GSE Affordable Housing Goals

Dear Sir/Madam:

The undersigned national organizations representing local government elected officials and practitioners thank you for the opportunity to provide comments on the proposed rule regarding revised housing goals for Fannie Mae and Freddie Mac, the GSEs.

Increased Goals

We enthusiastically support the increased goals for the CSEs, from 42% to 48% in 2000 and to 50% for 2001-2003 for the low-and moderate income goal, from 14% to 18% in 2000 and 20% for 2001-2003 for the special affordable housing goal, and from 24% to 29% in 2000 and 31% for 2001-2003 for underserved areas. Both Fannie Mae and Freddie Mac have performed well since the early 1990s in either meeting or exceeding their affordable housing goals. By their own account, the GSEs can do more in expanding the availability of home mortgage and multifamily rental housing finance. As the proposed rule points out, new market opportunities exist for the GSEs, including small multifamily properties (5-50 units), single family rental projects, borrowers in the subprime market, manufactured housing, and seasoned affordable housing mortgages (Community Reinvestment Act-eligible loans)

We also generally support maintenance of the existing regulatory structure for goalsetting in the proposed rule, namely that the goals remain percentage-based, that a unit financed may count towards one or more goals, that the goals are the same for both Fannie Mae and Freddie Mac, and that the goals are set for a four-year period.

We do believe, however, that the recent success of the GSEs in meeting or exceeding their goals occurred during a booming economy. We do not believe that this track record can be sustained in the event of a significant downturn in the economy. Accordingly, there should be an explicit mechanism in the rule providing for an appropriate adjustment in the goals in such an event.

Bonus Points

We also support the approach of awarding bonus points to encourage the GSEs to increase their activity in underserved markets. According to the proposed rule, the GSEs would receive double weight for all three goals for mortgage purchases involving small multifamily properties (5 to 50 units) and small single family rental properties (2-4 units) exceeding 60% of the average qualifying units for the 1995-1999 period). In our view, it is quite appropriate to provide incentives for encouraging these types of investment. We recommend, however, that the GSEs be given 1.5 times, rather than 2 times, bonus credit for their activities in underserved areas in order to insure that there is a real increase in these activities,

In addition, we believe that the unit of measure for the GSE's activities in meeting the Special Affordable Multifamily Subgoal should be the number of mortgages acquired rather than the dollar amount or number of units covered by a mortgage. Due to their lack of efficiencies in scale, smaller multifamily buildings need private investment more than large multifamily projects. Counting by the volume of dollars and or units could encourage more GSE involvement in large multifamily projects, not smaller ones.

Goals Credit for Purchases of Tax-exempt Bonds and Tax Credits

We believe that the proposed rule should be modified to give the GSEs credit for purchasing tax-exempt single-and multifamily housing bonds issued by local and state housing agencies. Fannie Mae and Freddie Mac are significant purchasers of such bonds, together constituting approximately 25% of the market. Their purchase of these bonds enables cost savings to accrue to the issuing entity which can help in making housing more affordable, Further, the proceeds of these bonds support the provision of affordable ownership and rental housing for very low, low and moderate-income households, the very market at which the GSE goals are targeted

As background, first-time homebuyers assisted with the proceeds of tax-exempt Mortgage Revenue Bonds may have incomes not exceeding 115% of area median for households of three or more persons, or 100% of median income for households of less than three persons. In certain prescribed target areas the income limit increases to 140% of median in an effort to stimulate investment in distressed neighborhoods. Tax-exempt bonds for multifamily affordable housing likewise are targeted to very-low and low income households. To be eligible for such financing a project must have at least either 20% of its units set-aside for households at or below 50% of area median income or 40% of the units at 60% of median.

The measure of credit for the GSEs toward any or all of the goals would be the number of units assisted. In doing so, HUD should not look to whether the underlying mortgages are readily securitized by the Government National Mortgage Association or any other federal agency. Rather, it should view these purchases as furthering the requirement in Section 1335(2) of the FHEFSSA of 1992 requiring the GSEs to develop relationships with state and local governments, including housing finance agencies, to meet affordable housing goals.

The GSEs are also significant purchasers of Low-Income Housing Tax Credits. However, under the existing regulations, they do not get credit for such purchases. Like tax-exempt multifamily housing bonds, projects receiving credits must set-aside at least either 20% of their units for households at or below 50% of area median income or 40% at 50 percent. Again, the measure toward any or all of the goals would be the number of units assisted. In the case of a project financed with both bonds and the Tax Credit, credit towards meeting the goal(s) should only be counted once. This activity should viewed as furthering the requirement in Section 1335(2) of the FHEFSSA of 1992 requiring the GSEs to develop relationships with state and local governments, including housing finance agencies, to meet affordable housing goals

The GSEs should also be given full credit for purchases of single-and multifamily loans in Empowerment Zones and Enterprise Communities. These federally designated areas contain distressed neighborhoods in which reinvestment is being encouraged. The GSEs could be important partners in helping expand affordable housing opportunities in these areas. This activity should be viewed as furthering the requirement in Section 1335(2) of the FHEFSSA of 1992 requiring the GSEs to development relationships with state and local governments, including housing finance agencies, to meet affordable housing goals

Finally, the GSEs should be given full goal credit for actions taken to help maintain, in the affordable housing stock, projects with expiring Section 8 rent subsidy contracts. Such actions may include the restructuring or refinancing of mortgages and credit enhancements or risk sharing arrangements to modified Or refinanced mortgages. The GSEs could be very significant partners of Participating Administrative Entities (PAEs) under the "Mark-to-Market" program in protecting this vital, affordable housing stock. The measure of credit should be units. This activity should be viewed as furthering the requirement in Section 1335(2) of the FHEFSSA of 1992 requiring the GSEs to develop relationships with state and local governments, including housing finance agencies, to meet affordable housing goals

High Cost Mortgage Loans

We believe that there is a need for an increased role for the GSEs in the subprime market, i.e. to assist borrowers with impaired credit. Their presence there can standardize the mortgage lending process and bring cost savings to borrowers. The CSEs can also play a role in helping to protect borrowers from "predatory lending" practices by refusing to purchase loans in which borrowers are charged very high interest rates, excessive front end fees, negative amortization, and prepayment penalties, consistent with the guidance each has announced. Not only are predatory lending practices harmful to borrowers, they can be destructive of neighborhoods. The GSEs should get goals credit for purchasing subprime loans but not predatory loans, predatory loans should be defined as those with APR5 that exceed 5% above the yield on Treasury securities with comparable maturity to the transaction, fees and up-front points exceeding 4% of the loan, negative amortization, prepayment penalties, refinancing a borrower within 2 years of the last loan without benefit to the borrower (flipping), or lump sum credit life insurance requirements.

Intersection of the Risk-Based Capital Standards with the New Affordable Housing Goals

Under the proposed risk-based capital standards, the GSEs are required to put more capital aside for high loan-to-value loans than they otherwise would. This will have a direct effect on the ability of the GSEs to meet the higher affordable housing goals contained in the proposed rule. HUD should give careful consideration to achieving the proper balance between safety and soundness and the more aggressive goals required of the GSEs.

Thank you for your favorable consideration of our views.

Sincerely,

Association of Local Housing Finance Agencies
National Association of Counties
National Community Development Association
U.S. Conference of Mayors

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