Federal Register: May 3, 2004 (Volume 69, Number 85)
DOCID: FR Doc 04-9352
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Western Area Power Administration
CFR Citation: 24 CFR Part 81
Docket ID: [Docket No. FR-4790-P-01]
RIN ID: RIN 2501-AC92
NOTICE: Part II
DOCUMENT ACTION: Proposed rule.
HUD's Proposed Housing Goals for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for the Years 2005-2008 and Amendments to HUD's Regulation of Fannie Mae and Freddie Mac
DATES: Comments must be submitted on or before: July 2, 2004.
Through this proposed rule, the Department of Housing and Urban Development is proposing new housing goal levels for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Government Sponsored Enterprises, or GSEs) for calendar years 2005 through 2008. The new housing goal levels are proposed in accordance with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) and govern the purchase by Fannie Mae and Freddie Mac of mortgages financing low and moderateincome housing, special affordable housing, and housing in central cities, rural areas and other underserved areas.
To increase homeownership opportunities for families targeted by the three housing goals, this rule also would establish new subgoals for the GSEs' acquisitions of home purchase loans that qualify for each of the housing goals. Under the proposed rule, performance under these subgoals would be calculated as percentages of the GSEs' total acquisitions of home purchase mortgages for singlefamily, owner occupied properties located in metropolitan areas meeting each of the three housing goals.
The Department also proposes to revise the existing rule to provide enhanced requirements to ensure GSE data integrity by: codifying the existing authority that authorizes HUD to independently verify the accuracy and completeness of data, information and reports provided by the GSEs; establishing certification requirements for the submission of the GSEs' Annual Housing Activities Report (AHAR) and for such other report(s), data submission(s) or information for which certification is requested in writing by HUD; codifying a process for handling errors, omissions or discrepancies in a GSE's current yearend data submissions; clarifying that HUD may exercise its goal counting authority by adjusting a GSE's housing goals performance for a current year by deducting miscredits from a previous year caused by errors, omissions or discrepancies in a GSE's prior year data submissions (including the AHAR); and clarifying that HUD may take enforcement action against the GSEs, as authorized by FHEFSSA and as implemented by HUD's regulations at 24 CFR part 81, subpart G, for the submission of noncurrent, inaccurate or incomplete report(s), data or information.
In addition, HUD is proposing in this rulemaking to amend the definitions of ``Underserved area'', ``Metropolitan area'' and ``Minority'', and to add a new definition of the term ``Home Purchase Mortgage'.
The rulemaking also invites comments on whether HUD should have a standard econometrically based method for imputing the distribution of GSEpurchased mortgages that lack income data, and whether HUD should revise its definitions or other rules (including the counting rules) to ensure that only those large scale GSE transactions that are consistent with the statute and its purposes qualify under the goals.
Housing and Urban Development Department,
A. Statutory and Regulatory Background
In 1968, at the time Fannie Mae was chartered in its current form as a government sponsored enterprise (GSE), Congress assigned the Department of Housing and Urban Development (``HUD'' or ``the Department'') regulatory authority over Fannie Mae pursuant to section 802(ee) of the Housing and Urban Development Act of 1968 (Pub. L. 90 448, approved August 1, 1968, 82 Stat. 476, 541) (HUD Act of 1968). In 1989, Congress granted the Department essentially identical authority over another GSE, Freddie Mac, pursuant to section 731 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (Pub. L. 10173, approved August 9, 1989), which amended the Federal Home Loan Mortgage Corporation Charter Act, Pub. L. 91351, approved July 24, 1970 (the ``Freddie Mac Charter Act'').
Under section 802(ee) of the HUD Act of 1968, HUD was authorized to require that a ``reasonable portion'' of Fannie Mae's mortgage purchases be related to the national goal of providing adequate housing for low and moderateincome families. Accordingly, in 1978, the Department established by regulation two housing goals for Fannie Mae: a goal for mortgages on low and moderateincome housing and a goal for mortgages on housing located in central cities (see 24 CFR 81.16(d) and 81.17 of HUD's former rules at 43 FR 39203, published August 15, 1978). HUD established each goal at the level of 30 percent of Fannie Mae's conventional mortgage purchases.
Similar housing goals for Freddie Mac were proposed by the Department in 1991 (at 56 FR 41022, published August 16, 1991) but were not finalized prior to October 1992, when Congress enacted FHEFSSA and revised the Department's GSE regulatory authorities, including establishing new requirements for the housing goals.
Specifically, FHEFSSA established the Office of Federal Housing Enterprise
Oversight (OFHEO) as the GSEs' safety and soundness regulator and affirmed, clarified and expanded the Secretary of Housing and Urban Development's GSE regulatory authority. FHEFSSA also provided that, except for certain exclusive authorities of the Director of OFHEO, and all other matters relating to the GSEs' safety and soundness, the Secretary had general regulatory power over the GSEs. (See section 1321 of FHEFSSA, 12 U.S.C. 4541.)
Further, FHEFSSA detailed and expanded the Department's responsibilities to establish, monitor, and enforce housing goals for the GSEs' purchases of mortgages that finance housing for low and moderateincome families (the ``Low and ModerateIncome Housing Goal''), housing located in central cities, rural areas, and other underserved areas (the ``Underserved Areas Housing Goal''), and special affordable housing, affordable to very lowincome families and low income families in lowincome areas (the ``Special Affordable Housing Goal'') (collectively, the ``Housing Goals'' or, individually, the ``Housing Goal''). (See, generally, sections 13311334 of FHEFSSA, 12 U.S.C. 45614564.) There is also a subgoal under the Special Affordable Housing Goal for multifamily housing.
Under FHEFSSA, the Department is required to establish each Housing Goal after consideration of certain factors that are relevant to the particular Housing Goal, including: (a) National housing needs; (b) economic, housing and demographic conditions; (c) the performance and efforts of the GSEs toward achieving the Housing Goal in previous years; (d) the size of the market for mortgages targeted by the Housing Goal relative to the overall conventional mortgage market; (e) the ability of the GSEs to lead the industry in making credit available for mortgages targeted by the Housing Goal; and (f) the need to maintain the sound financial condition of the GSEs. (See sections 1332(b), 1333(a)(2), 1334(b) of FHEFSSA; 12 U.S.C. 4562(b); 12 U.S.C. 4563(a)(2); and 12 U.S.C. 4564.) (There are slight differences among the three Housing Goals in the statutory specification of the factors. In particular, for the Special Affordable Housing Goal factors (b) and (d) are absent, and there is a factor for data submitted in previous years to the Secretary in connection with the Housing Goal.)
For the transition period of 19931994, FHEFSSA required HUD to establish interim Housing Goals, which HUD did in 1993 (at 53 FR 53048). In November 1994, HUD extended the 1994 interim Housing Goals for both GSEs through 1995 while the Department completed its development of posttransition Housing Goals (see 59 FR 61504).
In 1995, the Department issued a proposed rule (60 FR 9154, published February 16, 1995) and, several months later, a final rule (60 FR 61846, published December 1, 1995) (the ``Housing Goals 1995 final rule'') establishing the Housing Goals for the years 1996 through 1999, along with regulations implementing FHEFSSA. The Housing Goals 1995 final rule provided that the Housing Goals for 1999 would continue beyond 1999 if the Department elected not to change the Housing Goals, and that HUD could change the level of the Housing Goals for the years 2000 and beyond based upon HUD's experience and in accordance with HUD's statutory authority and responsibility.
The Housing Goals 1995 final rule established counting requirements to calculate performance under the Housing Goals. The Housing Goals 1995 final rule also: (1) Prohibited the GSEs from discriminating in any manner, on any prohibited basis, in their mortgage purchases; (2) implemented procedures for the exercise of HUD's new program review authority; (3) established reporting requirements and a public use data base of the GSEs' mortgage purchase activities; (4) provided protections for GSE confidential and proprietary information; and (5) established enforcement procedures.
On March 9, 2000, HUD published a proposed rule to establish new Housing Goal levels for Fannie Mae and Freddie Mac for calendar years 2000 through 2003 (see 65 FR 1263212816). On October 31, 2000, after analyzing over 250 comments, HUD issued a final rule establishing the new Housing Goals (the ``Housing Goals 2000 Final Rule,'' 65 FR 65044 65229).
The Housing Goals 2000 final rule increased the level of the
Housing Goals for Fannie Mae and Freddie Mac. Specifically, this rule:
(1) Increased the level of the Housing Goals for calendar years 2001 through 2003 as follows:
(2) Made temporary bonus points available for the GSEs' purchases of mortgages for small multifamily properties with 5 to 50 units, and, above a threshold, for singlefamily 2 to 4unit owneroccupied rental properties, for calendar years 2001 through 2003 (but not for subsequent years, unless determined by HUD);
(3) Established a temporary adjustment factor (``TAF'') for Freddie Mac's purchases of mortgages on large multifamily properties (over 50 units) for calendar years 2001 through 2003;
(4) Prohibited highcost mortgage loans with predatory features from receiving Housing Goals credit;
(5) Established and clarified counting rules under the Housing Goals for the treatment of missing affordability data, purchases of seasoned mortgage loans, purchases of federally insured mortgage loans and purchases of mortgage loans on properties with expiring assistance contracts;
(6) Established procedures for HUD's review of transactions to determine appropriate Housing Goal treatment; and
(7) Made certain definitional and technical corrections to the Housing Goals 1995 final rule.
The Housing Goals 2000 final rule provided for the award of temporary bonus points (double credit) toward the Housing Goals for both GSEs' mortgage purchases that financed singlefamily, owner occupied 24 unit properties and 550 unit multifamily properties. Under the TAF, the rule also awarded Freddie Mac 1.2 units credit for each multifamily unit in property over 50 units.\1\ The Housing Goals 2000 final rule made clear, however, that both of these measures were temporary, intended to encourage the GSEs to ramp up their efforts to meet financing needs that had not been well served. During the three years for which the temporary bonus points and TAF were established, HUD expected the GSEs to develop new, sustainable business relationships and purchasing strategies for the targeted needs. \1\ Congress increased the level of the TAF to 1.35 per unit, section 1002 of Pub. L. 106554 (December 21, 2000).
At the end of the three years (20012003), the Department
determined not to extend the bonus points or the TAF, after careful
review of the facts and circumstances of performance under the Housing
Goals. Data indicate that both GSEs increased their financing of units [[Page 24230]]
targeted by the bonus points and the TAF.
B. Background: Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac were chartered by the Congress as
government sponsored enterprises. Pursuant to section 301 of the
Federal National Mortgage Association Charter Act (the ``Fannie Mae
Charter Act'', 12 U.S.C. 1716, et seq.) and section 301(b) of the
Federal Home Loan Mortgage Corporation Act (the ``Freddie Mac Charter
Act'', 12 U.S.C. 1451, et seq.), the GSEs were chartered expressly to:
(1) Provide stability in the secondary market for residential mortgages;
(2) Respond appropriately to the private capital market; (3) Provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low and moderateincome families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
(4) Promote access to mortgage credit throughout the nation (including central cities, rural areas, and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
As a result of their status as GSEs, Fannie Mae and Freddie Mac
receive significant explicit benefits that are not enjoyed by fully
private shareholderowned corporations in the mortgage market. These benefits include:
\2\ Fannie Mae and Freddie Mac have both announced their intention voluntarily to register their common stock with the Securities and Exchange Commission (SEC) under section 12(g) of the Securities Exchange Act of 1934. Fannie Mae's registration became effective March 31, 2003. Freddie Mac has stated that it will complete the process of voluntarily registering its common stock once it resumes timely reporting of its financial results.
Fannie Mae and Freddie Mac engage in two principal businesses: purchasing and otherwise investing in residential mortgages and guaranteeing securities backed by residential mortgages.
While the securities that the GSEs guarantee, and the debt instruments they issue, are explicitly not backed by the full faith and credit of the United States, and nothing in this proposed rule should be construed otherwise, such securities and instruments trade at yields only a few basis points over those of U.S. Treasury securities with comparable terms. Moreover, these securities also offer yields lower than those for securities issued by fully private firms that are more highly capitalized but otherwise comparable.
These factors, in addition to the fact that the market does not require that individual GSE securities be rated by a national rating agency, evidence that investors perceive that GSEguaranteed securities have inherent advantages over other types of guaranteed securities in light of the GSEs' relationship to the Federal Government, including their public purposes, their Congressional charters, and the explicit benefits provided in their charters as described above.
Consequently, the GSEs are able to fund their operations at lower
cost than other private firms with similar financial characteristics.
In a recent report, the Congressional Budget Office (CBO) estimated
this funding advantage for the year 2003 to be a $19.6 billion annual
combined subsidy for both GSEs. Of this amount, CBO estimated that the
GSEs retained about $6.2 billion, or approximately onethird of the
subsidy, for their officers and shareholders, while the remainder accrued to borrowers.\3\
\3\ ``Updated Estimates of the Subsidies to the Housing GSEs'', attachment to a letter from Douglas HoltzEakin, Director,
Congressional Budget Office, to the Honorable Richard C. Shelby, Chairman, Committee on Banking, Housing, and Urban Affairs, United States Senate, April 8, 2004. A related recent study is Wayne Passmore, ``The GSE Implicit Subsidy and Value of Government Ambiguity,'' Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, FEDS Working Paper 200364, December 2003.
C. Secretary's Approach To Regulating the GSEs
In return for the public benefits they receive, Congress has mandated in the GSEs' Charter Acts that the GSEs carry out public purposes not required of other private sector entities in the housing finance industry.
Specifically, as indicated, the GSEs' Charter Acts require them to continually assist in the efficient functioning of the secondary market for residential mortgages, including mortgages for low and moderate income families that may involve a reasonable economic return that is less than the economic return on other mortgages. The GSEs also are required to promote access to mortgage credit throughout the nation, including central cities, rural areas, and other underserved areas. These statutory mandates obligate the GSEs to work to ensure that everyone in the nation has a reasonable opportunity to enjoy access to the mortgage financing benefits resulting from the activities of these enterprises.
The GSEs have achieved an important part of their mission: providing stability and liquidity to large segments of the housing finance markets. They have also increased their purchases of loans affordable to lowincome families over the past decade since the affordable housing goals were put in place under FHEFSSA. Through partnership efforts, new product offerings, and flexible underwriting and purchase standards, both enterprises have reached out to underserved borrowers, as discussed below in this preamble and in the appendices.
The major premise of this proposed rule is that the GSEs must further utilize their entrepreneurial talents and power in the marketplace to genuinely ``lead the mortgage finance industry'' and to ``ensure that citizens throughout the country enjoy access to the public benefits provided by these federally related entities.'' (See, S. Rep. No. 282, 102d Cong., 2d Sess. 34 (1992).)
For example, despite the record national homeownership rate of 67.9
percent in 2002, certain segments of the population clearly have not
benefited to the same degree that others have from the advantages and
efficiencies provided by Fannie Mae and Freddie Mac. Problems continue to persist for lowincome families and certain minorities:
American applicants, 15.1 percent for Hispanic applicants, 8.9 percent for Asian applicants, and 7.9 percent for White applicants.
Fannie Mae and Freddie Mac have increased their role in providing
financing for the lowincome end of the mortgage market, but the GSEs
need to increase their efforts further and demonstrate their capacity
to be industry leaders. There are ample market opportunities for them to do so, including:
Under the present rulemaking, the Department is proposing new,
higher levels for the Housing Goals, accompanied by subgoals under each
of the Housing Goals for purchases of home purchase mortgages on owner
occupied properties in metropolitan areas. (The subgoals are hereafter
referred to in this rule as ``Home Purchase Subgoal'' or ``Subgoal''.)
The Department's purpose in proposing higher Housing Goals and in
establishing new Home Purchase Subgoals in this rulemaking is to
encourage the GSEs to facilitate greater financing and homeownership
opportunities for families and neighborhoods targeted by the Housing
Goals. In developing these regulations, the Department was guided by,
and reaffirms, the following principles established in the Housing Goals 1995 final rule:
(1) The GSEs should fulfill FHEFSSA's intent that they lead the industry in ensuring that access to mortgage credit is made available for very low, low and moderateincome families and residents of underserved areas. HUD recognizes that, to lead the mortgage industry over time, the GSEs will have to stretch to reach certain Housing Goals and to close gaps between the secondary mortgage market and the primary mortgage market for various categories of loans. This approach is consistent with the Congress' directive that ``the enterprises will need to stretch their efforts to achieve'' the goals (see S. Rep. No. 282, 102d Cong., 2d Sess., 35 (1992)).
(2) The Department's role as a regulator is to set broad performance standards for the GSEs through the Housing Goals, but not to dictate the specific products or delivery mechanisms the GSEs will use to achieve a Housing Goal. Regulating two exceedingly large financial enterprises in a dynamic market requires that HUD provide the GSEs with sufficient latitude to use their innovative capacities to determine how best to develop products to carry out their respective missions. HUD's regulations are intended to allow the GSEs the flexibility to respond quickly to market opportunities. At the same time, the Department must ensure that the GSEs' strategies address national credit needs, especially as they relate to housing for low and moderateincome families and housing located in underserved geographical areas. The addition of Home Purchase Subgoals to the regulatory structure provides an additional means of encouraging the GSEs' affordable housing activities to address identified, persistent credit needs while leaving to the GSEs the specific approaches to meeting these needs.
(3) Discrimination in lendingalbeit sometimes subtle and unintentionalhas denied racial and ethnic minorities the same access to credit to purchase a home that has been available to similarly situated nonminorities. As noted above, troublesome gaps in homeownership remain for minorities even after record growth in affordable lending and homeownership during the nineties. Studies indicate that, over the next few years, minorities will account for a growing share of the families seeking to buy their first home. HUD's analyses indicate, however, that Fannie Mae and Freddie Mac account for a relatively small share of the minority firsttime homebuyer market. The GSEs have a responsibility to promote access to capital for minorities and others who are seeking their first homes, and to demonstrate the benefits of such lending to industry and borrowers alike. The GSEs also have an integral role in eliminating predatory mortgage lending practices.
(4) In addition to the GSEs' purchases of singlefamily home mortgages, the GSEs also must continue to assist in the creation of an active secondary market for mortgages on multifamily rental housing. Affordable rental housing is essential for those families who cannot afford to become, or who choose not to become, homeowners. For this reason, the GSEs must assist in making capital available to assure the continued development of singlefamily and multifamily rental housing.
With these principles in mind, the Department is proposing levels
of the Housing Goals that will bring the GSEs to a position of market leadership in a range of foreseeable economic
circumstances related to the future course of interest rates and consequent fluctuations in origination rates on home purchase and refinance mortgagesboth multifamily and singlefamily. For each Goal, HUD has projected Goalqualifying percentages of mortgage originations in terms of ranges that cover a variety of economic scenarios. The objective of HUD's proposed Housing Goals is to bring the GSEs' performance to the upper end of HUD's market range estimate for each Goal, consistent with the statutory criterion that HUD should consider the GSEs' ability to lead the market for each Goal. To enable the GSEs to achieve this leadership, the Department is proposing modest increases in Housing Goal levels for 2005 which will increase further, yearbyyear through 2008, to achieve the ultimate objective for the GSEs to lead the market under a range of foreseeable economic circumstances by 2008. Such a program of staged increases is consistent with the statutory requirement that HUD consider the past performance of the GSEs in setting the Goals. Staged annual increases in the Goals will provide the enterprises with opportunity to adjust their business models and prudently try out business strategies, so as to meet the required 2008 levels without compromising other business objectives and requirements.
The Department believes that the Home Purchase Subgoals that it proposes to establish under this rulemaking are necessary and warranted. Increasing homeownership is a national priority. As detailed below, the GSEs must apply greater efforts to increasing homeownership for low and moderateincome families, families living in underserved areas, and verylow income families and lowincome families living in lowincome areas. The addition of Home Purchase Subgoals to the regulatory structure will serve to better focus the GSEs' efforts in a clear and transparent manner and better allow the government and public alike to monitor the GSEs' efforts in meeting the nation's homeownership needs.
Moreover, the Department reaffirms its view that neither the award of bonus points for particular mortgage purchases nor the temporary adjustment factor for Freddie Mac's multifamily purchases are necessary. At this point, their continued use would only result in misleading information about the extent to which the GSEs are, in fact, meeting the Housing Goals. The decision to increase the levels of the Housing Goals substantially in a staged manner under this proposal and, at the same time, not to renew the bonus points or TAF, will ensure that the GSEs continue to address the areas formerly targeted by these measures. The business relationships that the GSEs established when these provisions were in place will be necessary to meet the higher Housing Goals.
The Department's proposals to increase the levels of the Housing Goals, and to establish new Home Purchase Subgoals, are predicated upon its recognition that the GSEs not only have the ability to achieve these Housing Goals but, also, that they are fully consistent with the statutory factors established under FHEFSSA. In addition, these proposals are supported by the Department's comprehensive analyses of the size of the mortgage market, the opportunities available to the GSEs, America's unmet housing needs, and identified credit gaps.
The Department anticipates that, as the GSEs' businesses grow, the
increased level of the Housing Goals, and the new Home Purchase
Subgoals, will enable the GSEs to continue to address new markets and persistent, unmet housing finance needs.
A. Affordable Housing Goals
1. Proposed Changes to Housing Goal Levels
The current Housing Goal levels are 50 percent for the Low and ModerateIncome Housing Goal, 31 percent for the Underserved Areas Housing Goal, and 20 percent for the Special Affordable Housing Goal. The Special Affordable Housing Goal includes a Subgoal for mortgage purchases financing dwelling units in multifamily housing which is 1.0 percent of the average annual dollar volume of mortgages (both single family and multifamily) purchased by the respective GSE in 1997, 1998, and 1999$2.85 billion annually for Fannie Mae and $2.11 billion annually for Freddie Mac.
The Department is proposing in this rulemaking to increase the Housing Goal levels as follows:
The Housing Goal percentages that are proposed in this rule reflect
the application of area median incomes and minority percentages based
on 2000 Census data, the Census Bureau's specification of census tract
boundaries for the 2000 Census, and the Office of Management and
Budget's specification of metropolitan area boundaries based on the 2000 Census.
2. HUD's Consideration of Statutory Factors in Setting the Housing Goals
As discussed above, HUD considered six statutory factors before it
decided upon the levels of the Housing Goals being proposed in this
rulemaking, as described in Section III(B) of this preamble and
proposed rule amendment numbers 35 of this proposed rule. A summary of
HUD's findings relative to each factor follows. More detailed
discussion of these points is included in Appendices A, B, and C. a. Demographic, Economic, and Housing Conditions
(i) Demographic Trends. Changing population demographics will result in a need for the primary and secondary mortgage markets to meet nontraditional credit needs, respond to diverse housing preferences and overcome information and other barriers that many immigrants and minorities face.
The U.S. Census Bureau has projected that the U.S. population will grow by an average of 2.5 million persons per year between 2000 and 2025, resulting in about 1.2 million new households per year. The aging of the babyboom generation and the entry of the babybust generation into prime homebuying age will have a dampening effect on housing demand. Growing housing demand from minorities, immigrants and non traditional homebuyers will help offset declines in the demand for housing caused by the aging of the population.
The continued influx of immigrants will increase the demand for rental housing, while those who immigrated during the 1980s and 1990s will be in the market for homeownership. Immigrants and minoritieswho accounted for nearly 40 percent of the growth in the nation's homeownership rate over the past five yearswill be responsible for almost twothirds of the growth in the number of new households over the next ten years.
Nontraditional households have become more important, as overall household formation rates have slowed. With later marriages, divorce, and nontraditional living arrangements, the fastest growing household groups have been singleparent and singleperson households. By 2025, nonfamily households will make up a third of all households. The role of traditional 25to34 yearold married, firsttime homebuyers in the housing market will be smaller in the current decade due to the aging of the population. Between 2000 and 2025, the Census Bureau projects that the largest growth in households will occur among householders 65 and over.
As these demographic factors play out, the overall effect on
housing demand will likely be continued growth and an increasingly
diverse household population from which to draw new renters and
homeowners. A greater diversity in the housing market will, in turn,
require greater adaptation by the primary and secondary mortgage markets.
(ii) Economic and Housing Conditions. While most other sectors of the economy were weak or declining during 2001 and 2002, the housing sector showed remarkable strength. The housing market continued at a record pace during 2003.
In 2002, the U.S. economy moved into recovery, with real Gross Domestic Product (GDP) growing 2.2 percent, although measures of unemployment continued to rise. In October 2002, the average 30year home mortgage interest rate slipped below 6 percent for the first time since the mid1960s. Favorable financing conditions and solid increases in house prices were the key supports to record housing markets during both 2002 and 2003. By the end of 2003, the industry had set new records in singlefamily permits, new home sales, existing home sales, interest rates, and homeownership. Other indicatorstotal permits, starts, completions, and affordabilityreached levels that were among the highest in the past two decades.
Over the near term, the Administration's forecast for real GDP
growth is 4.0 percent for 2004, while the Congressional Budget Office
(CBO) projects that real GDP will grow at an average rate of 3.2
percent from 2005 through 2008. The tenyear Treasury rate is projected
to average 5.5 percent between 2005 and 2008 compared to its average of
4.6 percent in 2002 and 4.0 percent in 2003. Standard & Poor's expects
housing starts to average 1.8 million units in 200405. Fannie Mae
projects existing home sales at 6.1 million units for 2004 and 5.8
million for 2005, compared to their record 6 million level in 2003.
(iii) Mortgage Market Conditions. Low interest rates and record
levels of refinancing caused mortgage originations to soar from $2.2
trillion in 2001 to $2.9 trillion in 2002 and around $3.8 trillion in
2003. Fannie Mae projects that mortgage originations will drop to $2.4
trillion in 2004 and $1.7 trillion in 2005, as refinancing returns to
more normal levels. The volume of home purchase mortgages was $910
billion to $1.1 trillion between 1999 and 2001 before jumping to $1.2
trillion in 2002 and $1.3 trillion in 2003. As with housing starts, the
home purchase origination market is expected to exhibit sustained growth.
b. National Housing Needs
(i) Affordability Problems. Data from the 2000 Census and the American Housing Surveys demonstrate that there are substantial housing needs among low and moderateincome families. Many of these households are burdened by high homeownership costs or rent payments and, consequently, are facing serious housing affordability problems.
There is evidence of persistent housing problems for Americans with
the lowest incomes. HUD's analysis of American Housing Survey data
reveals that, in 2001, 5.1 million households had ``worst case''
housing needs, defined as housing costs greater than 50 percent of
household income or severely inadequate housing among unassisted very
lowincome renter households. Among these households, 90 percent had a
severe rent burden, 6 percent lived in severely inadequate housing, and
4 percent suffered from both problems. Among the 34 million renters in
all income categories, 6.3 million (19 percent) had a severe rent
burden and over one million renters (3 percent) lived in housing that was severely inadequate.
(ii) Disparities in Housing and Mortgage Markets. Despite the strong growth in affordable lending over the past ten years, there are families who are not being adequately served by the nation's housing and mortgage markets.
Serious racial and income disparities remain. The homeownership
rate for minorities is 25 percentage points below that for whites. A
major HUDfunded study of discrimination in the sales and rental
markets found that while discrimination against minorities was
generally down since 1989, it remained at unacceptable levels in 2000.
The most prevalent form of discrimination against Hispanic and African
American home seekers observed in the study was Hispanics and African
Americans being told that housing units were unavailable when non
Hispanic whites found them to be available. The study also found other
worrisome trends of discrimination in metropolitan housing markets that
persisted in 2000, for example, geographical steering experienced by
AfricanAmerican homebuyers, and real estate agents who provided less
assistance in obtaining financing for Hispanic homebuyers than for non
Hispanic whites.\4\ Racial disparities in mortgage lending are also
well documented. HUDsponsored studies of the prequalification process
conclude that African Americans and Hispanics face a significant risk
of unequal treatment when they visit mainstream mortgage lenders.
Studies have shown that mortgage denial rates are substantially higher
for African Americans and Hispanics, even after controlling for
applicant income and a host of underwriting characteristics, such as the credit record of the applicant.\5\
\4\ Margery Austin Turner, All Other Things Being Equal: A Paired Testing Study of Mortgage Lending Institutions, The Urban Institute Press, April 2002. Appendix A includes further discussion of this study.
\5\ These studies are discussed in section B.1 of Appendix B.
The existence of substantial neighborhood disparities in homeownership and mortgage credit is also well documented for metropolitan areas. HUD's analysis of HMDA data shows that mortgage credit flows in metropolitan areas are substantially lower in high minority and lowincome neighborhoods and mortgage denial rates are much higher for residents of these neighborhoods. Studies have also documented that mainstream lenders often do not operate in innercity minority neighborhoods, leaving their residents with only highcost lenders as options. Too often, residents of these same neighborhoods have been subjected to the abusive practices of predatory lenders.
These troublesome disparities mostly affect those families
(minorities and immigrants) who are projected to account for almost
twothirds of the growth in the number of new households over the next ten years.
(iii) SingleFamily Market: Trends in Affordable Lending and Homeownership. Many younger, minority and lowerincome families did not become homeowners during the 1980s due to the slow growth of earnings, high real interest rates, and continued house price increases. Over the past ten years, economic expansion, accompanied by low interest rates and
increased outreach on the part of the mortgage industry, has improved affordability conditions for these families.
As this preamble and the appendices note, there has been a ``revolution in affordable lending'' that has extended homeownership opportunities to historically underserved households. The mortgage industry, including the GSEs, has offered more customized mortgage products, more flexible underwriting, and expanded outreach to low income and minority borrowers.
HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2002, conventional loans to lowincome and minority families increased at much faster rates than loans to upperincome and non minority families. Conventional home purchase originations to African Americans more than doubled between 1993 and 2002 and those to Hispanic borrowers more than tripled during this period. Home loans to low income borrowers and to lowincome and highminority census tracts also more than doubled during this period.
Thus, the 1990s and the early part of the current decade have seen the development of a strong affordable lending market. Homeownership statistics show similar trends. After declining during the 1980s, the homeownership rate has increased every year since 1994, reaching a record mark of 67.9 percent in 2002. The number of households owning their own home in 2002 was 10.6 million greater than in 1994. Gains in homeownership rates have been widespread over the last eight years, with the homeownership rate for African American households increasing from 42.5 percent to 47.9 percent, for Hispanic households from 41.2 percent to 48.2 percent, for nonHispanic white households from 50.8 percent to 55.1 percent, and for central city residents from 48.5 percent to 51.8 percent from 1994 to 2002.
Despite the record gains in homeownership since 1994, a substantial gap in the homeownership rate of approximately 25 percentage points prevails for AfricanAmerican and Hispanic households as compared to white nonHispanic households. Studies show that these lower homeownership rates are only partly accounted for by differences in income, age, and other socioeconomic factors.
In addition to low income, barriers to homeownership that
disproportionately affect minorities and immigrants include: lack of
capital for down payment and closing costs; poor credit history; lack
of access to mainstream lenders; little understanding of the home
buying process; a limited supply of modestly priced homes; and
continued discrimination in housing markets and mortgage lending. These barriers are discussed in Appendix A.
(iv) SingleFamily Market: Potential Homeowners. As already noted, the potential homeowner population over the next decade will be highly diverse, as growing housing demand from immigrants (both those who are already in this country and those who are projected to arrive), minorities, and nontraditional homebuyers will help to offset declines in the demand for housing caused by the aging of the population.
Fannie Mae reports that, between 1980 and 1995, the number of new immigrant owners increased by 1.4 million and, between 1995 and 2010, that figure is expected to rise by more than 50 percent to 2.2 million. These trends do not depend on the future inflow of new immigrants, as immigrants do not, on average, enter the home purchase market until they have been in this country for eleven years. Fannie Mae staff note that there are enough immigrants already in this country to keep housing demand strong for several years.
Thus, the need for the GSEs and other industry participants to meet nontraditional credit needs, respond to diverse housing preferences, and to overcome the information barriers that many immigrants face will take on added importance. A new or recent immigrant may have no credit history or, at least, may not have a credit history that can be documented by traditional methods. In order to address these needs, the GSEs and the mortgage industry have been developing innovative products and seeking to extend their outreach efforts to attract these homebuyers, as discussed in Appendix A.
In addition, the current low homeownership rates in inner cities (as compared with the suburbs) also suggest that urban areas may be a potential growth market for lenders. As explained in Appendix A, lenders are beginning to recognize that urban borrowers and properties have different needs than suburban borrowers and properties. CRAtype lending will continue to be important in our inner cities.
Surveys indicate that these demographic trends will be reinforced by the fact that most Americans desire, and plan, to become homeowners. According to Fannie Mae's 2002 National Housing Survey, Americans rate homeownership as the best investment they can make, far ahead of 401(k)s, other retirement accounts, and stocks. Fortytwo percent of AfricanAmerican families reported that they were ``very or fairly likely'' to buy a home in the next three years, up from 38 percent in 1998 and 25 percent in 1997. Among Hispanics and Hispanic immigrants, the numbers reached 37 percent and 34 percent, respectively. The survey also reported that more than half of Hispanic renters cite homeownership as being ``one of their top priorities.''
In spite of these trends, potential minority and immigrant homebuyers see more obstacles to buying a home than does the general public. Typically, the primary barriers to homeownership are credit issues and a lack of funds for a downpayment and closing costs. However, other barriers also exist, such as a lack of affordable housing, little understanding of the home buying process, and language barriers. Thus, the new group of potential homeowners will have unique needs.
The GSEs can play an important role in tapping this potential homeowner population. Along with others in the industry, they can address these needs on several fronts, such as expanding education and outreach efforts, introducing new products, and adjusting current underwriting standards to better reflect the special circumstances of these new households. These efforts will be necessary if the Administration's goal of expanding minority homeownership by 5.5 million families by the end of the decade is to be achieved. (In this regard, the Joint Center for Housing Studies has stated that, if favorable economic and housing market trends continue, and if additional efforts to target mortgage lending to lowincome and minority households are made, the homeownership rate could reach 70 percent by 2010.)
The singlefamily mortgage market has been very dynamic over the past few years, experiencing volatile swings in originations (with the 1998 and 20012003 refinancing waves), witnessing the rapid growth in new types of lending (such as subprime lending), incorporating new technologies (such as automated underwriting systems), and facing serious challenges (such as abusive predatory lending). Fannie Mae and Freddie Mac have played a major role in the ongoing changes in the singlefamily market and in helping the industry address the problems and challenges that have arisen.
The appendices to this proposed rule discuss the various roles that Fannie Mae and Freddie Mac have played in
the singlefamily market. A wide range of topics is examined, including the GSEs' automated underwriting technology used throughout the industry, their many affordable lending partnerships and underwriting initiatives aimed at extending credit to underserved borrowers, their development of new targeted lowdownpayment products, their entry into new markets such as subprime lending, and their attempts to reduce predatory lending. As that discussion emphasizes, the GSEs have the ability to bring increased efficiencies to a market and to attract mainstream lenders into markets. (Readers are referred to Appendices A C for further discussion of the GSEs' role in different segments of the singlefamily mortgage market.)
(v) Multifamily Mortgage Market. The market for financing of multifamily apartments has reached record volume. The favorable long term prospects for apartments, combined with record low interest rates, have kept investor demand for apartments strong and have also supported property prices.
Fannie Mae and Freddie Mac have been among those boosting their volumes of multifamily financing and both have introduced new programs to serve the multifamily market. Fannie Mae and, especially (considering its early withdrawal from the market), Freddie Mac have rapidly expanded their presence in the multifamily mortgage market under the Housing Goals.
Freddie Mac has successfully rebuilt its multifamily acquisition program, as shown by the increase in its purchases of multifamily mortgages: from $27 million in 1992 to $3 billion in 1997 and then to approximately $7 billion annually during the next three years (1998 to 2000), before rising further to $11.9 billion in 2001 and $13.3 billion in 2002. Multifamily units accounted for 8.4 percent of all dwelling units (both owner and rental) financed by Freddie Mac between 1999 and 2002.
Concerns regarding multifamily capabilities no longer constrain Freddie Mac's performance with regard to the Housing Goals. Although Fannie Mae never withdrew from the multifamily market, it has stepped up its activities in this area substantially, with multifamily purchases rising from $3.0 billion in 1992 to $9.4 billion in 1999, and $18.7 billion in 2001, and then declining slightly to $18.3 billion in 2002. Multifamily units accounted for 9.2 percent of all dwelling units (both owner and rental) financed by Fannie Mae between 1999 and 2002.
The increased role of Fannie Mae and Freddie Mac in the multifamily market has major implications for the Low and ModerateIncome Housing and Special Affordable Housing Goals, since high percentages of multifamily units have affordablelevel rents and can count toward one or both of these Housing Goals. However, the potential of the GSEs to lead the multifamily mortgage industry has not been fully developed. The GSEs' purchases between 1999 and 2002 accounted for only 30 percent of the multifamily units that received financing during this period. Certainly there are ample opportunities and room for expansion of the GSEs' share of the multifamily mortgage market.
The GSEs' size and market position between loan originators and mortgage investors make them the logical institutions to identify and promote needed innovations and to establish standards that will improve market efficiency. As their role in the multifamily market continues to grow, the GSEs will have the knowledge and market presence to push simultaneously for standardization and for programmatic flexibility to meet special needs and circumstances, with the ultimate goal of increasing the availability and reducing the cost of financing for affordable and other multifamily rental properties.
The longterm outlook for the multifamily rental market is sustained, moderate growth, based on favorable demographics. The minority population, especially Hispanics, provides a growing source of demand for affordable rental housing. ``Lifestyle renters'' (older, middleincome households) are also a fastgrowing segment of the rental population.
At the same time, the provision of affordable housing units will continue to challenge suppliers of multifamily rental housing as well as policy makers at all levels of government. Low incomes, combined with high housing costs, define the difficult situation of millions of renter households. Housing cost reductions are constrained by high land prices and construction costs in many markets. Regulatory barriers at the state and local level have an enormous impact on the development of affordable rental housing. Government actionthrough land use regulation, building codes, and occupancy standardsis a major contributor to high housing costs.
Since the early 1990s, the multifamily mortgage market has become more closely interconnected with global capital markets, although not to the same degree as the singlefamily mortgage market. Loans on multifamily properties are still viewed as riskier by some than mortgages on singlefamily properties. Property values, vacancy rates, and market rents of multifamily properties appear to be highly correlated with local job market conditions, creating greater sensitivity in loan performance to economic conditions than may be experienced for singlefamily mortgages.
There is a need for an ongoing GSE presence in the multifamily
secondary market, both to increase liquidity and to further affordable
housing efforts. The potential for an increased GSE presence is
enhanced by the fact that an increasing proportion of multifamily
mortgages are now originated in accordance with secondary market
standards. Small multifamily properties, and multifamily properties
with significant rehabilitation needs, have historically experienced
difficulty gaining access to mortgage financing, and the flow of
capital into multifamily housing for seniors has been historically
characterized by volatility. The GSEs can play a role in promoting
liquidity for multifamily mortgages and increasing the availability of longterm, fixed rate financing for these properties.
c. GSEs' Past Performance and Effort Toward Achieving the Housing Goals
Both Fannie Mae and Freddie Mac have improved their affordable
housing loan performance over the past ten years, since the enactment
of FHEFSSA and HUD's establishment in 1993 of the Housing Goals.
However, the GSEs' mortgage purchases have generally lagged, and not
led, the overall primary market in providing financing for affordable
housing to low and moderateincome families and underserved borrowers
and their neighborhoods, indicating that there is more that the GSEs can do to improve their performance.
(i) Performance on the Housing Goals. The year 2001 was the first year under the higher levels of the Housing Goals established in the Housing Goals 2000 final rule. Both GSEs met all three Housing Goals in 2001 and 2002. Their performance is discussed further in a later section of this preamble.
(ii) The GSEs' Efforts in the Home Purchase Mortgage Market. The Appendices include a comprehensive analysis of each GSE's performance in funding home purchase mortgages for borrowers and neighborhoods targeted by the three Housing Goalsspecial affordable and low and moderateincome borrowers and underserved areas. The GSEs' role in the firsttime homebuyer market is also analyzed. Because homeownership opportunities are integrally tied to the ready availability of affordable home purchase
loans, the main findings from that analysis are provided below:
d. Size of the Mortgage Market That Qualifies for the Housing Goals
The Department estimates the size of the conventional, conforming
market for loans that would qualify under each Housing Goal category.
The market estimates (which reflect 2000 Census data and geography) are as follows:
These market estimates exclude the B&C (subprime loans that are not A minus grade) portion of the subprime market. The estimates, expressed as ranges, allow for economic and market affordability conditions that are more adverse than recent conditions. The market estimates are based on several mortgage market databases such as Home Mortgage Disclosure Act (HMDA) and American Housing Survey data. The Department's estimates of the size of the conventional mortgage market for each Housing Goal are discussed in detail in Appendix D.
The GSEs have substantial room for growth in serving the affordable housing mortgage market. The Department estimates that the two GSEs' mortgage purchases accounted for 49 percent of the total (singlefamily and multifamily) conventional, conforming mortgage market between 1999 and 2002. In contrast, GSE purchases comprised 42 percent of the low and moderateincome market, 41 percent of the underserved areas market, and a still smaller 35 percent of the special affordable market. Thus, 5865 percent of the Goalsqualifying markets have not yet been touched by the GSEs.
The GSEs' presence in mortgage markets for rental properties, where much of the nation's affordable housing
is concentrated, is below that in the singlefamilyowner market. The GSEs' share of the rental market (including both singlefamily and multifamily) was only 30 percent during the 1999to2002 period. Obviously, there is room for the GSEs to increase their presence in the singlefamily rental and multifamily rental markets.
Table 1 summarizes the Department's findings regarding GSE
performance relative to HUD's market estimates for 19992002, market
projections for 20052008, and the proposed Housing Goal levels for 20052008.
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The analysis reflected in Table 1 is based on 2000 Census data on area median incomes and minority concentrations, with the metropolitan area boundaries specified in June 2003 by the Office of Management and Budget. This affects the market percentages for all three Housing Goals, as well as the figures on area median incomes and minority percentage figures that will be used to measure GSE performance on the Housing Goals beginning in 2005. For example, expressing the Underserved Areas Housing Goal in terms of 2000 Census data adds approximately 5 percentage points to the Housing Goal and market levels, compared with analysis using 1990 Census data with Metropolitan Statistical Areas as defined prior to 2000.
The GSEs' baseline performance figures in Table 1 exclude the effects of the bonus points for small multifamily and singlefamily 24 unit owneroccupied properties and the Temporary Adjustment Factor for Freddie Mac which were applied in official scoring toward the Housing Goals in 20012003. The Department did not extend these adjustments beyond 2003.
Table 1 reveals several features of HUD's proposed Housing Goals. First, the high end of the range for HUD's 20052008 market projections is the same as or within one percentage point of the 19992002 average of the market levels for the Housing Goals.
Second, it is evident from this table that the proposed initial new level for the Special Affordable Housing Goal (22 percent) is below the low end of HUD's projected market range for 20052008 (24 percent). The proposed initial level of the Low and ModerateIncome Housing Goal (52 percent) is at the lowend of HUD's market estimate range.
Third, the proposed initial Underserved Areas Housing goal level is more consistent than the current Goal level with the market range now projected by HUD for the Housing Goals using 2000 Census data.
Fourth, the GSEs' performance on all of the Housing Goals was significantly below the market average for 19992002. The higher Housing Goals are intended to move the GSEs closer to or within the market range for 2005 and to the upper end of the market range projection by 2008.
An analysis of the GSEs' mortgage purchases by property type shows that they have had much less presence in the ``G
FOR FURTHER INFORMATION CONTACT
Sandra Fostek, Director, Office of Government Sponsored Enterprises, Office of Housing, Room 3150, telephone 2027082224. For questions on data or methodology, contact John L. Gardner, Director, Financial Institutions Regulation Division, Office of Policy Development and Research, Room 8212, telephone (202) 7081464. For legal questions, contact Kenneth A. Markison, Assistant General Counsel for Government Sponsored Enterprises/RESPA or Paul S. Ceja, Deputy Assistant General Counsel for Government Sponsored Enterprises/RESPA, Office of the General Counsel, Room 9262, telephone 2027083137. The address for all of these persons is Department of Housing and Urban Development, 451 Seventh Street, SW., Washington, DC, 20410. Persons with hearing and speech impairments may access the phone numbers via TTY by calling the Federal Information Relay Service at (800) 8778399.