53 17.29 13.41 8.19

233 1981/1982 AZ, IA, LA, NM, OK, SD, UT, WY 7.41 58.76 63.43 61.10 9.53 17.28 13.40 8.19

234 1981/1983 AZ, ID, MT, ND, NM, OK, SD, UT,

WY ............................................. 5.32 57.75 62.49 60.12 9.42 17.82 13.62 8.19

235 1982/1983 AR, AZ, MS, NM, OK, UT, WY ..... 6.08 59.89 62.16 61.02 9.29 17.54 13.41 8.19

236 1981/1984 IA, KS, MT, NE, OK, UT, WY ....... 5.56 59.78 64.65 62.22 8.52 17.80 13.16 8.19

237 1981/1984 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 59.72 64.67 62.20 8.58 17.73 13.16 8.18

238 1981/1982 AR, KS, MS, MT, ND, NE, OK,

UT, WY ...................................... 6.68 59.80 65.01 62.41 9.28 16.95 13.11 8.18

239 1982/1983 AZ, LA, MT, ND, NM, OK, UT, WY 6.45 59.16 62.15 60.66 9.94 17.04 13.49 8.18

240 1982/1983 IA, ID, KS, NE, OK, UT, WY ......... 5.63 58.50 63.74 61.12 9.19 17.58 13.39 8.18

241 1982/1983 AR, KS, MS, MT, NE, OK, UT,

WY ............................................. 6.39 59.24 63.20 61.22 9.31 17.42 13.37 8.18

242 1982/1984 AR, KS, NE, OK, SD, UT, WY ...... 5.24 59.89 64.37 62.13 8.79 17.55 13.17 8.18

243 1982/1983 AZ, LA, NM, OK, SD, UT, WY ...... 6.12 59.21 62.14 60.68 9.97 16.99 13.48 8.18

244 1981/1984 AR, KS, MT, ND, NE, OK, UT, WY 5.57 59.28 64.55 61.91 8.84 17.58 13.21 8.18

245 1981/1983 AR, AZ, IA, ND, NM, OK, SD, UT,

WY ............................................. 6.85 59.18 62.53 60.85 9.00 17.87 13.44 8.18

246 1981/1982 AR, IA, KS, MS, NE, OK, UT, WY 7.33 59.80 65.03 62.42 9.25 16.95 13.10 8.18

247 1981/1982 AZ, ID, MT, ND, NM, OK, OR, UT,

WY ............................................. 6.18 60.07 62.91 61.49 8.79 17.80 13.30 8.18

248 1982/1983 AZ, ID, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.67 59.07 62.62 60.84 9.45 17.42 13.44 8.18

249 1981/1982 AR, AZ, LA, MT, ND, NM, OK, UT,

WY ............................................. 7.46 58.84 63.52 61.18 9.52 17.20 13.36 8.17

250 1981/1982 AR, AZ, IA, LA, ND, NM, OK, SD,

UT, WY ...................................... 8.71 58.84 63.54 61.19 9.52 17.19 13.36 8.17

251 1982/1984 AR, KS, MT, NE, OK, SD, UT, WY 5.59 59.94 64.36 62.15 8.75 17.55 13.15 8.17

252 1981/1984 IA, KS, NE ,OK, SD, UT, WY ........ 5.52 59.67 64.68 62.17 8.55 17.73 13.14 8.17

253 1981/1982 AR, AZ, ID, ND, NM, OK, OR, SD,

UT, WY ...................................... 7.14 60.15 63.08 61.62 8.86 17.66 13.26 8.17

254 1981/1982 AR, KS, MS, MT, ND, NE, OK,

SD, UT, WY ............................... 6.99 59.80 65.01 62.41 9.25 16.92 13.09 8.17

255 1981/1983 AZ, ID, MT, NM, OK, SD, UT, WY 5.03 57.75 62.48 60.12 9.36 17.81 13.58 8.17

256 1981/1982 AR, AZ, ID, NM, OK, OR, UT, WY 6.55 60.15 63.08 61.61 8.84 17.67 13.25 8.17

257 1981/1984 AR, KS, ND, NE, OK, SD, UT, WY 5.53 59.16 64.58 61.87 8.88 17.51 13.20 8.16

258 1981/1983 ID, KS, ND, NE, OK, OR, SD, UT,

WY ............................................. 6.10 57.08 63.70 60.39 9.57 17.47 13.52 8.16

259 1981/1982 AZ, ID, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.67 60.16 63.21 61.69 8.96 17.51 13.23 8.16

260 1981/1982 AR, AZ, LA, MT, ND, NM, OK,

SD, UT, WY ............................... 7.77 58.84 63.52 61.18 9.50 17.19 13.34 8.16

261 1982/1983 AZ, LA, MT, NM, OK, UT, WY ...... 6.17 59.16 62.14 60.65 9.89 17.03 13.46 8.16

262 1981/1982 AR, KS, MS, MT, NE, OK, UT,

WY ............................................. 6.39 59.80 65.01 62.40 9.23 16.93 13.08 8.16

263 1982/1983 AZ, ID, NE, NM, OK, UT, WY ....... 5.07 59.07 62.60 60.84 9.38 17.45 13.42 8.16

264 1981/1983 AR, AZ, NE, NM, OK, UT, WY ...... 5.66 59.17 62.44 60.81 9.19 17.65 13.42 8.16

265 1981/1982 AR, AZ, LA, MT, NM, OK, UT, WY 7.18 58.84 63.51 61.18 9.48 17.19 13.34 8.16

266 1981/1982 AZ, ID, NE, NM, OK, UT, WY ....... 5.07 60.16 63.20 61.68 8.94 17.51 13.23 8.16
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29611

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

267 1981/1982 AR, AZ, IA, LA, NM, OK, SD, UT,

WY ............................................. 8.42 58.84 63.53 61.19 9.48 17.18 13.33 8.16

268 1981/1984 IA, KS, MT, NE, OK, SD, UT, WY 5.86 59.72 64.66 62.19 8.51 17.72 13.12 8.16

269 1983/1984 IA, KS, MT, NE, OK, UT, WY ....... 5.50 59.42 63.35 61.38 8.26 18.31 13.29 8.15

270 1981/1983 ID, KS, NE, OK, OR, UT, WY ....... 5.50 57.08 63.69 60.38 9.51 17.50 13.50 8.15

271 1981/1983 AR, AZ, IA, NM, OK, SD, UT, WY 6.56 59.18 62.52 60.85 8.94 17.86 13.40 8.15

272 1981/1983 AR, AZ, IA, MT, ND, NM, OK, SD,

UT, WY ...................................... 7.20 59.13 62.52 60.83 8.93 17.87 13.40 8.15

273 1981/1984 AR, KS, MT, NE, OK, UT, WY ...... 5.28 59.27 64.54 61.91 8.76 17.57 13.17 8.15

274 1981/1984 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 59.22 64.56 61.89 8.83 17.51 13.17 8.15

275 1982/1983 AZ, ID, NE, NM, OK, SD, UT, WY 5.38 59.07 62.60 60.84 9.39 17.41 13.40 8.15

276 1982/1983 ID, KS, ND, NE, OK, OR, SD, UT,

WY ............................................. 6.10 58.08 63.58 60.83 9.60 17.19 13.40 8.15

277 1982/1983 AZ, ID, MT, ND, NE, NM, OK, SD,

UT, WY ...................................... 6.01 59.02 62.61 60.82 9.37 17.43 13.40 8.15

278 1983/1984 IA, KS, NE, OK, UT, WY ............... 5.15 59.33 63.35 61.34 8.27 18.30 13.28 8.15

279 1981/1983 ID, KS, MT, ND, NE, OK, OR, UT,

WY ............................................. 6.14 57.05 63.69 60.37 9.48 17.51 13.50 8.15

280 1982/1983 AR, AZ, IA, NE, NM, OK, UT, WY 6.95 60.75 62.46 61.60 8.85 17.60 13.23 8.15

281 1981/1983 AZ, MS, ND, NM, OK, SD, UT,

WY ............................................. 5.67 58.59 62.05 60.32 9.31 17.69 13.50 8.15

282 1981/1982 AZ, ID, NE, NM, OK, SD, UT, WY 5.38 60.16 63.20 61.68 8.91 17.49 13.20 8.14

283 1981/1982 IA, ID, MT, ND, NV, OR, SD, UT,

WY ............................................. 5.01 53.95 54.79 54.37 8.45 21.51 14.98 8.14

284 1981/1983 IA, ID, KS, NE, OK, UT, WY ......... 5.63 57.57 64.03 60.80 9.19 17.60 13.39 8.14

285 1981/1983 ID, KS, NE, OK, OR, SD, UT, WY 5.81 57.08 63.69 60.38 9.51 17.45 13.48 8.14

286 1981/1982 AZ, LA, NE, NM, OK, UT, WY ...... 6.51 58.82 63.38 61.10 9.53 17.12 13.32 8.14

287 1982/1983 AZ, IA, ID, NM, OK, SD, UT, WY 5.97 59.12 62.59 60.85 9.10 17.65 13.37 8.14

288 1981/1982 AR, AZ, ID, MT, ND, NM, OK, OR,

UT, WY ...................................... 7.19 60.15 63.07 61.61 8.75 17.66 13.21 8.14

289 1982/1983 ID, KS, NE, OK, OR, UT, WY ....... 5.50 58.08 63.57 60.82 9.54 17.22 13.38 8.14

290 1982/1983 ID, KS, MT, ND, NE, OK, OR, UT,

WY ............................................. 6.14 58.04 63.57 60.81 9.51 17.25 13.38 8.14

291 1981/1984 AR, KS, NE, OK, SD, UT, WY ...... 5.24 59.15 64.57 61.86 8.81 17.50 13.15 8.14

292 1982/1983 AZ, ID, MT, NE, NM, OK, UT, WY 5.42 59.02 62.60 60.81 9.30 17.46 13.38 8.14

293 1981/1983 AZ, LA, ND, NM, OK, SD, UT, WY 6.41 58.07 62.15 60.11 9.84 17.22 13.53 8.13

294 1981/1983 ID, KS, MT, ND, NE, OK, OR, SD,

UT, WY ...................................... 6.44 57.05 63.69 60.37 9.48 17.47 13.48 8.13

295 1981/1982 AR, AZ, IA, ID, ND, NM, OK, OR,

SD, UT, WY ............................... 8.43 60.15 63.10 61.63 8.75 17.65 13.20 8.13

296 1983/1984 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.07 59.33 63.39 61.36 8.34 18.17 13.25 8.13

297 1982/1983 AZ, ID, ND, NM, OK, OR, SD, UT,

WY ............................................. 6.13 58.69 62.47 60.58 9.49 17.35 13.42 8.13

298 1981/1982 AZ, LA, NE, NM, OK, SD, UT, WY 6.82 58.82 63.38 61.10 9.50 17.10 13.30 8.13

299 1981/1982 AZ, ID, LA, NM, OK, UT, WY ........ 6.24 57.99 63.27 60.63 9.62 17.20 13.41 8.13

300 1981/1983 AZ, MS, MT, ND, NM, OK, UT,

WY ............................................. 5.71 58.55 62.04 60.30 9.23 17.73 13.48 8.13

301 1982/1983 AR, AZ, NM, NV, OK, UT, WY ...... 5.32 59.63 61.70 60.67 9.10 17.70 13.40 8.13

302 1981/1983 AR, AZ, IA, MT, NM, OK, SD, UT,

WY ............................................. 6.91 59.13 62.51 60.82 8.87 17.86 13.36 8.13

303 1981/1982 AR, AZ, IA, LA, MT, ND, NM, OK,

SD, UT, WY ............................... 9.06 58.84 63.53 61.18 9.38 17.18 13.28 8.13

304 1982/1983 AZ, MS, NE, NM, OK, UT, WY ..... 5.77 59.83 62.29 61.06 9.18 17.43 13.31 8.13

305 1983/1984 IA, KS, ND, NE, OK, SD, UT, WY 5.73 59.24 63.39 61.32 8.35 18.15 13.25 8.13

306 1981/1982 AR, AZ, ID, MT, ND, NM, OK, OR,

SD, UT, WY ............................... 7.49 60.15 63.07 61.61 8.73 17.64 13.19 8.12

307 1981/1983 ID, KS, MT, NE, OK, OR, UT, WY 5.85 57.05 63.68 60.36 9.42 17.50 13.46 8.12

308 1981/1983 AR, KS, MS, ND, NE, OK, SD,

UT, WY ...................................... 6.64 58.40 63.31 60.86 9.43 17.27 13.35 8.12

309 1982/1983 ID, KS, NE, OK, OR, SD, UT, WY 5.81 58.08 63.57 60.82 9.54 17.17 13.36 8.12

310 1982/1983 ID, KS, MT, ND, NE, OK, OR, SD,

UT, WY ...................................... 6.44 58.04 63.57 60.81 9.52 17.20 13.36 8.12

311 1982/1983 AR, AZ, LA, ND, NM, OK, SD, UT,

WY ............................................. 7.42 59.26 62.04 60.65 9.91 16.87 13.39 8.12

312 1981/1984 AR, KS, MT, NE, OK, SD, UT, WY 5.59 59.21 64.56 61.88 8.76 17.49 13.13 8.12

313 1981/1983 AZ, MS, NM, OK, SD, UT, WY ..... 5.38 58.59 62.04 60.31 9.26 17.68 13.47 8.12

314 1982/1983 AR, CO, ND, OK, SD, UT, WY ..... 5.07 59.32 62.38 60.85 9.44 17.26 13.35 8.12
29612 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

315 1981/1982 AR, AZ, ID, MT, NM, OK, OR, UT,

WY ............................................. 6.90 60.15 63.06 61.61 8.71 17.65 13.18 8.12

316 1981/1982 AZ, IA, ID, NE, NM, OK, UT, WY 6.36 60.16 63.22 61.69 8.82 17.50 13.16 8.12

317 1981/1983 AR, AZ, ID, NM, OK, UT, WY ....... 5.39 57.85 62.38 60.11 9.34 17.67 13.51 8.12

318 1982/1983 AZ, ID, NM, OK, OR, UT, WY ....... 5.54 58.69 62.45 60.57 9.43 17.38 13.40 8.12

319 1982/1983 AZ, ID, MT, ND, NM, OK, OR, UT,

WY ............................................. 6.18 58.65 62.46 60.55 9.41 17.40 13.41 8.12

320 1981/1983 AZ, LA, MT, ND, NM, OK, UT, WY 6.45 58.04 62.15 60.09 9.76 17.25 13.51 8.12

321 1981/1983 AZ, LA, NM, OK, SD, UT, WY ...... 6.12 58.07 62.15 60.11 9.80 17.21 13.50 8.12

322 1983/1984 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.42 59.14 63.99 61.57 8.92 17.44 13.18 8.11

323 1982/1983 AZ, MS, NE, NM, OK, SD, UT,

WY ............................................. 6.07 59.83 62.29 61.06 9.19 17.39 13.29 8.11

324 1982/1983 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.38 58.73 62.73 60.73 10.02 16.70 13.36 8.11

325 1981/1982 AZ, ID, MT, ND, NE, NM, OK, SD,

UT, WY ...................................... 6.01 60.16 63.19 61.68 8.82 17.49 13.16 8.11

326 1981/1983 AR, KS, MS, NE, OK, UT, WY ...... 6.05 58.40 63.30 60.85 9.37 17.30 13.33 8.11

327 1980/1983 AR, KS, ND, NE, OK, SD, UT, WY 5.53 57.40 63.11 60.26 9.68 17.24 13.46 8.11

328 1982/1983 AR, AZ, LA, NM, OK, UT, WY ...... 6.83 59.26 62.03 60.64 9.86 16.89 13.38 8.11

329 1982/1983 ID, KS, MT, NE, OK, OR, UT, WY 5.85 58.04 63.56 60.80 9.45 17.23 13.34 8.11

330 1981/1983 AZ, IA, ND, NE, NM, OK, SD, UT,

WY ............................................. 6.54 59.16 62.57 60.86 8.90 17.76 13.33 8.11

331 1981/1982 AZ, ID, MT, NE, NM, OK, UT, WY 5.42 60.16 63.19 61.67 8.80 17.50 13.15 8.11

332 1981/1983 AR, KS, MS, MT, ND, NE, OK,

UT, WY ...................................... 6.68 58.36 63.30 60.83 9.34 17.32 13.33 8.11

333 1982/1983 AR, AZ, LA, MT, ND, NM, OK, UT,

WY ............................................. 7.46 59.21 62.04 60.63 9.83 16.91 13.37 8.11

334 1982/1983 AZ, ID, NM, OK, OR, SD, UT, WY 5.85 58.69 62.45 60.57 9.43 17.34 13.38 8.11

335 1981/1983 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.38 57.89 62.99 60.44 9.95 16.87 13.41 8.11

336 1981/1983 AZ, MS, MT, NM, OK, UT, WY ..... 5.42 58.55 62.03 60.29 9.17 17.72 13.44 8.11

337 1983/1984 IA, KS, MT, NE, OK, SD, UT, WY 5.79 59.33 63.37 61.35 8.26 18.16 13.21 8.10

338 1982/1983 AR, AZ, MT, NM, NV, OK, UT,

WY ............................................. 5.67 59.58 61.70 60.64 9.02 17.71 13.36 8.10

339 1982/1983 AR, AZ, LA, NM, OK, SD, UT, WY 7.13 59.26 62.03 60.64 9.86 16.86 13.36 8.10

340 1981/1982 AZ, IA, LA, NE, NM, OK, UT, WY 7.80 58.82 63.39 61.11 9.41 17.12 13.26 8.10

341 1982/1983 AR, KS, LA, NE, OK, UT, WY ....... 6.79 58.73 62.72 60.72 9.97 16.72 13.34 8.10

342 1982/1983 AZ, MS, MT, NE, NM, OK, UT,

WY ............................................. 6.12 59.78 62.29 61.03 9.11 17.45 13.28 8.10

343 1982/1984 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.43 59.36 64.65 62.00 9.17 16.96 13.06 8.10

344 1981/1983 AR, KS, MS, NE, OK, SD, UT, WY 6.35 58.40 63.30 60.85 9.37 17.26 13.31 8.10

345 1981/1983 AZ, IA, NE, NM, OK, UT, WY ....... 5.94 59.16 62.55 60.86 8.83 17.78 13.31 8.10

346 1982/1983 AR, AZ, LA, MT, ND, NM, OK,

SD, UT, WY ............................... 7.77 59.21 62.04 60.63 9.83 16.88 13.36 8.10

347 1981/1983 AZ, LA, MT, NM, OK, UT, WY ...... 6.17 58.04 62.14 60.09 9.72 17.24 13.48 8.10

348 1982/1983 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.43 58.68 62.72 60.70 9.94 16.75 13.34 8.10

349 1983/1984 IA, KS, NE, OK, SD, UT, WY ........ 5.44 59.24 63.37 61.31 8.27 18.14 13.21 8.10

350 1982/1984 AR, IA, KS, MT, ND, NE, OK, UT,

WY ............................................. 6.86 60.35 64.26 62.31 8.40 17.60 13.00 8.10

351 1981/1983 AR, KS, LA, NE, OK, UT, WY ....... 6.79 57.89 62.98 60.44 9.91 16.89 13.40 8.10

352 1981/1983 AR, KS, MS, MT, ND, NE, OK,

SD, UT, WY ............................... 6.99 58.36 63.30 60.83 9.34 17.27 13.31 8.10

353 1981/1983 AZ, MS, MT, NM, OK, SD, UT,

WY ............................................. 5.73 58.55 62.03 60.29 9.17 17.68 13.43 8.09

354 1982/1983 AR, KS, LA, NE, OK, SD, UT, WY 7.09 58.73 62.72 60.72 9.97 16.69 13.33 8.09

355 1983/1984 AR, KS, LA, MT, NE, OK, UT, WY 7.14 59.14 63.99 61.56 8.86 17.43 13.15 8.09

356 1981/1982 AZ, LA, MT, NE, NM, OK, UT, WY 6.86 58.82 63.37 61.09 9.39 17.11 13.25 8.09

357 1983/1984 AR, KS, LA, NE, OK, UT, WY ....... 6.79 59.06 63.99 61.52 8.88 17.42 13.15 8.09

358 1982/1983 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.73 58.68 62.72 60.70 9.94 16.71 13.33 8.09

359 1982/1984 AR, KS, LA, NE, OK, UT, WY ....... 6.79 59.31 64.65 61.98 9.15 16.95 13.05 8.09

360 1982/1984 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.38 59.26 64.66 61.96 9.21 16.90 13.05 8.09

361 1981/1983 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.43 57.85 62.99 60.42 9.87 16.90 13.39 8.09

362 1980/1983 AR, KS, NE, OK, SD, UT, WY ...... 5.24 57.48 63.09 60.29 9.60 17.23 13.41 8.09
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29613

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

363 1981/1983 AZ, IA, NE, NM, OK, SD, UT, WY 6.25 59.16 62.55 60.86 8.83 17.74 13.29 8.09

364 1982/1983 AR, AZ, LA, MT, NM, OK, UT, WY 7.18 59.21 62.02 60.62 9.78 16.90 13.34 8.09

365 1981/1982 AZ, MS, ND, NM, OK, SD, UT,

WY ............................................. 5.67 60.35 62.69 61.52 8.67 17.62 13.15 8.09

366 1981/1983 AR, KS, LA, NE, OK, SD, UT, WY 7.09 57.89 62.98 60.44 9.90 16.86 13.38 8.09

367 1981/1982 AZ, ID, NE, NM, OK, OR, UT, WY 6.23 60.14 62.86 61.50 8.74 17.56 13.15 8.09

368 1981/1983 AR, KS, MS, MT, NE, OK, UT,

WY ............................................. 6.39 58.36 63.29 60.82 9.28 17.30 13.29 8.08

369 1981/1983 AZ, ID, ND, NM, OK, OR, SD, UT,

WY ............................................. 6.13 57.36 62.24 59.80 9.34 17.69 13.52 8.08

370 1983/1984 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.72 59.07 64.01 61.54 8.92 17.35 13.13 8.08

371 1983/1984 AR, KS, MT, ND, NE, OK, UT, WY 5.57 58.54 62.99 60.77 8.60 17.99 13.30 8.08

372 1982/1984 AR, KS, LA, MT, NE, OK, UT, WY 7.14 59.36 64.64 62.00 9.11 16.95 13.03 8.08

373 1982/1984 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.73 59.31 64.66 61.98 9.17 16.90 13.03 8.08

374 1983/1984 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.37 59.00 64.01 61.50 8.94 17.34 13.14 8.08

375 1980/1982 IA, KS, ND, NE, OK, SD, UT, WY 5.80 58.14 64.10 61.12 9.75 16.68 13.22 8.08

376 1981/1983 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.73 57.85 62.99 60.42 9.87 16.87 13.37 8.08

377 1982/1983 AR, KS, LA, MT, NE, OK, UT, WY 7.14 58.68 62.71 60.70 9.88 16.73 13.31 8.08

378 1981/1984 AR, KS, LA, MT, ND, NE, OK, UT,

WY ............................................. 7.43 58.84 64.49 61.66 9.15 17.05 13.10 8.08

379 1982/1984 AR, IA, KS, NE, OK, UT, WY ........ 6.22 60.31 64.25 62.28 8.35 17.58 12.97 8.08

380 1981/1983 AZ, IA, MT, NE, NM, OK, UT, WY 6.29 59.12 62.55 60.83 8.76 17.78 13.27 8.07

381 1982/1984 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 60.24 64.28 62.26 8.43 17.50 12.97 8.07

382 1981/1983 AZ, ID, NM, OK, OR, UT, WY ....... 5.54 57.36 62.23 59.80 9.29 17.71 13.50 8.07

383 1981/1984 AR, KS, LA, ND, NE, OK, SD, UT,

WY ............................................. 7.38 58.75 64.50 61.62 9.19 17.00 13.10 8.07

384 1982/1983 CO, IA, ND, OK, SD, UT, WY ....... 5.34 59.30 62.51 60.91 9.10

17.40

13.25 8.07

385 1982/1984 AR, IA, KS, MT, NE, OK, UT, WY 6.57 60.36 64.25 62.30 8.32 17.58 12.95 8.07

386 1982/1983 AZ, NE, NM, NV, OK, UT, WY ...... 5.01 59.57 61.82 60.70 8.99 17.60 13.29 8.07

387 1982/1983 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.44 58.68 62.71 60.70 9.89 16.70 13.29 8.07

388 1981/1983 AR, KS, LA, MT, NE, OK, UT, WY 7.14 57.85 62.98 60.42 9.82 16.89 13.36 8.07

389 1981/1983 AR, AZ, LA, ND, NM, OK, SD, UT,

WY ............................................. 7.42 58.12 62.09 60.11 9.74 17.11 13.42 8.07

390 1981/1984 AR, KS, LA, NE, OK, UT, WY ....... 6.79 58.78 64.49 61.64 9.14 17.04 13.09 8.07

391 1981/1982 AZ, MS, NM, OK, SD, UT, WY ..... 5.38 60.35 62.68 61.52 8.62 17.61 13.11 8.07

392 1981/1983 AR, ID, KS, ND, NE, OK, OR, SD,

UT, WY ...................................... 7.11 57.14 63.55 60.34 9.45 17.29 13.37 8.07

393 1980/1982 AR, KS, ND, NE, OK, SD, UT, WY 5.53 57.87 64.28 61.08 9.79 16.63 13.21 8.07

394 1981/1983 AZ, ID, MT, ND, NM, OK, OR, UT,

WY ............................................. 6.18 57.33 62.24 59.78 9.26 17.72 13.49 8.07

395 1982/1984 AR, KS, LA, NE, OK, SD, UT, WY 7.09 59.25 64.66 61.96 9.15 16.89 13.02 8.07

396 1980/1982 IA, KS, NE, OK, UT, WY ............... 5.21 58.26 64.09 61.18 9.68 16.70 13.19 8.07

397 1982/1984 AR, IA, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.16 60.29 64.27 62.28 8.40 17.50 12.95 8.07

398 1980/1983 AR, KS, MT, ND, NE, OK, UT, WY 5.57 57.32 63.10 60.21 9.52 17.27 13.39 8.06

399 1981/1983 AZ, IA, MT, NE, NM, OK, SD, UT,

WY ............................................. 6.59 59.12 62.55 60.83 8.76 17.74 13.25 8.06

400 1981/1983 AZ, ID, ND, NE, NM, OK, SD, UT,

WY ............................................. 5.67 57.83 62.43 60.13 9.28 17.53 13.41 8.06

401 1982/1983 AZ, LA, NE, NM, OK, UT, WY ...... 6.51 59.21 62.12 60.66 9.76 16.81 13.29 8.06

402 1982/1984 ID, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 5.28 58.62 64.35 61.49 8.90 17.32 13.11 8.06

403 1981/1983 AZ, ID, NM, OK, OR, SD, UT, WY 5.85 57.36 62.23 59.80 9.29 17.68 13.48 8.06

404 1983/1984 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.43 59.06 64.00 61.53 8.86 17.34 13.10 8.06

405 1981/1983 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.44 57.85 62.98 60.42 9.82 16.86 13.34 8.06

406 1981/1984 AR, KS, LA, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.73 58.80 64.49 61.65 9.15 17.00 13.07 8.06

407 1981/1984 AR, IA, KS, MT, ND, NE, OK, UT,

WY ............................................. 6.86 59.63 64.52 62.07 8.42 17.54 12.98 8.06

408 1981/1983 AR, AZ, LA, NM, OK, UT, WY ...... 6.83 58.12 62.08 60.10 9.69 17.12 13.41 8.06
29614 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

409 1982/1984 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.44 59.30 64.65 61.98 9.11 16.89 13.00 8.06

410 1982/1983 AZ, NE, NM, NV, OK, SD, UT, WY 5.31 59.57 61.82 60.70 9.00 17.56 13.28 8.06

411 1980/1983 IA, KS, ND, NE, OK, SD, UT, WY 5.80 57.66 63.24 60.45 9.33 17.33 13.33 8.06

412 1983/1984 AR, KS, LA, NE, OK, SD, UT, WY 7.09 58.99 64.00 61.50 8.88 17.33 13.10 8.06

413 1981/1983 AR, ID, KS, NE, OK, OR, UT, WY 6.51 57.14 63.54 60.34 9.40 17.31 13.35 8.06

414 1981/1984 AR, KS, LA, MT, NE, OK, UT, WY 7.14 58.84 64.48 61.66 9.10 17.03 13.07 8.06

415 1983/1984 AR, CO, LA, MT, OK, WY ............. 6.11 57.89 63.92 60.90 9.04 17.41 13.23 8.06

416 1981/1982 AZ, ID, LA, NM, OK, OR, UT, WY 7.40 58.01 63.04 60.53 9.38 17.24 13.31 8.06

417 1981/1982 AZ, MS, MT, ND, NM, OK, UT,

WY ............................................. 5.71 60.35 62.67 61.51 8.56 17.63 13.09 8.05

418 1980/1982 IA, KS, ND, NE, OK, SD, WY ....... 5.16 58.40 65.54 61.97 9.08 16.91 13.00 8.05

419 1982/1983 AZ, LA, NE, NM, OK, SD, UT, WY 6.82 59.21 62.12 60.66 9.77 16.78 13.27 8.05

420 1981/1984 ID, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 5.28 58.04 64.45 61.24 8.90 17.39 13.15 8.05

421 1981/1983 AR, ID, KS, MT, ND, NE, OK, OR,

UT, WY ...................................... 7.15 57.11 63.54 60.32 9.37 17.33 13.35 8.05

422 1983/1984 AR, KS, MT, NE, OK, UT, WY ...... 5.29 58.53 62.98 60.75 8.53 17.98 13.25 8.05

423 1980/1982 IA, KS, NE, OK, SD, UT, WY ........ 5.52 58.26 64.09 61.18 9.66 16.67 13.16 8.05

424 1981/1983 AR, AZ, LA, MT, ND, NM, OK, UT,

WY ............................................. 7.46 58.09 62.09 60.09 9.66 17.14 13.40 8.05

425 1982/1983 AZ, IA, NM, NV, OK, SD, UT, WY 5.91 59.62 61.81 60.71 8.73 17.79 13.26 8.05

426 1980/1983 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.87 57.32 63.10 60.21 9.51 17.23 13.37 8.05

427 1981/1983 AR, AZ, LA, NM, OK, SD, UT, WY 7.13 58.12 62.08 60.10 9.69 17.10 13.39 8.05

428 1981/1983 AZ, ID, NE, NM, OK, UT, WY ....... 5.07 57.83 62.41 60.12 9.22 17.56 13.39 8.05

429 1981/1984 AR, KS, LA, NE, OK, SD, UT, WY 7.09 58.74 64.50 61.62 9.14 16.99 13.06 8.05

430 1981/1983 AR, AZ, MS, NM, OK, UT, WY ..... 6.08 58.64 61.94 60.29 9.15 17.55 13.35 8.05

431 1980/1983 IA, KS, NE, OK, UT, WY ............... 5.21 57.74 63.22 60.48 9.26 17.36 13.31 8.05

432 1981/1983 AZ, IA, ID, NM, OK, SD, UT, WY 5.97 57.84 62.50 60.17 8.98 17.77 13.37 8.05

433 1982/1983 AZ, MT, NE, NM, NV, OK, UT,

WY ............................................. 5.36 59.52 61.82 60.67 8.92 17.61 13.26 8.05

434 1982/1984 AR, IA, KS, NE, OK, SD, UT, WY 6.52 60.25 64.27 62.26 8.35 17.49 12.92 8.04

435 1981/1983 AR, AZ, LA, MT, ND, NM, OK,

SD, UT, WY ............................... 7.77 58.09 62.09 60.09 9.66 17.11 13.39 8.04

436 1981/1984 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 59.52 64.54 62.03 8.45 17.48 12.97 8.04

437 1981/1984 AR, IA, KS, NE, OK, UT, WY ........ 6.22 59.57 64.52 62.05 8.39 17.54 12.96 8.04

438 1982/1983 AR, ID, KS, ND, NE, OK, OR, SD,

UT, WY ...................................... 7.11 58.15 63.36 60.75 9.49 16.99 13.24 8.04

439 1981/1982 AR, AZ, MS, NM, OK, UT, WY ..... 6.08 60.43 62.85 61.64 8.60 17.49 13.05 8.04

440 1981/1983 AR, ID, KS, MT, ND, NE, OK, OR,

SD, UT, WY ............................... 7.45 57.11 63.54 60.32 9.37 17.29 13.33 8.04

441 1980/1983 AR, KS, MT, NE, OK, UT, WY ...... 5.28 57.39 63.08 60.24 9.44 17.26 13.35 8.04

442 1981/1983 AZ, ID, NE, NM, OK, SD, UT, WY 5.38 57.83 62.41 60.12 9.22 17.52 13.37 8.04

443 1981/1984 AR, KS, LA, MT, NE, OK, SD, UT,

WY ............................................. 7.44 58.79 64.49 61.64 9.10 16.99 13.04 8.04

444 1982/1984 AR, IA, KS, MT, NE, OK, SD, UT,

WY ............................................. 6.87 60.30 64.26 62.28 8.32 17.49 12.91 8.04

445 1982/1983 AZ, LA, MT, NE, NM, OK, UT, WY 6.86 59.16 62.12 60.64 9.69 16.82 13.25 8.04

446 1980/1982 AR, KS, NE, OK, SD, UT, WY ...... 5.24 57.99 64.27 61.13 9.68 16.61 13.15 8.04

447 1982/1983 AZ, ID, MS, NM, OK, UT, WY ....... 5.49 58.35 62.24 60.30 9.33 17.33 13.33 8.04

448 1980/1982 AR, IA, KS, ND, NE, OK, SD, UT,

WY ............................................. 6.81 58.12 64.26 61.19 9.72 16.55 13.13 8.04

449 1982/1983 AR, AZ, ID, ND, NM, OK, OR, SD,

UT, WY ...................................... 7.14 58.75 62.30 60.53 9.38 17.17 13.28 8.04

450 1982/1983 AR, IA, KS, MS, NE, OK, UT, WY 7.33 59.34 63.13 61.24 8.90 17.34 13.12 8.04

451 1981/1982 AZ, MS, MT, NM, OK, UT, WY ..... 5.42 60.35 62.67 61.51 8.52 17.61 13.06 8.04

452 1981/1982 AR, LA, MS, OK ............................ 5.31 59.66 64.99 62.32 10.64 15.15 12.89 8.03

453 1981/1983 AZ, ID, MT, ND, NE, NM, OK, SD,

UT, WY ...................................... 6.01 57.79 62.42 60.11 9.20 17.53 13.37 8.03

454 1980/1983 IA, KS, NE, OK, SD, UT, WY ........ 5.52 57.74 63.22 60.48 9.26 17.31 13.28 8.03

455 1981/1982 AZ, ID, LA, NE, NM, OK, UT, WY 6.93 58.05 63.23 60.64 9.47 17.02 13.25 8.03

456 1981/1983 AR, AZ, LA, MT, NM, OK, UT, WY 7.18 58.09 62.08 60.08 9.62 17.12 13.37 8.03

457 1983/1984 AR, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 5.86 58.45 63.02 60.74 8.60 17.85 13.22 8.03

458 1981/1984 AR, IA, KS, MT, NE, OK, UT, WY 6.57 59.63 64.51 62.07 8.35 17.53 12.94 8.03

459 1981/1984 AR, IA, KS, MT, ND, NE, OK, SD,

UT, WY ...................................... 7.16 59.57 64.53 62.05 8.42 17.47 12.94 8.03
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29615

46Section 1361(d)(1) (12 U.S.C. 4611(d)(1)).

47See note 20 above.

HIGHEST LOSS RATES AMONG CANDIDATE STATE/YEAR COMBINATIONS—Continued

Rank Time period Region

Percent

of U.S.

population

Freddie

Mac

severity

Fannie

Mae

severity

Average

severity

Freddie

Mac

default

Fannie

Mae

default

Average

default

Loss

rate

460 1982/1983 AR, ID, KS, MT, ND, NE, OK, OR,

UT, WY ...................................... 7.15 58.10 63.35 60.73 9.40 17.05 13.22 8.03

461 1982/1983 AZ, NM, NV, OK, OR, UT, WY ..... 5.48 59.17 61.68 60.43 9.05 17.53 13.29 8.03

462 1982/1983 AR, ID, KS, NE, OK, OR, UT, WY 6.51 58.15 63.34 60.75 9.42 17.02 13.22 8.03

463 1982/1983 AZ, IA, LA, NM, OK, SD, UT, WY 7.41 59.25 62.11 60.68 9.51 16.95 13.23 8.03

464 1981/1983 AR, ID, KS, MT, NE, OK, OR, UT,

WY ............................................. 6.86 57.11 63.52 60.32 9.31 17.31 13.31 8.03

465 1982/1983 AZ, ID, MS, NM, OK, SD, UT, WY 5.80 58.35 62.24 60.30 9.33 17.29 13.31 8.03

466 1983/1984 AR, KS, ND, NE, OK, SD, UT, WY 5.52 58.34 63.02 60.68 8.62 17.83 13.23 8.03

467 1980/1983 AR, KS, MT, NE, OK, SD, UT, WY 5.59 57.39 63.08 60.24 9.44 17.21 13.32 8.03

468 1980/1982 AR, IA, KS, NE, OK, UT, WY ........ 6.22 58.24 64.26 61.25 9.64 16.56 13.10 8.02

469 1982/1983 AR, AZ, ID, MT, ND, NM, OK, OR,

UT, WY ...................................... 7.19 58.71 62.29 60.50 9.30 17.23 13.26 8.02

470 1982/1983 AR, AZ, ID, NM, OK, OR, UT, WY 6.55 58.75 62.28 60.52 9.32 17.20 13.26 8.02

471 1981/1982 AZ, MS, MT, NM, OK, SD, UT,

WY ............................................. 5.73 60.35 62.67 61.51 8.50 17.59 13.04 8.02

472 1981/1983 AZ, ID, MT, NE, NM, OK, UT, WY 5.42 57.79 62.41 60.10 9.14 17.56 13.35 8.02

473 1981/1982 AR, AZ, NM, NV, OK, UT, WY ...... 5.32 59.85 62.05 60.95 8.52 17.79 13.16 8.02

474 1980/1983 AR, LA, MS, OK ............................ 5.31 57.99 62.81 60.40 11.31 15.24 13.28 8.02

475 1982/1983 AZ, NM, NV, OK, OR, SD, UT,

WY ............................................. 5.78 59.17 61.68 60.43 9.05 17.49 13.27 8.02

476 1980/1982 ID, KS, ND, NE, OK, OR, SD, UT,

WY ............................................. 6.10 57.27 63.32 60.30 9.78 16.81 13.30 8.02

477 1982/1983 AR, ID, KS, MT, ND, NE, OK, OR,

SD, UT, WY ............................... 7.45 58.10 63.35 60.73 9.40 17.00 13.20 8.02

478 1981/1984 AR, IA, KS, NE, OK, SD, UT, WY 6.52 59.52 64.54 62.03 8.38 17.46 12.92 8.02

479 1981/1983 AR, AZ, IA, NE, NM, OK, UT, WY 6.95 59.21 62.45 60.83 8.74 17.61 13.18 8.01

480 1982/1983 AZ, ID, MS, MT, NM, OK, UT, WY 5.84 58.30 62.24 60.27 9.25 17.34 13.30 8.01

481 1982/1983 AR, AZ, ID, MT, ND, NM, OK, OR,

SD, UT, WY ............................... 7.49 58.71 62.29 60.50 9.30 17.19 13.24 8.01

482 1980/1982 AR, IA, KS, NE, OK, SD, UT, WY 6.52 58.24 64.26 61.25 9.62 16.53 13.08 8.01

483 1982/1984 AR, AZ, LA, NM, OK ..................... 5.98 59.25 64.72 61.99 9.39 16.45 12.92 8.01

484 1981/1982 AZ, IA, NM, NV, OK, SD, UT, WY 5.91 59.77 61.91 60.84 8.44 17.89 13.16 8.01

485 1982/1983 AZ, MT, NM, NV, OK, OR, UT,

WY ............................................. 5.83 59.12 61.68 60.40 8.98 17.54 13.26 8.01

486 1980/1982 ID, KS, NE, OK, OR, UT, WY ....... 5.50 57.37 63.32 60.34 9.72 16.82 13.27 8.01

487 1982/1983 AR, ID, KS, MT, NE, OK, OR, UT,

WY ............................................. 6.86 58.10 63.34 60.72 9.34 17.03 13.18 8.01

488 1981/1983 IA, ID, KS, NE, OK, OR, UT, WY 6.79 57.14 63.69 60.41 9.04 17.46 13.25 8.00

489 1981/1984 AR, IA, KS, MT, NE, OK, SD, UT,

WY ............................................. 6.87 59.57 64.52 62.05 8.35 17.45 12.90 8.00

490 1981/1983 IA, ID, KS, MT, ND, NE, OK, OR,

UT, WY ...................................... 7.42 57.11 63.69 60.40 9.03 17.47 13.25 8.00

491 1981/1983 AZ, LA, NE, NM, OK, UT, WY ...... 6.51 58.11 62.10 60.10 9.59 17.04 13.31 8.00

492 1983/1984 AR, KS, MT, NE, OK, SD, UT, WY 5.58 58.43 63.00 60.72 8.53 17.83 13.18 8.00

493 1980/1983 IA, KS, MT, ND, NE, OK, SD, UT,

WY ............................................. 6.15 57.57 63.23 60.40 9.19 17.31 13.25 8.00

494 1981/1983 AR, AZ, ID, ND, NM, OK, OR, SD,

UT, WY ...................................... 7.14 57.42 62.15 59.79 9.24 17.53 13.38 8.00

495 1982/1983 AR, AZ, ID, MT, NM, OK, OR, UT,

WY ............................................. 6.90 58.71 62.28 60.49 9.24 17.21 13.22 8.00

496 1982/1984 AZ, LA, MT, ND, NM, OK, UT, WY 6.45 58.20 63.79 60.99 9.17 17.06 13.11 8.00

497 1981/1983 AR, AZ, NM, NV, OK, UT, WY ...... 5.32 57.78 61.49 59.63 8.99 17.84 13.41 8.00

498 1983/1984 AR, KS, NE, OK, SD, UT, WY ...... 5.23 58.32 63.00 60.66 8.54 17.82 13.18 8.00

499 1981/1982 AZ, NM, NV, OK, OR, UT, WY ..... 5.48 59.75 61.57 60.66 8.41 17.96 13.18 8.00

500 1981/1983 AZ, LA, NE, NM, OK, SD, UT, WY 6.82 58.11 62.10 60.10 9.59 17.01 13.30 7.99

House Price Indexes

Introduction

In implementing the risk-based

capital stress test, the 1992 Act requires

OFHEO to take seasoning of mortgages

into account, in accordance with the

CQHPI or any index of similar quality,

authority, and public availability that is

regularly used by the Federal

Government.46 The 1992 Act defines

‘‘seasoning’’ as the change in the LTV

ratio of a mortgage over time.47 Such

changes result from changes in the

principal balance of the mortgage and

changes in the value of the property.

Changes in the value of the underlying

property usually will have a much

greater impact than scheduled

amortization or curtailments on the

seasoning of mortgages, particularly

during the early years of the loan.

OFHEO proposes to use its house price
29616 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

48 ‘‘House Price Index’’ is a collective term that

refers to all the subindexes described below.

49A technical description of the HPI and the

methodology used to create it has been published

by OFHEO and is available from the agency upon

request. Charles A. Calhoun, OFHEO House Price

Indexes: HPI Technical Description (March 1996)

(HPI Technical Description).

50Section 1361(d)(1) (12 U.S.C. 4611(d)(1)).

51Congress indicated that use by OFHEO would

satisfy the requirement at section 1361(d)(1) of the

1992 Act (12 U.S.C. 4611(d)(1)) that an appropriate

index would ‘‘be regularly used by the Federal

Government.’’ See 138 Cong. Rec. S 17920

(Chairman Riegle explaining that the index ‘‘should

be * * * used consistently by the Director or other

Federal agencies * * *.’’).

52S. Rep. No. 282, at 20.

53 60 FR 7475 (Feb. 8, 1995).

index, HPI,48 which is a weighted repeat

transactions index based on Enterprise

data, rather than the CQHPI.

Using an Index to Adjust for Seasoning

The 1992 Act does not specify how an

index should be used to account for the

seasoning of Enterprise mortgages in the

stress test. OFHEO proposes to account

for the impact of changes in individual

property values on the seasoning of

single-family mortgages in the stress test

based upon changes in the index used

for the particular geographical area in

which the property is located. In

accounting for the changes in the

distribution of current LTV ratios,

OFHEO will also make adjustments for

the scheduled amortization of the

principal of the loan.

In general, a house price index

provides estimates of changes in the

general level of values over time based

on observations of the values of specific

properties in a particular geographic

area. The accuracy of an adjustment to

the value of an individual property

based on an index will depend

significantly on the accuracy of the

index for the particular market area in

which the property is located. It also

will depend upon the degree of

similarity between the valuedetermining characteristics of that

property and the properties from which

the index is estimated.

No matter how accurate an index,

however, individual house values will

appreciate at greater or lesser rates than

the index over time. The longer the time

period, the greater is the dispersion in

changes of individual house values.

That is one major reason why house

prices can appreciate on the average, but

mortgages on individual properties still

default. OFHEO is studying alternative

means to account for the increasing

dispersion of rates of house price

change that occur within a group of

loans over time. OFHEO will address

this issue in the second NPR.

Description of the HPI

OFHEO began publishing the HPI in

March 1996 using data provided by the

Enterprises. The HPI is released

approximately 2 months after the end of

each quarter. This index is reported for

the nation, and subindexes are reported

for 9 U.S. Census Divisions, 50 states,

and the District of Columbia.

OFHEO calculates the HPI for each

specified geographic area using repeated

observations of housing values for

individual single-family properties on

which mortgages were originated and

purchased by either Enterprise since

1975.49 There are now more than 6.9

million repeat transaction pairs in the

national sample. The use of house price

differentials computed from repeat

transactions on the same properties

controls for differences in the quality of

the houses over time. For this reason,

the HPI is described as a ‘‘constant

quality’’ house price index. The HPI is

updated each quarter as additional

mortgages are purchased by the

Enterprises through the identification of

additional repeat transactions for the

most recent quarter and all earlier

quarters.

The HPI provides broad geographic

coverage by virtue of the national

operations of the two Enterprises. There

are, however, some limitations on the

coverage of the HPI because it is

produced using data on single-family,

detached properties financed by

conforming conventional mortgages

purchased by the Enterprises. Thus, the

HPI is not based upon any mortgage

transactions on properties financed by

government-insured loans, properties

financed by mortgages exceeding the

conforming loan limits determining

eligibility for purchase by Freddie Mac

or Fannie Mae, or multifamily

properties.

Quarterly HPI reports include a

summary of recent developments,

frequently asked questions and answers,

and statistical reports for each

geographic area. The most recent HPI

report is included as Exhibit 1 to this

NPR.

Issues, Alternatives Considered, and

Comments Received

1. Use of the HPI Versus the CQHPI and

Other Alternatives

OFHEO has concluded that the HPI is

superior to the CQHPI for purposes of

determining current values of singlefamily properties securing Enterprise

loans. This conclusion is consistent

with Congressional intent. During

consideration of the 1992 Act, Congress

recognized that the CQHPI might not be

the most suitable index and provided

OFHEO discretion to use another

index.50 The legislative history also

indicates Congress expected OFHEO to

develop its own index for the stress

test.51 The Senate report stated: ‘‘As no

existing data series is fully satisfactory

for this purpose, the Director is

encouraged to conduct research

necessary to produce and publish a

suitable index.’’ 52

The CQHPI is based on data from the

Housing Sales Survey conducted by the

Bureau of the Census. Information on

the physical characteristics and sales

prices of new one-family houses are

obtained through interviews with a

national sample of the houses’ builders

and owners. The sample includes about

13,000 houses per year. The Commerce

Department divides the data for

detached houses into four regional

samples. For each region, a statistical

model is used to estimate how much the

current average prices of new houses

would have changed from the preceding

period if the physical characteristics of

new houses in both periods remained

the same as they were in 1987. These

regional estimates are published

annually. The Commerce Department

also publishes quarterly a national

index that is a weighted average of the

four regional indexes and a national

index for attached houses.

In the ANPR, OFHEO expressed the

view that a weighted repeat transactions

index based on Enterprise data was

more appropriate for purposes of the

risk-based capital test than the CQHPI.53

The HPI is such an index. By relying

entirely upon Enterprise data, the HPI

provides a more appropriate measure of

average house price changes for the mix

of properties securing the Enterprises’

mortgages than does the CQHPI, which

is based on a different mix of houses. A

particularly important difference is that

the HPI measures changes in values of

existing houses, while the CQHPI

measures price changes of new houses.

The CQHPI’s small sample size results

in other limitations that are undesirable

for OFHEO’s purposes. Because of

limited data, the CQHPI provides

national estimates by quarter, but only

annual estimates for the four Census

regions. Using either the quarterly,

national estimates or the annual,

regional estimates would present

difficulties in accurately modeling the

seasoning of Enterprise mortgages

because house prices vary widely

within Census regions and OFHEO must

assess the Enterprises’ capital on a

quarterly basis. Such difficulties are

avoided through the use of the HPI.

With an existing database of more than
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29617

54 12 U.S.C. 1709(b).

55Revision volatility is the change in past index

values that occurs as a result of current

transactions. Current transactions can change index

values for prior quarters, because every repeat sale

of a property provides additional information about

house price changes during the time since the prior

transaction on that property.

56See HPI Technical Description, at 10–11

(discussion of ideal indexes, geometric versus

arithmetic repeat sales estimators, and the

Enterprises’ approach in the CMHPI).

57Also, the adjustment used to produce the

CMHPI depends on the base period of the index and

the time elapsed since that period. Reporting the

adjustment factors separately preserves the ability

to adjust between any two dates covered by the

index.

6.9 million transaction pairs, the

weighted repeat sales approach provides

sufficient data to estimate quarterly

house price changes by states and by

Census divisions.

The implications of these and other

statistical issues of house price index

construction are reviewed in more detail

in the HPI Technical Description.

The Enterprises currently publish

jointly the Conforming Mortgage House

Price Index (CMHPI), a weighted repeat

transactions index, using the same data

as the HPI and a very similar

methodology. OFHEO decided to

produce its own index, rather than rely

on the Enterprises’ index, because of the

important role of the house price index

in determining capital requirements. By

producing the HPI, OFHEO ensures that

the index will meet the statutory

requirements of quality, authority, and

public availability. Additionally,

OFHEO believes its index uses a

statistical methodology that is more

appropriate for its purposes (see issue 4.

‘‘Statistical Methodology’’ below).

OFHEO also considered other existing

house price indexes. NAR has published

indexes for existing single-family

houses for metropolitan areas since

1968, using data on transactions

reported by member boards. The NAR

indexes represent the change in the

median transaction price with no

adjustment for variations in the

composition of the properties that make

up the sample in each period. The

National Association of Home Builders

reports mean and median prices for both

existing and new houses derived from

county records. FHA issues a median

value index for single-family houses

financed under the Section 203(b)

program.54 This index is available as a

time series back to 1936 and is based on

appraisal values.

For OFHEO’s purposes, these mean

and median house price indexes are

subject to a number of statistical

shortcomings. In particular, changes in

the composition of the sample of

properties with a given set of attributes,

such as square footage, number of

rooms, lot size, fixtures, etc.,

contributing to these indexes causes

them to be less reliable than the HPI as

indicators of changes in the actual mean

or median property value over time. A

constant quality index, such as the HPI,

which controls for this particular source

of bias by comparing the same or similar

properties, is a better source of

information concerning the rate of

house price inflation than these other

indexes.

All of the commenters who addressed

this issue favored using a weighted

repeat transactions index, such as the

HPI, rather than the CQHPI. ACB, for

example, stated that ‘‘[t]he weighted

repeat sales approach currently used by

the [Enterprises] as a house price index

is clearly preferable to other approaches

since its purpose is . . . targeted to the

population of properties where the

[Enterprises] can assume risk.’’

2. Geographic Aggregation

OFHEO sought comment in the ANPR

concerning the appropriate level of

geographic aggregation for the index

that will be used to adjust house prices

in the risk-based capital stress test. The

HPI is published for 9 Census divisions,

50 states, and the District of Columbia.

A second NPR will address the level or

levels of geographic aggregation that

will be used in the stress test.

3. Bias and Volatility in the HPI

OFHEO sought comment in the ANPR

about whether to adjust for sample

selection bias, appraisal bias, or other

possible sources of bias in a weighted

repeat transactions index of house

prices. After considering comments on

the matter, the Director decided not to

adjust the HPI for such possible biases.

Likewise, OFHEO requested comments

about whether revision volatility in

house price indexes should be reflected

in the risk-based capital test.55 The

Director also determined not to adjust

the indexes for revision volatility.

However, OFHEO is studying both the

appropriateness and the practicality of

adjusting for biases and revision

volatility in the stress test, and will

address these issues in a second NPR.

4. Statistical Methodology

The HPI is based upon a geometric

repeat transactions estimator derived

from a stochastic model of individual

housing values. A geometric repeat

transaction estimator estimates the

average rate of change in housing

values, with each house weighted

equally regardless of dollar value. The

Enterprises use an adjustment to the

geometric estimator to approximate an

arithmetic repeat sales procedure in

calculating the CMHPI.56 Arithmetic

repeat transactions indexes have been

shown to be more accurate for

computing the change in the sum of the

values of a fixed portfolio of properties.

Because OFHEO plans to apply the

index to loan-level data to update the

distribution of current LTV ratios,

OFHEO believes a geometric estimator

is more suitable for use in the stress test.

The publication of the HPI includes

both the geometric index estimates and

the adjustment factors needed to

approximate an arithmetic index. Thus,

the HPI publication provides the

information needed to relate changes in

the index to changes in the values of

individual properties or portfolios of

properties.57

Section by Section Analysis

As noted in the preamble, at a later

date OFHEO will issue a second NPR to

propose all the remaining aspects of the

stress test and to describe how the stress

test will be used to determine the

Enterprises’ risk-based capital

requirements.

Proposed Section 1750.5 Notice of

Capital Classification

This section will be amended to add

to the notice of capital classification,

which OFHEO issues at least quarterly

for each Enterprise, the risk-based

capital level and the summary

computation of that level.

Proposed Section 1750.10 General

This section identifies a ‘‘Subpart B’’

to the capital regulation, which

establishes risk-based capital

requirements for each Enterprise. This

section also requires the board of

directors of an Enterprise to ensure that

the Enterprise maintains total capital at

a level that is sufficient to ensure the

continued financial viability of the

Enterprise and is equal to or greater than

the risk-based capital level specified in

the regulation.

Proposed Section 1750.11 Definitions

This section defines various terms

used in Subpart B and provides that,

except where a term is explicitly

defined differently in Subpart B, all

terms defined at § 1750.2 of Subpart A

(the minimum capital regulation) shall

have the same meanings for purposes of

Subpart B.
29618 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

58Section 1361(a) (12 U.S.C. 4611(a)).

59 1992 Act, section 1361(a)(3) (12 U.S.C.

4611(a)(3)).

60Section 1361(a)(4) (12 U.S.C. 4611(a)(4)).

61 1992 Act, section 1361(b)(1) (12 U.S.C.

4611(b)(1)).

62Section 1361(b)(2) (12 U.S.C. 4611(b)(2)).

63 Id.

64Sections 1361(b)(1), 1361(d)(1) (12 U.S.C.

4611(b)(1), 4611(d)(1)).

Proposed Section 1750.12 Procedures

and Timing

This section will specify the timing

and procedures for filing and the

content of risk-based capital reports by

each Enterprise. These reports will

provide OFHEO with the information

necessary to determine the risk-based

capital level of each Enterprise. The

section also requires that whenever an

Enterprise makes an adjustment to the

data contained in the risk-based capital

report that may cause an adjustment to

the risk-based capital determination, the

Enterprise shall file with the Director an

amended risk-based capital report not

later than 3 business days after the date

of such adjustment. Finally, the section

requires that each risk-based capital

report or amended risk-based capital

report contain a declaration by an

officer, authorized by the board of

directors to do so, that the report is true

and correct to the best of such officer’s

knowledge and belief.

Proposed Section 1750.13 Risk-Based

Capital Level Computation

This section implements by regulation

the provisions of the 1992 Act that

describe risk-based capital. Together

with Appendix A to Subpart B of the

regulation, proposed section 1750.13

describes how OFHEO calculates the

risk-based capital requirement for an

Enterprise.

This section of the regulation

implements the requirements of the

1992 Act that requires OFHEO to create

a stress test that relates losses of each

Enterprise during the stress period to

the historical benchmark loss

experience in which losses on

mortgages were the highest.58 The

methodology that OFHEO uses to

determine the benchmark area and

period are referred to in proposed

section 1750.13, and explained in

greater detail in proposed Appendix A

to Subpart B.

The 1992 Act also describes aspects of

the interest rate environment that

OFHEO must apply during the stress

period and makes frequent use of the

term ‘‘the preceding [period].’’ Proposed

section 1750.13 implements that

requirement and provides that when

referring to a ‘‘preceding’’ period, the

reference is to the period immediately

preceding the beginning of the stress

period.

In constructing the stress test, OFHEO

initially must assume that new business

of the Enterprises will be limited to

fulfilling contractual commitments of

each Enterprise to purchase mortgages

or issue securities.59 Proposed section

1750.13(a)(3) implements this

requirement of the 1992 Act. The 1992

Act limits new business as described

above until completion of two studies,

one by the Director of the Congressional

Budget Office and the other by the

Comptroller General of the United

States, on the advisability and

appropriate form of any new business

assumptions. The 1992 Act requires

these studies to be completed within 1

year after issuance of the final riskbased capital regulation. The 1992 Act

further provides that any new business

assumptions incorporated by OFHEO

into the stress test shall not become

effective until 4 years after issuance of

the final risk-based capital regulation.

The 1992 Act also requires that the

stress test incorporate losses or gains on

activities, other than those specifically

identified in the statute, in an amount

and manner to be determined by the

Director to be consistent with the stress

period.60

The risk-based capital test must take

into account other considerations,

including distinctions among the types

of mortgage products, differences in

seasoning, and any other factors the

Director considers appropriate.61

Proposed paragraph 1750.13(a)(1)

implements this provision of the 1992

Act and specifies that the detailed

description of these factors and the

methodology by which they shall be

taken into account are included in

Appendix A to Subpart B of the

regulation.

Proposed paragraph 1750.13(a)(5) also

implements the requirement of the 1992

Act that characteristics of the stress

period, other than those specifically set

forth in that Act, will be determined by

the Director to be most consistent with

the stress period.62 The subsection also

indicates that the details of these

characteristics are provided in

Appendix A to Subpart B of the

regulation.

Proposed subsection 1750.13(b)

implements the 1992 Act’s requirement

that the total risk-based capital

requirement include an additional

amount equal to 30 percent of the

capital determined by applying the riskbased capital test.63

Proposed Appendix A: Risk-Based

Capital Test Methodology and

Assumptions

Appendix A to Subpart B of the

capital regulation will provide a

detailed description of the stress test. In

this NPR, OFHEO proposes the part of

Appendix A that defines the

methodology OFHEO uses to identify

the benchmark loss experience. The

other aspects of the stress test by which

OFHEO will relate Enterprise losses in

the stress period to the benchmark loss

experience will be the subject of a

second NPR.

Appendix A also includes a proposal

to use the House Price Index (HPI),

published by OFHEO, to calculate the

change over time in the value of houses

that secure mortgages purchased by the

Enterprises. The 1992 Act requires

OFHEO to calculate this change in value

in accordance with the CQHPI,

published by the Secretary of

Commerce, or any index of similar

quality, authority, and public

availability that is regularly used by the

Federal Government.64 Under proposed

Appendix A, OFHEO uses the HPI,

which is a weighted repeat transactions

index based on Enterprise data, rather

than the CQHPI, as the basic measure of

changes in the value of house prices.

Regulatory Impact

Executive Order 12606, The Family

This proposed regulation does not

have potential for significant impact on

family formulation, maintenance, and

general well-being, and thus is not

subject to review under Executive Order

12606.

Executive Order 12612, Federalism

This proposed regulation has no

federalism implications that warrant the

preparation of a Federalism Assessment

in accordance with Executive Order

12612.

Executive Order 12866, Regulatory

Planning and Review

This proposed regulation has been

reviewed by the Office of Management

and Budget pursuant to Executive Order

12866.

Executive Order 12988, Civil Justice

Reform

This proposed regulation meets the

applicable standards of sections 3(a) and

(b) of Executive Order 12988.

Unfunded Mandates Reform Act of 1995

This proposed regulation does not

include a federal mandate that may
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29619

1The financing costs associated with properties

acquired through foreclosure from the time of

foreclosure through property disposition were

calculated using the average from 1982 through

1992 of the 12-month Federal Agency constant

maturity yield computed by Bank of America.

result in the expenditure by State, local,

and tribal governments, in the aggregate,

or by the private sector, of $100,000,000

or more (adjusted annually for inflation)

in any one year.

Consequently, the proposed

regulation does not warrant the

preparation of an assessment statement

in accordance with the Unfunded

Mandates Reform Act of 1995.

Regulatory Flexibility Act

This proposed regulation is applicable

only to the Enterprises, which are not

small entities for purposes of the

Regulatory Flexibility Act, and does not

have a significant effect on a substantial

number of small entities. Therefore, the

General Counsel of OFHEO has certified

that the proposed regulation would not

have significant economic impact on a

substantial number of small entities.

Paperwork Reduction Act

This proposed regulation contains no

information collection requirements that

require the approval of the Office of

Management and Budget pursuant to the

Paperwork Reduction Act of 1980, 44

U.S.C. 3501 et seq.

List of Subjects in 12 CFR Part 1750

Risk-based capital, capital

classifications.

Accordingly, for the reasons set forth

in the preamble, OFHEO proposes to

amend Part 1750 of Chapter XVII of

Title 12 of the Code of Federal

Regulations, as proposed at 60 FR 30201

(June 8, 1995), as follows:

PART 1750—[AMENDED]

1. The Authority section for Part 1750

is revised to read as follows:

Authority: 12 U.S.C. 4513, 4514, 4611,

4612, 4614, 4618.

2. Section 1750.5 of Subpart A is

amended by deleting the ‘‘and’’ at the

end of paragraph (b)(1)(ii) and by

deleting the period at the end of

paragraph (b)(1)(iii) and inserting a

semicolon in lieu of the period. The

section is further amended by adding

the following paragraphs after paragraph

(b)(1)(iii):

§ 1750.5 Notice of Capital Classification

* * * * *

(b)(1) * * *

(iv) the proposed risk-based capital

level; and

(v) the summary computation of the

proposed risk-based capital level.

* * * * *

3. Subpart B is added to read as

follows:

Subpart B—Risk-Based Capital

Sec.

1750.10 General.

1750.11 Definitions.

1750.12 Procedures and Timing.

1750.13 Risk-Based Capital Level

Computation.

Appendix A to Subpart B of Part 1750—

Risk-Based Capital Test Methodology

and Assumptions

Subpart B—Risk-Based Capital

§ 1750.10 General.

The regulation contained in this

Subpart B establishes the risk-based

capital requirement for each Enterprise.

The board of directors of an Enterprise

is responsible for ensuring that the

Enterprise maintains total capital at a

level that is sufficient to ensure the

continued financial viability of the

Enterprise and is equal to or exceeds the

risk-based capital level contained in this

Subpart B.

§ 1750.11 Definitions.

Except where a term is explicitly

defined differently in Subpart B, all

terms defined at § 1750.2 of Subpart A

shall have the same meanings for

purposes of Subpart B. For purposes of

Subpart B, the following definitions

shall apply:

Benchmark loss experience means the

default and severity behavior of

mortgage loans that:

(1) Were originated during a period of

2 or more consecutive calendar years in

contiguous areas that together contain at

least 5 percent of the population of the

United States, and

(2) Experienced the highest loss rate

for any period of such duration in

comparison with the loans originated in

any other contiguous areas that together

contain at least 5 percent of the

population of the United States.

Constant maturity Treasury yield

means the constant maturity Treasury

yield, published by the Board of

Governors of the Federal Reserve

System.

Contiguous areas means all the areas

within a state or a group of two or more

states sharing common borders.

‘‘Sharing common borders’’ does not

mean meeting at a single point.

Colorado, for example, is contiguous

with New Mexico, but not with Arizona.

Credit risk means the risk of financial

loss to an Enterprise from

nonperformance by borrowers or other

obligors on instruments in which an

Enterprise has a financial interest, or as

to which the Enterprise has a financial

obligation.

The default rate of a given group of

loans means the ratio of the aggregate

original principal balance of the

defaulted loans in the group to the

aggregate original principal balance of

all loans in the group.

Defaulted loan means a loan that,

within 10 years following its

origination:

(1) Resulted in pre-foreclosure sale,

(2) Completed foreclosure,

(3) Resulted in REO, or

(4) Resulted in a credit loss to an

Enterprise.

Financing costs of property acquired

through foreclosure means the product

of:

(1) The number of years (including

fractions) of the period from the

completion of foreclosure through

disposition of the property,

(2) The average of the Enterprises’

short-term funding costs, and

(3) The unpaid principal balance at

the time of foreclosure.

Interest rate risk means the risk of

financial loss due to the sensitivity of

earnings and net worth of an Enterprise

to changes in interest rates.

Loss on any defaulted loan in category

1, 2, or 3 of the definition of defaulted

loan means the difference between:

(1) The sum of the principal and

interest owed when the borrower lost

title to the property securing the

mortgage; REO financing costs 1 through

the date of property disposition; and

cash expenses incurred during the

foreclosure process, REO holding

period, and property liquidation

process; and

(2) The sum of the property sales

price and any other liquidation

proceeds (except those resulting from

private mortgage insurance proceeds or

other third-party credit enhancements).

Losses on defaulted loans not in

categories 1, 2, or 3 of the definition

were defined as the amount of the

financial loss to the Enterprise.

Mortgage means any loan secured by

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 house that is

personal property under the laws of the

State in which the manufactured house

is located, together with the credit

instruments, if any, secured thereby,

and includes interests in mortgages.

Seasoning means the change over

time in the ratio of the unpaid principal

balance of a mortgage to the value of the
29620 Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules

property by which such mortgage loan

is secured.

Severity rate for any group of

defaulted loans means the aggregate

losses on all loans in that group divided

by the aggregate original principal

balances of those loans.

Stress period means a hypothetical

10-year period immediately following

the day for which capital is being

measured, which is a period marked by

severely adverse economic

circumstances.

Total capital means, with respect to

an Enterprise, the sum of the following:

(1) The core capital of the Enterprise;

(2) A general allowance for

foreclosure losses, which—

(i) shall include an allowance for

portfolio mortgage losses, an allowance

for non-reimbursable foreclosure costs

on government claims, and an

allowance for liabilities reflected on the

balance sheet for the Enterprise for

estimated foreclosure losses on

mortgage-backed securities; and

(ii) shall not include any reserves of

the Enterprise made or held against

specific assets.

(3) Any other amounts from sources of

funds available to absorb losses incurred

by the Enterprise, that the Director by

regulation determines are appropriate to

include in determining total capital.

Type of mortgage product means a

classification of one or more mortgage

products, as established by the Director,

that have similar characteristics from

each set of characteristics under the

following paragraphs:

(1) The property securing the

mortgage is—

(i) a residential property consisting of

1 to 4 dwelling units; or

(ii) a residential property consisting of

more than 4 dwelling units.

(2) The interest rate on the mortgage

is—

(i) fixed; or

(ii) adjustable.

(3) The priority of the lien securing

the mortgage is—

(i) first; or

(ii) second or other.

(4) The term of the mortgage is—

(i) 1 to 15 years;

(ii) 16–30 years; or

(iii) more than 30 years.

(5) The owner of the property is—

(i) an owner-occupant; or

(ii) an investor.

(6) The unpaid principal balance of

the mortgage—

(i) will amortize completely over the

term of the mortgage, and will not

increase significantly at any time during

the term of the mortgage;

(ii) will not amortize completely over

the term of the mortgage, and will not

increase significantly at any time during

the term of the mortgage; or

(iii) may increase significantly at

some time during the term of the

mortgage.

(7) Any other characteristics of the

mortgage, as specified in Appendix A.

§ 1750.12 Procedures and Timing.

(a) Each Enterprise shall file with the

Director a risk-based capital report each

quarter, or at such other times as the

Director requires. The report shall

contain information identified by

OFHEO in written instructions to each

Enterprise, including, but not limited to:

(1) all data required to implement the

risk-based capital test, as specified more

fully at Appendix A to Subpart B of Part

1750; and

(2) such other information as may be

required by the Director.

(b) The quarterly risk-based capital

report for the last day of the preceding

quarter shall be submitted not later than

April 30, July 30, October 30, and

January 30 of each year.

(c) Each risk-based capital report shall

be submitted in such format or media as

may be required by the Director.

(d) If an Enterprise makes an

adjustment to the data contained in the

risk-based capital report for a quarter or

a date for which the report was

previously supplied that may cause an

adjustment to the risk-based capital

determination, the Enterprise shall file

with the Director an amended risk-based

capital report not later than 3 business

days after the date of such adjustment.

(e) Each risk-based capital report or

any amended risk-based capital report

shall contain a declaration by the

president, vice-president, treasurer, or

any other officer designated by the

board of directors of the Enterprise to

make such a declaration that the report

is true and correct to the best of such

officer’s knowledge and belief.

§ 1750.13 Risk-Based Capital Level

Computation.

(a) Risk-Based Capital Test—OFHEO

shall compute a risk-based capital level

for each Enterprise at least quarterly by

applying a risk-based capital test to

determine the amount of total capital

required for each Enterprise to maintain

positive capital during the stress period.

In making this determination, the

Director shall take into account any

appropriate distinctions among types of

mortgage products, differences in

seasoning of mortgages, and other

factors determined appropriate by the

Director in accordance with the

methodology specified in Appendix A

to this subpart. The stress period has the

following characteristics:

(1) Credit risk—With respect to

mortgages owned or guaranteed by the

Enterprise and other obligations of the

Enterprise, losses occur throughout the

United States at a rate of default and

severity reasonably related, in

accordance with Appendix A to this

subpart, to the rate and severity of losses

in the benchmark loss experience.

(2) Interest rate risk—

(i) In general—Interest rates decrease

as described in paragraph (a)(2)(ii) of

this section or increase as described in

paragraph (a)(2)(iii) of this section,

whichever would require more capital

in the stress test for the Enterprise.

Appendix A contains a description of

the methodology applied to implement

the interest rate scenarios described in

those subparagraphs.

(ii) Decreases—The 10-year constant

maturity Treasury yield decreases

during the first year of the stress period

and remains at the new level for the

remainder of the stress period. The yield

decreases to the lesser of—

(A) 600 basis points below the average

yield during the 9 months immediately

preceding the stress period, or

(B) 60 percent of the average yield

during the 3 years immediately

preceding the stress period,

but in no case to a yield less than 50

percent of the average yield during the

9 months immediately preceding the

stress period.

(iii) Increases—The 10-year constant

maturity Treasury yield increases

during the first year of the stress period

and will remain at the new level for the

remainder of the stress period. The yield

increases to the greater of—

(A) 600 basis points above the average

yield during the 9 months immediately

preceding the stress period, or

(B) 160 percent of the average yield

during the 3 years immediately

preceding the stress period,

but in no case to a yield greater than 175

percent of the average yield during the

9 months immediately preceding the

stress period.

(iv) Different terms to maturity—

Yields of Treasury instruments with

terms to maturity other than 10 years

will change relative to the 10-year

constant maturity Treasury yield in

patterns and for durations that are

reasonably related to historical

experience and are judged reasonable by

the Director. The methodology used by

the Director to adjust the yields of those

other instruments is specified in

Appendix A to this subpart.

(v) Large increases in yields—If the

10-year constant maturity Treasury

yield is assumed to increase by more

than 50 percent over the average yield
Federal Register / Vol. 61, No. 113 / Tuesday, June 11, 1996 / Proposed Rules 29621

during the 9 months immediately

preceding the stress period, the Director

shall adjust the losses resulting from the

conditions specified in paragraphs (a)(2)

(i) and (ii) of this section to reflect a

correspondingly higher rate of general

price inflation. The method of such

adjustment by the Director is specified

in Appendix A to this subpart.

(3) New business—Any contractual

commitments of the Enterprise to

purchase mortgages or issue securities

will be fulfilled. The characteristics of

resulting mortgages purchased,

securities issued, and other financing

will be consistent with the contractual

terms of such commitments, recent

experience, and the economic

characteristics of the stress period, as

more fully specified in Appendix A to

this subpart. No other purchases of

mortgages shall be assumed.

(4 ) Other activities—Losses or gains

on other activities, including interest

rate and foreign exchange hedging

activities, shall be determined by the

Director, in accordance with Appendix

A to this subpart and on the basis of

available information, to be consistent

with the stress period.

(5) Consistency—Characteristics of

the stress period other than those

specifically set forth in this paragraph

(a), such as prepayment experience and

dividend policies, will be determined

by the Director, in accordance with

Appendix A, on the basis of available

information, to be most consistent with

the stress period.

(b) Risk-Based Capital Level—The

risk-based capital level of an Enterprise,

to be used in determining the

appropriate capital classification of each

Enterprise, as required by section 1364

of the Federal Housing Enterprises

Financial Safety and Soundness Act of

1992 (12 U.S.C. 4614), shall be equal to

the sum of the following amounts:

(1) Credit and Interest Rate Risk—The

amount of total capital determined by

applying the risk-based capital test

under paragrpah (a) of this section to the

Enterprise.

(2) Management and Operations

Risk—To provide for management and

operations risk, 30 percent of the

amount of total capital determined by

applying the risk-based capital test

under paragraph (a) of this section to the

Enterprise.

Appendix A to Subpart B of Part 1750—

Risk-Based Capital Test Methodology

and Assumptions

1. Identifying the Benchmark Loss

Experience.—OFHEO will use the

definitions, data, and methodology described

below to identify the benchmark loss

experience.

A. Definitions.—In addition to the terms

defined at section 1750.11, the following

definition shall apply for this Appendix A:

Origination year means the year in which

a loan is originated.

B. Data.

OFHEO identifies the benchmark loss

experience using historical loan-level data

required to be submitted by each of the two

Enterprises. OFHEO’s analysis is based

entirely on the most current data available on

conventional, 30-year, fixed-rate loans

secured by first liens on single-unit, owneroccupied, detached properties. Detached

properties are defined as single-family

properties excluding condominiums,

planned urban developments, and

cooperatives. The data includes only loans

that were purchased by an Enterprise within

12 months after loan origination and loans

for which the Enterprise has no recourse to

the lender.

OFHEO organizes the data from each

Enterprise to create two substantially

consistent data sets. OFHEO separately

analyzes default and severity data from each

Enterprise. Default rates are calculated from

loan records meeting the criteria specified

above. Severity rates are calculated from the

subset of defaulted loans for which loss data

are available.

C. Procedures.

i. Cumulative 10-year default rates for each

combination of states and origination years

(state/year combination) that OFHEO

examines are calculated for each Enterprise

by grouping all of the Enterprise’s loans

originated in that combination of states and

years. For origination years with less than 10

years of loss experience, cumulative-to-date

default rates are used. The two Enterprise

default rates are averaged, yielding an

‘‘average default rate’’ for that state/year

combination.

ii. An ‘‘average severity rate’’ for each

state/year combination is determined in the

same manner as the average default rate. For

each Enterprise, the aggregate severity rate is

calculated for all loans in the relevant state/

year combination and the two Enterprise

severity rates are averaged.

iii. The ‘‘loss rate’’ for any state/year

combination examined is calculated by

multiplying the average default rate for that

state/year combination by the average

severity rate for that combination.

iv. The default and severity behavior of

loans in the state/year combination

containing at least 2 consecutive origination

years and contiguous areas with a total

population equal to or greater than 5% of the

population of the United States with the

highest loss rate constitutes the benchmark

loss experience.

2. Identification of a New Benchmark Loss

Experience.—OFHEO will periodically

monitor available data and reevaluate the

benchmark loss experience using the

methodology set forth in this Appendix A.

Using this methodology, OFHEO may

identify a new benchmark loss experience

that has a higher rate of loss than the

benchmark experience identified at the time

of the issuance of this regulation. In the event

such a benchmark is identified, OFHEO may

incorporate the resulting higher loss rates in

the stress test.

3. Contents of the Risk-Based Capital

Report.—(This space deliberately left blank.)

4. Computation of Risk-Based Capital

Level.—(This space deliberately left blank.)

A. Seasoning Methodology.—OFHEO will

determine the rate of change over time in the

values of single-family properties securing

mortgages using the House Price Index

published by OFHEO or any successor index.

(The remainder of this paragraph deliberately

left blank.)

Aida Alvarez,

Director, Office of Federal Housing Enterprise

Oversight.

[FR Doc. 96–14496 Filed 6–10–96; 8:45 am]

BILLING CODE 4220–01–P