Federal Home Loan Bank Housing Goals

AGENCY:

Federal Housing Finance Agency.

ACTION:

Final rule.

SUMMARY:

Section 1205 of the Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Home Loan Bank Act (Bank Act) by adding a new section 10C(a) that requires the Director of the Federal Housing Finance Agency (FHFA) to establish housing goals with respect to the Federal Home Loan Banks' (Banks) purchase of mortgages, if any. Section 10C(b) provides that the Banks' housing goals are to be consistent with the housing goals established by FHFA for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) under sections 1331 through 1334 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act), as amended by HERA, taking into consideration the unique mission and ownership structure of the Banks.

To implement section 10C, FHFA is adopting a final rule that is substantially the same as the proposed rule published by FHFA for notice and comment. The final rule establishes three single-family owner-occupied purchase money mortgage goals and one single-family refinancing mortgage goal applicable to the Banks' purchases of single-family owner-occupied mortgages, if any, under their Acquired Member Assets (AMA) programs, consistent with the single-family housing goals for the Enterprises. A Bank will be subject to the housing goals if its AMA-approved mortgage purchases in a given year exceed a volume threshold of $2.5 billion.

DATES:

This rule is effective January 26, 2011.

FOR FURTHER INFORMATION CONTACT:

Brian Doherty, Acting Senior Associate Director, (202) 408-2991, Charles E. McLean, Associate Director, (202) 408-2537, or Rafe R. Ellison, Senior Program Analyst, (202) 408-2968, Office of Housing and Community Investment, 1625 Eye Street, NW., Washington, DC 20006. (These are not toll-free numbers.) For legal matters, contact Kevin Sheehan, Attorney, (202) 414-8952, or Sharon Like, Managing Associate General Counsel, (202) 414-8950, Office of General Counsel, Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. (These are not toll-free numbers.) The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Federal Home Loan Bank System

The Federal Home Loan Bank System (System) was created by the Bank Act to support mortgage lending and related community investment. See 12 U.S.C. 1421 et seq. The System is composed of 12 Banks with more than 8,000 member financial institutions, and the System's fiscal agent, the Office of Finance. The Banks fulfill their statutory mission primarily by providing secured loans (called advances) to their members. The Bank Act provides the Banks explicit authority to make secured advances. 12 U.S.C. 1430(a). Advances provide members with a source of funding for mortgages and asset-liability management, liquidity for a member's short-term needs, and additional funds for housing finance and community investment. Advances are collateralized primarily by residential mortgage loans and government and agency securities. 12 U.S.C. 1430(a)(3). Community financial institutions (CFIs) (i.e., members with average total assets of less than $1 billion (as adjusted annually for inflation)) may also pledge small business, small agriculture or community development loans as collateral for advances. 12 U.S.C. 1430(a)(3)(E).

Consolidated obligations, consisting of bonds and discount notes, are the principal source for the Banks to fund advances and investments. The Office of Finance issues all consolidated obligations on behalf of the 12 Banks. Although each Bank is primarily liable for the portion of consolidated obligations corresponding to the proceeds received by that Bank, each Bank is also jointly and severally liable with the other eleven Banks for the payment of principal of, and interest on, all consolidated obligations. See 12 CFR 966.9.

B. Bank AMA Programs

In July 2000, the Federal Housing Finance Board (FHFB) adopted a final regulation authorizing the Banks to establish Acquired Member Assets (AMA) programs. See 12 CFR part 955. A Bank may participate in an AMA program at its discretion; FHFA does not have the authority to compel a Bank to engage in any mortgage purchase activities. Each Bank must receive approval from FHFA pursuant to the requirements for new business activities in order to establish an AMA program. See 12 CFR part 980. A majority of the Banks have implemented AMA programs pursuant to the AMA approval authority.

In order for a Bank to acquire a mortgage loan under an AMA program, the loan must meet the requirements set forth under a three-part test established by the regulation. The three-part test consists of: A loan type requirement; a member or housing associate nexus requirement; and a credit risk-sharing requirement. 12 CFR 955.2. The AMA regulation generally authorizes the Banks to purchase conforming whole loans on single-family residential real property not more than 90 days delinquent. In addition, the Banks are authorized to purchase conforming whole loans on single-family residential real property regardless of delinquency status if the loan is insured or guaranteed by the U.S. government, although such loans are not eligible to be counted toward the Enterprises' housing goals, as provided in the Safety and Soundness Act. The Banks acquire AMA from their participating members through either a purchase or funding transaction. The Banks are not authorized under the AMA programs to securitize the mortgages they purchase.

To date, FHFA has approved two AMA programs—the Mortgage Partnership Finance (MPF) program and the Mortgage Purchase Program (MPP)—that authorize the Banks to purchase only eligible single-family, fixed-rate mortgages, including manufactured housing loans, from participating financial institution (PFI) members. The Banks are not approved to purchase any other types of mortgages under the AMA programs, including mortgages secured by multifamily properties. In operation, the Banks have limited their AMA programs to purchasing conforming, conventional and government-insured or -guaranteed fixed-rate whole first mortgages on single-family residential property with maturities ranging from 5 to 30 years. Banks have also purchased participations in AMA-approved loan pools after the original Bank acquired the loans. As of June 30, 2010, the combined value of the AMA mortgage loans in the 12 Banks' portfolios was $67 billion, representing approximately seven percent of the Banks' total combined assets. In contrast, the Banks' outstanding advances, their primary business line, totaled $540 billion as of June 30, 2010, representing 58 percent of the Banks' total combined assets.

The MPF and MPP programs are designed such that the Banks manage the interest-rate risk and the PFI assumes a substantial portion of the risks associated with originating the mortgage, particularly the credit risk. The AMA regulation requires that PFIs provide credit enhancement to give the mortgages the Banks purchase the credit quality equivalent to an instrument rated at least investment grade (the fourth highest credit rating category or triple-B), although the approved AMA programs require PFIs to enhance the loans to the second highest investment grade (double-A). 12 CFR 955.3. The PFI may provide this credit enhancement through various means, such as establishing a risk account to cover losses in excess of a borrower's equity and primary mortgage insurance on mortgages purchased by a Bank, accepting direct liability to pay credit losses up to a specified amount, or entering into a contractual obligation to provide supplemental mortgage guaranty insurance.

As previously noted, advances remain the core business activity of the Banks and a principal means by which they fulfill their mission. Participation in an AMA program is elective. The acquisition of AMA has presented certain risk management challenges for some Banks. The AMA are long-term, fixed-rate loans, and the portfolio requires careful attention to interest rate risk management in order to match the duration of assets and liabilities and to adjust for loan prepayments. The Banks must also competitively price their product in the market without eroding their own financial interest. Given these challenges and in light of recent interest rate and earnings volatility, several Banks have scaled down their purchases of AMA and returned to their core products. After peaking in 2003, when the Banks purchased over $91.2 billion in AMA, annual AMA purchases have steadily declined to an annualized average of about $6.7 billion during the period between 2006 and 2009. Several Banks either have stopped accepting additional master commitments to purchase AMA from their members or no longer accept delivery. In 2007, 2008 and 2009, the principal pay-down and maturities of AMA held for portfolio were greater than purchases and funding of new loans held for portfolio.

C. Bank Housing Goals Statutory Provisions

Section 10C(a) of the Bank Act, as amended by HERA, requires the Director of FHFA to “establish housing goals with respect to the purchase of mortgages, if any, by the [Banks],” which “shall be consistent with the goals established under sections 1331 through 1334 of the [Safety and Soundness Act, as amended].” 12 U.S.C. 1430c(a). Section 10C(b) provides that, in establishing the goals for the Banks, “the Director shall consider the unique mission and ownership structure of the [Banks].” 12 U.S.C. 1430c(b). In addition, section 10C(c) provides that, “to facilitate an orderly transition,” the Director shall establish interim target goals for the purchase of mortgages by the Banks for the calendar years 2009 and 2010. 12 U.S.C. 1430c(c). Section 10C(d) provides that the monitoring and enforcement requirements of section 1336 of the Safety and Soundness Act shall apply to the Banks in the same manner and to the same extent as they apply to the Enterprises. 12 U.S.C. 1430c(d). Section 10C(e) requires the Director to annually report to Congress on the performance of the Banks in meeting the housing goals under section 10C. 12 U.S.C. 1430c(e).

Sections 1331 through 1333 of the Safety and Soundness Act, as amended by HERA, require the Director of FHFA to establish new housing goals effective for 2010 and beyond for the Enterprises. The new Enterprise housing goals include four goals for conventional conforming single-family owner-occupied housing, one multifamily special affordable housing goal, and one multifamily special affordable housing subgoal. See 12 U.S.C. 4561, 4563(a)(2). The single-family housing goals target purchase money mortgages for low-income families, families that reside in low-income areas, and very low-income families, and refinancing mortgages for low-income families. See 12 U.S.C. 4562. The multifamily special affordable housing goal targets multifamily housing affordable to low-income families, and the multifamily special affordable housing subgoal targets multifamily housing affordable to very low-income families. See 12 U.S.C. 4563. In a separate rulemaking, FHFA has published in the Federal Register a final rule for the new housing goals for the Enterprises for 2010 and 2011 pursuant to the requirements of sections 1331 through 1333 of the Safety and Soundness Act, as amended. 75 FR 55892 (Sept. 14, 2010).

D. Banks' and Enterprises' Differences

Section 1313 of the Safety and Soundness Act, as amended, 12 U.S.C. 4513(f), requires the Director of FHFA to consider the differences between the Banks and the Enterprises whenever promulgating regulations that affect the Banks. In preparing the final rule, pursuant to section 1313, the Director considered the differences between the Banks and the Enterprises with respect to the Banks' cooperative ownership structure, mission of providing liquidity to members, affordable housing and community development mission, capital structure, and joint and several liability, and determined that the final rule is appropriate. As described below, there are significant differences between the Enterprise housing goals and the Bank housing goals—including establishing a volume threshold for the Banks to avoid adverse impact on Bank AMA programs, particularly with respect to CFIs that are PFIs—that recognize the significant differences between the Banks' businesses and purposes and those of the Enterprises.

Each Bank is a cooperative owned by financial institution members that act as both owners and customers of the cooperative. Members, as owners, are entitled to receive shares of the cooperative's earnings and access to the cooperative's products and services, including the AMA programs. A Bank is authorized to serve only members of its cooperative, and, as discussed above, its primary business is providing advances to its members.

Fannie Mae and Freddie Mac have been owned by investors through their holdings of preferred or common stock shares since 1968 and 1989, respectively. An Enterprise's primary business is securitizing mortgages originated by financial institutions, and guaranteeing the timely payment of principal and interest on the mortgage-backed securities (MBS). The Enterprises also purchase mortgages for their mortgage portfolios. FHFA has instructed the Enterprises to significantly reduce the size of their mortgage portfolios over time. The Banks are restricted to purchasing loans from their members, most of which are regulated depositories. By contrast, the Enterprises have access to a broad, nationwide network of financial institutions from which they purchase mortgages. Also, unlike the Banks, for which participation in the AMA is an elective activity, the fundamental statutory purpose of the Enterprises is to bring stability in the secondary market for residential mortgages by purchasing and making commitments to purchase residential mortgages. See 12 U.S.C. 1451 note; 12 U.S.C. 1716.

The Banks' and Enterprises' different ownership structures and associated statutory restrictions in the Bank Act and the Federal National Mortgage Association Charter Act and the Federal Home Loan Mortgage Corporation Act (together, the Charter Acts), respectively, have a significant impact on their respective mortgage purchase activities. The Enterprises' mortgage purchase activities are substantially greater than that of the Banks. In calendar year 2009, the Banks' combined number of single-family mortgage purchases was slightly over 48,000, while Fannie Mae purchased approximately 3.51 million single-family mortgages and Freddie Mac purchased approximately 2.42 million single-family mortgages. The disparity between the Banks' and Enterprises' mortgage purchase businesses was great even during the peak years of the AMA programs. In 2003, the Banks purchased approximately 606,000 single-family mortgages, which was only 4.3 percent of the approximately 14.02 million single-family mortgages purchased by the Enterprises in that year (see Figure 1).

II. Proposed Rule

On May 28, 2010, FHFA published in the Federal Register a proposed rule to establish new housing goals for the Banks. The 45-day comment period closed July 12, 2010. See 75 FR 29947 (May 28, 2010). FHFA received a total of 9 comment letters on the proposed rule. Five of the comment letters were from Banks, one was from a not-for-profit organization, two were from trade associations, and one was from a corporation.

FHFA has considered all of the comments on the proposed rule and has determined to adopt a final rule that is substantially the same as the proposed rule. The comments are discussed below in the Analysis of Final Rule section. Comments that raised issues beyond the scope of the proposed rule are not addressed in this final rule, but may be considered by FHFA at a future date.

III. Applicability of Bank Housing Goals to 2011 and Beyond

HERA requires FHFA to establish 2009 and 2010 interim target housing goals for the Banks that facilitate an orderly transition and are consistent with those of the Enterprises. In order to facilitate an orderly transition, the final rule establishes housing goals for 2011 and beyond. The Banks' unique ownership structure and mission is such that FHFA needed to add criteria to the Bank housing goals that are not necessary for those of the Enterprises, and FHFA required additional time to develop those criteria. The Banks' administrative and monitoring challenges will be reduced by enabling the Banks to establish policies and procedures to meet the housing goals requirements with the knowledge that these requirements will not be changed the following year. FHFA believes this approach will facilitate an orderly transition to housing goals.

IV. Summary of Final Rule

A. Market-Based Housing Goals

Consistent with the proposed rule, the final rule establishes market-based single-family housing goals for the Banks in a manner largely consistent with the market-based single-family housing goals for the Enterprises. Separate goals are established for AMA-approved mortgages on owner-occupied single-family housing. The goals for purchase money mortgages separately measure performance on purchase money mortgages for low-income families, for families in low-income areas, and for very low-income families. The goal for refinancing mortgages measures performance on refinancing mortgages for low-income families.

The final rule does not establish benchmark levels to measure the Banks' housing goals performance. The Banks' performance under the housing goals will be measured relative to the actual goals-qualifying shares of the district-level primary mortgage market during the year in their districts. FHFA will calculate the actual goals-qualifying shares of the market using all mortgages originated in the geographic boundaries of each Bank district (meaning that the properties securing the mortgages are located in the district), including mortgages originated both by members and non-members.

A Bank meets a housing goal if its annual performance meets or exceeds the actual share of the market in that district that fits the criteria for a particular housing goal for that year. A Bank fails to meet a housing goal if it falls short of the actual market share for that goal in that year. All mortgages purchased by a Bank that meet the requirements of the final rule will count toward the Bank's goal performance, regardless of where the properties securing the mortgages are located, but the market share against which the Bank's performance will be evaluated will be the market share of mortgages secured by properties located in the district, as described above. The housing goals do not apply to an individual Bank unless it has exceeded the $2.5 billion volume threshold.

B. Volume Threshold

Consistent with the proposed rule, the final rule establishes a dollar volume threshold of $2.5 billion that a Bank's total unpaid principal balance (UPB) of AMA-approved mortgage purchases in a given year must exceed before the Bank is subject to the housing goals. The volume threshold recognizes the Banks' unique mission and ownership structure and the current status of the AMA programs, specifically, their mission to provide liquidity to their members.

V. Analysis of Final Rule

A. Definitions—§ 1281.1

The final rule sets forth definitions applicable to the Bank housing goals provisions. A number of the definitions are the same as those applicable to the Enterprise housing goals, and other definitions were modified to reflect their applicability to the Banks' AMA programs.

“Designated disaster area.” The definition of “families in low-income areas” includes families with incomes at or below 100 percent of area median income (AMI) who reside in “designated disaster areas.” The final rule defines “designated disaster area” as any census tract that is located in a county designated by the Federal Government as adversely affected by a declared major disaster administered by the Federal Emergency Management Agency (FEMA), where individual assistance payments were authorized by FEMA. In order to remain consistent with the revised definition in the final 2010-2011 Enterprise housing goals rule, the final Bank housing goals rule definition does not include the proposed requirement that average damage severity, as reported by FEMA, exceed $1,000 per household in a census tract.

Disaster areas are declared when an area is adversely affected by some unforeseen event. However, not all disasters impact housing to the same degree, and the severity of the impact varies within the declared area. Presidential Major Disaster Declarations are defined by FEMA at the county level in the area affected by the major disaster and can be declared to be eligible for public assistance, individual assistance, or both. Public assistance is available to local governments for the repair, replacement, or clean-up of public infrastructure. Individual assistance is broken down further into two categories, housing needs and “other than housing needs.” Housing needs include repair, replacement, and construction of homeowner residences. Consistent with the proposed rule and with the Community Reinvestment Act (CRA), the final rule limits the definition of “designated disaster areas” to those counties eligible for individual assistance.

For purposes of complying with CRA, regulators have made the determination that “[e]xaminers will consider institution activities related to disaster recovery that revitalize or stabilize a designated disaster area for 36 months following the date of designation. Where there is a demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended.” To accommodate the Banks' business planning requirements, for purposes of the low-income areas housing goal, the final rule, consistent with the proposed rule, will treat a designated disaster area as effective beginning on the January 1 after the FEMA designation of the county and continuing through December 31 of the third full calendar year following the FEMA designation. If data are available in a particular case to support treatment as a designated disaster area from an earlier date or for a longer period of time, FHFA may provide for such treatment by notice to the Banks.

“Families in low-income areas.” Consistent with the proposed rule, the definition of “families in low-income areas” in the final rule includes families with incomes at or below 100 percent of AMI who reside in “minority census tracts,” which is defined by the Safety and Soundness Act to mean a census tract that has a minority population of at least 30 percent and a median family income of less than 100 percent of AMI. 12 U.S.C. 4502(29). In addition, the definition of “families in low-income areas” includes families with incomes at or below 100 percent of AMI who reside in “designated disaster areas.”

“Mortgage.” Consistent with the proposed rule and the final Enterprise 2010-2011 housing goals rule, the definition of “mortgage” in the final rule does not include personal property manufactured housing loans. Therefore, any purchases of personal property manufactured housing loans will not qualify for credit under the Bank housing goals.

“Mortgage purchase.” Consistent with the proposed rule, the final rule defines “mortgage purchase” as a transaction in which a Bank bought or otherwise acquired a mortgage. The Banks commented that the phrase “otherwise acquired a mortgage” is overly broad and could be read to include the Banks' Affordable Housing Program (AHP) and collateral received from members. The Banks requested that FHFA clarify the definition to mean a transaction in which a Bank bought or otherwise acquired a mortgage pursuant to the Bank's authority under the AMA regulation. The final rule does not limit the definition of “mortgage purchase” to mean only purchases of AMA-approved mortgages, because the types of mortgage purchases that are covered by the Bank housing goals are set out in § 1281.11. That section provides that the Bank housing goals are limited to purchases of AMA-approved mortgages.

“Refinancing mortgage.” Consistent with the final Enterprise 2010-2011 housing goals rule, the definition of “refinancing mortgage” in the final Bank housing goals rule provides that changes to a loan as a result of a workout agreement generally will not be treated as a separate refinancing mortgage. The proposed Bank housing goals rule did not address workout agreements in the definition “refinancing mortgage,” but the provision is included in the final rule to maintain consistency with the long-standing definition of “refinancing” under the Enterprise housing goals.

B. Housing Goals—Proposed §§ 1281.10 and 1281.11

General. Consistent with the proposed rule, § 1281.10 of the final rule provides an overview of the contents of this subpart. FHFA will evaluate Bank performance under the housing goals established for 2010 on a calendar year basis.

Volume Threshold. Consistent with the proposed rule, § 1281.11(a) of the final rule establishes a volume threshold that will trigger application of the housing goals to a Bank. Specifically, a Bank that in a calendar year purchased AMA-approved mortgages with a total UPB greater than $2.5 billion will be subject to the housing goals for that year, a threshold that FHFA selected as one which would result in goals being applied to substantial AMA programs, of a size that a number of Banks have operated in the past, while enabling small programs, which might serve as mortgage sales outlets for CFIs, to operate without compliance burdens that might cause them to be abandoned. To illustrate the magnitude of this volume threshold, it is currently equal to approximately 0.25 percent of the overall single-family market, which equaled $986 billion (approximately $1.0 trillion). (FHFA arrived at this estimate of the size of the market by using 2008 HMDA mortgage origination data to calculate the total UPB of conforming, first lien mortgages originated in 2008 that were secured by owner-occupied, single-family residences. Mortgages for home improvement and Home Ownership and Equity Protection Act (HOEPA) mortgages were excluded to be consistent with the market estimate approach for the Enterprise housing goals.) Looking at this threshold another way, assuming that the average UPB of the mortgages a Bank purchases equals $200,000, a Bank would need to purchase only 12,500 mortgages in a given year to meet the volume threshold. In FHFA's view, below this threshold it would be challenging for Banks to ensure that the small numbers of AMA mortgages purchased—in transactions that the Banks do not themselves initiate—are representative of the market and include sufficient affordable mortgages to meet housing goals.

FHFA requested comment on whether a volume threshold should apply, whether the proposed volume threshold of $2.5 billion is appropriate, whether a higher or lower threshold should apply, and whether the volume threshold alternatives discussed in the proposed rule or any other alternatives might be used. The Banks recommended establishing a volume threshold at $5.0 billion, or on a sliding scale up to $5 billion, if the Bank met specified qualitative factors that serve the Banks' housing mission, such as a Bank's purchase of Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) mortgages and its use of Bank AHP funds in conjunction with AMA mortgage purchases. The Banks stated that applying a higher threshold to Banks that met such qualitative measures would encourage the Banks to be accountable to their housing mission. The Banks also recommended that mortgages purchased from CFIs be excluded when determining whether a Bank exceeded the volume threshold. Finally, the Banks commented that because a Bank may not know until the fourth quarter whether it will exceed the volume threshold that year, the housing goals should apply to a Bank only in the year following the year for which the Bank exceeded the volume threshold.

A trade association recommended establishing a volume threshold of 6,000 AMA-approved mortgages purchased annually. Assuming that the average UPB of the mortgages a Bank purchases equals $200,000, the volume threshold would be equivalent to $1.2 billion. A not-for-profit organization recommended that there be no volume threshold.

FHFA has considered the comments on the proposed $2.5 billion volume threshold and concluded that this volume threshold will adequately balance the Banks' missions to support affordable housing and to provide liquidity to CFIs. The volume threshold is intended in part to ensure that Banks with significant AMA volume in any year are subject to the housing goals. For that reason, the Bank housing goals will apply in the same calendar year for which a Bank exceeded the volume threshold. In determining whether the proposed $2.5 billion is an appropriate level for the volume threshold, FHFA considered the volume of mortgages purchased by the Banks over the past decade. From 2002 to 2004, when the Banks had their largest presence in the national market, a number of Banks had annual volumes of AMA-approved mortgages greater than $2.5 billion: seven Banks in 2002, eight Banks in 2003 and four Banks in 2004. A significant percentage of Banks' annual volume of AMA-approved mortgage purchases exceeded $5.0 billion in 2002 and 2003: four Banks in 2002 and seven Banks in 2003. Annual volumes of AMA-approved mortgages were significantly lower from 2005 to 2009. Although a few Banks had annual volumes exceeding $2.5 billion during that period, none of the Banks exceeded an annual volume of $5.0 billion. (See Table 1.)

Based on this analysis of the volume of the Banks' AMA-approved mortgage purchases, a volume threshold of $2.5 billion is mid-way between the higher volume threshold of $5.0 billion and housing goals that would apply without regard to the volume of mortgages purchased by the Bank. Increasing the volume threshold above $2.5 billion would unnecessarily reduce the likelihood that a Bank would be subject to housing goals in the future and would not meet the intent of Congress that the Banks be subject to housing goals, as reflected in HERA.

The volume threshold is also intended to ensure that Banks with a relatively low annual volume of purchases of AMA-approved mortgages, i.e., $2.5 billion or less, can continue to serve CFIs without being subject to the housing goals. Several Banks offer their AMA programs as a service to CFIs, which is consistent with their mission to provide liquidity to their members. FHFA set the volume threshold at an amount that would ensure that the housing goals would not cause the Banks that offer AMA programs primarily to service CFIs to discontinue their programs. The AMA programs are an important source of liquidity for such CFIs, and the discontinuance of an AMA program could adversely impact CFIs, such as those in rural areas, that may have limited or no access to the secondary market because of the higher per-mortgage sales cost associated with delivering a relatively small number of mortgages to purchasers, or the inability of these CFIs to meet purchasers' mortgage servicing requirements. Because the volume threshold already limits the impact of the housing goals on a Bank with an AMA program focused on its small members, the final rule does not exclude mortgages purchased from CFIs from counting for purposes of the volume threshold.

Market-Based Housing Goals. Consistent with the proposed rule, § 1281.11(b) of the final rule provides that compliance with the housing goals will be measured by comparing a Bank's performance with the actual goals-qualifying shares of the primary market during the year in the Bank's district. Under this retrospective, market-based approach, FHFA will calculate the actual goals-qualifying shares of the district-level primary mortgage market during the year using all mortgages originated in the geographic boundaries of each Bank district (meaning that the properties securing the mortgages are located in the district), including mortgages originated both by members and non-members. The Enterprise housing goals rule includes both this market-based approach and specific benchmark housing goal levels for the Enterprises. Under the Bank housing goals rule, a Bank's performance will not be measured against specific benchmark levels. Several provisions in the Enterprise housing goals rule that relate to the benchmark housing goal levels have been omitted from the Bank housing goals rule as unnecessary in light of the retrospective, market-based approach.

As noted in the proposed rule, FHFA believes that the advantages of comparing the Bank's performance to actual market performance outweigh the disadvantages. A more detailed discussion of the market-based approach is included in the final Enterprise 2010-2011 housing goals rule. See 75 FR at 55896-55898. The market size analysis used to establish the benchmark levels for the Enterprise housing goals does not reflect differences between the various Bank districts. The difficulties in accurately predicting the size of the market for each housing goal in each Bank district make it impractical to set meaningful annual benchmark levels for each Bank.

A disadvantage of the market-based approach is that public information on the goal-qualifying shares of the single-family primary mortgage market is not available until the release of Home Mortgage Disclosure Act (HMDA) data in late summer of the following year. However, a Bank that is subject to the housing goals will be active in the mortgage market in its district and hence positioned to understand how its performance is likely to compare to the overall market in its district.

In the proposed rule, FHFA discussed other possible alternatives for measuring market size that had been considered and rejected. The Banks recommended using a market measurement that is limited to mortgages that are similar to the types of mortgages a Bank might purchase under its AMA program, namely, prime, fixed rate, fully amortizing mortgage loans that are originated by regulated depository institutions in the member's district and that are intended for sale in the secondary market. However, FHFA has determined that a more inclusive measurement of the market will provide a better basis for evaluating the extent to which a Bank's purchases under its AMA program address mortgage credit needs in the Bank's district.

The Banks also recommended that mortgages purchased from CFIs be excluded from consideration under the Bank housing goals because such mortgages are not represented in the HMDA data used to measure the size of the market. The Banks recommended that such loans also be excluded when determining whether a Bank exceeded the volume threshold and when measuring a Bank's actual performance under the housing goals. The final rule does not exclude mortgages purchased from CFIs from consideration under the housing goals. As discussed above, the volume threshold already limits the impact of the housing goals on a Bank with an AMA program focused on its small members. In addition, removing all mortgages purchased from CFIs from consideration under the housing goals would lead to an inaccurate measure of the extent to which a Bank's purchases of AMA-approved mortgages meet the housing goals.

Consistent with the proposed rule, the final rule does not establish benchmark levels to measure the Banks' performance under the housing goals. FHFA requested comment on whether it would be appropriate to establish benchmark levels as a means of measuring the Banks' housing goals performance, in addition to measuring performance based on a Bank's actual share of goal-qualifying mortgages relative to its district-level market share, and if so, whether it would be appropriate to set benchmark levels for the Bank housing goals equal to the benchmark levels for the Enterprise housing goals. The comments did not specifically address establishing benchmark levels for the Banks, although a trade association suggested that the Banks should be encouraged to exceed the market share.

FHFA has concluded that it would be inappropriate to set benchmark levels for the Banks equal to the benchmark levels for the corresponding Enterprise housing goals, because the Enterprise benchmarks are based on national mortgage market estimates and no Bank has an AMA program with a national scope. In addition, FHFA has concluded that setting benchmark levels based on district-level market size estimates would be inappropriate because the market sizes cannot be reliably estimated in advance.

Section 1281.11(b) establishes criteria for determining the size of the market for each Bank district based on HMDA data on mortgages secured by property located in that Bank district. The criteria for establishing the size of the market reflect the types of mortgages that will count for purposes of the housing goals and that are typically eligible for purchase by a Bank. The criteria are the same as those in the proposed rule except for the definition of higher-priced loan to be used in the measurement of market size. The proposed rule would have excluded from the measurement of the market any mortgages with rate spreads of 300 basis points or more above the applicable Average Prime Offer Rate (APOR) reported under HMDA. Consistent with the definition in the final Enterprise 2010-2011 housing goals rule, for purposes of measuring the market for each Bank district, mortgages with rate spreads of 150 basis points above the applicable APOR reported under HMDA will be excluded. The 150 basis point rate spread is consistent with the definition of higher-priced loan used by the Federal Reserve Board.

Bank Housing Goals. Consistent with the proposed rule, § 1281.11(c) through 1281.11(f) of the final rule establishes four single-family housing goals applicable to any Bank that exceeds the volume threshold in a particular year. Goals are established for purchase money mortgages for low-income families, for families in low-income areas, and for very low-income families. In addition, a goal is established for refinancing mortgages for low-income families. The single-family housing goals will be based on an evaluation of the Bank's performance relative to the market for each housing goal in each year. The Banks have not been approved to purchase multifamily loans under the AMA programs. Accordingly, unlike the new Enterprise housing goals, the Bank housing goals do not include a multifamily special affordable housing goal or multifamily special affordable housing subgoal.

Two commenters recommended expanding the coverage of the Bank housing goals beyond the scope of the Enterprise housing goals. A not-for-profit organization recommended that FHFA give Bank housing goals credit for rental units in single-family properties, stating that such units provide an important source of affordable housing. A trade association suggested that FHFA consider adding a neighborhood goal for refinance lending, in addition to the borrower goal. In order to remain consistent with the Enterprise housing goals, the final rule does not alter the basic structure of the proposed Bank housing goals. The Bank housing goals do not include any investor-owned single-family properties, and they do not provide additional credit for any rental units in owner-occupied single-family properties. The Bank housing goals also do not include a separate goal for refinancing mortgages in low-income areas.

In contrast to the new Enterprise housing goals, the Bank housing goals also do not include a low-income areas subgoal. Because the Bank housing goals do not include benchmark levels set prospectively, there is no need for a separate subgoal to address the unpredictable impact designated disaster areas may have from year to year.

C. General Counting Requirements—§ 1281.12

Consistent with the proposed rule, § 1281.12 of the final rule sets forth general requirements for the counting of Bank AMA-approved mortgage purchases toward the achievement of the housing goals. Performance under the housing goals will be evaluated based on the percentage of all AMA-approved mortgages on single-family, owner-occupied properties purchased by a Bank that meet a particular goal.

As proposed, § 1281.12(a) of the final rule provides that performance under each of the single-family housing goals shall be measured using a fraction that is converted into a percentage. Neither the numerator nor the denominator shall include Bank transactions or activities that are not AMA-approved mortgage purchases as defined by FHFA or that are specifically excluded as ineligible under § 1281.13(b). The numerator is the number of AMA-approved mortgage purchases of a Bank in a particular year that finance owner-occupied single-family properties that count toward achievement of a particular housing goal. The denominator is the total number of AMA-approved mortgage purchases of a Bank in a particular year that finance owner-occupied, single-family properties.

As proposed, § 1281.12(b) of the final rule provides that when a Bank lacks sufficient data or information, e.g., income of mortgagor, to determine whether the purchase of a mortgage counts toward achievement of a particular housing goal, that mortgage purchase shall be included in the denominator for that housing goal, but may not be included in the numerator. The Banks may not use missing data estimation methodologies, as used by the Enterprises, in light of the complexity of developing an estimation methodology suitable for the Banks. FHFA invited comment on whether a method for estimating missing affordability data would be feasible for the Bank housing goals but did not receive comments on this issue.

The provisions in § 1281.12(c) through (f), which address credit toward multiple goals, application of median income, sampling and newly available data, respectively, are consistent with the provisions in the proposed rule and the final Enterprise 2010-2011 housing goals rule.

The MPF program allows Banks to purchase a percentage of a mortgage or mortgage pool initially acquired by another Bank under the program. As discussed in the proposed rule, for purposes of receiving credit under one of the housing goals, each mortgage will be assigned to the Bank that initially acquired the mortgage regardless of whether an interest in the mortgage was later sold to another Bank.

In September 2008, FHFA approved the Chicago Bank's request to establish the MPF Xtra program, under which the Bank would buy certain qualified, conforming mortgages from eligible members for immediate sale to Fannie Mae. As discussed in the proposed rule, the MPF Xtra program is not an AMA program authorized under 12 CFR part 955. Under the MPF Xtra program, the Bank serves essentially as a conduit or intermediary with respect to the sale of the mortgages to Fannie Mae. The mortgages may be counted by Fannie Mae toward compliance with its housing goals. If the mortgages were also to be considered for purposes of the Bank housing goals, double-counting of the mortgages could occur. Avoiding double-counting of mortgage purchases is consistent with the Enterprise housing goals. An Enterprise cannot receive credit towards a housing goal for a mortgage purchase if the other Enterprise received credit for that mortgage. Additionally, under the Enterprise housing goals, credit towards a housing goal is only awarded for a mortgage where the Enterprise purchases the mortgage or assumes the credit risks associated with the mortgage. The Bank does not fund MPF Xtra mortgages or assume any credit risks in MPF Xtra transactions. For these reasons, under the final rule, mortgages purchased by a Bank pursuant to the MPF Xtra program will not be considered for purposes of the Bank housing goals.

D. Special Counting Requirements—§ 1281.13

Consistent with the proposed rule, § 1281.13 of the final rule sets forth special counting requirements for the receipt of full, partial or no credit for a transaction toward achievement of the housing goals, a number of which are discussed further below.

Section 1281.13(b) specifies the types of transactions that shall not be counted for purposes of the housing goals and shall not be included in the numerator or the denominator in calculating a Bank's performance under the housing goals. The intent of this section is to specify the counting treatment for transactions in which the Banks are authorized to engage under the approved AMA programs. The counting rules do not purport to authorize the purchase of any types of mortgages, but are intended solely to indicate whether such mortgages shall receive full, partial or no credit toward the housing goals. Accordingly, transactions in which the Banks are not authorized to engage under the approved AMA programs are not included in paragraph (b). The Bank counting rules differ in some respects from the counting rules for the Enterprise housing goals. For example, the Banks are not authorized to purchase private label securities (PLS) under the AMA programs; therefore it is not necessary to exclude PLS from counting under the Bank housing goals. On the other hand, while the Banks are authorized to purchase non-conventional loans under the AMA authority, such loans are excluded from counting under the Enterprise housing goals and, therefore, have been excluded from counting under the Bank housing goals as well.

Section 1281.13(b) of the final rule makes clear that where a mortgage falls within one of the categories excluded from consideration under the housing goals, the mortgage shall be excluded even if it otherwise falls within one of the special counting rules in § 1281.13(c). For example, a non-conventional mortgage that would be excluded from consideration pursuant to § 1281.13(b)(1) cannot be counted even if it otherwise counts as a seasoned mortgage under § 1281.13(c)(2).

Home Equity Conversion Mortgages. Section 1281.13(b)(1) of the final rule excludes the purchases of all non-conventional single-family mortgages, including Home Equity Conversion Mortgages (HECMs), from counting towards the Banks' housing goals—that is, such purchases shall be excluded from both the numerator and denominator in calculating goal performance. This is consistent with the counting treatment for the new Enterprise housing goals, as HERA amended section 1332(a) of the Safety and Soundness Act to restrict the Enterprise single-family housing goals to include only conventional mortgages. See 12 U.S.C. 4562(a).

Mortgages financing secondary residences. Section 1281.13(b)(6) of the final rule prohibits the counting of mortgage purchases to the extent they finance any dwelling units that are secondary residences. This is consistent with the counting treatment for the new Enterprise housing goals, as HERA amended section 1332(a) of the Safety and Soundness Act to restrict the Enterprise single-family housing goals to include only purchases of owner-occupied mortgages. See 12 U.S.C. 4562.

Subordinate liens. Section 1281.13(b)(8) of the final rule excludes the purchases of subordinate lien mortgages (second mortgages) from counting towards the Banks' housing goals. HERA amended section 1331 of the Safety and Soundness Act to provide that the Enterprise single-family housing goals are limited to purchase money or refinancing mortgages. See 12 U.S.C. 4561. Consistent with the counting treatment for the new Enterprise housing goals, the Bank housing goals exclude home equity loans from counting for purposes of the housing goals. The Bank housing goals also exclude other subordinate lien mortgages, such as “piggy-back” loans that may be acquired by a Bank along with the corresponding first lien mortgage. Subordinate lien mortgages are excluded because it is difficult to determine whether such loans are purchase money loans or home equity loans, and because first lien mortgages provide a better measure of a Bank's support for residential housing.

Previously counted mortgages. Section 1281.13(b)(9) of the final rule prohibits the counting of mortgages toward performance under the housing goals if the mortgages have previously been counted for purposes of the performance of the Bank under the housing goals. In order to limit excessively burdensome recordkeeping that could result, the rule makes clear that this limitation only extends back for five years. Although the Banks have not previously been subject to housing goals, this language is included for applicability in future years.

Construction-to-permanent loans. Section 1281.13(b)(10) of the final rule excludes purchases of mortgages secured by properties that have not been approved for occupancy from consideration for purposes of the housing goals.

Housing goals credit for certain transactions. Section 1281.13(c) of the final rule provides that certain types of transactions shall be counted for purposes of the housing goals, including mortgages on cooperative housing and condominium units, seasoned mortgages, and refinancing mortgages. Section 1281.13(c) does not include certain types of transactions that are eligible for housing goals credit under the Enterprise housing goals, including credit enhancements for goal-qualifying mortgages, entering into risk sharing agreements with federal agencies to finance qualifying mortgages, and purchasing mortgage revenue bonds backed by qualifying mortgages. Such transactions are not eligible for Bank housing goals credit because of the more limited scope of the approved AMA programs. Section 1281.13(c) makes clear that where a transaction falls under more than one of the special counting rules in § 1281.13(c), all of the applicable requirements must be satisfied in order for the loan to be counted for purposes of the housing goals.

HOEPA mortgages and mortgages with unacceptable terms and conditions. Consistent with the proposed rule, § 1281.13(d) of the final rule provides that HOEPA mortgages and mortgages with unacceptable terms and conditions must be counted in the denominator as mortgage purchases but may not be counted in the numerator, regardless of whether the mortgages would otherwise qualify based on the affordability and other counting criteria. This treatment is consistent with past practice for the Enterprises and with section 1332(i) of the Safety and Soundness Act, as amended by HERA, which provides that no credit may be given for mortgages that FHFA determines are “unacceptable or contrary to good lending practices.” 12 U.S.C. 4562(i).

The proposed rule defined “mortgages with unacceptable terms or conditions” to include mortgages with excessive fees or interest rates, as well as mortgages with prepayment penalties, mortgages sold with prepaid single-premium credit life insurance products, and mortgages originated using practices that violate fair lending laws or that are contrary to the Interagency Guidance on Nontraditional Mortgage Product Risks (71 FR 58609) (Oct. 4, 2006), the Interagency Statement on Subprime Mortgage Lending (72 FR 37569) (July 10, 2007), or similar guidance subsequently issued by federal banking agencies.

A trade association commented that FHFA should strengthen the terms and conditions that constitute unacceptable mortgages, and recommended the use of Regulation Z and HOEPA rather than interagency guidance to determine whether a mortgage is eligible to be counted under the housing goals. The final rule does not change the proposed definition of “mortgages with unacceptable terms or conditions.” While the final rule specifically references interagency guidance on subprime and nontraditional loans, FHFA expects the Banks to ensure that mortgage loans they acquire comply with Regulation Z and HOEPA, as well as any federal law related to minimum standards for mortgages and predatory lending. As markets and abusive practices evolve, FHFA may determine additional terms and conditions to be unacceptable.

FHFA guidance. Section 1281.13(e) of the final rule provides that FHFA may provide guidance on the treatment of any transactions under the housing goals. The guidance may be provided in response to a request from a Bank, or at the initiation of FHFA.

Private label securities. As discussed in the proposed rule, because FHFA is counting only mortgages purchased through AMA programs in determining each Bank's housing goal performance, and the Banks are not authorized to purchase PLS through these programs, PLS will not be counted in determining a Bank's housing goals performance.

Housing finance agency obligations and other transactions. Consistent with the proposed rule, the final rule provides that only mortgages purchased through AMA programs will count in determining each Bank's housing goal performance. A trade association commenter recommended giving the Banks housing goals credit for Bank advances and investments, including transactions such as the purchase of housing finance agency (HFA) bonds, investment in housing-related bonds and tax credits, and advances to HFAs. The final rule does not expand the types of transactions that will receive credit under the housing goals to include transactions, such as purchases of HFA obligations, that are not AMA-approved mortgage purchases. Expanding the types of Bank transactions subject to housing goals beyond AMA-approved mortgage purchases would impede the ability of the Banks to make an orderly transition to the housing goals, because it would entail the Banks collecting information they may not currently collect, and for some Banks, modifying their activities involving HFAs.

E. Housing Goals Enforcement—§§ 1281.14 and 1281.15

Consistent with the proposed rule, § 1281.14 of the final rule provides that the Director shall determine whether each Bank has exceeded the volume threshold on an annual basis. For any Bank that has exceeded the volume threshold, the Director will also determine whether the Bank has met the housing goals, in accordance with the standards established under the Safety and Soundness Act, as amended by HERA. If the Director determines that a Bank has failed to meet any housing goal, the Director shall provide notice to the Bank in writing of such preliminary determination.

Consistent with the proposed rule, § 1281.15 of the final rule includes requirements for submission of a housing plan by a Bank for failure to meet any housing goal that is determined to be feasible by FHFA. The requirement to submit a housing plan is at the discretion of the Director.

F. Reporting Requirements—§§ 1281.20 Through 1281.23

As required for the Enterprises, and consistent with the proposed rule, §§ 1281.20 through 1281.23 of the final rule establish reporting requirements for the Banks with respect to their housing goals performance. Section 1281.21(a) requires the Banks to collect and compile computerized loan-level data on each AMA-approved mortgage purchased, as described in FHFA's Data Reporting Manual (DRM). These reporting requirements apply to each Bank, regardless of whether in a particular year the Bank expects to exceed the volume threshold and thus be subject to the housing goals.

Section 1281.21(b) requires each Bank to submit to the Director, on a semi-annual basis, a Mortgage Report containing aggregations of the loan-level mortgage data for year-to-date AMA-approved mortgage purchases, and year-to-date dollar volume, number of units, and number of AMA-approved mortgages on owner-occupied properties purchased that do, and do not, qualify under each housing goal. The loan-level data that must be reported are currently collected by FHFA on a semi-annual basis. As advances in technology have made more frequent submissions less burdensome, FHFA will consider quarterly reporting for the Banks in future years. Quarterly reporting would be consistent with the current requirements for the Enterprises. The additional data provided facilitates FHFA's monitoring of Enterprise performance under the housing goals. The Enterprises are also required to submit Annual Housing Activities Reports (AHARs) to FHFA. The final rule does not require the Banks to submit AHARs, but FHFA will consider requiring such reports in the future.

Consistent with the proposed rule, § 1281.22 of the final rule requires each Bank to provide to the Director such reports, information and data as the Director may request from time to time, or as may be supplemented in the DRM.

As proposed, § 1281.23 of the final rule sets forth the data integrity process for Bank housing goals data. The final rule requires the senior officer of each Bank who is responsible for submitting any report, data or other information for which certification is requested by the Director, to certify such report, data or information. FHFA will determine on an annual basis the official housing goals performance figures for any Bank that is subject to the housing goals, and may resolve any error, omission or discrepancy by adjusting the Bank's official housing goals performance figure. If the Director determines that the year-end data reported by a Bank for a year preceding the latest year for which data on housing goals performance was reported to FHFA contained a material error, omission or discrepancy, the Director may increase the corresponding housing goal for the current year by the number of mortgages that the Director determines were overstated in the prior year's goal performance.

FHFA will implement the data integrity process pursuant to its general regulatory authority over the Banks. FHFA expects that the Banks will work cooperatively with FHFA to identify and resolve any discrepancies or errors in the housing goals data reported to FHFA.

VI. Paperwork Reduction Act

The final rule does not contain any information collection requirement that requires the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final rule under the Regulatory Flexibility Act. The General Counsel of FHFA certifies that the final rule is not likely to have a significant economic impact on a substantial number of small business entities because the regulation is applicable only to the Banks, which are not small entities for purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1281

• Credit
• Federal home loan banks
• Housing
• Mortgages
• Reporting and recordkeeping requirements

Accordingly, for the reasons stated in the preamble, under the authority of 12 U.S.C. 1430c, FHFA amends chapter XII of title 12 of the Code of Federal Regulations, by adding new part 1281 to subchapter E to read as follows:

SUBCHAPTER E—HOUSING GOALS AND MISSION

PART 1281—FEDERAL HOME LOAN BANK HOUSING GOALS

Authority: 12 U.S.C. 1430c.

Subpart A—General

Subpart B—Housing Goals

Subpart C—Reporting Requirements