[Federal Register Volume 73, Number 116 (Monday, June 16, 2008)]
[Proposed Rules]
[Pages 33941-33955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1356]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-5087-N-04]
RIN 2502-AI52
Standards for Mortgagor's Investment in Mortgaged Property:
Additional Public Comment Period
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule; reopening of comment period.
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SUMMARY: This document provides additional background information and
requests additional public comment for HUD's rulemaking on Standards
for Mortgagor's Investment in Mortgaged Property.
DATES: Comment Due Date: August 15, 2008.
ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, Office of General Counsel,
Department of Housing and Urban Development, 451 Seventh Street, SW.,
Room 10276, Washington, DC 20410-0500. Communications should refer to
the above docket number and title.
Comment by Mail. Please note that due to security measures at all
Federal agencies, submission of comments by mail often results in
delayed delivery.
Electronic Submission of Comments. HUD now accepts comments
electronically. Interested persons may now submit comments
electronically through the Federal eRulemaking Portal at http://www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission allows the commenter
maximum time to prepare and submit a comment, ensures timely receipt by
HUD, and enables HUD to make them immediately available for public
viewing. Commenters should follow the instructions provided at http://www.regulations.gov to submit comments electronically.
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
In all cases, communications must refer to the docket number and title.
Public Inspection of Public Comments. All comments and
communications submitted will be available, without revision, for
inspection and downloading at http://www.regulations.gov. Comments are
also available for public inspection and copying between 8 a.m. and 5
p.m. weekdays at the Regulations Division.
[[Page 33942]]
Due to security measures at the HUD Headquarters building, please
schedule an appointment to review the comments by calling the
Regulations Division at (202) 708-3055 (this is not a toll-free
number).
FOR FURTHER INFORMATION CONTACT: Margaret Burns, Director, Office of
Single Family Program Development, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410; telephone
number 202-708-2121 (this is not a toll-free number). Persons with
hearing or speech impairments may access this number through TTY by
calling the toll-free Federal Information Relay Service at 800-877-
8339.
SUPPLEMENTARY INFORMATION:
With this notice, HUD is republishing, for public comment, a
proposed rule that would amend HUD policy concerning downpayment
assistance for Federal Housing Administration (FHA) borrowers. HUD's
current policies in connection with downpayment assistance have given
rise to a practice known informally as seller-funded downpayment
assistance that has resulted in disproportionately high borrower
default and claim rates among FHA borrowers. Over time, the rate of
defaults, foreclosures, and claims has increased so dramatically that
the practice has significantly jeopardized FHA's ability to maintain
the solvency, as discussed herein, of its insurance fund and to
facilitate the provision of affordable home financing to millions of
American families.
HUD's proposal, if implemented, will without question exact a major
change in its downpayment assistance policy. It would eliminate a
practice that has heretofore been allowable and that has been actively
engaged in for many years. Even so, the conceptual basis for the change
is consistent with a downpayment assistance policy that has been in
existence from the inception of the FHA single family insurance
program.
HUD's current policy disallows downpayment assistance directly from
an entity, such as a seller of a home, that would derive a financial
benefit from the sale. The basis for this policy is that such an
entity, standing to derive a financial benefit from the sales
transaction, may promote its own interest in the transaction to the
detriment of the buyer. The current policy is aimed at ensuring that
downpayment assistance is indeed a gift to the borrower and that it
will not ultimately distort the economics of the transaction to the
detriment of the borrower and HUD.
HUD's proposal to amend its regulation is based on this same
premise, and seeks to disallow downpayment assistance from any entity
that stands to derive a financial benefit from the sales transaction.
The major proposed change to HUD's downpayment assistance policy is
that it would apply this prohibition irrespective of whether that
assistance is made directly or indirectly to the homebuyer. The data
displayed in this notice clearly demonstrates the adverse impact of
allowing the current policy to continue. HUD is concerned not only
about the practice itself, but also about the consequences of the
practice on homebuyers participating in FHA insurance programs and on
the FHA insurance fund that is there to serve those homebuyers. A
practice simply cannot be tolerated when default rates and claim rates
for more than a third of home purchase loans it insures range between 2
and 3 times those applicable to the norm. The counterargument that many
people have been helped into homeownership by this practice, even if
accepted at face value, pales in light of the damage done to homebuyers
who have not been able to retain their homes and to FHA's ability to
meet its mission of increasing access to sustainable homeownership.
Understanding that the current situation is untenable, HUD has
grappled with the issue of how to best address the problem over a
period of years. This is evidenced in actions, discussed in the text
below, that include exploring rulemaking and legislative solutions that
did not come to fruition. While HUD will consider alternative measures
to eliminating the practice, piecemeal solutions do not cure but only
postpone a viable solution, while extending the damage. In essence,
borrowers are being harmed and the solution does not lie in spreading
the damaging consequences among an even broader universe of borrowers.
The FHA insurance fund is teetering on credit insolvency. Such a
circumstance is never welcomed, but especially not when the FHA is
trying to be a stabilizing force during the worst housing crisis in
generations.
Therefore, HUD is proposing an action that would advance the
interests of the public and is a reasonable exercise of agency
discretion.
HUD's decision to publish this notice is responsive to court orders
issued by the U.S. District Courts for the Eastern District of
California, on February 29, 2008, and the District of Columbia, on
March 5, 2008.
On October 1, 2007, HUD published a final rule entitled ``Standards
for Mortgagor's Investment in Mortgaged Property'' (72 FR 56002). Like
the rule reproposed for comment here, that rule sought to eliminate the
use of downpayment assistance from financially interested parties in
FHA-insured single-family mortgages. The October 1, 2007, final rule
was challenged in the U.S. District Court for the District of Columbia
and in the U.S. District Court for the Eastern District of California
by organizations that provide seller-funded downpayment assistance, as
defined herein. On February 29, 2008, the U.S. District Court for the
Eastern District of California set aside the final rule and remanded
the matter to HUD for further action consistent with its order.
Nehemiah Corporation of America v. Jackson, et al., No. S-07-2056 (E.D.
Cal.). The court found, among other things, that HUD failed
forthrightly to explain that the rule reversed its prior practice of
allowing seller-funded downpayment assistance (Id. at 19-20) and that
HUD failed to respond adequately to certain categories of comments (Id.
at 21-24). The court also disqualified then-HUD Secretary Alphonso
Jackson from participating in the remanded proceedings.
After issuing an order on October 31, 2007, preliminarily enjoining
HUD's enforcement of the final rule, on March 5, 2008, the U.S.
District Court for the District of Columbia vacated the final rule and
also remanded it to HUD for further proceedings consistent with that
court's opinion. Ameridream Inc., et. al., v. Jackson, No. 07-1752
(D.D.C. March 5, 2008) and Penobscot Indian Nation, et. al., v. HUD,
No. 07-1282-PLF (D.D.C. March 5, 2008). The court found, among other
things, that HUD violated the Administrative Procedure Act by failing
to allow comment on critical factual material and by failing to offer a
rational explanation for the final rule. Id. at 6. The court held that
an internal analysis of HUD's loan portfolio referenced only in the
final rule constituted critical factual information that, with at least
a summary of the specific data and methodology on which the analysis
relied, should have been disclosed during the rulemaking proceeding.
Id. at 11-12. The court also held that HUD's explanation for the rule
relied on sources that did not support its conclusions. Id. at 18.
Pursuant to the courts' orders, this publication provides notice
that now former Secretary Jackson, who resigned effective April 18,
2008, has not participated in the further promulgation of the rule
proposed on May 11, 2007, entitled ``Standards for Mortgagor's
Investment in Mortgaged Property'' (72 FR 27048). HUD will separately
publish
[[Page 33943]]
a notice vacating the October 1, 2007, final rule. This publication
also addresses the courts' concerns by acknowledging that the proposed
rule marks a clear departure from HUD's prior practice. With respect to
the concern that HUD previously had failed to provide critical factual
information and otherwise provided an insufficient rationale for the
rule, this notice provides additional explanation and data, including
analyses of HUD's loan portfolio and access to the data on which those
analyses rely. The Regulatory Flexibility Act section has been revised
to address only the impact on entities that would be directly affected
by the rule. This notice also reopens the comment period for 60 days
for the submission of comments on that additional information and on
the May 11, 2007, proposed rule, as revised by the October 1, 2007,
rule. At the end of the comment period, HUD will review the comments
and determine whether to issue a final rule, and will publish a
response to significant comments as appropriate. To address the courts'
concern with HUD's response to prior public comments, if HUD decides to
issue a final rule, HUD will also provide additional responses to those
significant comments submitted in response to the May 11, 2007, Notice
of Proposed Rulemaking.
If, after reviewing the comments, HUD issues a final rule, it would
be effective 180 days from the date of publication with regard to all
insured mortgages involving properties for which contracts of sale are
dated on or after the effective date.
I. The Proposed Rule
Section 203(b)(9) of the National Housing Act (12 U.S.C.
1709(b)(9)) requires, for a mortgage to be eligible for insurance by
FHA, the mortgagor (with narrow exceptions) to pay on account of the
property at least 3 percent of the cost of acquisition. The current
implementing regulations at 24 CFR 203.19 are silent about permissible
or impermissible sources of the mortgagor's investment, although some
sources are specifically permitted under the statute.\1\
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\1\ For example, section 203(b)(9) of the National Housing Act
permits family members to provide loans to other family members, and
permits the mortgagor's downpayment to be paid by a corporation or
person other than the mortgagor in certain circumstances, such as
when the mortgagor is 60 years of age or older, or when the mortgage
covers a housing unit in a homeownership program under the
Homeownership and Opportunity Through HOPE Act (Title IV of Pub. L.
101-625, 104 Stat. 4148, approved November 28, 1990).
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Paragraph 2-10.C. of FHA's underwriting guidelines, HUD Handbook
4155.1, has long provided that the 3 percent cost of acquisition, i.e.,
the downpayment, may include an ``outright gift'' to the borrower from
relatives, charitable organizations, government entities, and certain
others. (HUD Handbook 4155.1 is available at http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/index.cfm.) It further
provides, however, that gifts may not be made by any person or entity
with an interest in the sale of the property. Such payments are
considered self-interested inducements to purchase a particular
property rather than true gifts for the borrower's personal investment.
In other words, downpayment assistance from those who receive a
financial benefit from the sale may promote the sale on any terms, even
terms that may be adverse to the sustainability of the borrower's
mortgage and homeownership. A disinterested gift of downpayment funds,
on the other hand, does not distort the fundamental economics of the
transaction and so does not conflict with the borrower's interest in
achieving sustainable homeownership.
On May 11, 2007, HUD published a proposed rule to do two things:
codify standards governing a mortgagor's investment in property with a
mortgage insured by FHA, and specify prohibited sources for a
mortgagor's investment. Specifically, the proposed rule would have
codified HUD's longstanding practice of allowing a mortgagor's
investment to be derived from gifts by family members and certain
organizations, but not from gifts by sellers or other persons that
financially benefit from the transaction. It had also been HUD's
practice to permit a mortgagor's investment to be derived from funds
provided by charitable organizations that were ultimately reimbursed
directly or indirectly by sellers of the properties involved in the
transactions. The May 11, 2007, proposed rule marked a clear departure
from this last-noted practice. The rule would have established that a
prohibited source of downpayment assistance is a payment that consists,
in whole or in part, of funds provided by any of the following parties
before, during, or after closing of the property sale: (1) The seller,
or any other person or entity that financially benefits from the
transaction; or (2) any third party or entity that is reimbursed
directly or indirectly by any of the parties listed in clause (1).
Throughout this preamble, such a third-party payment as described in
clause (2) is referred to as ``seller-funded downpayment assistance''
(SFDPA).
HUD concluded that this practice permits the seller or other party
that financially benefits from the transaction to accomplish indirectly
what could not be done directly. For example, when funds are advanced
to the buyer by a downpayment assistance provider that is reimbursed by
the seller, there is a quid pro quo between the homebuyer's purchase of
the property and the seller's ``contribution'' to the downpayment
assistance provider. This scheme facilitates the sale at terms
potentially more favorable to the seller and, because funds are
fungible, it is reasonable to conclude that the donor's funds are the
equivalent of the seller's funds. Viewed in this way, it becomes
apparent that a prohibited inducement to purchase is present in these
transactions, and HUD has concluded that such payments amount to an
impermissible gift provided by a person or entity that financially
benefits from the transaction. In a transaction involving SFDPA, both
the seller, who is the ultimate source of the payment, and the entity
that funnels or advances the payment for the seller to the homebuyer
(and receives reimbursement and a fee from the seller for its role in
the transaction) have an interest in the sale of the property that
makes their payments an impermissible source of the buyer's equity
investment.
HUD's conclusion is reinforced by a report of the Government
Accountability Office (GAO), Report No. 06-24, Mortgage Financing:
Additional Action Needed to Manage Risks of FHA-Insured Loans with Down
Payment Assistance (November 2005) (hereinafter, November 2005 GAO
Report). At the request of Congress, GAO examined the trends in the use
of downpayment assistance with FHA-insured loans, its impact on
purchase transactions and house prices, and how it influenced the
performance of FHA-insured loans. GAO found that downpayment assistance
from seller-funded entities alters the structure of the purchase
transaction in important ways. First, it creates an indirect funding
stream from property sellers to homebuyers that does not exist in other
transactions, even those involving some other type of downpayment
assistance. Second, property sellers who provided downpayment
assistance through nonprofit organizations often raised the sales price
of the homes involved in order to recover the required payments that
went to the organizations. GAO's analyses of empirical data showed that
FHA-insured homes bought with seller-funded downpayment assistance
appraised at and sold for higher prices than comparable homes bought
without
[[Page 33944]]
such assistance, resulting in larger loans for the same collateral and
higher effective loan-to-value (LTV) ratios. That is, homebuyers had
less equity in the transaction than would otherwise be the case.\2\
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\2\ November 2005 GAO Report, pp. 3-4. This report can be found
at http://www.gao.gov/new.items/d0624.pdf.
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The original 60-day comment period provided in the May 11, 2007,
proposed rule was extended by notice (72 FR 37500; July 10, 2007) for
an additional 30 days. When the public comment period ended on August
10, 2007, HUD had received approximately 15,000 public comments on the
proposed rule, mostly brief statements in similar format and wording
that opposed the rule and urged HUD not to eliminate downpayment
assistance in connection with FHA-insured mortgages.
On October 1, 2007, HUD promulgated the rule, with a few clarifying
revisions, as a final rule to be effective October 31, 2007. The
October 1, 2007, rule clarified that a tribal government or a tribally
designated housing entity (TDHE), as defined at 25 U.S.C. 4103(21), is
a permissible source of downpayment assistance if prerequisites in the
rule were satisfied, and also more closely aligned the description of
tax-exempt charitable organizations with the description used by the
Internal Revenue Service (IRS) for such organizations. This rule never
went into effect, however, since it was enjoined and then vacated by
the courts.
II. Historical Policy Regarding Seller-Funded Downpayment Assistance
The issue of SFDPA came to HUD's attention in the late 1990s. When
this funding scheme first came into being, some local HUD offices
approved mortgages with SFDPA for FHA insurance, and other HUD offices
did not. As a result, in 1997, a provider of this type of assistance
brought a lawsuit against HUD (Nehemiah Progressive Housing Development
Corporation v. Cuomo, et al., No. S-97-2311-GEB/PAN (E.D. Cal.))
seeking consistent treatment. That suit was settled when the
plaintiff's status was confirmed as a tax-exempt charitable
organization under Internal Revenue Code (IRC) section 501(c)(3), a
permissible source of assistance. HUD also acknowledged that based upon
the program-specific information accompanying the plaintiff's
submission to the IRS, the program complied with HUD's regulations and
guidance pertaining to the source of funds for the borrowers'
downpayments. Although downpayment assistance from charitable
organizations is permitted, HUD continued to have concerns where the
funds provided by an organization to the homebuyer were reimbursed by
the seller in the transaction when the seller made a contribution of
funds to the charitable organization, often after loan closing.
HUD addressed the subject of prohibited sources of downpayment
assistance in a 1999 proposed rule. (See HUD's proposed rule published
on September 14, 1999, 64 FR 49956.) In 2001, HUD withdrew the 1999
proposed rule, which had received a large number of public comments
critical of the proposal. (See January 12, 2001, notice of withdrawal
of proposed rule at 66 FR 2851.) At the time, the volume of loans with
such assistance and their potential impact were small. Also, because
the payment to the buyers did not come directly from the sellers, it
was not clear that inducements to purchase were present in the
transactions. Moreover, while FHA had serious concerns about SFDPA, it
lacked the historical data to substantiate its adverse effects.
By 2003, with the seller-funded downpayment assistance business
growing exponentially, FHA had data tending to show that the
performance of the loans made to borrowers relying on SFDPA was poor
and that the program flaws could not be addressed with underwriting
changes. FHA determined that the most feasible and appropriate solution
was to create a new FHA insurance product to serve consumers who were
unable to save funds for a downpayment, which would obviate the need
for seller-funded downpayment assistance.
In early 2004, a bill was introduced in Congress that would provide
FHA with authority to insure a 100 percent financing product.\3\ At the
same time, FHA commissioned an independent research firm, Concentrance
Consulting Group, Inc., to conduct a comprehensive examination of
downpayment gift programs administered by nonprofit organizations. The
report was the culmination of a 10-month effort, beginning in January
2004, to understand the influence of seller-funded nonprofit
downpayment assistance on FHA-insured home loans. The study involved
travel to 10 cities and interviews of more than 400 persons involved in
mortgage transactions--from homebuyers and sellers to realtors,
appraisers, underwriters, loan officers, builders, and downpayment
assistance providers. Published on March 1, 2005, the report focused on
the operational aspects of the programs in an effort to understand the
financial relationships between the various parties involved. It
highlighted the harmful features of the programs and concluded that the
programs create unsustainable homeownership arrangements.\4\ The report
served as the basis for FHA's strong push for new legislative authority
to offer a 100 percent financing option to borrowers who might
otherwise rely on a risky SFDPA program.
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\3\ See H.R. 3755, Zero Downpayment Act of 2004, at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_bills&docid=f:h3755ih.txt.pdf.
\4\ An Examination of Downpayment Gift Programs Administered by
Non-Profit Organizations, Final Report, HUD Contract C-OPC-22550/
M0001, March 1, 2005. Available at: http://www.hud.gov/offices/hsg/comp/rpts/dpassist/conmenu.cfm.
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In June 2005, when Congress introduced another piece of Zero Down
legislation, H.R. 3043,\5\ a reformulation of the previous bill, HUD
supported the bill because an FHA Zero Down product would be a more
affordable, yet still financially sound, alternative for families
without savings for a downpayment.\6\
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\5\ See H.R. 3043, Zero Downpayment Pilot Program Act of 2005,
at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h3043ih.txt.pdf.
\6\ An FHA zero downpayment product would not pose the credit
risks associated with SFDPA, for a number of reasons. First,
homebuyers would understand upfront that they are buying a home with
no initial equity and would have a realistic view of their options
for resale. Also, underwriting requirements and insurance pricing
are more easily developed and enforced when tied to a loan product
than when tied to variable downpayment sources. In addition, the
zero downpayment option is not tied to a particular property whose
seller participates in an SFDPA program so that homebuyers can shop
and negotiate with any number of sellers with the same bargaining
power as a buyer with a true equity investment, which would also
help prevent the concentration of 100 percent LTV loans in weak
housing markets.
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Also in 2005, the research arm of Congress, GAO, produced two
reports concerning the risks associated with various proposed and
existing FHA insurance products, including loans with zero downpayment
and those with SFDPA.\7\ HUD agrees with the court, in Ameridream,
Inc., v. Jackson and Penobscot Indian Nation v. HUD, that the first of
these two reports (the February 2005 report discussing proposed FHA
insurance products) provides little meaningful support for the current
rule, which addresses the risks associated with SFDPA. However, the
November 2005 GAO Report directly addressed the risks associated with
loans with SFDPA and represents independent corroboration of the
[[Page 33945]]
findings of HUD's internal data analyses and the Concentrance study.
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\7\ See Report No. 05-194, Mortgage Financing: Actions Needed to
Help FHA Manage Risks from New Mortgage Loan Products (February
2005); and November 2005 GAO Report.
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The November 2005 GAO Report found that the problems associated
with SFDPA loans (e.g., home price inflation and risk of defaults) are
grave enough to merit an outright ban on SFDPA. The FHA Commissioner
responded to the GAO's draft report in a letter dated October 25, 2005,
which is incorporated in the final published report. The Commissioner
acknowledged that GAO's findings confirmed FHA's own analysis and those
of the Concentrance study, but expressed the agency's reasons for not
pursuing GAO's recommended ban on SFDPA. The Commissioner expressed the
agency's desire to provide safer financing without having to exclude
traditional FHA borrowers, who are often in need of downpayment funds,
and pointed to FHA's pursuit of a zero downpayment insurance product
and higher insurance premiums as better alternatives to achieve those
goals than banning SFDPA would be. The response to GAO also reiterated
a legal opinion of HUD's Office of General Counsel that the structure
and the timing of payments in SFDPA transactions did not violate the
letter of HUD's underwriting guidelines.\8\
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\8\ See November 2005 GAO Report, pp. 89-91.
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For the reasons noted in the October 25, 2005, response letter to
GAO, HUD continued to tolerate SFDPA programs, even though HUD had an
ongoing concern about the risks inherent in SFDPA-generated loans,
especially given the ever-increasing proportion of these loans in FHA's
portfolio.
In May 2006, the IRS issued Revenue Ruling 2006-27, which analyzed
a model transaction typical of SFDPA programs and explained that
organizations participating in such programs do not qualify as
organizations described in IRC section 501(c)(3), because the
assistance involved not a downpayment gift, but rather, ``represents a
rebate or purchase price reduction.'' The Revenue Ruling stated that in
these transactions, the so-called downpayment gifts ``do not proceed
from detached and disinterested generosity, but are in response to an
anticipated economic benefit, namely facilitating the sale of a
seller's home.''
HUD acknowledges the court's finding in Ameridream, Inc., v.
Jackson and Penobscot Indian Nation v. HUD that IRS Revenue Ruling
2006-27 on its face does not prove that seller-funded downpayment
assistance loans are inherently and unacceptably risky. Nevertheless,
the Revenue Ruling reinforced HUD's concerns with these transactions
through its determination that they do not involve a gift, but a quid
pro quo. The Revenue Ruling also highlighted an inconsistency in HUD's
prior interpretation of these transactions with those of other
Executive Branch agencies.
HUD did not take regulatory action at any point in time from 1999
through 2006, because the agency was anticipating a legislative
solution to the problem. During that time frame, the portion of
borrowers relying on SFDPA grew to represent over a third of all home
purchase loans insured by FHA. As a result of the growth in the
business and the poor performance, these loans have increased risk to
FHA's fiscal soundness, a risk that threatens the opportunities of all
(not just homeowners in need of downpayment assistance) to obtain
single family FHA-insured financing. Because no legislative solution
has yet materialized, HUD determined that the most prudent option was,
and remains, to prohibit SFDPA through the rule that HUD initially
proposed on May 11, 2007.
III. HUD's Analysis of Its Loan Portfolio Data
A. HUD's Database
HUD, using information submitted by lenders, regularly monitors the
performance of FHA-insured loans. Since the mid-1990s, FHA has
maintained a Single Family Data Warehouse (SFDW), where data from its
various program systems are uploaded on a monthly basis. At the present
time, the SFDW contains 34,000,000 records, each capturing the
characteristics and performance of a loan insured by FHA. Because each
FHA program system uses the same case number for each insured loan, the
SFDW is able to link more than 400 fields containing borrower
demographic and loan application, origination, termination, and
recovery data in one database. These data are used by an independent
contractor to assess the performance of insured loans for the annual
actuarial review of the Mutual Mortgage Insurance Fund (MMIF or Fund),
FHA's largest insurance fund. These data are also used by HUD staff to
calculate FHA's mortgage insurance liability for FHA's annual financial
statements and to estimate credit subsidy for HUD's budget. For this
reason, the data are audited by the independent auditor hired by HUD's
Office of Inspector General and are closely reviewed by the Office of
Management and Budget (OMB).
For the single-family portfolio, HUD's monitoring includes tracking
performance by source of downpayment funds, such as the borrower's own
funds, or funds provided by family members, government agencies, or
nonprofit organizations, as reported to HUD by lenders. The
``nonprofit'' category source of downpayment funds consists of entities
that hold the status of charitable organizations. Analysis of the data,
however, indicates, by identifying the entities that provide the
downpayment assistance, that more than 95 percent of the downpayment
assistance provided under the ``nonprofit'' category is seller-
funded.\9\ Therefore, the term ``nonprofit,'' as used in this preamble
discussion and tables, refers to organizations that hold the status of
charitable organizations and provided SFDPA. Though HUD does not
publish information on performance by downpayment source in formal
reports, the data are regularly reviewed internally by HUD, and they
have been made available at various times to GAO, OMB, and Congress. As
demonstrated by the discussion in this preamble and the related tables
included in the Appendix to this publication, loan performance data
maintained by HUD on FHA-insured mortgages has provided a consistent
story over time: Loans with nonprofit downpayment assistance, i.e.,
SFDPA, perform much worse than do other single family loans insured by
FHA.
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\9\ This comports with the November 2005 GAO Report indicating
that about 93 percent of assistance from nonprofit organizations was
funded by sellers. See November 2005 GAO Report, p. 14.
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To give the public the opportunity to examine and comment fully on
HUD's data analyses, HUD is making the underlying data available online
during this additional comment period. The data files provide loan-
level records that will enable interested parties to explore issues
regarding downpayment assistance provided to homebuyers utilizing FHA
insured mortgage financing. The files are compressed using standard
protocols that should be readable by a wide variety of software. The
particular software product used to create these files is WinZip 9.0
(SR-1). The URL for the FHA Purchase Loan Endorsement Data Web page is:
http://www.hud.gov/offices/hsg/comp/rpts/pled/pledmenu.cfm.
B. Increase of Seller-Funded Downpayment Assistance Loans
The substantial increase over time of loans with downpayment
assistance from nonprofit groups (nonprofit-assisted loans) in the FHA-
insured single-family portfolio has dramatically changed the
fundamental insurance risk
[[Page 33946]]
of that portfolio. As can be seen in Table 1 in the Appendix to this
rule, these loans in Fiscal Year (FY) 2007 made up more than 35 percent
of all home purchase loans insured by FHA. In FY 2000, they were less
than 2 percent of FHA's single family purchase loan activity.
As the discussion and data presented below demonstrate, the
substantial increase over time of nonprofit-assisted loans has created
a financially unsustainable situation for the FHA insurance fund. Table
1, as noted, and all the other Tables referenced in this preamble
discussion appear in the Appendix at the end of this document.
C. Default and Claim Rate Comparisons for Loans With Nonprofit
Downpayment Assistance
1. Default Rates
Tables 2, 3, and 4 provide a summary of default rates on home
purchase loans insured by FHA. Default is measured here as a loan that
is at least 90 days in arrears. Since the 1980s, loan servicers have
reported to HUD all 90-day default events for FHA-insured loans.
Activity on each default episode is reported to HUD until there is a
final resolution, be that a cure of the default, a foreclosure, or some
other outcome.\10\ Three summary statistics are used here--the early
default rate, the ever-defaulted rate, and the current default rate.
Each one is calculated separately by source of downpayment funds used
to purchase the home, and shown by year of insurance endorsement (i.e.,
an ``insurance cohort''). The left half of each table lists the
calculated default rates, and the right half provides a direct
comparison of the performance of loans receiving each type of
downpayment assistance with the performance of loans in which borrowers
use their own funds for the downpayment. The comparisons in each table
show that nonprofit downpayment-assisted loans have the highest default
rates among all FHA-insured home-purchase loans.
---------------------------------------------------------------------------
\10\ Since October 2006, HUD has collected information on all
loan defaults, starting at 30-days delinquency. Ninety-day
delinquencies, however, are an industry standard for defining the
point at which foreclosure (and insurance claim payment) become a
significant concern. Therefore, HUD analysis of the potential risk
of insurance claim payments continues to use 90-day delinquency as
the defining metric of default.
---------------------------------------------------------------------------
The first default statistic, shown in Table 2, is the early default
rate. It measures the share of loans that experience a (90-day) default
within the first 24 months of scheduled mortgage payments, and is
calculated by dividing the number of such loans by the total number of
insured loans in an insurance cohort. HUD uses this statistic as a
first indication of the level of claim payments that might be expected
from any given insurance cohort. The ratios found on the right-hand
side of Table 2 are calculated by dividing the early-default rate for
each type of downpayment assistance by the default rate for loans with
borrower-funded downpayments, within each insurance cohort.
The early default rate of loans with nonprofit downpayment
assistance has consistently been more than twice the rate found on
loans with borrower-funded downpayments, with the average multiple
across the FY 2000-2005 period being 2.43. The early default rate for
loans with nonprofit downpayment assistance is also nearly twice that
of loans with downpayments provided by a family member. These early
default rate comparisons are a leading indicator of eventual
foreclosure and claim rate patterns, as will be seen in Tables 5 and 6.
Loans with nonprofit downpayment assistance have elevated foreclosure
and claim rates commensurate with their elevated early default rates.
The second default statistic, found in Table 3, is the ever-
defaulted rate. This measures the share of borrowers who have ever had
a delinquency that extended beyond 90 days. It is calculated by
dividing the number of borrowers with at least one (90-day) default
since loan origination by the number of insured loans in an insurance
cohort. The ratios on the right-hand side of Table 3 are calculated
like those in Table 2. The ratio of the ever-defaulted rate for
nonprofit downpayment-assisted homebuyers, to that of homebuyers with
FHA-insured loans using their own downpayment funds, is at or above
2.00 for all insurance cohorts since FY 2003 and close to that mark for
FY 2002. The FY 2007 insurance cohort shows the same pattern as have
earlier insurance cohorts. The second default statistic shows that, for
loans endorsed from 2000 to 2005, between approximately 24 and 29
percent of loans with seller-funded assistance had experienced a 90-day
delinquency, compared to approximately 11 to 16 percent of loans
without downpayment assistance. This default statistic is consistent
with GAO's findings in 2005 that loans with downpayment assistance from
seller-funded nonprofit organizations do not perform as well as loans
with downpayment assistance from other sources. GAO used samples of
FHA-insured, single family purchase money loans endorsed in 2000, 2001,
and 2002 and concluded that between 22 and 28 percent of loans with
seller-funded assistance had experienced a 90-day delinquency, compared
to 11 to 16 percent of loans with downpayment assistance from other
sources and 8 to 12 percent of loans without downpayment
assistance.\11\
---------------------------------------------------------------------------
\11\ November 2005 GAO Report, pp. 26-27.
---------------------------------------------------------------------------
The last default statistic shown in the Appendix is the current
default rate (Table 4). That measure is a snapshot at a point in time
that focuses on all loans still active on a given date. The date used
for this snapshot is February 29, 2008. The current default rate is
computed by dividing the number of loans in default on that date by the
number of loans active on the same date in an insurance cohort. The
``Nonprofit'' column in the right-hand side (``Ratios* * *'') of Table
4 shows that the share of loans with nonprofit downpayment assistance
that were in default on the snapshot date was near or above two times
that of home-purchase loans with borrower-funded downpayments for all
insurance cohorts since FY 2001. One will notice that the current-
default-rate ratios for older insurance cohorts are somewhat smaller
than those for new insurance cohorts. This difference is primarily due
to the fact that the weakest loans in those older insurance cohorts
have already gone to foreclosure and claim, leaving fewer weak loans to
default in the present. When the entire nonprofit downpayment
assistance portfolio is compared to the entire borrower-funded
downpayment assistance portfolio, across all insurance cohort years,
the default-rate ratio on February 29, 2008, was 1.80. The actual
default rate for loans with nonprofit downpayment assistance shown on
the left-hand side of Table 4 was 11.19 percent and that for borrower-
funded purchase loans was 6.22 percent.
2. Historical Claim Rates
Table 5 focuses on the insurance claim-payment experience of FHA,
comparing home purchase loans by source of downpayment funds and by
year of insurance cohort. Claims generally are paid by FHA to lenders
after a lender acquires title to a property, generally through a
foreclosure process.\12\ The metric used in the left-hand panel of
Table 5 is the to-date claim rate, which measures the number of
insurance claims paid as a percentage of all loans insured by FHA, as
of a given date. The date used here
[[Page 33947]]
is February 29, 2008. Insurance cohorts that are older will have had
more time for borrowers whose defaults result in foreclosure and an FHA
insurance claim. Consequently, to-date claim rates for the FY 2000 and
FY 2001 insurance cohorts are greater than those for more recent
insurance cohorts.
---------------------------------------------------------------------------
\12\ The lender/servicer bids at the foreclosure auction. Once
the foreclosure has been completed, the lender/servicer, as the
winning bidder, usually transfers title of the property to HUD. FHA
then pays an insurance claim to the lender upon conveyance of
acceptable title to HUD.
---------------------------------------------------------------------------
The data in Table 5 indicate that when nonprofit downpayment
assistance is provided, borrowers, as a group, are less likely to
sustain the financial responsibilities of a home mortgage than are
borrowers receiving downpayment funds from other sources. With to-date
claim rates that exceed three times those of borrower-funded purchase
loans, the insurance risk is higher than FHA has ever considered
acceptable. Such high claim rates cause significant harm to families
who are displaced by foreclosures, and they also have the potential of
destabilizing neighborhoods.
3. Projected Lifetime Claim Rates
Each year, HUD hires an independent contractor to perform a full
actuarial study of its single family insured portfolio. That study,
which is required by law, covers all insurance programs under the
umbrella of the MMIF. The Fund encompasses around 90 percent of all FHA
single family insurance activity. Loans not included are those for
condominiums and section 203(k) purchase-and-rehabilitation loans,
along with some minor targeted programs.\13\ The formal Actuarial
Review published from the actuarial study measures to-date performance
of each insurance cohort, and provides projections of ultimate claim
rates over the 30-year life of each insurance cohort. That Actuarial
Review is forwarded to Congress each year. The work of the independent
contractor is also scrutinized each year by independent auditors hired
by the Office of the Inspector General at HUD.
---------------------------------------------------------------------------
\13\ These other loans are insured under the General and the
Special Risk Insurance Funds.
---------------------------------------------------------------------------
For the last 3 years, the actuarial study contractor has identified
nonprofit downpayment assistance as adding an especially high risk
factor to the FHA portfolio. First, in the FY 2005 Actuarial Review
(available at http://www.hud.gov/offices/hsg/comp/rpts/actr/2005actr.cfm), statistical results were presented that showed the
additional risk of claim in any given calendar quarter arising from
various forms of downpayment assistance. The additional risk posed by
nonprofit downpayment assistance was measured as three times that from
family downpayment assistance, and 1.5 times that from government
assistance.\14\ The FY 2006 Actuarial Review (available at http://www.hud.gov/offices/hsg/comp/rpts/actr/2006actr.cfm) alerted HUD that
continued high concentrations of business coming from loans with
nonprofit downpayment assistance would cause FHA to suffer net
losses.\15\
---------------------------------------------------------------------------
\14\ See Exhibit A-2 on p. A-19 of the FY 2005 Actuarial Review.
\15\ See discussion on p. 49 of the FY 2006 Actuarial Review,
and Exhibit V-5 on p. 50.
---------------------------------------------------------------------------
The FY 2007 actuarial study and Actuarial Review provide a new
level of analysis on expected claim rates over the life of FHA-insured
loans. Since the statistical model that predicts claims now includes a
factor for borrower credit scores, the actuarial study contractor was
able to provide HUD with projections of lifetime claim rates by cross-
sections of credit-score and loan-to-value (LTV) classes. Table 6 shows
such cross-sections for loans insured in 3 recent years, FY 2005, FY
2006, and FY 2007. High-LTV loans are separated into those with
nonprofit downpayment assistance, and those without. Only the high-LTV
group (above 95% LTV) needs this separation because property sellers
that participate in, and contribute to the nonprofit programs,
generally provide only the minimum required 3 percent downpayment. The
ratio of projected claim rates on nonprofit assisted loans to other
above-95%-LTV loans is presented in the last column of Table 6.
Comparisons found in Table 6 show smaller differences in lifetime
claim rates than might be inferred from differences in the to-date
claim rates presented in Table 5. One reason for the difference is the
comparison in Table 6 is made only on high-LTV loans, which have higher
claim rates than do lower-LTV loans. Comparisons in Tables 2, 3, 4, and
5, however, are across all LTV ranges. Nevertheless, for all three
insurance cohorts shown in Table 6, loans with nonprofit downpayment
assistance are more than twice as likely to go to foreclosure and FHA
insurance claim over their lifetime as all other high-LTV loans.
As claim rates rise for all loans insured during housing market
downturns, such as FY 2007, the high insurance claim ratio for loans
with nonprofit downpayment assistance and the large share of loans
utilizing those downpayment assistance programs present a severe
financial challenge to FHA. The expected lifetime claim rate on loans
with nonprofit downpayment assistance in the FY 2005 insurance cohort
is close to 17 percent, and for FY 2007 is above 28 percent. The 16.79
percent for FY 2005 contrasts with a 6.94 percent expected lifetime
claim rate for other high-LTV loans insured during the same period. FY
2007 is a particularly challenging year as it starts with a decline in
home prices across much of the nation. The 28.49 percent expected claim
rate on loans with nonprofit downpayment assistance insured in FY 2007
contrasts with a 12.25 percent expected claim rate on all other high-
LTV loans. It is not possible under current law to charge insurance
premiums in an amount sufficient to cover this increased insurance
claim risk, even if the maximum allowable insurance premiums were
charged to all FHA-insured homebuyers.\16\
---------------------------------------------------------------------------
\16\ See mortgage insurance premium rates at 12 U.S.C.
1709(c)(2).
---------------------------------------------------------------------------
The claim rates shown in Table 6 are under the base case economic
scenario of August 2007, which relied upon forecasts of house prices
and interest rates provided by Global Insight Inc. Since that time,
housing market conditions have deteriorated more than was expected, and
the projected claim rates on the FY 2005 to FY 2007 insurance cohorts
are now even higher than those shown in Table 6. Because the expected
claim rates on loans with nonprofit downpayment assistance are well
above the rate that can be supported by reasonable premium charges in
normal economic conditions, the financial problems caused by these
loans are only compounded during housing market downturns.
4. Higher Losses on Claims
An additional problem with loans with nonprofit downpayment
assistance is that homes purchased using this form of assistance are
often purchased at inflated prices. The price increase is made, or the
seller refrains from accepting a lower price that would have been
acceptable in an arms-length transaction, so that the seller can
receive the same net proceeds from selling to the homebuyer needing
downpayment assistance, as the seller would receive from a buyer
without downpayment assistance. This business practice was confirmed in
a field study performed for HUD by an independent contractor, and
statistically validated in research performed by the GAO.\17\
---------------------------------------------------------------------------
\17\ The contractor study is that of Concentrance Consulting
Group, Inc., An Examination of Downpayment Gift Programs
Administered by Non-Profit Organizations, ibid. The GAO study is in
the November 2005 GAO Report.
---------------------------------------------------------------------------
In the November 2005 GAO Report, the GAO analyzed ``a sample of
FHA-insured loans settled in March 2005,'' and found that ``for loans
with seller-funded down payment assistance, the
[[Page 33948]]
appraised value and sales price were higher as compared with loans
without such assistance.''\18\ The March 2005 study by Concentrance
Consulting Group, commissioned by HUD, interviewed more than 400
persons involved in the mortgage industry and corroborates GAO's
assessment. The Concentrance study ``found overwhelming evidence that
the cost of the seller-funded down payment assistance is added to the
sales price, which then increases the allowable FHA loan amount and
eliminates any borrower equity in the property.'' \19\ Such an inflated
sale price does not represent the true value of the property and leads
to a higher mortgage amount.
---------------------------------------------------------------------------
\18\ November 2005 GAO Report, pp. 22-23.
\19\ Concentrance Consulting Group Report, p 6.
---------------------------------------------------------------------------
The effect on FHA, in addition to an increase in the amount of
insurance claim payments, is increased net losses after disposing of
foreclosed properties. Not only do loans with nonprofit assistance have
significantly elevated insurance claim rates, 76 percent greater
according to the same GAO study,\20\ but FHA ultimately suffers greater
losses on those claims. The FY 2006 Actuarial Review documents
differentiate net loss rates--as a percentage of the unpaid loan
balance at the time of default and claim by loans having or not having
nonprofit downpayment assistance (see Appendix B of the FY 2006
Actuarial Review).
---------------------------------------------------------------------------
\20\ November 2005 GAO Report, p. 32.
---------------------------------------------------------------------------
D. FHA Insurance Fund Solvency
FHA program data is used by an independent contractor to conduct
the annual actuarial review of the MMIF, FHA's largest insurance fund.
MMIF programs are required to be self-supporting and to generate
sufficient receipts to fund a Capital Reserve Account in an amount
equal to at least 2 percent of its outstanding insurance-in-force. (See
12 U.S.C. 1711(f).) This Account provides a vehicle for recording the
balance of payments between MMIF programs and the federal budget over
time. Growth of the Reserve Account occurs as MMIF programs generate
budget receipts and as Account balances earn interest over time.
Reserve Account balances fall when HUD needs to fund unexpected claims
on outstanding loan guarantees. In its 74-year history, the MMIF has
always been self-supporting and never required additional
appropriations beyond its initial capitalization in 1934, which was
paid back by FHA decades ago.
All funds associated with MMIF insurance program operations--
including premium collections, claim payments, and proceeds from the
sale of foreclosed properties--flow through a separate MMIF Financing
Account. In accordance with the Federal Credit Reform Act of 1990, 2
U.S.C. 661, et seq., which requires agencies to estimate the long-term
cost to the government of guaranteeing credit (referred to as ``the
subsidy cost''), FHA must maintain a balance in the MMIF Financing
Account for each insurance cohort (i.e., the loans endorsed in a single
fiscal year) sufficient to cover the net cash outflows projected for
the insurance cohort over its lifetime. Each year, in the course of
preparing the President's Budget, FHA estimates the subsidy cost for
the upcoming insurance cohort. As long as expected premium revenues
outweigh expected claim costs, HUD can fund the required Financing
Account balance and provide net budget receipts that help build Capital
Reserve Account balances. Were a situation to arise in which expected
premium revenues could not cover expected claim costs, then FHA
programs would require a budget appropriation from Congress to help
fund the required Financing Account balance.
In order for FHA MMIF programs to both maintain required capital
reserves and avoid budgetary appropriations, they must be managed in
such a way that generates what is called a ``negative credit subsidy
rate.'' The credit subsidy rate (CSR) is the ratio of expected budget
outlays or receipts to expected loan volumes. The CSR also is the
government's estimated long-term cost, excluding administrative costs,
as a percentage of the amount of loans guaranteed. The rate is
calculated on a net present value basis over the life of the loans
guaranteed in a given fiscal year. The CSR is thus a helpful summary
measure of actuarial soundness.
HUD currently has an internal target for a normal-economy CSR of
around -1.00 percent for MMIF programs in an insurance cohort. The
negative sign means negative outlays, which translates into positive
budget receipts. Having such a target provides a cushion for economic
downturns, minimizing the chance that the CSR could actually turn
positive. Such a target, however, is impossible to achieve today with
the resource drain caused by SFDPA. Taken as a whole, loans with SFDPA
have a CSR of over +6.00 percent, which means that supporting them
costs the FHA program 6 cents for every dollar of these insured loans.
Current premium rates cannot cover the cost of such a large CSR for
these downpayment-assisted loans. HUD is at the point where continuing
to support loans with SFDPA will require budget appropriations for all
of the FHA MMIF loans.
On the basis of the FY 2007 independent Actuarial Review, FHA has
estimated its credit subsidy requirements for FY 2009. FHA has
concluded that if it continued to charge the same 1.5 percent up-front
and 50 basis point annual insurance premiums, and continued to serve
the same mix of borrowers it served in FY 2007, including the same
share using SFDPA, the MMIF program would have a positive credit
subsidy rate of 1.12 percent. Assuming estimated loan-guarantee
obligations of $110 billion, the MMIF program would require a credit
subsidy appropriation of $1.4 billion in order to begin operations in
FY 2009. To ward off this eventuality, HUD is proposing to eliminate
SFDPA.
E. Sustainable Cross-Subsidization
The data presented above in HUD's analysis of its loan portfolio
shows the poor performance of loans with SFDPA relative to loans
without such assistance. Due to this poor performance, borrowers with
SFDPA require an unsustainable level of premium cross-subsidies from
other borrowers. Any attempt to raise premiums to help to cover part of
that cost could result in other borrowers being discouraged from using
financing with FHA mortgage insurance by the high relative cost to them
of providing cross-subsidies to the seller-funded portfolio. This
phenomenon is known as ``adverse selection'' and results in the need to
continually raise premiums when the pool of cross-subsidizing borrowers
declines with each round of price/premium increases. By proposing to
eliminate FHA insurance on loans with SFDPA, FHA is endeavoring to
reestablish a sustainable level of cross-subsidization in its portfolio
so that it can serve more homebuyers, including first-time and minority
homebuyers, without the continual need for appropriations. Avoiding a
general premium-rate increase is all the more important because lower-
income borrowers, who benefit most from FHA's MMIF program, are
concentrated in its less risky credit score and loan-to-value
categories of borrowers, i.e., the categories that would be discouraged
from using the program by higher premium rates. See Table 7.
Table 8 shows the distribution of FHA-insured purchase loans in FY
2007, over FICO \21\ and loan-to-value ratio categories. Purchase loans
with
[[Page 33949]]
SFDPA appear in the SFDPA row. In FY 2007, such homebuyers constituted
over 33 percent of FHA-insured homebuyers (see Table 8).
---------------------------------------------------------------------------
\21\ FICO is a credit score developed by the Fair Isaac
Corporation and is an acronym for it.
---------------------------------------------------------------------------
Table 9 shows the expected lifetime claim rates for purchase loans
in each of the FICO and LTV categories defined in Table 8. Expected
claim rates increase with increases in LTV and with decreases in FICO
scores. That is, they rise as one moves from the upper left to the
lower right of the table. Some of these groups of borrowers have
excessively high claim rates--above 25 percent. HUD has determined that
such high rates are incompatible with homeownership sustainability. In
the worst case, borrowers with SFDPA who have FICO scores below 500
have expected claim rates of 61.4 percent. While these borrowers
constituted only 0.6 percent of all purchase loans endorsed in FY 2007
(see Table 8), for all homebuyers with SFDPA, the weighted average
expected claim rate was over 28 percent.
Even a small number of borrowers with very high expected claim
rates places a substantial burden on the remaining borrowers who must
provide premium revenues sufficient to cover losses incurred on the
high claim-rate group. Table 10 shows credit subsidy rates calculated
for loans in each FICO and LTV grouping. It shows that credit subsidy
rates for different categories of borrowers vary between -2.95 percent
and +20.41 percent. A credit subsidy rate of -2.0 percent generates
$2,000 in receipts on a $100,000 loan and $4,000 on a $200,000 loan. On
the other hand, a credit subsidy rate of +20.4 percent requires $20,400
in subsidies--from some combination of higher premiums on all borrowers
and direct budget appropriations--for a $100,000 loan and $40,800 in
subsidies for a $200,000 loan. With such high positive credit subsidy
requirements, too many borrowers with good credit are needed to offset
the cost of higher-risk, and frequently higher-income, borrowers. Under
current law, FHA is prevented from raising up-front premiums above 2.25
percent or annual premiums above 55 basis points. (See 12 U.S.C.
1709(c)(2).) Nevertheless, one might ask whether it would be possible
to charge sufficient premiums for loans with SFDPA so that they would
not require cross-subsidization. Table 11 shows break-even up-front and
annual premiums for SFDPA loans by FICO score category. Except for
borrowers with FICO scores greater than 680, up-front and annual
premiums would have to be raised to very high levels for example, 5.56
percent upfront and 0.55 percent annually for borrowers with FICO
scores between 640 and 680, and 12.09 percent up-front and 2.0 percent
annually for borrowers with FICO scores between 500 and 560. Therefore,
under the current law, it is not possible to fully offset the risk of
SFDPA simply by raising premiums. Even if there were no statutory cap
on premium rates charged by FHA, however, it is unlikely that borrowers
would opt for an FHA-insured mortgage if the insurance premiums were
raised as high as needed to ensure the sustainability of the insurance
fund in a scenario where SFDPA is allowed to continue. The large up-
front premiums alone, when added to the initial loan balance, would
increase expected claim rates even more, as borrowers could have to
wait many years before they could sell their properties free-and-clear.
Therefore, raising premium rates to extraordinary levels would not be a
viable solution, even if the Congress were to authorize such.
IV. Downpayment Assistance From Nonprofits or Any Other Sources--
Financial Benefit Prohibited
Although the data and discussion above demonstrating the negative
default, claim, and other adverse effects of SFDPA are focused on
nonprofit organizations, the rule, if implemented, would have broader
application. It would prohibit a mortgagor's required cash investment
from consisting, in whole or part, of funds provided by the seller, or
any other person or entity that financially benefits from the
transaction, or any third party or entity reimbursed by the seller or
other person or entity that financially benefits from the transaction.
HUD has determined that this broader prohibition is appropriate and
justified, as discussed below.
HUD is not singling out nonprofit organizations in proposing to
prohibit SFDPA because the same scheme of funneling or advancing funds
for the seller, through an intermediary, to the homebuyer can be
accomplished using any person or entity as the intermediary or using
any number or layers of intermediaries. HUD's rule would apply to all
such transactions. Whenever the funds for the homebuyer's required
investment in the property are provided by a party that financially
benefits from the sale of the property, the transaction is distorted by
the provider's interest in inducing a purchase on any terms, in
conflict with the borrower's and FHA's interest in achieving
sustainable homeownership through a sustainable mortgage. This conflict
is not abated when such funds are provided by an intermediary
reimbursed by the party that financially benefits. It is present
whether the seller provides the funds directly to the homebuyer or
indirectly through an intermediary to the homebuyer.
Further, when the source of downpayment funds financially benefits
from the transaction, the downpayment amount is likely to be added to
the sales price to ensure that the funder's net benefit is not
diminished. Any cost to the buyer added to the transaction adds to the
long-term financial burden to the mortgagor and increases the loan
amount insured by HUD, thereby increasing HUD's risk exposure in the
event of an insurance claim.
While it is not certain that the downpayment funder's cost will be
added dollar for dollar to the transaction in every instance, it would
be an extreme administrative burden to HUD, if not an outright
impossibility, to ensure that the addition of cost has not occurred.
Even if the cost is not added to the sales price, and the property is
sold for its appraised value, it may be deduced that the seller has
refrained from accepting a lower price that would have otherwise been
acceptable in an arms-length transaction. Therefore, the rule would
prohibit downpayment assistance from any sources that financially
benefit from the transaction in order to eliminate, not only the
conflict of interest, but the potential for additional financial burden
imposed upon the mortgagor and added insurance risk to HUD.
HUD considers it reasonable to conclude that the problems
associated with SFDPA from nonprofit organizations would appear in
connection with seller- (or other financial beneficiary-) funded
downpayment assistance from any other sources. The potential for
problems to arise is not related to the nature of the intermediary that
serves as the conduit for the assistance but to the quid pro quo
relationship between the funding of a downpayment and the funder's
receipt of a financial benefit. Thus, for example, although the rule
generally permits a gift from a family member to be used by the
mortgagor to meet the minimum investment requirement, a payment from a
family member who is reimbursed by the seller, or by another party that
financially benefits from the transaction, would not be permitted by
the rule. The same outcome would result if the payment to the mortgagor
came from a nonprofit organization, a government agency, a tribal
government, or any other intermediary; if the intermediary that serves
as the conduit for the payment is reimbursed by the seller or other
party that financially benefits, the payment would not be
[[Page 33950]]
permitted. A transaction-distorting conflict of interest with the
potential for adding an above-market burden on the borrower and
increased risk to the FHA fund is present in each such instance.
This rule would not disturb the programs of direct homeownership
assistance that are administered by private, charitable organizations
or state, local, and tribal governments that are not dependent upon
payment or reimbursement of the assistance by a seller or other party
that benefits financially from a transaction. Programs acceptable to
HUD do not contain the conflict of interest inherent in programs and
transactions in which downpayment assistance is linked to a payment or
reimbursement by the seller or other entity that financially benefits
from the transaction. For these reasons, HUD would continue to allow
programs in which the downpayment assistance is not linked to a payment
or reimbursement by the seller or other entity that benefits
financially from the transaction.
V. Findings and Certifications
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed the rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that the rule is a ``significant regulatory action,'' as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). The docket file is available for
public inspection in the Regulations Division, Office of General
Counsel, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-
0500.
Environmental Review
A Finding of No Significant Impact was not required for the
proposed rule. Under 24 CFR 50.19(b)(6), the rule is categorically
excluded from the requirements of the National Environmental Policy Act
(42 U.S.C. 4332 et seq.) and that categorical exclusion continues to
apply.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (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.
The entities directly affected by this rule are FHA-approved
``direct endorsement'' (DE) lenders, i.e., mortgage lenders that are
approved to underwrite and endorse their loans for FHA insurance, that
must follow FHA requirements to have a loan insured by the FHA, and
that are the party ``insured'' by FHA. While other types of entities
may be indirectly affected by this rule, the RFA does not cover such
indirect effects.
As a result of this rule, DE lenders would no longer be able to
obtain FHA insurance for loans with seller-funded downpayment
assistance. Therefore, the economic impact, if any, of the rule on
regulated entities may be estimated by attempting to determine what
proportion of DE lenders' loan volume will be affected by the rule
(i.e., what proportion consists of FHA-insured loans with seller-funded
downpayment assistance) and how much, if any, revenue and profit DE
lenders would forgo as a result of FHA no longer being able to insure
that particular category of loans.
A. Estimating the Number of Small Entities Potentially Affected
To determine if the rule would have a significant economic impact
on a substantial number of small entities, HUD first identified the
total number of DE lenders, large or small, with current FHA loan
activity. According to HUD's records, there were 1,487 DE lenders that
were actively underwriting FHA-insured loans in 2007. The next step in
the analysis was to estimate how many of these 1,487 DE lenders would
be considered ``small entities.'' Under the applicable industry
classifications, banks and other depository institutions are considered
``small entities'' if they have $165 million or less in assets; non-
bank mortgage lenders are considered ``small'' if they have $6.5
million or less in annual revenues.\22\ To begin narrowing the field,
HUD attempted to identify the subset of DE lenders whose annual revenue
from FHA-insured loans was $6.5 million or less. This was done by
multiplying the total dollar volume of FHA-insured loans made by a
lender, information that HUD collects on an annual basis, by a factor
of four percent, which represents a per-loan revenue estimate typically
quoted by FHA lenders. Out of the original universe of 1,487, HUD
identified 74 DE lenders whose estimated annual revenue from FHA-
insured loans was $6.5 million or less. This number still overstates
the number of DE lenders who actually meet the ``small entity test,''
because FHA-insured loans typically are not the only line of business
or income stream for a DE lender. However, it serves the useful purpose
of flagging the subset of DE lenders that potentially fall within the
``small entity'' definition and thus require further analysis.
---------------------------------------------------------------------------
\22\ U.S. Small Business Administration, Table of Small Business
Size Standards Matched to North American Industry Classification
System Codes; avialable at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------
The next step in the analysis was to ascertain how many of the 74
flagged DE lenders actually meet the applicable test for ``small
entity.'' As noted above, the test is different depending on whether
the entity is a bank or other depository institution, on the one hand,
or a non-bank mortgage lender on the other. Sixty-two of the 74 flagged
DE lenders were non-bank mortgage lenders; 12 were banks or other
depository institutions. With respect to non-bank mortgage lenders, HUD
has access to their annual audited financial statements, which they
must submit to HUD on-line via the Lender Assessment Sub-System (LASS)
in order to renew their FHA lender approval. Of the 62 flagged non-bank
mortgage lenders, 36 reported annual revenue that would qualify them as
``small entities'' under the applicable less-than-$6.5 million-annual-
revenue test.
As noted above, banks and other depository institutions are
considered ``small entities'' if they have $165 million or less in
assets. DE lenders that are banking institutions are not required to
supply financial statements through HUD's LASS. From publicly available
annual reports, however, HUD was able to ascertain that none of the 12
flagged banking institutions met this test. Thus, 36 of the 74 flagged
DE lenders are small entities subject to this regulation.
B. Estimating the Number of Small Entities That Would Be Significantly
Impacted by the Rule
The foregoing discussion demonstrated that there are 36 DE lenders
that qualify as ``small entities'' under the applicable tests. The next
step in the analysis is to determine whether the rule is likely to have
a significant economic impact on a substantial number of these 36 small
entities. In the RFA context, a 10 percent loss of profits is commonly
used as a measure of significant impact. HUD does not have access to
sufficient data to perform a 10 percent loss-of-profits analysis
directly. However, HUD can approximate a 10 percent loss-of-profits
analysis by determining whether a DE lender's total portfolio of FHA-
insured loans consists of 10 percent or more loans with seller-funded
downpayment assistance. This methodology is more conservative than a
straightforward 10 percent loss-of-profits approach, since a 10 percent
loss of FHA-insured loan business likely
[[Page 33951]]
represents a lesser percent of an entity's overall business. HUD is not
aware of any FHA-approved lender whose business consists exclusively of
FHA-insured loans; thus, even if a lender's FHA-insured loan volume
fell by a margin of 10 percent or more, its overall profits from all
segments of its business would not necessarily be affected by the same
margin. Although HUD is unaware of any other institution, public or
private, that will insure loans with seller-funded downpayment
assistance, the regulation's impact could be further mitigated to the
extent that other SFDPA-loan insurers exist.
Only five of the 36 identified small DE lenders had FY 2007 FHA-
insured loan portfolios consisting of at least 10 percent loans with
nonprofit downpayment assistance.\23\ Therefore, the maximum number of
small entities that might be significantly affected by the regulation
is 5 out of a field of 36 small DE lenders. Most likely, not even all
of these 5 will be significantly affected, because to the extent they
have any revenue-generating activities other than FHA-insured loans,
SFDPA FHA-insured loans may well comprise under 10 percent of the
entity's total business even if they comprise more than 10 percent of
the entity's FHA-insured loan business. In any event, even 5
economically impacted small entities is not in itself a substantial
number; nor is it a substantial portion of the total number of small
entities in the field.\24\
---------------------------------------------------------------------------
\23\ Ninety-two percent of all loans with nonprofit downpayment
assistance were made by 5 lenders that are not small entities.
\24\ Moreover, when the total number of small entities in the
whole relevant industry is considered, including mortgage lenders
that are not approved to underwrite FHA loans and are therefore not
affected by the regulation, the figure of five small entities that
may be significantly impacted becomes even more insubstantial. Based
on data provided in the preamble to a rule proposed earlier this
year by the Board of Governors of the Federal Reserve System, of the
17,618 depository institutions reporting data to the Board, more
than 10,000 were small mortgage lenders. See Truth in Lending:
Proposed Rule, 73 FR 1671, 1719 (January 9, 2008). Including small,
non-depository mortgage lenders would only increase that universe
beyond 10,000.
---------------------------------------------------------------------------
Accordingly, the undersigned certifies that this rule will not have
a significant economic impact on a substantial number of small
entities.
Executive Order 12612, Federalism
Executive Order 12612 (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 rule
does not impose substantial direct compliance costs on state and local
governments or preempt state law within the meaning of the Executive
Order. This rule solely addresses requirements under HUD's FHA mortgage
insurance programs.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4, approved March 22, 1995) established requirements for federal
agencies to assess the effects of their regulatory actions on state,
local, and tribal governments, and the private sector. This rule does
not impose any federal mandates on any state, local, or tribal
governments or the private sector within the meaning of the Unfunded
Mandates Reform Act of 1995.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance Number for the principal
FHA single family mortgage insurance program is 14.117. This rule also
applies through cross-referencing to FHA mortgage insurance for
condominium units (14.133), and other smaller single family programs.
List of Subjects in 24 CFR Part 203
Loan programs--housing and community development, Mortgage
insurance, Reporting and recordkeeping requirements.
Accordingly, the Department proposes to amend 24 CFR part 203, as
follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
1. The authority citation for part 203 continues to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42
U.S.C. 3535(d).
2. Section 203.19 is revised to read as follows:
Sec. 203.19 Mortgagor's investment in the property.
(a) Required funds. The mortgagor must have available funds equal
to the difference between:
(1) The cost of acquisition, which is the sum of the purchase price
of the home and settlement costs acceptable to the Secretary; and
(2) The amount of the insured mortgage.
(b) Mortgagor's minimum cash investment. The required funds under
paragraph (a) of this section must include an investment in the
property by the mortgagor, in cash or cash equivalent, equal to at
least 3 percent of the cost of acquisition, as determined by the
Secretary, unless the mortgagor is:
(1) A veteran meeting the requirements of Sec. 203.18(b); or
(2) A disaster victim meeting the requirements of Sec. 203.18(e).
(c) Restrictions on seller funding. Notwithstanding paragraphs (e)
and (f) of this section, the funds required by paragraph (a) of this
section shall not consist, in whole or in part, of funds provided by
any of the following parties before, during, or after closing of the
property sale:
(1) The seller or any other person or entity that financially
benefits from the transaction; or
(2) Any third party or entity that is reimbursed, directly or
indirectly, by any of the parties described in paragraph (c)(1) of this
section.
(d) Gifts and loans usually prohibited for minimum cash investment.
A mortgagor may not use funds for any part of the minimum cash
investment under paragraph (b) of this section if the funds were
obtained through a loan or a gift from any person, except as provided
in paragraphs (e) and (f) of this section, respectively.
(e) Permissible sources of loans--(1) Statutory authorization
needed. A statute must authorize a loan as a source of the mortgagor's
minimum cash investment under paragraph (b) of this section.
(2) Examples. The following loans are authorized by statute as a
source for the minimum investment:
(i) A loan from a family member, a loan to a mortgagor who is at
least 60 years old when the mortgage is accepted for insurance, or a
loan that is otherwise expressly authorized by section 203(b)(9) of the
National Housing Act;
(ii) A loan made or held by, or insured by, a federal, state, or
local government agency or instrumentality under terms and conditions
approved by the Secretary;
(iii) A loan made or held by, or insured by, a tribal government or
an agency or instrumentality thereof, including a tribally designated
housing entity as defined at 25 U.S.C. 4103(21), which is treated as a
state or local government under applicable state or local law, under
terms and conditions approved by the Secretary; and
(iv) A federal disaster relief loan.
(f) Permissible sources of gifts. The following are permissible
sources of gifts or grants used for the mortgagor's minimum investment
under paragraph (b) of this section:
(1) Family members and governmental agencies and
[[Page 33952]]
instrumentalities eligible under paragraphs (e)(2)(i) and (ii) of this
section;
(2) A tribal government or an agency or instrumentality thereof,
including a tribally designated housing entity, as defined at 25 U.S.C.
4103(21);
(3) An employer or labor union of the mortgagor;
(4) Organizations described in section 501(c)(3) and exempt from
taxation under section 501(a) of the Internal Revenue Code of 1986;
(5) Disaster relief grants; and
(6) Other sources as may be approved by the Secretary on a case-by-
case basis.
Dated: June 10, 2008.
Brian D. Montgomery,
Assistant Secretary for Housing, Federal Housing Commissioner.
Appendix--Tables
Note: This Appendix will not be codified in the Code of Federal
Regulations.
Table 1.--FHA Single-Family Purchase Loan Endorsements, Shares by Downpayment Source Type and Fiscal Year
----------------------------------------------------------------------------------------------------------------
Source of downpayment funds in percent
-----------------------------------------------------------
Fiscal year Govt
Borrower Family Nonprofit agency Employer
----------------------------------------------------------------------------------------------------------------
2000................................................ 75.75 20.28 1.74 2.14 0.09
2001................................................ 77.52 15.64 4.92 1.83 0.10
2002................................................ 74.95 13.75 9.18 2.04 0.09
2003................................................ 63.53 15.25 18.40 2.70 0.12
2004................................................ 53.97 15.59 27.19 3.12 0.12
2005................................................ 48.44 14.18 33.09 4.17 0.12
2006................................................ 48.73 12.93 32.78 5.43 0.13
2007................................................ 47.52 12.02 35.09 5.25 0.12
2008 \a\............................................ 46.05 12.25 37.30 4.32 0.09
----------------------------------------------------------------------------------------------------------------
\a\ Data for five months, October through February.
Source: U.S. Department of Housing and Urban Development.
Table 2.--Early Default Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Early default rates in percent Ratios to ``borrower'' early default rates
----------------------------------------------------------------------------------------------------
Fiscal year of insurance endorsement Govt Govt
Borrower Family Nonprofit agency Employer Family Nonprofit agency Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000............................................... 3.89 5.26 7.98 6.76 4.37 1.36 2.05 1.74 1.12
2001............................................... 7.43 9.10 16.32 13.17 8.51 1.22 2.20 1.77 1.15
2002............................................... 6.99 8.56 15.22 12.62 11.93 1.23 2.18 1.81 1.71
2003............................................... 5.79 7.34 13.90 12.17 9.28 1.27 2.40 2.10 1.60
2004............................................... 5.84 7.79 14.33 12.36 10.42 1.33 2.46 2.12 1.78
2005............................................... 7.08 9.24 16.43 12.81 9.95 1.30 2.32 1.81 1.41
----------------------------------------------------------------------------------------------------
2000-2005.......................................... 6.08 7.57 14.80 11.56 9.00 1.24 2.43 1.90 1.48
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: HUD.
Notes: FHA-insured home-purchase loans; early default is defined as a 90-day (3 month) delinquency within the first 2 years of scheduled payments on the
mortgage.
Table 3.--Ever-Defaulted Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ever-defaulted rates in percent Ratios to ``borrower'' ever-defaulted rates
----------------------------------------------------------------------------------------------------
Fiscal year of insurance endorsement Govt Govt
Borrower Family Nonprofit agency Employer Family Nonprofit agency Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000............................................... 16.40 21.39 28.69 27.79 21.83 1.30 1.75 1.69 1.33
2001............................................... 15.28 18.36 28.38 28.40 19.70 1.20 1.86 1.86 1.29
2002............................................... 13.24 15.30 25.30 24.47 17.30 1.16 1.91 1.85 1.31
2003............................................... 11.86 14.26 25.05 23.68 17.53 1.20 2.11 2.00 1.48
2004............................................... 10.60 13.57 23.94 20.88 17.92 1.28 2.26 1.97 1.69
2005............................................... 10.75 13.80 23.28 18.46 15.40 1.28 2.16 1.72 1.43
2006............................................... 8.16 10.59 17.67 12.31 16.22 1.30 2.16 1.51 1.99
2007............................................... 4.13 5.26 9.90 5.70 4.22 1.27 2.40 1.38 1.02
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: HUD; FHA-insured home-purchase loans; data as of February 29, 2008.
Notes: Default is defined as a 90-day (3 month) delinquency; ever-defaulted represents having had at least one default episode.
[[Page 33953]]
Table 4.--Current Default Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current default rates in percent Ratios to ``borrower'' current default
-------------------------------------------------------- rates
Fiscal year of insurance endorsement --------------------------------------------
Borrower Family Nonprofit Govt Employer Govt
agency Family Nonprofit agency Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000............................................... 11.83 14.80 17.33 13.50 19.12 1.25 1.46 1.14 1.62
2001............................................... 10.69 12.75 19.51 13.65 21.69 1.19 1.82 1.28 2.03
2002............................................... 8.23 10.01 15.97 11.83 4.20 1.22 1.94 1.44 0.51
2003............................................... 5.63 6.92 11.64 9.26 8.18 1.23 2.07 1.65 1.45
2004............................................... 5.36 7.41 12.33 8.64 10.92 1.38 2.30 1.61 2.04
2005............................................... 5.55 7.43 12.64 8.76 9.43 1.34 2.28 1.58 1.70
2006............................................... 4.94 6.46 10.97 6.98 9.81 1.31 2.22 1.41 1.99
2007............................................... 2.86 3.78 7.47 3.92 3.05 1.32 2.61 1.37 1.07
----------------------------------------------------------------------------------------------------
All Years.......................................... 6.22 7.68 11.19 8.07 9.02 1.24 1.80 1.30 1.45
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: HUD.
Note: Data are as of February 29, 2008.
Table 5.--Date Claim Rate Comparisons on FHA-Insured Home Purchase Loans by Source of Downpayment Funds and Fiscal Year of Insurance Endorsement
--------------------------------------------------------------------------------------------------------------------------------------------------------
To-date claim rates in percent Ratios to ``borrower'' to-date claim rates
----------------------------------------------------------------------------------------------------
Fiscal year of insurance endorsement Govt Govt
Borrower Family Nonprofit agency Employer Family Nonprofit agency Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000............................................... 6.29 8.38 16.07 13.58 9.52 1.33 2.56 2.16 1.51
2001............................................... 5.67 6.68 16.23 13.34 7.24 1.18 2.86 2.35 1.28
2002............................................... 4.45 4.58 13.27 10.72 6.16 1.03 2.98 2.41 1.38
2003............................................... 3.31 3.58 11.22 8.84 4.57 1.08 3.39 2.67 1.38
2004............................................... 2.21 2.77 8.89 5.80 3.75 1.25 4.02 2.62 1.69
2005............................................... 1.61 1.88 6.29 3.81 2.61 1.17 3.91 2.36 1.62
2006............................................... 0.73 0.85 2.91 1.60 2.21 1.17 3.99 2.19 3.03
2007............................................... 0.08 0.09 0.41 0.17 0.00 1.12 5.07 2.14 0.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: HUD; claims paid as of February 29, 2008.
Table 6.--Expected Lifetime Claim Rates on Recent FHA Insurance Endorsements, by Credit Score, LTV, and
Nonprofit Downpayment Assistance Fixed-Rate, 30-Year Mortgages
----------------------------------------------------------------------------------------------------------------
Loan-to-value ranges
------------------------------------------------- Ratio of
Above 95 percent nonprofit to
Credit score ranges ------------------------- other above-95
Up to 90 90.1-95 Other percent claim
percent percent downpayment Nonprofit rates
funds assisted
----------------------------------------------------------------------------------------------------------------
FY 2005 Insurance Endorsements
----------------------------------------------------------------------------------------------------------------
680-850........................................ 2.74 3.19 3.37 6.69 1.99
640-679........................................ 4.32 5.56 6.23 13.02 2.09
620-639........................................ 4.54 5.89 6.59 13.36 2.03
580-619........................................ 6.44 9.17 10.57 21.58 2.04
540-579........................................ 7.74 12.80 13.52 26.20 1.94
500-539........................................ 10.56 17.53 17.49 32.92 1.88
300-499........................................ 13.56 12.21 21.33 46.63 2.19
None........................................... 6.81 9.66 11.04 23.80 2.16
----------------------------------------------------------------
All............................................ 5.60 6.90 6.94 16.79 2.42
----------------------------------------------------------------------------------------------------------------
FY 2006 Insurance Endorsements
----------------------------------------------------------------------------------------------------------------
680-850........................................ 2.05 3.07 3.80 9.13 2.40
640-679........................................ 4.04 6.92 8.73 19.25 2.21
620-639........................................ 3.93 7.22 9.20 20.00 2.17
580-619........................................ 6.14 12.24 15.21 31.81 2.09
540-579........................................ 7.41 15.53 19.00 37.34 1.97
500-539........................................ 10.56 19.54 25.03 46.67 1.86
300-499........................................ 16.11 27.04 34.47 59.09 1.71
None........................................... 7.91 12.89 16.21 37.02 2.28
----------------------------------------------------------------
[[Page 33954]]
All............................................ 5.22 8.21 9.24 23.21 2.51
----------------------------------------------------------------------------------------------------------------
FY 2007 Insurance Endorsements
----------------------------------------------------------------------------------------------------------------
680-850........................................ 2.14 3.75 4.9 11.54 2.36
640-679........................................ 4.45 8.10 11.15 23.78 2.13
620-639........................................ 4.43 8.68 11.54 24.57 2.13
580-619........................................ 7.43 14.28 19.47 38.49 1.98
540-579........................................ 8.71 18.71 24.01 45.03 1.88
500-539........................................ 10.51 22.73 30.86 53.80 1.74
300-499........................................ 16.09 33.68 40.82 68.31 1.67
None........................................... 9.21 15.73 21.14 42.85 2.03
----------------------------------------------------------------
All............................................ 6.05 10.01 12.25 28.49 2.33
----------------------------------------------------------------------------------------------------------------
Source: Special aggregations performed by Integrated Financial Engineering, Inc., from the FY 2007 actuarial
study of the FHA Mutual Mortgage Insurance Fund (available at http://www.hud.gov/offices/hsg/comp/rpts/actr/2007actr.cfm). Lifetime claim rate predictions use base case economic forecasts provided by Global Insight,
Inc.
Table 7.--Median Incomes of FHA Purchase Borrowers in FY 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
FICO score range
Loan-to-value ratio --------------------------------------------------------------------------------------------------
850-680 679-640 639-620 619-600 599-560 559-500 499-300 None Row
--------------------------------------------------------------------------------------------------------------------------------------------------------
LE 90................................................ $43,404 $42,906 $43,290 $44,550 $48,180 $52,068 $49,200 $32,232 $44,688
91-95................................................ 47,388 49,338 49,800 51,420 53,724 54,984 55,170 37,440 49,920
96-97................................................ 49,512 52,506 53,208 54,996 55,068 55,500 52,824 39,000 51,996
SFDPA*............................................... 48,432 50,754 51,024 51,672 51,618 51,732 52,008 36,900 50,136
Column............................................... 48,756 51,372 51,936 52,752 53,004 53,388 51,996 37,440 50,760
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Loans with seller-funded downpayment assistance.
Table 8.--Purchase Loan Composition in FY 2007, by LTV and FICO Score
[In percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
FICO score range
Loan-to-value ratio --------------------------------------------------------------------------------------------------
850-680 679-640 639-620 619-600 599-560 559-500 499-300 None LTV sum
--------------------------------------------------------------------------------------------------------------------------------------------------------
LE 90................................................ 1.7 1.4 1.0 1.0 1.9 1.3 0.2 0.6 9.1
91-95................................................ 1.7 1.6 1.0 1.0 1.3 0.7 0.1 0.3 7.8
96-97................................................ 14.3 10.1 5.6 5.6 7.8 3.8 0.4 2.4 49.9
SFDPA*............................................... 5.0 5.5 4.1 4.1 7.4 4.8 0.6 1.6 33.2
FICO Sum............................................. 22.8 18.7 11.7 11.7 18.5 10.6 1.2 5.0 100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Loans with seller-funded downpayment assistance.
Table 9.--Expected Claim Rates for All FY 2009 Loans Based on FY 2007 Actuarial Review and Recent Economic Assumptions
[In percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
FICO score range
Loan-to-value ratio ---------------------------------------------------------------------------------------
850-680 679-640 639-620 619-600 599-560 559-500 499-300 None
--------------------------------------------------------------------------------------------------------------------------------------------------------
LE 90........................................................... 2.2 4.7 4.5 7.7 8.7 10.2 15.3 9.6
91-95........................................................... 3.1 6.7 7.0 11.6 14.6 18.3 26.0 13.4
96-97........................................................... 3.9 8.9 9.3 15.5 19.0 25.3 36.2 17.7
SFDPA*.......................................................... 8.9 18.6 19.4 31.7 36.8 47.0 61.4 34.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Loans with seller-funded downpayment assistance.
[[Page 33955]]
Table 10.--Credit Subsidy Rates by LTV and FICO Score
[In percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
FICO score range
Loan-to-value ratio ---------------------------------------------------------------------------------------
850-680 679-640 639-620 619-600 599-560 559-500 499-300 None
--------------------------------------------------------------------------------------------------------------------------------------------------------
LE 90........................................................... -2.95 -1.89 -2.00 -0.69 -0.54 -0.01 2.41 0.10
90-95........................................................... -2.56 -1.08 -0.94 0.90 1.26 2.62 6.70 1.65
95-97........................................................... -2.22 -0.18 -0.04 2.49 2.88 4.80 10.74 3.37
SFDPA*.......................................................... -0.20 3.73 4.07 8.97 9.57 12.63 20.41 10.12
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Loans with seller-funded downpayment assistance.
Table 11.--Breakeven Up-Front and Annual Insurance Premiums for Seller-Funded Downpayment Assistance Loans
[In percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
FICO score range
---------------------------------------------------------------------------------------
850-680 679-640 639-620 619-600 599-560 559-500 499-300 None
--------------------------------------------------------------------------------------------------------------------------------------------------------
Up-front Premium................................................ 0.95 5.56 5.99 5.92 6.88 12.09 28.95 7.77
Annual Premium.................................................. 0.55 0.55 0.55 2.00 2.00 2.00 2.00 2.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
[FR Doc. 08-1356 Filed 6-11-08; 2:56 pm]
BILLING CODE 4210-67-P