Market

Table 4

Market/GSE Performance Comparisons for 2001 and 2002 By Race/Ethnicity
Market Analysis By Year of Loan Origination and

The symbols (-), (=), and (+) indicate direction of difference, if any, relative to the market.

Market percentages are for current-year mortgage originations, based on HMDA data. GSE percentages are for GSEs' mortgage purchases (including purchases of seasoned loans), based on GSE loan-level data provided annually to HUD. Because these ratios for the GSES include seasoned loans and the market ratios include only current-year mortgage originations, the GSE ratios tend to overstate the GSES' business shares in each category, compared to mortgage origination activity in a given year.

The analysis is limited to conventional conforming home purchase mortgages for owner-occupied 1-4 unit properties in Metropolitan Areas, excluding mortgages on second homes. Properties with missing race/ethnicity data are excluded from the analysis.

Table 5

First-time Homebuyer Mortgages* as a Share of All Conventional Conforming
Home Purchase Mortgages, for GSEs' Purchases and Market Originations

* The first-time homebuyer concept for the market analysis is homebuyers who have never owned a home. The concept for the GSES is purchasers who have not owned a home within the previous three years.

The market analysis is based on GSE, HMDA, and American Housing Survey data. Because the ratios for the GSEs include seasoned loans and the market ratios include only current-year mortgage originations, the GSE ratios tend to overstate the GSEs' business shares in each category, compared to mortgage origination activity in a given year.

Q.2.b. If you are able to definitively demonstrate such a difference between the GSE's and the private market exists, please describe why such a difference exists, considering that it is in GSE's financial interests to buy as many conventional loans as possible.

A.2.b. In the past, the GSE's generally focused on borrowers with traditional backgrounds and living in suburban settings, as Congress observed in the early 1990's: "Inadequate access to mortgage credit is a particular problem which results, in large part, from the vestiges of redlining and the unintended consequences of the Enterprises' orientation toward suburban and "plain vanilla" mortgages."1

The GSE's have made significant changes in their underwriting guidelines in recent years and, in conjunction with primary lenders, have introduced a variety of new products and programs for nontraditional buyers. Thus, major gains have been made by the GSE's in serving traditionally underserved borrowers and neighborhoods. However, HUD and others believe that additional steps could be taken by the GSE's, without damaging their safety and soundness, to reach out further to this market.

For example, research on the GSES' mortgage purchases has found that many of their goal-qualifying loans have rather low loan-to-value ratios. This has raised concerns that some nontraditional borrowers who are unable to make high downpayments are not able to obtain conventional loans that could be purchased by the GSE's, thereby forcing these borrowers to more expensive loans, such as FHA-insured loans. In this regard, there are indications that both GSE's understand the importance of improving access for borrowers with low downpayments. For example, Fannie Mae recently announced a plan for a joint venture with a mortgage insurer to increase such purchases.

Q.2.c. Why hasn't HUD updated the affordable housing goals yet using its current authority? When do you plan on updating them? A.2.c. HUD is currently working on establishing new affordable housing goals. However, determinations regarding the market share, upon which each goal is based are highly dependent upon current census data. Complete data from the 2000 census has only recently become available. HUD's regulations state that housing goals will remain in effect until such time as a new regulation is promulgated. The Department anticipates that new goals will be in place for 2005. With respect to rulemaking for affordable housing goals and other HUD regulatory responsibilities, it is important to remember that the Department has limited staff that it can devote to these regulatory activities, because it lacks the ability to fund its regulatory activities through assessments on the GSE's. Other financial regulators do have assessment authority. The Administration's proposal, which will establish a dedicated office and staff to carry out HUD's regulatory responsibilities and which will provide for funding based upon fee assessments on the GSE's, will markedly improve HUD's ability to carry out its functions.

1 Senate Report 102-282, May 1992, p.38.

Q.3.a. How does HUD currently define the difference between new programs and new activity and/or products?

A.3.a. HUD relies on the current statutory definition in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA), as well as its legislative history, in making determinations about what is subject to review as required under the FHEFSSA. Section 1303 of the FHEFSSA defines a "new program"

as

any program for the purchasing, servicing, selling, lending on the security of, or otherwise dealing in, conventional mortgages that (A) is significantly different from programs that have been approved under this Act or that were approved or engaged in by an enterprise before the date of the enactment of this Act [10/28/92]; or (B) represents an expansion, in terms of dollar volume or number of mortgages or securities involved, of programs above limits expressly contained in any prior approval.

The legislative history states that "[n]ew products or programs that differ from existing programs because of insignificant variations in mortgage characteristics, technical improvements, or those, generally, that represent recombinations of features used in existing programs need not be submitted for approval."2 There is no statutory definition or legislative history that differentiates "activities" from either "products" or "programs.'

Q.3.b. Is there a problem with this definition? Why or why not? A.3.b. The current definition is imprecise. It is often difficult to make the distinction between products and programs for regulatory purposes. Both GSE's have relied upon the imprecise language to determine for themselves that nearly all initiatives are either products, mortgage features, or other activities that do not fall within the meaning of "new programs" as defined in FHEFSSA. As a result, even though the current statute requires the GSE's to receive prior approval from HUD before instituting a new program, they rarely seek this approval.

Q.3.c. If there is a problem with this definition, how would you propose changing it?

A.3.c. The Administration is proposing the creation of a world-class regulatory office within the Treasury Department with authority over both safety and soundness and the review of new and ongoing activities of the Enterprises. The Administration's proposal for new activity review better delineates the scope of oversight authority by removing the definitional distinctions that have contributed to confusion and misunderstanding in the past.

Q.4.a. You sent the Congress legislative language that would give the HUD Secretary the authority to rescind housing goals that Congress has established for these companies by only giving 30 days notice. By my reading of this language, you could rewrite the goals set by Congress simply by determining in your opinion that there are other housing needs. Why does HUD need the power to rescind housing goals with 30 days notice?

A.4.a. The Administration's proposal would not authorize HUD to rescind housing goals upon a 30-day notice. Under the Administration's proposal, HUD may only establish, modify, or rescind a goal by regulation, with formal notice and comment. Therefore, if HUD

2 Senate Report 102-282, May 15, 1992, p.15.

rescinds a goal or establishes a new goal, it can only be done by notice and comment rulemaking.

A new goal would not become effective until at least a year after it was promulgated by a final rule, that is, following at least a 1year transition period. For example, a new goal established by a final rule promulgated on October 1, 2004, would be made effective on January 1, 2006.

Under the Administration's proposal, HUD could establish necessary implementation requirements for the transition, for example, procedures for reporting on the transitional goal or for applying the goal requirements. These transition requirements could be established by notice only after providing the GSE's at least 30 days to comment. The Administration's proposal is modeled on the transition language for establishing the goals under FHEFSSA. Accordingly, the 30-day period is only relevant to the GSEs' opportunity to comment on the establishment of transition requirements for goals established through rulemaking.

Q.4.b. In your testimony, you argued that there should be a new first-time homebuyer goal. Wouldn't such a goal damage the housing refinancing or multifamily markets? Why not?

A.4.b. Under the Administration's proposal, the Enterprises could continue to purchase any volume of multifamily and refinanced single family mortgages that they desire with no adverse impact on their ability to achieve a first-time homebuyer goal. The reason for this lies in the way goals are established and performance under them is calculated.

The Administration's proposal applies only to loans to buy homes that are purchased or securitized by the GSE's. There would not be a numerical target for the total number of home purchase loans, nor would there be a home purchase loan target in terms of the percentage of total GSE business that would be devoted to home purchase loans. Instead, the number of home purchase loans would be left to the business judgment of the GSE's. Whatever that number may be in a given year, some specified percentage of those loans would be for first-time homebuyers.

The performance of the Enterprises under this component would be calculated by dividing the number of home purchase mortgages that are for first-time homebuyers by the total number of home purchase mortgages acquired, including both first-time and repeat homebuyers. The inclusion of other types of mortgages in the calculation, such as refinance mortgages, would indeed cause a corresponding drop in the reported percentage of first-time home purchase mortgages acquired and could possibly deter the Enterprises from purchasing these types of mortgages. This is not what the Administration proposes.

Helping families become homeowners is an important public purpose of the GSE's, and home purchase loans are their "bread and butter" business. The housing goals do not now recognize the importance of homeownership. The Administration believes that they should.