Federal Register: July 20, 2007 (Volume 72, Number 139)
DOCID: fr20jy07-15 FR Doc E7-14030
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
United States Mint
CFR Citation: 24 CFR Parts 203 and 206
Docket ID: [Docket No. FR-4969-F-02]
RIN ID: RIN 2502-AI32
NOTICE: Part III
DOCUMENT ACTION: Final rule.
Adjustable Rate and Home Equity Conversion Mortgages--Additional Index
DATES: Effective Date: August 20, 2007.
This final rule adds: The one-year London Interbank Offered Rate (LIBOR) as an acceptable index for the HUDinsured one, 3, 5, 7, and 10year Adjustable Rate Mortgage (ARM) products, and the one month Constant Maturity Treasury (CMT), the onemonth LIBOR, and the oneyear (12month) LIBOR as acceptable indices to adjust interest rates on the HUDinsured Home Equity Conversion Mortgage (HECM). Under current regulations, only the weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year (commonly referred to as the oneyear CMT), may be used to adjust interest rates on HUDinsured ARMs and HECMs. This final rule follows a June 19, 2006, proposed rule and includes HECMs in response to public comment on the June 19, 2006, proposed rule.
Housing and Urban Development Department,
FOR FURTHER INFORMATION CONTACT
James Beavers, Deputy Director, Single
Family Program Development, Office of Single Family Housing, Office of
Housing, Department of Housing and Urban Development, 451 Seventh
Street, SW., Washington, DC 204108000; telephone number (202) 7082121
(this is not a tollfree number). Persons with hearing or speech
impairments may access this number through TTY by calling the tollfree Federal Information Relay Service at (800) 8778339.
The previous policy of HUD's Federal Housing Administration (FHA) Single Family mortgage programs had been to use the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year as the basis for interest rate adjustments on HUDinsured ARM loans and to determine interest rates on HECM loans. HUD believed that indices calculated and published by the U.S. Government were appropriate for mortgage loans insured by the U.S. Government (see HUD's responses to public comments on hybrid ARMs, as presented in the final rule published on March 10, 2004, at 69 FR 11500). However, the growing popularity of the LIBOR index, including its acceptance in the secondary mortgage market, has led to a change in HUD's policy on this issue.
LIBOR is both an international index determined on the basis of the world economy and an index that has recently become widely used for ARM loans in the United States. LIBORbased loans have become very popular in the secondary market, and this greater liquidity allows lenders to offer lower margins to borrowers.
The LIBOR indices and the corresponding CMT indices have historically tracked each other closely over time. While the LIBOR rate may often be slightly higher, the better margins available for LIBOR indexed loans often make LIBORbased loans a better deal for consumers.
In addition, as LIBOR loans become more popular, it is necessary for HUD to offer a LIBOR option to remain competitive in the secondary market. With the large number of lenders now offering LIBORbased ARM loans, to be competitive it no longer makes economic sense for FHA to restrict itself to the Treasury index.
Under the authority of section 251(a) of the National Housing Act (12 U.S.C. 1715z16(a)), HUD may set by regulation a national interest rate index, and information on the index must be readily available to mortgagors. The onemonth LIBOR and the oneyear LIBOR are widely published and meet this availability requirement. Information on LIBOR rates is readily available through a variety of media, including the Internet.
II. The June 19, 2006, Proposed Rule
On June 19, 2006, HUD published a proposed rule that would amend HUD's regulations at 24 CFR 203.49(b) to add the LIBOR index as an acceptable index for determining interest rate adjustments of HUD insured ARMs (see 71 FR 35370). The proposed rule did not cover HECM loans, which are governed by separate regulations at 24 CFR part 206. III. This Final Rule; Significant Changes to the June 19, 2006, Proposed Rule
In response to public comments, which are discussed in Section IV, this final rule adds HECM loans as eligible to use the LIBOR indices. IV. Discussion of Public Comments Received on the June 19, 2006, Proposed Rule
The public comment period of the June 19, 2006, proposed rule closed on August 18, 2006, and HUD received five comments on the proposed rule. Comments were received from three trade organizations representing mortgage bankers and home builders, the home mortgage division of a bank, and a residential mortgage group.
All five commenters supported HUD's proposal to add LIBOR as an acceptable index for adjusting the interest rate of HUDinsured ARM products. The commenters wrote that the inclusion of the LIBOR allows lenders greater flexibility in offering ARM products, provides an incentive for more lenders to use the FHA program, and broadens mortgage options for FHA borrowers. Two of the commenters requested that HUD extend the availability of the LIBOR index to HUD's HECM products. The commenters wrote that the same reasoning and benefits apply for allowing the LIBOR indices to be used with the HECM program.
After careful consideration of the comments requesting that the
LIBOR index be allowed for HUD's HECM products, HUD has decided to
include the aforementioned LIBOR indices as an option in HUD's HECM
programs. Inclusion of the LIBOR as acceptable indices for HECM
products does not impose any requirement on regulated entities or on
the public. Rather, it permits the use of alternative indices for
calculating interest rate adjustments and the expected average mortgage
interest rate on HECM loans. Mortgage lenders that do not wish to use
the LIBOR indices as the basis for the interest rate adjustments on
HUDinsured HECMs can continue using the current oneyear CMT index.
HUD's HECM regulations are also being amended to allow the onemonth
CMT or onemonth LIBOR as an option for lenders and borrowers.
Similarly, while this rule adds another option for determining interest
rate adjustments and expected average mortgage interest rates, members
of the public continue to have access to HUDinsured HECMs based on the
U.S. Treasury security indices. Further, as administered, the loans
provided today under the HECM program are predominantly ARMs. Allowing
the LIBOR indices to be used for HECMs is consistent with current HUD
policy, as expressed in this final rule. Not only does the inclusion of
the LIBOR indices for HECMs foster consistency within HUD's
regulations, but it also conforms HUD practice to that of the rest of the
mortgage industry, which offers LIBORbased ARM and reverse mortgage loans.
Section 255 of the National Housing Act, 12 U.S.C. 1715z20, provided for the establishment of the HECM program. The HECM provides elderly homeowners with an opportunity to convert home equity into monthly streams of income and/or lines of credit. In establishing the HECM loan, the lender must compute two interest rates. The first interest rate is the expected average mortgage interest rate, which is a rate that remains fixed for the life of the loan and is used to calculate the loan's principal limit and payment plan. A longterm rate is utilized as the benchmark for the expected average mortgage interest rate, as it better predicts performance for the life of the loan than does a shortterm rate. The second interest rate computed is the mortgage interest (accrual or note) rate, which is a shortterm rate. Currently, the fixed HECM expected rate and the adjustable HECM mortgage interest rates are both tied to yields on U.S. Treasury securities, which are adjusted to a constant maturity of one year for the mortgage interest rate and to a constant maturity of 10 years for the expected average mortgage interest rate.
HUD's regulations at 24 CFR 206.3 are being amended to add the LIBOR index as an acceptable index for determining interest rate adjustments of HECM loans. The rule now adds the onemonth CMT, the onemonth LIBOR, and the oneyear LIBOR as acceptable indices to adjust interest rates on the HECM, and to require use of the 10year LIBOR swap rate to establish the expected average mortgage interest rate on the HECM product, if the note is indexed to either the onemonth or oneyear LIBOR rate. The rule provides additional options in the case of monthly adjusting HECM loans, in that it provides for the option, which may be preferable, of using the onemonth LIBOR index or one month CMT index to adjust the interest rate of monthly adjusting HECM loans. However, the oneyear CMT may continue to be used to adjust the interest rate of monthly adjustable HECM loans. The rule also provides for the option of using the oneyear LIBOR index or oneyear CMT index to adjust the interest rate of annually adjusting HECM loans.
In order to calculate the expected average mortgage interest rate on either monthly adjusting or annually adjusting HECMs indexed to LIBOR, the U.S. dollar denominated 10year LIBOR swap rate will be used. Since LIBOR rates are shortterm rates (ranging from maturities of one week through 12 months), the financial community relies on the LIBOR ``swap rate curve'' to calculate the LIBORbased interest rate yield curve for maturities greater than one year. The U.S. dollar denominated LIBOR swap rate curve shows the fixedrate leg (i.e., portion of the swap) of ordinary fixedfor floating rate swap contracts where the floatingrate leg is the 6month LIBOR rate expressed in dollars.
A swap is a financial derivative under which two parties exchange two streams of future cash flows. The transaction is called a ``plain vanilla'' interestrate swap if both cash flow streams are in the same currency and involve an exchange of fixedrate for floatingrate interest payments on the same hypothetical (or ``notional'') loan amount. For example, in the case of a plain vanilla interest rate swap with a term of 10 years, the banks could agree to swap fixedrate dollar payments at 5.1 percent on a notional loan amount of $100,000 in exchange for dollardenominated 6month LIBOR payments on the same notional loan amount. The 5.1 percent fixedrate leg of the swap contract would correspond to the 10year point on the LIBOR swap rate curve.
As such, the U.S. dollardenominated 10year LIBOR swap rate is a longterm marketbased interest rate calculation that is driven by factors similar to those that affect the 10year CMT. Not only does the 10year LIBOR swap rate derive from a calculation of what the oneyear LIBOR index would be if it operated on a longterm basis, but it also has historically performed closely to the 10year CMT.
The addition of the LIBOR indices is beneficial to homeowners as well as entities in the mortgage community. Use of the LIBOR indices would attract new investors to HECMs, thus increasing liquidity in the secondary mortgage market, which in turn would drive down costs and interest rates for the mortgagor. Therefore, HUD believes it is reasonable to permit the use of LIBOR indices for HECM loans at the final rule phase.
In addition to the comments requesting the availability of the LIBOR index in HUD's HECM program, the following two comments were also made.
Comment: Borrowers need sufficient information so that they can make informed decisions. One commenter wrote that HUD should include in the regulation a disclosure requirement to ensure that prospective FHA borrowers receive sufficient information to make informed decisions as to indices, based on historical and prospective borrowing costs.
HUD Response: HUD agrees that borrowers choosing ARMs, for forward and reverse mortgages, should be provided with sufficient disclosures regarding adjustable rate mortgage products, and will continue to require that lenders provide ARM disclosures prescribed by the Federal Reserve. However, HUD will not require lenders to develop ARM disclosures specific to FHA mortgage insurance programs.
Comment: Increasing the annual cap to 2 percentage points and a lifeofloan cap of 6 percentage points would benefit consumers. One commenter wrote that HUD should allow HUD's 5/1 ARM product to be offered with 2/6 caps. The commenter realized that this is current HUD policy, but that FHA sponsors have not yet made these products available.
HUD Response: The HUD regulation at 24 CFR 203.49(f)(2) allows for
5, 7, and 10 year ARMs to adjust as much as 2 percentage points
annually after the initial contract period, and a maximum of 6
percentage points over the life of the loan. HUD makes insured interest
rate products such as ARM loans available to the market; however, HUD
does not mandate that any lender offer any or all of the ARM products
available. Whether or not a lender offers a particular product depends
on market demand and other economic factors. For example, in a rising
interest rate environment, 2/6 ARMs may not be desirable for borrowers.
However, the product requested by the comment is, in fact, legally available.
V. Findings and Certifications
Impact on Small Entities
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.
This rule would permit greater flexibility for lenders that, in
offering ARMs and HECMs to homebuyers, want to have a choice of indices
for determining interest rate adjustments for the ARM and HECM, and for
establishing the expected mortgage interest rate on HECM loans.
However, this rule would not require any small business to take any
action or meet any requirements. Therefore, this rule would create no
impact on small entities. Accordingly, the undersigned certifies that
this final rule will not have a significant economic impact on a substantial number of small entities,
and an initial regulatory flexibility analysis is not required. Environmental Impact
This final rule involves the discretionary establishment of interest rates and external administrative or fiscal requirements or procedures that do not constitute a development decision that affects the physical condition of specific project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), this rule is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the extent practicable and permitted by law, an agency from promulgating a regulation that has federalism implications and either imposes substantial direct compliance costs on state and local governments and is not required by statute, or preempts state law, unless the relevant requirements of section 6 of the Executive Order are met. This final rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2
U.S.C. 15311538) establishes requirements for federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments, and the private sector. This final rule would not
impose any federal mandates on any state, local, or tribal government, or the private sector within the meaning of UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number applicable to this rule is 14.175.
List of Subjects
24 CFR Part 203
Hawaiian Natives, Home improvement, Indianslands, Loan programs housing and community development, Mortgage insurance, Reporting and recordkeeping requirements, Solar energy.
24 CFR Part 206
Aged, Condominiums, Loan programshousing and community
development, Mortgage insurance, Reporting and recordkeeping requirements.
Therefore, for the reasons stated in the preamble, HUD amends 24 CFR parts 203 and 206, as follows:
PART 203SINGLE FAMILY MORTGAGE INSURANCE
1. The authority citation for 24 CFR part 203 continues to read as follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z16, and 1715u; 42 U.S.C. 3535(d).
2. Amend Sec. 203.49 by revising the first sentence of Sec. 203.49(b) to read as follows:
Sec. 203.49 Eligibility of adjustable rate mortgages.
* * * * *
(b) Interest rate index. Changes in the interest rate charged on an adjustable rate mortgage must correspond either to changes in the one year London Interbank Offered Rate (LIBOR) or to changes in the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of one year. * * *
* * * * *
PART 206HOME EQUITY CONVERSION MORTGAGE INSURANCE
3. The authority citation for 24 CFR part 206 continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715z1720; 42 U.S.C. 3535(d).
4. Amend Sec. 206.3 by revising the definition of ``Expected average
mortgage interest rate'' and adding, in proper alphabetical order,
definitions of ``LIBOR'' and ``Onemonth Constant Maturity Treasury (CMT) Index'' to read as follows:
Sec. 206.3 Definitions.
* * * * *
Expected average mortgage interest rate means the interest rate
used to calculate the principal limit and the future payments to the
mortgagor and is established based on the date on which the initial
loan application is signed by the borrower. For fixed rate HECMs, it is
the fixed mortgage interest rate. For adjustable rate HECMs, it is
either the sum of the mortgagee's margin plus the weekly average yield
for U.S. Treasury securities adjusted to a constant maturity of 10
years, or it is the sum of the mortgagee's margin plus the 10year
LIBOR swap rate, depending on which interest rate index is chosen by
the mortgagor. The margin is determined by the mortgagee and is defined
as the amount that is added to the index value to compute the mortgage
interest rate. The index type (i.e., CMT or LIBOR) used to calculate
the expected average mortgage interest rate must be the same index type
used to calculate mortgage interest rate adjustmentscommingling of
index types is not allowed (e.g., it is not permissible to use the 10
year CMT to determine the expected average mortgage interest rate and
use the oneyear LIBOR index to adjust the interest rate). The
mortgagee's margin is the same margin used to determine the periodic adjustments to the interest rate.
* * * * *
LIBOR means the London Interbank Offered Rate.
* * * * *
Onemonth Constant Maturity Treasury (CMT) Index means the average
weekly yield of U.S. Treasury securities adjusted to a constant maturity of one month.
* * * * *
5. In Sec. 206.21, revise paragraphs (b)(1) and (b)(2) to read as follows:
Sec. 206.21 Interest rate.
* * * * *
(b) * * *
(1) A mortgagee offering an adjustable interest rate shall offer a mortgage with an interest rate cap structure that limits the periodic interest rate increases and decreases as provided in Sec. 203.49(a), (b), (d), and (f) of this chapter, except that reference to mortgagor's first debt service payment in Sec. 203.49(d) shall mean closing, and references in Sec. 203.49(f)(1) to one percentage point shall mean two percentage points.
(2) If a mortgage meeting the requirements of paragraph (b)(1) of this section is offered, the mortgagee may also offer a mortgage which provides for monthly adjustments to the interest rate, corresponding to an index as provided in Sec. 203.49(a), (b), and (f)(1), or to the onemonth CMT index or onemonth LIBOR index, and which sets a maximum interest rate that can be charged without limiting monthly or annual increases or decreases. The first adjustment must occur on the first day of the second full month after closing.
* * * * *
Dated: July 13, 2007.
Brian D. Montgomery,
Assistant Secretary for HousingFederal Housing Commissioner. [FR Doc. E714030 Filed 71907; 8:45 am]
BILLING CODE 421067P