Single Family Housing Loans, Payment Assistance, 8523-8543 [06-1349]
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8523
Proposed Rules
Federal Register
Vol. 71, No. 33
Friday, February 17, 2006
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
DEPARTMENT OF AGRICULTURE
Rural Housing Service
7 CFR Part 3550
Classification
RIN 0575–AC59
Single Family Housing Loans, Payment
Assistance
Rural Housing Service, USDA.
ACTION: Proposed rule.
AGENCY:
The Rural Housing Service
(RHS) proposes to amend its regulations
for Single Family Housing Loans. This
action proposes to amend only the
amount of payment assistance for which
a borrower qualifies. This action is
taken to improve distribution of
program benefits, simplify the
application process, and improve
customer service.
DATES: Written or e-mail comments
must be received on or before April 18,
2006.
ADDRESSES: You may submit comments
to this rule by any of the following
methods:
• Agency Web site: https://
www.rurdev.usda.gov/regs/. Follow the
instructions for submitting comments
on the Web site.
• E-Mail: comments@wdc.usda.gov.
Include the RIN number (0575–AC59) in
the subject line of the message.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Submit written comments via
the U.S. Postal Service to the Branch
Chief, Regulations and Paperwork
Management Branch, U.S. Department
of Agriculture, STOP 0742, 1400
Independence Avenue SW, Washington,
DC 20250–0742.
• Hand Delivery/Courier: Submit
written comments via Federal Express
Mail or another mail courier service
requiring a street address to the Branch
Chief, Regulations and Paperwork
Management Branch, U.S. Department
of Agriculture, 300 7th Street, SW., 7th
Floor, Suite 701, Washington, DC 20024.
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SUMMARY:
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All written comments will be
available for public inspection during
regular work hours at the 300 7th Street,
SW., address listed above.
FOR FURTHER INFORMATION CONTACT:
Michael S. Feinberg, Chief, Loan
Origination Branch, Rural Housing
Service, USDA, Ag Box 0783, Room
2214, 1400 Independence Avenue, SW.,
Washington, DC 20250–0783.
Telephone: 202–720–1474.
SUPPLEMENTARY INFORMATION:
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This rule has been determined to be
significant by the Office of Management
and Budget (OMB) under Executive
Order 12866 and has been reviewed by
OMB.
Regulatory Flexibility Act
In compliance with the Regulatory
Flexibility Act (5 U.S.C. 601–602), the
undersigned has determined and
certified by signature of this document
that this rule will not have a significant
economic impact on a substantial
number of small entities. This rule does
not impose any new requirements on
Agency applicants and borrowers and
the regulatory changes affect only
Agency determination of program
benefits for individual loans.
Environmental Impact Statement
This document has been reviewed in
accordance with 7 CFR part 1940,
subpart G, ‘‘Environmental Program.’’ It
is the determination of RHS that this
proposed action does not constitute a
major Federal Action significantly
affecting the quality of the human
environment, and in accordance with
the National Environmental Policy Act
of 1969, Public Law 91–190, an
Environmental Impact Statement is not
required.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (UMRA), Public
Law 104–4, establishes requirements for
Federal agencies to assess the effects of
their regulatory actions on State, local,
and tribal governments and the private
sector. Under section 202 of the UMRA,
the Agency generally must prepare a
written statement, including a costbenefit analysis, for proposed and final
rules with ‘‘Federal mandates’’ that may
result in expenditures to State, local, or
tribal governments, in the aggregate, or
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to the private sector, of $100 million or
more in any one year. When such a
statement is needed for a rule, section
205 of the UMRA generally requires the
Agency to identify and consider a
reasonable number of regulatory
alternatives and adopt the least costly,
more cost-effective or least burdensome
alternative that achieves the objectives
of the rule.
This rule contains no Federal
mandates (under the regulatory
provisions of Title II of the UMRA) for
State, local, and tribal governments or
the private sector. Therefore, this rule is
not subject to the requirements of
sections 202 and 205 of the UMRA.
Executive Order 13132
The policies contained in this rule do
not have any substantial direct effect on
States, on the relationship between the
national government and States, or on
the distribution of power and
responsibilities among the various
levels of government. Nor does this rule
impose substantial direct compliance
costs on State and local governments.
Therefore, consultation with the States
is not required.
Programs Affected
This program is listed in the Catalog
of Federal Domestic Assistance under
No. 10.410, Low Income Housing Loans.
Intergovernmental Consultation
For the reasons set forth in the final
rule related Notice to 7 CFR part 3015,
subpart V, this program is excluded
from the scope of Executive Order (E.O.)
12372, which requires
intergovernmental consultation with
State and local officials.
Civil Justice Reform
This proposed rule has been reviewed
under Executive Order 12988, Civil
Justice Reform. In accordance with this
Executive Order: (1) All State and local
laws and regulations that are in conflict
with this rule will be preempted, (2) no
retroactive effect will be given to this
rule, and (3) administrative proceedings
in accordance with the regulations of
the Agency at 7 CFR part 11 must be
exhausted before bringing litigation
challenging action taken under this rule.
Paperwork Reduction Act
The information collection
requirements contained in these
regulations have been approved by OMB
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under the provisions of 44 U.S.C.
chapter 35 and have been assigned OMB
control numbers 0575–0172 in
accordance with the Paperwork
Reduction Act. This proposed rule does
not revise or impose any new
information collection requirements
from those mentioned above.
GPEA Statement
RHS is committed to compliance with
the Government Paperwork Elimination
Act (GPEA), which requires Government
agencies, in general, to provide the
public the option of submitting
information or transacting business
electronically to the maximum extent
possible.
Background
The U.S. Department of Agriculture’s
(USDA’s) Rural Housing Service (RHS)
is proposing to revise the regulations for
Direct Single Family Housing Loans.
This action is being taken to improve
distribution of payment assistance
subsidies to its section 502 Single
Family housing direct loan program
borrowers and simplify the formula for
determining the level of payment
assistance granted to new borrowers.
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Economic Impact Analysis
USDA contracted for a study of its
payment assistance formula including
the development of alternatives. This
study is available for public inspection
during working hours at Room 2214,
1400 Independence Avenue, SW.,
Washington, DC 20250–0783.
Telephone: 202–720–1474. In its study
of alternatives to the current payment
assistance formula, RHS began with the
premise that a new payment assistance
formula must not increase the cost of
the program (be subsidy neutral) and
must serve the same target population.
These conditions assure that there
would be no significant economic
impact resulting from a revision of the
formula for payment assistance. The
program will continue to assist very
low- and low-income, rural residents to
improve their living conditions and
economic situation by building equity
through homeownership. Based on an
average loan in the range of $83,000 per
home, for each $1.0 billion in program
level, RHS provides financing for over
12,000 single-family homes. This
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investment is instrumental in creating
over 14,000 direct and indirect jobs.
Assuming an average salary of $20,000
per job created, $280 million in
purchasing power is generated.
Additionally, these jobs also generate
additional tax revenue for Federal,
State, and local governments, as well as
aid in the stabilization or
redevelopment of neighborhoods.
However, the proposed change will
affect the level of payment assistance
received by all new borrowers (in 2003
over 12,500) following the effective date
of the rule, and for that reason, the
proposed action has been determined to
be significant. The effect of the
proposed rule compared to that of the
current formula and the other
alternatives considered is discussed in
detail below.
Discussion
During fiscal year 2004, RHS studied
its payment assistance formula for the
Direct section 502 Single Family
Housing program and concluded that
changes were needed.
Current Formula
RHS administers the single-family
housing direct loan program authorized
in section 502 of the Housing Act of
1949, as amended (42 U.S.C. 1472). The
program provides loans to low- and very
low-income households to purchase
homes in rural areas, generally defined
as cities, towns, and unincorporated
areas with populations of 20,000 or
less.1 These loans provide financing at
reasonable rates and terms with no
down payment required.
Pursuant to section 502, eligible
families must be without adequate
housing and unable to obtain credit
through the private sector 2 but able to
afford the mortgage payments, taxes,
and insurance on the houses financed
by RHS. The interest rate on the loans
can be subsidized to as low as one
percent. Typically, the mortgage
payments require 24 to 30 percent of an
applicant’s income. Although a 38-year
term is available, most loans are issued
1 For the purposes of the section 502 program,
rural areas are statutorily defined in section 520 of
the Housing Act of 1949, 42 U.S.C. 1490 and its
implementing regulation, 7 CFR 3550.9.
2 Section 501(c) (42 U.S.C. 1471(c)).
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with a term of 33-years, and the majority
of homes initially financed by RHS are
refinanced through conventional
mortgages or repaid through property
sales within eight to ten years.
For loans made prior to 1995, RHS
subsidized using a program called
‘‘interest credit.’’ Borrowers made
monthly payments that were the greater
of (a) 20 percent of adjusted family
income; or (b) payments based on the
loan amortized at a one percent interest
rate. RHS provided interest credit to
make up the difference between this
amount and the amount of the payment
at the note rate.
One drawback of this method was that
it provided little incentive for borrowers
to shop for an inexpensive home since
the borrower’s payment did not increase
significantly as a result of a higher loan
amount. Another criticism was that it
was inequitable. For example, families
attempting to purchase inexpensive
homes were denied assistance if the
formula did not indicate principal,
interest, taxes, and insurance (PITI)
would exceed 20 percent of adjusted
income while borrowers who purchased
higher cost homes received the
maximum level of subsidy allowed.
As a result of these and other
limitations, RHS implemented a new
subsidy program effective October 27,
1995. Under this program called
‘‘payment assistance,’’ the subsidy for
each loan is based on the ratio of the
household’s annual adjusted income
(AAI) to the area median income (AMI),
a figure that the U.S. Department of
Housing and Urban Development (HUD)
publishes annually for all U.S. counties.
To be eligible for payment assistance,
household income must be within the
low-income limit, defined as 80% of
AMI. Once payment assistance is
granted, the household remains eligible
for payment assistance in accordance
with the formula below. The payment
assistance amount is the difference
between the note rate payment and the
greater of (a) the payment at an
equivalent interest rate and (b) the floor
payment.
The equivalent interest rate is derived
from a scale based on the ratio of the
borrower’s AAI to AMI, as described in
Exhibit 1 below:
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EXHIBIT 1.—EQUIVALENT INTEREST RATE SCALE
When the borrower’s adjusted income is
Equal to or more than
(percent)
But less than
Then the
equivalent interest rate is *
(percent)
0.0 .............................................................................................
50 ..............................................................................................
55 ..............................................................................................
60 ..............................................................................................
65 ..............................................................................................
70 ..............................................................................................
75 ..............................................................................................
80 ..............................................................................................
90 ..............................................................................................
100 ............................................................................................
110 ............................................................................................
50 percent of AMI ........................................................................
55 percent of AMI ........................................................................
60 percent of AMI ........................................................................
65 percent of AMI ........................................................................
70 percent of AMI ........................................................................
75 percent of AMI ........................................................................
80 percent of AMI ........................................................................
90 percent of AMI ........................................................................
100 percent of AMI ......................................................................
110 percent of AMI .......................................................................
or more than AMI .........................................................................
1
2
3
4
5
6
6.5
7.5
8.5
9.0
9.5
* Or note rate, whichever is less. In no case will the equivalent interest rate be less than 1 percent.
payment assistance for which he or she
qualifies, using the assumptions below:
Minimum per• Borrower Assumptions:
centage of AAI
Æ AAI: $19,000
that a borAAI as a percentage of AMI
Æ AMI: $30,000
rower must
pay for PITI
Æ Is the borrower eligible? Yes,
(percent)
because AAI is 63 percent of AMI and
the eligibility threshold is 80 percent.
0.0 percent to 50 percent .....
22
• Loan Assumptions:
50.01 percent to 65 percent
24
Æ Initial Principal Amount: $60,000
65.01 percent to 80 percent
26
Æ Loan Term: 33 Years
The following is the step-by-step
Æ Market Rate: 7 percent
process for determining a borrower’s
Æ Monthly Taxes and Insurance:
eligibility for payment assistance under
$90.00 (1.8 percent of Initial Principal/
the current formula, and the amount of
12 Months).
The floor payment is also based on
the ratio of the borrower’s AAI to the
AMI and is scaled to a minimum
percentage of income that a borrower
must pay for PITI.
Exhibit 2 shows this scale:
EXHIBIT 2.—FLOOR PAYMENT SCALE
EXHIBIT 3.—APPLICATION OF THE PAYMENT ASSISTANCE FORMULA USING THE ABOVE ASSUMPTIONS
Explanation
Calculation
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How Much Does the Borrower Pay to USDA for Principal and Interest
Cost?
The borrower pays the higher of the following two calculations:
First Calculation:
Based on the ratio of Borrower AAI to AMI (Exhibit 1), the borrower’s interest rate will be 4 percent, which equates to a
monthly payment of $273.00.
Second Calculation:
The Floor Payment for principal and Interest (This is the fixed percentage of borrower income or the minimum the borrower is required to pay to USDA).
Applicable floor payment percentage for PITI = 24 percent .............
Monthly Floor Payment = $380.
Monthly Floor Payment for principal and interest = $290 .................
The borrower pays at Floor Payment for principal and interest =
$290.
How much would the borrower pay at the Note Rate of 7%? $389
Payment Assistance received from USDA = $99 .............................
Recently, RHS began to examine
anecdotal evidence that suggested the
current formula caused anomalies in the
distribution of payment assistance to
borrowers, was complicated and
difficult to explain, and had other
unintended consequences, such as
encouraging borrowers to purchase
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Applicable Interest Rate at 63% AAI to AMI Ratio yields 4% equivalent
interest rate (from chart).
Initial Principal Amount $60,000 @4% for 33 years = $273.00.
Applicable percentage for 63% AAI to AMI ratio.
24% of AAI ($19,000) divided by 12 months.
PITI of $380 minus T&I of $90.
The higher of the two calculations.
$389 ($60,000 amortized @7% for 33 years).
$389 ¥ $290 = $99.
more expensive housing to qualify for
increased payment assistance.
RHS engaged a contractor with
extensive experience in Federal housing
programs and other lending programs
to:
• Assess the extent to which the
current formula results in unintended
treatment of borrowers;
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• Examine formulas used in other
mortgage assistance programs; and
• Develop a simpler and more
equitable alternative that would not
result in increased cost to the
Government but would continue to
serve the same target market.
RHS presented the findings and
preliminary alternatives to a panel of
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rural housing industry leaders and
obtained their feedback. RHS then
further analyzed two potential
alternatives to the current formula. The
results of these analyses follow.
Assessment Based on Historical and
Sensitivity Analyses
The assessment RHS commissioned
included a sensitivity analysis of the
factors that comprise the payment
assistance formula; a historical analysis
of 219,218 loans closed between
October 26, 1995 and November 5, 2003;
and research on other affordable singlefamily housing loan programs.
Affordable single-family programs
loans, and 151,107 of those were
analyzed. Leveraged loans were
analyzed and will be discussed
separately below because of the way the
Agency considers these loans for
payment assistance. The balance of the
non-leveraged loans were excluded
because of missing data. Of the 151,107
observations, 54 percent of the
borrowers have housing costs at or
below 26 percent of their AAIs.
Exhibit 4 presents loan characteristics
of borrowers based on payment
calculation methods: Effective interest
rate (EIR) and floor payment.
researched include programs offered by
the Department of Housing and Urban
Development, State agencies, and nongovernment entities. The historical
analysis summarized borrower and loan
characteristics and used the theoretical
findings of the sensitivity analysis to
evaluate whether borrowers with similar
income characteristics received different
levels of payment assistance. The results
of the historical analysis support the
theoretical findings of the sensitivity
analysis.
Summary of Loan Characteristics
Of the 219,218 loans, 70 percent
(152,830 loans) were non-leveraged
EXHIBIT 4.—KEY CHARACTERISTICS OF RHS 502 DIRECT LOAN BORROWERS (NON-LEVERAGED LOAN AGREEMENTS)
Payment calculation method
Count
Percent
of total
Average
AAI
Average
AMI
Average
AAI as
percent of
AMI
Average
EIR
Average
initial
principal
Average
borrower
contribution
Average
payment
assistance amt.
Average
borrower
PI portion
Average
borrower
PITI cost
with assist. as
percent of
AAI
EIR ........................................
Floor ......................................
95,248
57,582
62
38
$14,102
20,439
$38,348
41,080
38
50
1.61
2.09
$77,587
70,329
$260
310
$236
142
52
69
47
25
Total/Avg. .......................
152,830
100
16,489
39,377
42
1.79
74,852
279
201
58
39
The table shows that 62 percent of the
borrowers have principal and interest
payments based on the EIR. These
borrowers have lower annual adjusted
incomes, live in areas with lower area
median incomes, and have higher initial
principal amounts, all of which cause
their total housing cost to average 47
percent of their income, as opposed to
a portfolio average of 39 percent.
Conversely, borrowers with higher
incomes pay only 25 percent of their
incomes toward housing costs.
Historical and Sensitivity Analyses
Four factors determine the payment
assistance amount that RHS Single
Family housing direct loan program
borrowers receive: (1) AMI, (2)
borrower’s AAI, (3) the initial principal
amount of the loan, and (4) taxes and
insurance cost. The purpose of the
sensitivity analysis was to evaluate how
changes in each of the four factors affect
the borrower’s contribution and the
level of payment assistance, holding the
other three factors constant. The
baseline assumptions for this analysis
represent a typical 502 loan and are
used as examples in the RHS section
502 servicing handbook. They are as
follows:
• Borrower’s AAI: $19,000
• AMI: $30,000
• Initial Principal Amount: $60,000
• Loan Term in Years: 33
• Market Rate: 7 percent
• Monthly Taxes and Insurance: $90
(1.8 percent of Initial Principal Amount/
12 months)
The results of the sensitivity analyses
are as follows. Where relevant,
historical data has also been included.
Changing AMI, Holding Other Factors
Constant
An RHS borrower who decides to buy
a home in a county with a lower median
income receives less payment assistance
than he or she would in a higher income
county, even when the home price,
taxes, and insurance are exactly the
same in the two counties. Similarly,
when an RHS borrower whose income
stays constant lives in a county where
the AMI increases, he or she receives
additional payment assistance; and if
the county’s economy declines and the
AMI drops, he or she receives less
payment assistance. This occurs because
payment assistance is determined by the
ratio of the borrower’s AAI to the
county’s AMI.
The actual examples in Exhibit 5
illustrate the way in which AMI skews
the amount of payment assistance a
borrower receives, all other factors being
equal. The first example shows this
dynamic by examining two borrowers in
different counties. The second example
shows what happens to the amount of
payment assistance a borrower receives
from one year to the next when income
stays constant but county AMI changes.
EXHIBIT 5.—IMPACT OF CHANGES IN AMI ON PAYMENT ASSISTANCE, CURRENT FORMULA
Initial
principal
amount
Adjusted
annual
income
Area
median
income
AAI as a
percent of
AMI
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Borrower
County and state
1 ..........
A ..............
B ..............
Kingfisher County, OK .............
Suffolk County, VA ...................
$56,000
56,000
$20,440
20,440
$31,300
44,400
65
46
$446
446
$4
70
2 ..........
Difference
C ..............
D ..............
...................................................
Tulare County, CA ...................
Tulare County, CA ...................
....................
54,431
54,431
....................
19,330
19,330
13,100
38,600
39,200
....................
50
49
....................
425
425
66
39
71
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Original PITI
Payment
assistance
amount
Example
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EXHIBIT 5.—IMPACT OF CHANGES IN AMI ON PAYMENT ASSISTANCE, CURRENT FORMULA—Continued
Borrower
County and state
Initial
principal
amount
Adjusted
annual
income
Difference
Example
...................................................
....................
....................
In addition to showing the
discrepancies in payment assistance for
similar borrowers under the current
formula, these examples highlight the
formula’s inefficiencies. In Example 1,
the borrower in the lower income
county receives considerably less
payment assistance–in this case,
Borrower A receives 17.5 times less
assistance than Borrower B, yet their
AAI is identical. Example 2 shows how
small changes in AMI can lead to
significant changes in payment
assistance. The AMI in Tulare County
increased by 1.5 percent from one year
Area
median
income
AAI as a
percent of
AMI
600
to the next, yet Borrower C’s payment
assistance increased by 82 percent. Even
if the cost of living increased with the
rise in AMI, it is unlikely that Borrower
C needed an 82 percent increase in
assistance in order to adjust to this
change.
The historical analysis found that a
difference of $244 was the largest
difference in the amount of payment
assistance two borrowers received who
had the same incomes, principal
amount, and taxes and insurance. The
smallest difference was $14.
Original PITI
....................
Payment
assistance
amount
....................
32
Changing AAI, Holding Other Factors
Constant
Two noteworthy phenomena occur
when AAI changes while the other three
factors are held constant: First,
borrowers who pay the equivalent
interest rate (those with very low
incomes) receive a fixed amount of
payment assistance, regardless of
income; while those who pay based on
the floor payment receive payment
assistance that varies with their income.
Exhibit 6 illustrates this result.
EXHIBIT 6.—IMPACT OF CHANGES IN INCOME ON BORROWER’S PAYMENT AND PAYMENT ASSISTANCE, CURRENT FORMULA
AAI
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$13,000
$13,300
$13,600
$13,900
$14,200
$14,500
$14,800
$15,100
$15,400
$15,700
$16,000
$16,300
$16,600
$16,900
$17,200
$17,500
$17,800
$18,100
$18,400
$18,700
$19,000
$19,300
$19,600
$19,900
$20,200
$20,500
$20,800
$21,100
$21,400
$21,700
$22,000
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
AAI as a
percent of
AMI
Applied percent of floor
payment
Applied EIR
(percent)
22
22
22
22
22
22
22
24
24
24
24
24
24
24
24
24
24
24
24
24
24
24
26
26
26
26
26
26
26
26
26
1
1
1
1
1
1
1
2
2
2
2
2
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
6
6
6
6
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
This outcome is not undesirable:
borrowers with higher incomes receive
less assistance as their incomes
increase, while borrowers at the lower
end of the spectrum receive a capped
amount of assistance, helping to ensure
that the housing needs of low-income
families are met at reasonable cost to the
taxpayer and the level of assistance
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Original
total PITI
Floor payment of P&I
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
479
148
154
159
165
170
176
181
212
218
224
230
236
242
248
254
260
266
272
278
284
290
296
335
341
348
354
361
367
374
380
387
Payment
@ EIR
178
178
178
178
178
178
178
207
207
207
207
207
239
239
239
239
239
273
273
273
273
273
310
310
310
310
310
348
348
348
348
provided decreases as family income
increases.
However, the second phenomenon
that occurs with certain increases in
income is problematic: for borrowers
whose payments are based on the floor
payment, a small increase in income can
lead to a large decrease in payment
assistance. This happens because the
required floor payment is divided into
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Assistance
amount
Borrower’s
P&I contribution
Borrower’s
PITI contribution
portion
(percent)
Borrower’s
PITI cost
with assistance as a
percent of
AAI
211
211
211
211
211
211
208
177
171
165
159
153
147
141
135
129
123
116
111
105
99
93
54
48
41
35
28
22
15
9
2
56
56
56
56
56
56
57
63
64
66
67
68
69
71
72
73
74
76
77
78
79
81
89
90
91
93
94
95
97
98
100
25
24
24
23
23
22
22
24
24
24
24
24
24
24
24
24
24
24
24
24
24
24
26
26
26
26
26
26
26
26
26
178
178
178
178
178
178
181
212
218
224
230
236
242
248
254
260
266
273
278
284
290
296
335
341
348
354
361
367
374
380
387
three tiers that increase at a much
greater rate than income. For example,
when a borrower’s income increases
from 50 percent of AMI to 50.01
percent, the required floor payment
jumps from 22 percent of income to 24
percent; when borrower income
increases from 65 percent of AMI to
65.01 percent, the floor payment jumps
to 26 percent of income. Exhibit 7
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illustrates the impact on payment
assistance of a $300 increase in AAI that
also pushes the borrower into the next
tier of floor payments:
EXHIBIT 7.—IMPACT OF MARGINAL INCREASES IN INCOME ON PAYMENT ASSISTANCE, CURRENT FORMULA*
Adjusted
annual income
Example
Income .....................................................
Increase 1 ................................................
Change .....................................................
Income .....................................................
Increase 2 ................................................
Change .....................................................
AAI as a
percent of
AMI
$14,800
15,100
300
19,300
19,600
300
50
51
1
65
66
1
PITICost
with assistance as a
percent of
AAI
PITI
$479
479
....................
479
479
....................
22
24
2
24
26
2
Payment
assistance
amount
$208
177
-31
93
54
-39
Annualized
payment assistance
amount
Net Loss of
annual income
$2,496
2,124
-372
1,116
648
-468
....................
....................
$72
....................
....................
$168
* Some figures are rounded.
The first income increase of $300 gets
offset by a loss of $372 in payment
assistance, while the second income
increase of $300 gets offset by a loss of
$468 in payment assistance. The overall
trend to decrease payment assistance as
income increases is logical; as
borrowers’ earnings increase, they need
less Government assistance. However,
the unfortunate consequence of
staggering the floor payments in two
percent increments is that borrowers
who are already at the lower end of the
income scale can suffer a financial
setback when they earn a pay increase;
sometimes they have more to lose than
gain when their AAI rises. A more
equitable formula would leave the
borrower at least as well off as he or she
was before the pay increase.
Changing the Initial Principal Amount,
Holding Other Factors Constant
When only the principal amount
varies and all other factors are held
constant, payment assistance increases
at a faster rate relative to increases in
principal when the borrower pays based
on the floor payment than when he or
she pays based on the equivalent
interest rate.
The following exhibit illustrates this
dynamic.
EXHIBIT 8.—IMPACT OF CHANGES IN PRINCIPAL AMOUNT ON BORROWER’S CONTRIBUTION, CURRENT FORMULA
Payment @
note rate
$50,000 ....
52,400 ......
54,800 ......
57,200 ......
59,600 ......
62,000 ......
64,400 ......
75,200 ......
86,000 ......
cchase on PROD1PC60 with PROPOSALS
Initial principal
amount
Original PITI
Floor
payment of
PITI
Floor
payment of
PI
Payment @
EIR
Borrower’s
contribution
to PI
$324
340
355
371
386
402
417
487
557
$414
430
445
461
476
492
507
577
647
$380
380
380
380
380
380
380
380
380
$290
290
290
290
290
290
290
290
290
$228
239
249
260
271
282
293
342
391
$290
290
290
290
290
290
293
342
391
The exhibit shows that, given the
formula inputs used in the sensitivity
analysis, when the principal amount is
between $50,000 and $62,000, the
borrower’s PITI cost with payment
assistance equals 24.0 percent. Within
this range of principal amounts, the
borrower’s contribution for principal
and interest is fixed at the floor payment
of $290 per month, while payment
assistance increases to make up the
difference between the borrower’s
contribution and the note rate. Thus, the
borrower has the strongest incentive to
purchase the $62,000 house rather than
a cheaper one within the 24 percent
range. Once the principal is greater than
$62,000 and the borrower pays based on
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the EIR, the borrower’s contribution is
no longer fixed but increases as
principal increases. Payment assistance
also increases with principal, but not as
quickly as when the borrower pays at
the floor rate.
Thus, the current formula provides an
incentive to borrowers to purchase the
most expensive home within a fixed
range of principal amounts’in this
example, the $62,000 house. It is
important to note, however, that the
optimal purchase price has nothing to
do with the housing market and will
vary with each buyer’s income, AMI,
taxes and insurance, and the market rate
on the loan—it is not uniform across
RHS borrowers. In addition, while the
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Assistance
amount
$34
50
65
81
96
112
124
145
166
Borrower’s
PITI portion
(percent)
92
88
85
82
80
77
76
75
74
Borrower’s
PITI
cost with
assistance
as percent
of AAI
24.0
24.0
24.0
24.0
24.0
24.0
24.2
27.3
30.4
inputs to the formula create an
economically optimal purchase price for
each borrower, this price is not
necessarily the one at which a buyer
will purchase a house. There are many
other important and potentially
overriding factors in the borrower’s
decision-making process, including the
availability of appropriate housing at a
price he or she can afford, the location
of the housing, quality of the
neighborhood and schools, and safety,
among others. It is possible that a house
at the buyer’s optimal price is not
available and does not meet his or her
other criteria. The optimal price is
solely based on the four inputs to the
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payment assistance formula and does
not reflect any market or quality factors.
Changing Tax and Insurance (T&I) Cost,
Holding Other Factors Constant
The analysis indicates that when a
borrower’s payment is based on the
floor payment, the payment assistance
amount matches the increase in T&I
dollar-for-dollar. When a borrower’s
payment is based on EIR, the payment
assistance amount is not affected by the
change in T&I. As a result, very lowincome borrowers must bear the burden
of increased taxes and insurance
without an increase in payment
assistance, while low income borrowers
receive a dollar-for-dollar match. This
formula characteristic makes it difficult
not only for very low-income borrowers
to adjust to increased tax and insurance
costs, but also for RHS to provide
servicing assistance to very low-income
borrowers who get behind in their
payments as a result of a tax or
insurance increase. Sixty-two percent of
borrowers in the historic dataset pay
based on the EIR and thus do not
receive extra payment assistance when
their T&I amount increases.
Market Research
Included in the assessment of the
payment assistance formula was a
comparative analysis to identify other
affordable housing programs whose
features could be compared to and
contrasted with the section 502
program. None of the programs
reviewed offered the same depth of
subsidy available through the section
502 program, although many were
similar in other respects. The single
most important differentiating factor is
the target market served by the section
502 program. The following programs
were the primary focus of the
comparative analysis:
8529
• HUD Housing Choice Voucher
Programs—Homeownership and Tenant
Based
• Minnesota Housing Finance
Agency, Minnesota Mortgage Program,
Homeownership Assistance Fund
• HUD Home Investment
Partnerships Program (HOME)
• Virginia Department of Housing and
Community Development—Share
Homeless Intervention Program
• Habitat for Humanity International
• City of Longmont/Boulder County,
Colorado Downpayment Assistance
Program
• City of Livermore, California
Downpayment Assistance Program
• Illinois Housing Development
Authority, First Time Homebuyer
Program (Revenue Mortgage Bond
Program)
Exhibit 9 shows how key features of
these various programs compared to
those of the section 502 program.
EXHIBIT 9.—PROGRAM FEATURES OF THE SECTION 502 AND COMPARABLE AFFORDABLE SINGLE FAMILY HOUSING
PROGRAMS
Program feature
Section 502
Comparative analysis observations
Use of HUD AMI ................................................
HUD AMI is used as an eligibility criterion, for
targeting purposes, and as a payment assistance formula factor.
Use of Housing Cost-PITI-to-Income Ratios ......
PITI-to-income ratios are used during the underwriting process to determine repayment
ability.
Assistance Calculation .......................................
Payment Assistance is calculated by first determining the borrower’s PI contribution.
Payment Assistance covers the difference
between PI and this contribution.
Continual Assistance, given that borrowers
meet income and occupancy eligibility requirements.
—Eligibility criterion.
—Assistance limits.
—Financing terms.
—Targeting.
—Repayment ability.
—Program eligibility.
—Assistance eligibility.
—Participant contribution.
—Participant need is met up to a limit.
—Participant need is met up to a limit after a
required participant contribution.
Assistance Administration ..................................
cchase on PROD1PC60 with PROPOSALS
Assistance Recapture ........................................
The most noteworthy finding of the
market research was that while all of the
homeownership and rental subsidy
programs used income as a percentage
of AMI as an eligibility criterion, none
of the programs used the figure as a
determinant of the amount of assistance
received, as under the section 502
Program.
Other uses of AMI in program
administration include:
• Income eligibility, including
income floors, to determine repayment
capacity and program eligibility;
• Assistance limit/financing term
determination; and
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Entire amount of payment assistance is subject to recapture, given that it is less than
the adjusted appreciation value. Payment
assistance is always subject to recapture.
—Continual assistance.
—Limited assistance.
—Limited, deceasing assistance with eventual
cut-off.
—One time assistance.
—Entire amount.
—Pro-rated percentage.
—Recapture due within a finite timeframe.
• Targeting specific parts of the
population for assistance.
Preliminary Alternatives for Calculating
Payment Assistance
Public Forum
RHS directed that alternatives to the
current payment assistance formula
meet the following criteria:
• Alternatives must provide service to
the same target market currently eligible
to receive assistance,
• Alternatives must be subsidy
neutral, and
• Alternatives must simplify the
method of determining the levels of
payment assistance received.
Given these criteria and the feedback
from the industry forum, five
alternatives were developed. Because of
the distributional inequities created by
On February 3, 2004, RHS hosted a
forum of rural housing industry leaders
at which it presented the findings of the
sensitivity and historical analyses and
market research, proposed preliminary
alternatives to the current payment
assistance formula, and solicited
feedback from the participants to
address inequities in the current
formula.
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basing payment assistance on AMI, and
the lack of precedent for using AMI as
a determinant of payment assistance in
comparable affordable housing
programs, none of the alternatives
include AMI in the formula for
calculating payment assistance.
The alternatives are as follows:
Alternative 1: Calculate Monthly
Payment Assistance based only on the
borrower’s AAI.
Alternative 2: Calculate Monthly
Payment Assistance based on the
borrower’s AAI (building on Alterative
1) but the borrower’s contribution
equals the greater of (a) 25 percent of
AAI for PITI; and (b) principal and
interest payment based on a one percent
interest rate, plus taxes and insurance.
Alternative 3: Calculate Monthly
Payment Assistance as the difference
between principal and interest at the
note rate and principal and interest
calculated at a below-market interest
rate that is tied to the borrower’s AAI.
Alternative 4: Calculate Monthly
Payment Assistance as the difference
between PITI at the note rate and the
greater of (a) 24 percent of the
borrower’s AAI plus utilities and
maintenance costs; and (b) principal
and interest payment based on a one
percent interest rate, plus taxes and
insurance.
Alternative 5: Offer an up-front
principal reduction that results in a
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borrower’s payment being 24 percent of
AAI, with the up-front principal
reduction amount being provided as a
zero-interest loan to be repaid in full
upon graduation from the section 502
program.
Analyses of the five options
eliminated Alternatives 1, 4, and 5.
Alternative 4 was found to be very
similar to Alternative 2, but difficult to
explain because of the utility and
maintenance cost component. In
addition, an accurate utility and
maintenance allowance would be
difficult to establish on a nationwide
basis. Alternative 1 was eliminated
because it would not serve the same
target market. This is because
alternative 1 is based only on the
borrower’s income, without regard to
loan amount or taxes and insurance.
Alternative 5 was not subsidy neutral in
any year but the first.
The contractor performed a sensitivity
analysis to compare treatment of
borrowers by the current formula,
Alternative 2, and Alternative 3 along
the same dimensions as the sensitivity
analysis performed on the current
formula. Based on borrower and loan
characteristics for FY 2003, the
sensitivity analyses were performed
under the following assumptions:
• Borrower’s AAI: $21,000
• AMI: $44,000
• Initial Principal Amount: $90,000
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• Loan Term in Years: 33
• Market Rate: 7 percent
• Monthly Taxes and Insurance: $120
(1.6 percent of Initial Principal Amount/
12 months)
The results are as follows:
Changing AMI, Holding Other Factors
Constant
Since Alternatives 2 and 3 both
eliminate AMI by design, there is no
variability in the amount of payment
assistance borrowers receive based on
AMI under either of these alternatives.
Under the current payment assistance
formula, the amount of payment
assistance varies with AMI.
Changing AAI, Holding Other Factors
Constant
Under the current formula and the
two alternatives, there is a maximum
payment assistance amount. The current
formula and Alternative 2 provide fairly
similar amounts of payment assistance
while Alternative 3 provides a greater
amount of payment assistance to almost
all borrowers whose incomes are above
the cap.
Exhibit 10 shows this effect.
Exhibit 10.—Impact of Changes in
Income on Payment Assistance, Current
Formula and Alternatives
BILLING CODE 3410–XV–P
E:\FR\FM\17FEP1.SGM
17FEP1
Assumptions for Exhibit 10:
(1) Loan amount = $90,000
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(2) T&I = 1.6 percent of loan amount
(3) Note rate = 7 percent
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8531
(4) AMI = $44,000
E:\FR\FM\17FEP1.SGM
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Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
8532
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
Under the current formula, the cap is
determined by the ratio of AAI to AMI.
When the ratio increases, the amount of
payment assistance drops by more than
the increase in income. This effect does
not occur under either Alternative 2 or
Alternative 3. The table below shows a
borrower’s monthly payments when
income equals $21,000, $22,000, and
$23,000, with tax and insurance
payments ranging from 0.5 percent to
3.5 percent of the loan. Borrower
payments that are not bolded are based
on 25 percent of income. In this
example, the borrower pays 25 percent
when T&I is relatively low. The
borrower payments that are BOLDED are
based on a one percent interest rate.
EXHIBIT 11.—IMPACT OF CHANGE IN INCOME ON BORROWER PAYMENT AND PAYMENT ASSISTANCE, ALTERNATIVE 2
Income = $21,000
T&I as
percent of
loan
Number
1 ...............................
2 ...............................
3 ...............................
4 ...............................
5 ...............................
6 ...............................
7 ...............................
8 ...............................
9 ...............................
10 .............................
11 .............................
12 .............................
13 .............................
14 .............................
15 .............................
16 .............................
T&I
0.50
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3.10
3.30
3.50
PITI
$38
53
68
83
98
113
128
143
158
173
188
203
218
233
248
263
Thus, when the borrower’s payment is
based on 25 percent of income, and the
borrower’s annual income goes from
$21,000 to $22,000, the monthly
payments increase by $20, for an annual
increase of $240 and a net gain in
income of $760. When the borrower’s
payment is based on the one percent
interest rate, the amount of the payment
does not change. Similarly, when the
borrower’s payment is based on 25
Borrower
payment for
PITI
$621
636
651
666
681
696
711
726
741
756
771
786
801
816
831
846
$438
438
438
438
438
438
438
438
438
439
454
469
484
499
514
529
Income = $22,000
Payment
assistance
Borrower
payment for
PITI
$183
198
213
228
243
258
273
288
303
316
316
316
316
316
316
316
Borrower
payment for
PITI
Payment
assistance
$458
458
458
458
458
458
458
458
458
458
458
469
484
499
514
529
percent of income and income goes from
$21,000 to $23,000, the monthly
payment increases by $40, for an annual
increase of $480 and a net gain in
income of $1,520. When the borrower’s
payment is based on the one percent
rate, his or her payment does not
change.
Under Alternative 3, the EIR scale
increases so gradually relative to
increases in income that the borrower
Income = $23,000
$162
177
192
207
222
237
252
267
282
297
312
316
316
316
316
316
Payment
assistance
$479
479
479
479
479
479
479
479
479
479
479
479
484
499
514
529
$142
157
172
187
202
217
232
247
262
277
292
307
316
316
316
316
will not face a situation in which a loss
in payment assistance exceeds an
increase in earnings. Exhibit 12 shows
how borrower payments increase with
income, assuming the loan and
borrower characteristics described at the
beginning of this section. The payments
do not change with taxes and interest,
unlike under Alternative 2.
EXHIBIT 12.—IMPACT OF CHANGE IN INCOME ON BORROWER PAYMENT AND PAYMENT ASSISTANCE, ALTERNATIVE 3
Borrower payment for PITI
Income
$21,000 ........................................................................................................................................
$22,000 ........................................................................................................................................
$23,000 ........................................................................................................................................
As Exhibit 12 shows, a borrower who
earns $21,000 and receives a $1,000
raise must pay an additional $11 per
month for housing, or $132 per year. If
the borrower who earns $21,000
receives a $2,000 pay raise, the payment
increases by $23 per month, or $276 per
year.
Changing the Initial Principal Amount,
Holding Other Factors Constant
Under the current formula the
borrower has an incentive to purchase a
Payment
assistance
$408
419
431
$295
284
273
PITI
$703
703
703
house at the upper end of a certain price
range. The same phenomenon occurs
under Alternative 2, as shown in Exhibit
14 below.
cchase on PROD1PC60 with PROPOSALS
EXHIBIT 14.—IMPACT OF CHANGES IN PRINCIPAL ON BORROWER PAYMENT AND PAYMENT ASSISTANCE
Number
1
2
3
4
Principal
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
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$40,000
50,000
60,000
70,000
E:\FR\FM\17FEP1.SGM
Borrower
payment
PITI
T&I
$53
67
80
93
17FEP1
$313
391
438
438
Payment
assistance
$0
0
31
110
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Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
EXHIBIT 14.—IMPACT OF CHANGES IN PRINCIPAL ON BORROWER PAYMENT AND PAYMENT ASSISTANCE—Continued
Number
Principal
5 .......................................................................................................................................
6 .......................................................................................................................................
7 .......................................................................................................................................
8 .......................................................................................................................................
9 .......................................................................................................................................
10 .....................................................................................................................................
As Exhibit 14 shows, the borrower’s
payment is the same when the principal
ranges between $40,000 and $90,000, so
80,000
90,000
100,000
110,000
120,000
130,000
the borrower has an incentive to
purchase the $90,000 house.
Under Alternative 3, however, this
effect does not occur because both the
Borrower
payment
PITI
T&I
107
120
133
147
160
173
Payment
assistance
438
438
438
473
516
559
188
266
344
387
422
457
borrower’s payment and the payment
assistance increase with the principal
amount. The following exhibit
illustrates this dynamic.
EXHIBIT 15.—IMPACT OF CHANGE IN PRINCIPAL ON BORROWER PAYMENT AND PAYMENT ASSISTANCE, ALTERNATIVE 3
T&I at 1.6%
Principal
Borrower
payment for
PITI
$53
67
80
93
107
120
133
147
160
173
$181
227
272
318
363
408
454
499
544
590
$40,000 ....................................................................................................................................................
$50,000 ....................................................................................................................................................
$60,000 ....................................................................................................................................................
$70,000 ....................................................................................................................................................
$80,000 ....................................................................................................................................................
$90,000 ....................................................................................................................................................
$100,000 ..................................................................................................................................................
$110,000 ..................................................................................................................................................
$120,000 ..................................................................................................................................................
$130,000 ..................................................................................................................................................
cchase on PROD1PC60 with PROPOSALS
In addition, under the current formula
and Alternative 2, borrowers with
higher loan amounts receive more
payment assistance than under
Alternative 3, while borrowers with
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lower initial principal amounts receive
more payment assistance under
Alternative 3 than under either the
current formula or Alternative 2. Exhibit
16 shows this effect.
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Payment
assistance
Exhibit 16.—Impact of Changes in
Principal on Payment Assistance,
Current Formula and Alternatives
E:\FR\FM\17FEP1.SGM
17FEP1
$131
164
197
229
262
295
328
361
393
426
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
Assumptions for Exhibit 16:
(1) AAI = $21,000
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(2) T&I = 1.6% of loan amount
(3) Note rate = 7%
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(4)AMI = $44,000
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8534
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
Changing Tax and Insurance Cost,
Holding Other Factors Constant
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Under the current formula and
Alternative 2, payment assistance
sometimes covers increases in taxes and
insurance. Under the current formula,
when the borrower pays at the EIR,
payment assistance does not change
with changes in taxes and insurance,
but when the borrower pays the floor
payment, payment assistance increases
to cover increases in taxes and
insurance. Thus, borrowers whose
incomes are very low relative to their
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AMI receive a capped amount of
payment assistance.
Under Alternative 2, payment
assistance increases relative to increases
in taxes and insurance as long as the
borrower is paying 25 percent of
income. Borrowers pay 25 percent of
income when their income is high
relative to their PITI. When the
borrower’s payment equals one percent
plus T&I, the payment assistance
amount is capped, which means that as
taxes rise, payment assistance does not.
This means borrowers in high tax areas
receive proportionately less payment
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8535
assistance relative to their payment than
borrowers in low tax areas, all other
factors being equal.
Under Alternative 3, payment
assistance is the same regardless of T&I
amount. Thus, borrowers with the same
principal but different tax and insurance
rates receive the same amount of
payment assistance.
Exhibit 17 below illustrates this
dynamic:
Exhibit 17.—Impact of Changes in
Taxes and Insurance on Payment
Assistance, Current Formula and
Alternatives
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Assumptions for Exhibit 17:
(1) AAI = $21,000
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(2) Loan amount = $90,000
(3) Note rate = 7%
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(4) AMI = $44,000
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8536
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
Impact of the Alternatives on the
Current Market
cchase on PROD1PC60 with PROPOSALS
In addition to these analyses, the
contractor also studied the question of
how both alternatives would impact the
market that the current formula serves.
To assess whether each alternative
formula will serve the same target
market, three states were selected to
represent high, medium, and low cost
states. Average borrowers’ AAI, Initial
Principal Amount, and T&I were
calculated for the counties that had at
least 10 new borrowers in 2002 and
2003. The counties with the highest
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average borrower’s AAI were selected to
represent the high-income borrower’s
profile in each state. The same
methodology applies to both median
and low-income borrower profiles in
each state. The contractor assessed how
much payment assistance borrowers
with low, median, and high incomes
would receive, as well as the proportion
of their income that would go toward
housing under each alternative.
Under the current formula and
Alternative 2, borrowers receive similar
payment assistance and pay a similar
percentage of their income to housing.
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8537
Under Alternative 3, borrowers with
high incomes in California and Illinois
receive significantly less payment
assistance than under the current
formula, and many of them would also
pay more than 29 percent of their
income toward housing, thus
disqualifying them from receiving a
section 502 loan.
Exhibits 18 and 19 below illustrate
these results:
Exhibit 18.—Payment Assistance
Amounts in High-, Medium-, and LowCost States, Current Formula and
Alternatives
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8538
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
8539
BILLING CODE 3410–XV–C
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Exhibit 19.—Adjusted PITI-to-Income Ratios in High-, Medium-, and Low-Cost States, Current Formula and Alternatives
8540
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
In addition, applying the three
formulas to the new borrowers in FY
2003 3, the analysis showed that the
average ratio of borrower PITI with
assistance to income was nearly
identical for each formula, with
Alternative 3 the lowest (26.7 percent)
and the current formula the highest
(27.4 percent).4 The ratio of payment
assistance to total payment for
principal, interest, taxes, and insurance
was also fairly uniform across the three
alternatives, with Alternative 3 the
lowest at (38.3 percent) and the current
formula the highest at 39.8 percent.5
More noteworthy was the number of
current borrowers each formula would
exclude from the program. Applying the
requirements of each formula to the new
borrowers in FY 2003, it was found that
under Alternative 3 a sizeable number
would have payments that exceed the
maximum payment to income ratio of
29 percent for very low-income
borrowers and 33 percent for lowincome borrowers.
EXHIBIT 19
Average adjusted PITI
to income
(percent)
Scenario
Average
PITI to
income (exclude 17
outliers)*
(percent)
28.19
28.29
27.47
27.43
27.53
26.70
Current Formula ...............................................................
Alternative 2 .....................................................................
Alternative 3 .....................................................................
Number of
borrowers
>29%
Percent of
total
1,744
1,319
1,764
29
22
30
Number of
borrowers
>33%
706
571
854
Percent of
total
11.86
9.59
14.34
* Notes: 1. Exclude the 17 outliers with the percentage exceeding 100%.
2. Based on 5,954 new non-leveraged loan borrowers’ information in fiscal year 2003.
Revision of the Payment Assistance
Calculation
RHS proposes to revise the payment
assistance formula by implementing
Alternative 2. Payment assistance will
be calculated by taking the difference
between the total cost of PITI minus the
borrower’s contribution, which will be
the higher of 25 percent of AAI or P&I
calculated at a 1 percent interest rate
plus the cost of taxes and insurance.
Formula
cchase on PROD1PC60 with PROPOSALS
Payment Assistance = PITI-Borrower’s
PITI Contribution
Borrower’s contribution is the higher
of the following calculations:
• 25% of AAI
• P&I calculated at 1% Interest Rate
+ T&I
Alternative 2 improves upon the
current formula in that it is a more
simplified approach and is easier to
explain to borrowers and others
interested in the program. Alternative 2
does not rely on AMI, which was the
main factor in unintended consequences
of the current formula. In addition,
Alternative 2 provides for consideration
of property taxes and insurance cost
which is very important in some
segments of the RHS market. Under
alternative 2, borrowers may be
encouraged to buy the most expensive
home possible in order to get the
maximum amount of payment
assistance. This is similar to the current
formula. The Agency believes that this
issue is mitigated by loan underwriting
3 New Non-Leveraged Loan borrowers who have
loan origination dates within fiscal year 2003 (10/
1/02 to 9/30/03) and have the first payment
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criteria, such as repayment ratios and
Area Loan Limits. Borrowers in high tax
areas will receive proportionately less
payment assistance than borrowers in
low tax areas. This is also similar to the
current formula.
Alternative 3, on the other hand,
provides more generous payment
assistance to higher income borrowers
in many cases, is a more complex
formula requiring periodic adjustments,
and would exclude more borrowers
with PITI costs in excess of 33% of
income than would Alternative 2 or the
current formula.
The impact of implementation of
Alternative 2 is the removal of AMI as
part of the calculation. This will result
in a more consistent and fair
distribution of subsidy, especially in
neighboring counties.
Leveraged Loans
Leveraged loans, under the current
regulation, are not subject to the floor
rate portion of the payment assistance
formula. Payment assistance for a
leveraged loan is determined using only
the EIR. This provision has influenced
the payment assistance calculation as
well as the amount of funds available
for borrowers in rural areas. To assess
the impact of leveraged loans, RHS
included a review of the leveraging
policy in its overall assessment of the
payment assistance formula.
In the mid-1990s, RHS adopted a
policy of encouraging borrowers to
obtain a portion of their financing from
commercial lenders. The rationale
assistance agreement records in the provided
dataset.
4 Average borrowers’ adjusted PITI-to-Income
ratio was calculated using a simple average.
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behind this policy was, in part, to
increase the amount of funds available
for rural borrowers by utilizing private
lenders to supply a portion of the
financing. For example, if RHS has
authority to lend $1 billion for section
502 direct loans and borrowers
collectively secure 20 percent of their
financing from private lenders, then
RHS has effectively increased its
available funding to $1.2 billion and is
able to assist 2,500 more families than
otherwise would have been possible
(assuming an average principal amount
of $80,000). However, the results of the
payment assistance assessment
demonstrate that the actual effect of
leveraging decreases the amount of
funds available.
Effects of Leveraging Policy on Program
Level
The following exhibits demonstrate
the effects of the current leveraging
policy on the amount of funds available
to finance housing in rural areas. The
Payment Assistance to Principal and
Interest payment at the note rate (PA/PI
Ratio) represents the most significant
factor that determines the subsidy rate
for the program. For the purposes of this
illustration, it is assumed that the other
four inputs to calculate subsidy rate
remain constant. Thus, the same
percentage change in the PA/PI ratio
will be carried over to the subsidy rate.
Further, to demonstrate the effects, it is
necessary to assume the level of budget
authority remains the same.
Definitions:
5 Average ratio of payment assistance to PITI was
calculated using a weighted average of original loan
amounts.
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• Program level is the amount of
financing available to finance single
family homes.
• Budget Authority is the actual cost
of providing the financing.
• Subsidy Rate is the factor used to
determine budget authority. It includes
interest subsidy, a factor of loan losses,
maintenance, and other costs associated
directly with the loan.
The program level is determined by
dividing available budget authority by
the subsidy rate. For example, under the
current formula, $201 million in budget
authority divided by .194 subsidy rate
(the program subsidy rate for FY 2003)
equals $1,038 million in program level.
There is only one subsidy rate for the
entire section 502 direct loan program,
8541
which includes both leveraged, and
non-leveraged loans. The following rates
are for illustrative purposes to show the
difference in cost for the leveraging
provision of the payment assistance
formula (i.e. leveraged loans under the
current formula are not subject to the
payment assistance floor rate.)
Exhibit 20.
CURRENT FORMULA INCLUDING LEVERAGING PROVISION
Program level
Budget authority
Subsidy rate
$1,038 million ...............................................................
$201 million ..................................................................
19.40%
PA/PI ratio
39.75
ALTERNATIVE 2 WITHOUT LEVERAGING PROVISION
Estimated subsidy rate
Program level
Budget authority
$1,100 million ...............................................................
$201 million ..................................................................
18.27%
PA/PI ratio
37.43
ALTERNATIVE 2 WITH 30% LEVERAGING REQUIREMENT
Estimated subsidy rate
Program level
Budget authority
$838 million ..................................................................
$201 million ..................................................................
Comparing the first two formulas, the
5.8 percent decrease in the PA/PI ratio
occurs with the elimination of the
leveraging provision. Applying the same
percentage decrease to the subsidy rate
and dividing the budget authority by
that result produces a $62 million (or 6
percent) increase in the program level.
Conversely, with the inclusion of a
requirement of obtaining 30 percent of
each loan from commercial lenders, the
PA/PI ratio increases by 24 percent.
Applying the same percentage increase
to the subsidy rate raises it to 23.99
percent, which causes the program level
to decrease 19 percent to $838 million.
Of the 219,281 payment assistance
agreements analyzed as part of this
assessment, 66,451 (30 percent) were for
leveraged loans, meaning that a portion
of the original principal amount was
obtained from a private lender.6
Even though 30 percent of the 219,281
payment assistance agreements made
between 1996 and 2003 were associated
with leveraged loans, the leveraged
23.99%
PA/PI ratio
49.16
portion of the amount of principal
financed by borrowers was relatively
insignificant. Of the 10,502 new
borrowers in fiscal year 2003, 4,548 (43
percent) were leveraged loans, but the
leveraged portion of the principal
accounted for only 8.16 percent of the
total loan level.7 The effect of leveraging
at different thresholds (e.g., 30 percent
and 40 percent), on the total loan
volume is demonstrated in the following
exhibits:
EXHIBIT 21.—DETAILS OF FISCAL YEAR 2003 NEW BORROWERS’ LEVERAGE INFORMATION
PA/P&I @
note rate
year 1
Current formula
Actual Payment Assistance .....................
Number of
non leveraged loans
39.75%
5,954
Number of
leveraged
loans
4,548
Leveraged
loans/total
amount
(percent)
Total loans
$ Leveraged
loan amount
$ Total loan
amount
10,502
$77.4 M
$948 M
8.16
$ Leveraged
amount
$ Total loan
amount
$ Leveraged/$ total
(percent)
$0.00
96,999.33
79,169.39
$948,343.39
948,343.39
948,343.39
0.00
10.23
8.35
PAYMENT ASSISTANCE RATIO OF ALTERNATIVE 2 IN YEAR 1
PA/P&I @
note rate in
year 1
(percent)
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Scenario
Provision & threshold
1 ...............
2 ...............
3 ...............
Without Leverage ...........................................
With Provision 30% Threshold ......................
With Provision 20% Threshold ......................
6 Included in the definition of leveraged loans are
situations in which non-profit organizations
provide a grant to buy down the original principal
amount.
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Leveraged
loans
37.43
49.16
19.15
0
3,850
4,646
Total
10,502
10,502
10,502
7 The assessment was performed on the borrowers
who have a loan origination date within fiscal year
2003 and have the first payment assistance
agreement in the provided dataset.
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8542
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 / Proposed Rules
Note: In evaluating the effects of requiring
borrowers to obtain 30 percent of the
principal from commercial lenders, it was
apparent that leveraging would benefit only
3,850 of the 10,502 borrowers, and the
remainder would obtain a non-leveraged
loan. Some elect to pay 25 percent of AAI
toward PITI, and some are paying at 1
percent interest rate under a non-leveraged
scenario. The equivalent amount of leveraged
principal for the 3,850 borrowers is $97
million, equaling 10.23 percent of the total
lending. The same logic would hold true if
the leveraging threshold was set at 20
percent.
Because leveraging did not appear to
be achieving the policy objective of
increasing the funding available for
rural homeowners, the assessment also
analyzed the results of raising the
leveraging threshold to minimum levels
of 20 percent and 30 percent. Not only
did establishing a minimum level not
materially affect the total amount of
funding available, 8.35 percent and
10.23 percent respectively, the
minimum levels significantly increased
the amount of payment assistance
required.
Hence, the policy of using the
payment assistance formula to
encourage leveraging actually decreases
available funding. The effect, with two
different market interest rates, is
demonstrated in the following exhibits:
Assumptions
(1) AAI = $24,000
(2) Note Rate = Market Rate
(3) Annual T&I = 1.8 percent of
principal
EXHIBIT 22.—MARKET INTEREST RATE 6 PERCENT
Total original amount
No.
Scenario
1 ..................
2 ..................
3 ..................
USDA loan
amount
$90,000
90,000
90,000
$90,000
72,000
63,000
Non-Leveraged ...............
Leveraged (20%) ............
Leveraged (30%) ............
PA ratio
(PA/USDA
P&I)
(percent)
PA
$142
204
179
$27
49
49
Borrower’s
total P&I
$380
318
344
Adjusted
PITI-to-income ratio
(percent)
25.00
21.90
23.18
Weighted
average interest rate
(percent)
....................
2.0
2.5
EXHIBIT 23.—MARKET INTEREST RATE 8 PERCENT
Total original amount
No.
Scenario
1 ..................
2 ..................
3 ..................
USDA loan
amount
$90,000
90,000
90,000
$90,000
72,000
63,000
Non-Leveraged ...............
Leveraged (20%) ............
Leveraged (30%) ............
Based on the results demonstrated by
this analysis, RHS proposes not to
provide additional payment assistance
or use the payment assistance formula
as a means of encouraging the use of
leveraged funding. It is simpler to have
a single calculation. So, in conclusion,
RHS proposes to adopt Alternative 2,
under which payment assistance will be
based on a borrower contribution of
25% of AAI towards PITI, however in
no case will the amount of payment
assistance exceed the amount needed to
repay the loan if it were amortized at a
one percent rate.
cchase on PROD1PC60 with PROPOSALS
List of Subjects in 7 CFR Part 3550
Accounting, Housing, Loan
programs—Housing and community
development, Low and Moderate
income housing, Manufactured homes,
Reporting and recordkeeping
requirements, Rural areas, Subsidies.
Therefore, Chapter XXXV, title 7,
Code of Federal Regulations is proposed
to be amended to read as follows:
PART 3550—DIRECT SINGLE FAMILY
HOUSING LOANS AND GRANTS
1. The authority citation for part 3550
continues to read as follows:
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PA ratio
(PA/USDA
P&I
(percent)
PA
$267
304
266
Authority: 5 U.S.C. 301; 42 U.S.C. 1480.
Subpart B—Section 502 Origination
2. Section 3550.68 is revised to read
as follows:
§ 3550.68
Payment subsidies.
RHS administers three types of
payment subsidies: interest credit,
payment assistance method 1, and
payment assistance method 2. Payment
subsidies are subject to recapture when
the borrower transfers title or ceases to
occupy the property.
(a) Eligibility for payment subsidy. (1)
Applicants or borrowers who receive
loans on program terms are eligible to
receive payment subsidy if they
personally occupy the property and
have adjusted income at or below the
applicable moderate-income limit.
(2) Borrowers with loans approved
before August 1, 1968, are not eligible
for payment assistance, even if they
assumed the loan after that date.
(3) Payment subsidy may be granted
for initial loans or subsequent loans
made in conjunction with an
assumption only if the term of the loan
is at least 25 years or more.
(4) Payment subsidy may be granted
for subsequent loans not made in
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41
59
59
Borrower’s
total P&I
$380
343
381
Adjusted
PITI-to-income ratio
(percent)
25.00
23.14
25.04
Weighted
average interest rate
(percent)
....................
2.40
3.10
conjunction with an assumption if the
initial loan was for a term of 25 years
or more.
(b) Determining type of payment
subsidy. (1) A borrower currently
receiving interest credit will continue to
receive it for the initial loan and for any
subsequent loan for as long as the
borrower is eligible for and remains on
interest credit.
(2) A borrower currently receiving
payment assistance using payment
assistance method 1 will continue to
receive it for the initial loan and for any
subsequent loan for as long as the
borrower is eligible for and remains on
payment assistance method 1.
(3) A borrower who has never
received payment subsidy, or who has
stopped receiving interest credit or
payment assistance method 1, and at a
later date again qualifies for a payment
subsidy, will receive payment assistance
method 2.
(c) Calculation of payment assistance.
Regardless of the method used, payment
assistance may not exceed the amount
necessary if the loan were amortized at
an interest rate of one percent.
(1) Payment assistance method 2. The
amount of payment assistance granted is
the lesser of the difference between:
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(i) The annualized promissory note
installment plus the cost of taxes and
insurance less twenty-five percent of the
borrower’s adjusted income; or
(ii) The annualized promissory note
installment less amount the borrower
would pay if the loan were amortized at
an interest rate of one percent.
(2) Payment assistance method 1. The
amount of payment assistance granted is
the difference between the annualized
note rate installment as prescribed on
the promissory note and the lesser of:
(i) The floor payment, which is
defined as a minimum percentage of
adjusted income that the borrower must
pay for PITI: 22 percent for very lowincome borrowers, 24 percent for lowincome borrowers with adjusted income
below 65 percent of area adjusted
median, and 26 percent for low-income
borrowers with adjusted incomes
between 65 and 80 percent of area
adjusted median; or
(ii) The annualized note rate
installment and the payment at the
equivalent interest rate, which is
determined by a comparison of the
borrower’s adjusted income to the
adjusted median income for the area in
which the security property is located.
The following chart is used to determine
the equivalent interest rate.
Percentage of Median Income and the
Equivalent Interest Rate
When the applicant’s adjusted income
is:
THEN the
equivalent interest rate is 1
(percent)
Equal to or more than:
(percent)
BUT less than:
00 ............................................................................
50.01 .......................................................................
55 ............................................................................
60 ............................................................................
65 ............................................................................
70 ............................................................................
75 ............................................................................
80.01 .......................................................................
90 ............................................................................
100 ..........................................................................
110 ..........................................................................
50.01 of adjusted median income ..................................................................
55 of adjusted median income .......................................................................
60 of adjusted median income .......................................................................
65 of adjusted median income .......................................................................
70 of adjusted median income .......................................................................
75 of adjusted median income .......................................................................
80.01 of adjusted median income ..................................................................
90 of adjusted median income .......................................................................
100 of adjusted median income .....................................................................
110 of adjusted median income .....................................................................
Or more than adjusted median income ..........................................................
1 Or
1
2
3
4
5
6
6.5
7.5
8.5
9
9.5
note rate, whichever is less; in no case will the equivalent interest rate be less than one percent.
(d) Calculation of interest credit. The
amount of interest credit granted is the
difference between the note rate
installment as prescribed on the
promissory note and the greater of:
(1) Twenty percent of the borrower’s
adjusted income less the cost of real
estate taxes and insurance, or
(2) The amount the borrower would
pay if the loan were amortized at an
interest rate of one percent.
(e) Annual review. The borrower’s
income will be reviewed annually to
determine whether the borrower is
eligible for continued payment subsidy.
The borrower must notify RHS
whenever an adult member of the
household changes or obtains
employment, there is a change in
household composition, or if income
increases by at least 10 percent so that
RHS can determine whether a review of
the borrower’s circumstances is
required.
Dated: February 3, 2006.
Thomas C. Dorr,
Under Secretary, Rural Development.
[FR Doc. 06–1349 Filed 2–16–06; 8:45 am]
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DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 23
[Docket No. CE239; Notice No. 23–06–01–
SC]
Special Conditions: Societe de
Motorisation Aeronautiques (SMA)
Engines, Inc., Cessna Models 182Q
and 182R; Diesel Cycle Engine Using
Turbine (Jet) Fuel
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed special
conditions.
AGENCY:
SUMMARY: This notice proposes special
conditions for the Cessna Models 182Q
and 182R airplanes with a Societe de
Motorisation Aeronautiques (SMA)
Model SR305–230 aircraft diesel engine
(ADE). This airplane will have a novel
or unusual design feature(s) associated
with the installation of a diesel cycle
engine utilizing turbine (jet) fuel. The
applicable airworthiness regulations do
not contain adequate or appropriate
safety standards for installation of this
new technology engine. These proposed
special conditions contain the
additional safety standards that the
Administrator considers necessary to
establish a level of safety equivalent to
that established by the existing
airworthiness standards.
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Comments must be received on
or before June 19, 2006.
ADDRESSES: Comments on this proposal
may be mailed in duplicate to: Federal
Aviation Administration, Regional
Counsel, ACE–7, Attention: Rules
Docket, Docket No. CE239, 901 Locust,
Room 506, Kansas City, Missouri 64106,
or delivered in duplicate to the Regional
Counsel at the above address.
Comments must be marked: CE239.
Comments may be inspected in the
Rules Docket weekdays, except Federal
holidays, between 7:30 a.m. and 4 p.m.
FOR FURTHER INFORMATION CONTACT:
Peter L. Rouse, Federal Aviation
Administration, Aircraft Certification
Service, Small Airplane Directorate,
ACE–111, 901 Locust, Kansas City,
Missouri, 816–329–4135, fax 816–329–
4090.
SUPPLEMENTARY INFORMATION:
DATES:
Comments Invited
Interested persons are invited to
participate in the making of these
proposed special conditions by
submitting such written data, views, or
arguments, as they may desire.
Communications should identify the
regulatory docket or notice number and
be submitted in duplicate to the address
specified above. All communications
received on or before the closing date
for comments will be considered by the
Administrator. The proposals described
in this notice may be changed in light
E:\FR\FM\17FEP1.SGM
17FEP1
]]>Agencies
[Federal Register Volume 71, Number 33 (Friday, February 17, 2006)]
[Proposed Rules]
[Pages 8523-8543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1349]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 71, No. 33 / Friday, February 17, 2006 /
Proposed Rules
[[Page 8523]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
7 CFR Part 3550
RIN 0575-AC59
Single Family Housing Loans, Payment Assistance
AGENCY: Rural Housing Service, USDA.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Rural Housing Service (RHS) proposes to amend its
regulations for Single Family Housing Loans. This action proposes to
amend only the amount of payment assistance for which a borrower
qualifies. This action is taken to improve distribution of program
benefits, simplify the application process, and improve customer
service.
DATES: Written or e-mail comments must be received on or before April
18, 2006.
ADDRESSES: You may submit comments to this rule by any of the following
methods:
Agency Web site: https://www.rurdev.usda.gov/regs/. Follow
the instructions for submitting comments on the Web site.
E-Mail: comments@wdc.usda.gov. Include the RIN number
(0575-AC59) in the subject line of the message.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Submit written comments via the U.S. Postal Service
to the Branch Chief, Regulations and Paperwork Management Branch, U.S.
Department of Agriculture, STOP 0742, 1400 Independence Avenue SW,
Washington, DC 20250-0742.
Hand Delivery/Courier: Submit written comments via Federal
Express Mail or another mail courier service requiring a street address
to the Branch Chief, Regulations and Paperwork Management Branch, U.S.
Department of Agriculture, 300 7th Street, SW., 7th Floor, Suite 701,
Washington, DC 20024.
All written comments will be available for public inspection during
regular work hours at the 300 7th Street, SW., address listed above.
FOR FURTHER INFORMATION CONTACT: Michael S. Feinberg, Chief, Loan
Origination Branch, Rural Housing Service, USDA, Ag Box 0783, Room
2214, 1400 Independence Avenue, SW., Washington, DC 20250-0783.
Telephone: 202-720-1474.
SUPPLEMENTARY INFORMATION:
Classification
This rule has been determined to be significant by the Office of
Management and Budget (OMB) under Executive Order 12866 and has been
reviewed by OMB.
Regulatory Flexibility Act
In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
602), the undersigned has determined and certified by signature of this
document that this rule will not have a significant economic impact on
a substantial number of small entities. This rule does not impose any
new requirements on Agency applicants and borrowers and the regulatory
changes affect only Agency determination of program benefits for
individual loans.
Environmental Impact Statement
This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' It is the determination of RHS
that this proposed action does not constitute a major Federal Action
significantly affecting the quality of the human environment, and in
accordance with the National Environmental Policy Act of 1969, Public
Law 91-190, an Environmental Impact Statement is not required.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. Under section 202 of the UMRA, the
Agency generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to State, local, or tribal
governments, in the aggregate, or to the private sector, of $100
million or more in any one year. When such a statement is needed for a
rule, section 205 of the UMRA generally requires the Agency to identify
and consider a reasonable number of regulatory alternatives and adopt
the least costly, more cost-effective or least burdensome alternative
that achieves the objectives of the rule.
This rule contains no Federal mandates (under the regulatory
provisions of Title II of the UMRA) for State, local, and tribal
governments or the private sector. Therefore, this rule is not subject
to the requirements of sections 202 and 205 of the UMRA.
Executive Order 13132
The policies contained in this rule do not have any substantial
direct effect on States, on the relationship between the national
government and States, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose substantial direct compliance costs on State and local
governments. Therefore, consultation with the States is not required.
Programs Affected
This program is listed in the Catalog of Federal Domestic
Assistance under No. 10.410, Low Income Housing Loans.
Intergovernmental Consultation
For the reasons set forth in the final rule related Notice to 7 CFR
part 3015, subpart V, this program is excluded from the scope of
Executive Order (E.O.) 12372, which requires intergovernmental
consultation with State and local officials.
Civil Justice Reform
This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform. In accordance with this Executive Order: (1) All
State and local laws and regulations that are in conflict with this
rule will be preempted, (2) no retroactive effect will be given to this
rule, and (3) administrative proceedings in accordance with the
regulations of the Agency at 7 CFR part 11 must be exhausted before
bringing litigation challenging action taken under this rule.
Paperwork Reduction Act
The information collection requirements contained in these
regulations have been approved by OMB
[[Page 8524]]
under the provisions of 44 U.S.C. chapter 35 and have been assigned OMB
control numbers 0575-0172 in accordance with the Paperwork Reduction
Act. This proposed rule does not revise or impose any new information
collection requirements from those mentioned above.
GPEA Statement
RHS is committed to compliance with the Government Paperwork
Elimination Act (GPEA), which requires Government agencies, in general,
to provide the public the option of submitting information or
transacting business electronically to the maximum extent possible.
Background
The U.S. Department of Agriculture's (USDA's) Rural Housing Service
(RHS) is proposing to revise the regulations for Direct Single Family
Housing Loans. This action is being taken to improve distribution of
payment assistance subsidies to its section 502 Single Family housing
direct loan program borrowers and simplify the formula for determining
the level of payment assistance granted to new borrowers.
Economic Impact Analysis
USDA contracted for a study of its payment assistance formula
including the development of alternatives. This study is available for
public inspection during working hours at Room 2214, 1400 Independence
Avenue, SW., Washington, DC 20250-0783. Telephone: 202-720-1474. In its
study of alternatives to the current payment assistance formula, RHS
began with the premise that a new payment assistance formula must not
increase the cost of the program (be subsidy neutral) and must serve
the same target population. These conditions assure that there would be
no significant economic impact resulting from a revision of the formula
for payment assistance. The program will continue to assist very low-
and low-income, rural residents to improve their living conditions and
economic situation by building equity through homeownership. Based on
an average loan in the range of $83,000 per home, for each $1.0 billion
in program level, RHS provides financing for over 12,000 single-family
homes. This investment is instrumental in creating over 14,000 direct
and indirect jobs. Assuming an average salary of $20,000 per job
created, $280 million in purchasing power is generated. Additionally,
these jobs also generate additional tax revenue for Federal, State, and
local governments, as well as aid in the stabilization or redevelopment
of neighborhoods.
However, the proposed change will affect the level of payment
assistance received by all new borrowers (in 2003 over 12,500)
following the effective date of the rule, and for that reason, the
proposed action has been determined to be significant. The effect of
the proposed rule compared to that of the current formula and the other
alternatives considered is discussed in detail below.
Discussion
During fiscal year 2004, RHS studied its payment assistance formula
for the Direct section 502 Single Family Housing program and concluded
that changes were needed.
Current Formula
RHS administers the single-family housing direct loan program
authorized in section 502 of the Housing Act of 1949, as amended (42
U.S.C. 1472). The program provides loans to low- and very low-income
households to purchase homes in rural areas, generally defined as
cities, towns, and unincorporated areas with populations of 20,000 or
less.\1\ These loans provide financing at reasonable rates and terms
with no down payment required.
---------------------------------------------------------------------------
\1\ For the purposes of the section 502 program, rural areas are
statutorily defined in section 520 of the Housing Act of 1949, 42
U.S.C. 1490 and its implementing regulation, 7 CFR 3550.9.
---------------------------------------------------------------------------
Pursuant to section 502, eligible families must be without adequate
housing and unable to obtain credit through the private sector \2\ but
able to afford the mortgage payments, taxes, and insurance on the
houses financed by RHS. The interest rate on the loans can be
subsidized to as low as one percent. Typically, the mortgage payments
require 24 to 30 percent of an applicant's income. Although a 38-year
term is available, most loans are issued with a term of 33-years, and
the majority of homes initially financed by RHS are refinanced through
conventional mortgages or repaid through property sales within eight to
ten years.
---------------------------------------------------------------------------
\2\ Section 501(c) (42 U.S.C. 1471(c)).
---------------------------------------------------------------------------
For loans made prior to 1995, RHS subsidized using a program called
``interest credit.'' Borrowers made monthly payments that were the
greater of (a) 20 percent of adjusted family income; or (b) payments
based on the loan amortized at a one percent interest rate. RHS
provided interest credit to make up the difference between this amount
and the amount of the payment at the note rate.
One drawback of this method was that it provided little incentive
for borrowers to shop for an inexpensive home since the borrower's
payment did not increase significantly as a result of a higher loan
amount. Another criticism was that it was inequitable. For example,
families attempting to purchase inexpensive homes were denied
assistance if the formula did not indicate principal, interest, taxes,
and insurance (PITI) would exceed 20 percent of adjusted income while
borrowers who purchased higher cost homes received the maximum level of
subsidy allowed.
As a result of these and other limitations, RHS implemented a new
subsidy program effective October 27, 1995. Under this program called
``payment assistance,'' the subsidy for each loan is based on the ratio
of the household's annual adjusted income (AAI) to the area median
income (AMI), a figure that the U.S. Department of Housing and Urban
Development (HUD) publishes annually for all U.S. counties. To be
eligible for payment assistance, household income must be within the
low-income limit, defined as 80% of AMI. Once payment assistance is
granted, the household remains eligible for payment assistance in
accordance with the formula below. The payment assistance amount is the
difference between the note rate payment and the greater of (a) the
payment at an equivalent interest rate and (b) the floor payment.
The equivalent interest rate is derived from a scale based on the
ratio of the borrower's AAI to AMI, as described in Exhibit 1 below:
[[Page 8525]]
Exhibit 1.--Equivalent Interest Rate Scale
------------------------------------------------------------------------
When the borrower's adjusted income
is
-------------------------------------
Then the
Equal to or more than (percent) equivalent
But less than interest rate
is *
(percent)
------------------------------------------------------------------------
0.0............................... 50 percent of AMI... 1
50................................ 55 percent of AMI... 2
55................................ 60 percent of AMI... 3
60................................ 65 percent of AMI... 4
65................................ 70 percent of AMI... 5
70................................ 75 percent of AMI... 6
75................................ 80 percent of AMI... 6.5
80................................ 90 percent of AMI... 7.5
90................................ 100 percent of AMI.. 8.5
100............................... 110 percent of AMI.. 9.0
110............................... or more than AMI.... 9.5
------------------------------------------------------------------------
* Or note rate, whichever is less. In no case will the equivalent
interest rate be less than 1 percent.
The floor payment is also based on the ratio of the borrower's AAI
to the AMI and is scaled to a minimum percentage of income that a
borrower must pay for PITI.
Exhibit 2 shows this scale:
Exhibit 2.--Floor Payment Scale
------------------------------------------------------------------------
Minimum
percentage of
AAI that a
AAI as a percentage of AMI borrower must
pay for PITI
(percent)
------------------------------------------------------------------------
0.0 percent to 50 percent............................... 22
50.01 percent to 65 percent............................. 24
65.01 percent to 80 percent............................. 26
------------------------------------------------------------------------
The following is the step-by-step process for determining a
borrower's eligibility for payment assistance under the current
formula, and the amount of payment assistance for which he or she
qualifies, using the assumptions below:
Borrower Assumptions:
[cir] AAI: $19,000
[cir] AMI: $30,000
[cir] Is the borrower eligible? Yes, because AAI is 63 percent of
AMI and the eligibility threshold is 80 percent.
Loan Assumptions:
[cir] Initial Principal Amount: $60,000
[cir] Loan Term: 33 Years
[cir] Market Rate: 7 percent
[cir] Monthly Taxes and Insurance: $90.00 (1.8 percent of Initial
Principal/12 Months).
Exhibit 3.--Application of the Payment Assistance Formula Using the
Above Assumptions
------------------------------------------------------------------------
Explanation Calculation
------------------------------------------------------------------------
How Much Does the Borrower Pay to USDA
for Principal and Interest Cost?
The borrower pays the higher of the
following two calculations:
First Calculation:
Based on the ratio of Borrower AAI Applicable Interest Rate at 63%
to AMI (Exhibit 1), the borrower's AAI to AMI Ratio yields 4%
interest rate will be 4 percent, equivalent interest rate (from
which equates to a monthly payment chart).
of $273.00.
Second Calculation:
The Floor Payment for principal and Initial Principal Amount
Interest (This is the fixed $60,000 @4% for 33 years =
percentage of borrower income or $273.00.
the minimum the borrower is
required to pay to USDA).
Applicable floor payment percentage Applicable percentage for 63%
for PITI = 24 percent. AAI to AMI ratio.
Monthly Floor Payment = $380.......
Monthly Floor Payment for principal 24% of AAI ($19,000) divided by
and interest = $290. 12 months.
The borrower pays at Floor Payment PITI of $380 minus T&I of $90.
for principal and interest = $290. The higher of the two
calculations.
How much would the borrower pay at $389 ($60,000 amortized @7% for
the Note Rate of 7%? $389. 33 years).
Payment Assistance received from $389 - $290 = $99.
USDA = $99.
------------------------------------------------------------------------
Recently, RHS began to examine anecdotal evidence that suggested
the current formula caused anomalies in the distribution of payment
assistance to borrowers, was complicated and difficult to explain, and
had other unintended consequences, such as encouraging borrowers to
purchase more expensive housing to qualify for increased payment
assistance.
RHS engaged a contractor with extensive experience in Federal
housing programs and other lending programs to:
Assess the extent to which the current formula results in
unintended treatment of borrowers;
Examine formulas used in other mortgage assistance
programs; and
Develop a simpler and more equitable alternative that
would not result in increased cost to the Government but would continue
to serve the same target market.
RHS presented the findings and preliminary alternatives to a panel
of
[[Page 8526]]
rural housing industry leaders and obtained their feedback. RHS then
further analyzed two potential alternatives to the current formula. The
results of these analyses follow.
Assessment Based on Historical and Sensitivity Analyses
The assessment RHS commissioned included a sensitivity analysis of
the factors that comprise the payment assistance formula; a historical
analysis of 219,218 loans closed between October 26, 1995 and November
5, 2003; and research on other affordable single-family housing loan
programs. Affordable single-family programs researched include programs
offered by the Department of Housing and Urban Development, State
agencies, and non-government entities. The historical analysis
summarized borrower and loan characteristics and used the theoretical
findings of the sensitivity analysis to evaluate whether borrowers with
similar income characteristics received different levels of payment
assistance. The results of the historical analysis support the
theoretical findings of the sensitivity analysis.
Summary of Loan Characteristics
Of the 219,218 loans, 70 percent (152,830 loans) were non-leveraged
loans, and 151,107 of those were analyzed. Leveraged loans were
analyzed and will be discussed separately below because of the way the
Agency considers these loans for payment assistance. The balance of the
non-leveraged loans were excluded because of missing data. Of the
151,107 observations, 54 percent of the borrowers have housing costs at
or below 26 percent of their AAIs.
Exhibit 4 presents loan characteristics of borrowers based on
payment calculation methods: Effective interest rate (EIR) and floor
payment.
Exhibit 4.--Key Characteristics of RHS 502 Direct Loan Borrowers (Non-Leveraged Loan Agreements)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average
borrower
Average Average Average PITI cost
Percent Average Average AAI as Average Average Average payment borrower with
Payment calculation method Count of total AAI AMI percent EIR initial borrower assistance PI assist.
of AMI principal contribution amt. portion as
percent
of AAI
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EIR................................................................ 95,248 62 $14,102 $38,348 38 1.61 $77,587 $260 $236 52 47
Floor.............................................................. 57,582 38 20,439 41,080 50 2.09 70,329 310 142 69 25
------------
Total/Avg...................................................... 152,830 100 16,489 39,377 42 1.79 74,852 279 201 58 39
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The table shows that 62 percent of the borrowers have principal and
interest payments based on the EIR. These borrowers have lower annual
adjusted incomes, live in areas with lower area median incomes, and
have higher initial principal amounts, all of which cause their total
housing cost to average 47 percent of their income, as opposed to a
portfolio average of 39 percent. Conversely, borrowers with higher
incomes pay only 25 percent of their incomes toward housing costs.
Historical and Sensitivity Analyses
Four factors determine the payment assistance amount that RHS
Single Family housing direct loan program borrowers receive: (1) AMI,
(2) borrower's AAI, (3) the initial principal amount of the loan, and
(4) taxes and insurance cost. The purpose of the sensitivity analysis
was to evaluate how changes in each of the four factors affect the
borrower's contribution and the level of payment assistance, holding
the other three factors constant. The baseline assumptions for this
analysis represent a typical 502 loan and are used as examples in the
RHS section 502 servicing handbook. They are as follows:
Borrower's AAI: $19,000
AMI: $30,000
Initial Principal Amount: $60,000
Loan Term in Years: 33
Market Rate: 7 percent
Monthly Taxes and Insurance: $90 (1.8 percent of Initial
Principal Amount/12 months)
The results of the sensitivity analyses are as follows. Where
relevant, historical data has also been included.
Changing AMI, Holding Other Factors Constant
An RHS borrower who decides to buy a home in a county with a lower
median income receives less payment assistance than he or she would in
a higher income county, even when the home price, taxes, and insurance
are exactly the same in the two counties. Similarly, when an RHS
borrower whose income stays constant lives in a county where the AMI
increases, he or she receives additional payment assistance; and if the
county's economy declines and the AMI drops, he or she receives less
payment assistance. This occurs because payment assistance is
determined by the ratio of the borrower's AAI to the county's AMI.
The actual examples in Exhibit 5 illustrate the way in which AMI
skews the amount of payment assistance a borrower receives, all other
factors being equal. The first example shows this dynamic by examining
two borrowers in different counties. The second example shows what
happens to the amount of payment assistance a borrower receives from
one year to the next when income stays constant but county AMI changes.
Exhibit 5.--Impact of Changes in AMI on Payment Assistance, Current Formula
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Adjusted Area AAI as a Payment
Example Borrower County and state principal annual median percent of Original assistance
amount income income AMI PITI amount
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................... A....................... Kingfisher County, OK.... $56,000 $20,440 $31,300 65 $446 $4
B....................... Suffolk County, VA....... 56,000 20,440 44,400 46 446 70
----------------------------
Difference.............. ......................... ........... ........... 13,100 ........... ........... 66
2.................... C....................... Tulare County, CA........ 54,431 19,330 38,600 50 425 39
D....................... Tulare County, CA........ 54,431 19,330 39,200 49 425 71
----------------------------
[[Page 8527]]
Difference.............. ......................... ........... ........... 600 ........... ........... 32
--------------------------------------------------------------------------------------------------------------------------------------------------------
In addition to showing the discrepancies in payment assistance for
similar borrowers under the current formula, these examples highlight
the formula's inefficiencies. In Example 1, the borrower in the lower
income county receives considerably less payment assistance-in this
case, Borrower A receives 17.5 times less assistance than Borrower B,
yet their AAI is identical. Example 2 shows how small changes in AMI
can lead to significant changes in payment assistance. The AMI in
Tulare County increased by 1.5 percent from one year to the next, yet
Borrower C's payment assistance increased by 82 percent. Even if the
cost of living increased with the rise in AMI, it is unlikely that
Borrower C needed an 82 percent increase in assistance in order to
adjust to this change.
The historical analysis found that a difference of $244 was the
largest difference in the amount of payment assistance two borrowers
received who had the same incomes, principal amount, and taxes and
insurance. The smallest difference was $14.
Changing AAI, Holding Other Factors Constant
Two noteworthy phenomena occur when AAI changes while the other
three factors are held constant: First, borrowers who pay the
equivalent interest rate (those with very low incomes) receive a fixed
amount of payment assistance, regardless of income; while those who pay
based on the floor payment receive payment assistance that varies with
their income.
Exhibit 6 illustrates this result.
Exhibit 6.--Impact of Changes in Income on Borrower's Payment and Payment Assistance, Current Formula
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Borrower's
Borrower's PITI cost
AAI as a Applied Floor Borrower's PITI with
AAI percent of percent of Applied EIR Original payment of Payment @ P&I Assistance contribution assistance
AMI floor (percent) total PITI P&I EIR contribution amount portion as a
payment (percent) percent of
AAI
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$13,000..................................................... 44 22 1 479 148 178 178 211 56 25
$13,300..................................................... 45 22 1 479 154 178 178 211 56 24
$13,600..................................................... 46 22 1 479 159 178 178 211 56 24
$13,900..................................................... 47 22 1 479 165 178 178 211 56 23
$14,200..................................................... 48 22 1 479 170 178 178 211 56 23
$14,500..................................................... 49 22 1 479 176 178 178 211 56 22
$14,800..................................................... 50 22 1 479 181 178 181 208 57 22
$15,100..................................................... 51 24 2 479 212 207 212 177 63 24
$15,400..................................................... 52 24 2 479 218 207 218 171 64 24
$15,700..................................................... 53 24 2 479 224 207 224 165 66 24
$16,000..................................................... 54 24 2 479 230 207 230 159 67 24
$16,300..................................................... 55 24 2 479 236 207 236 153 68 24
$16,600..................................................... 56 24 3 479 242 239 242 147 69 24
$16,900..................................................... 57 24 3 479 248 239 248 141 71 24
$17,200..................................................... 58 24 3 479 254 239 254 135 72 24
$17,500..................................................... 59 24 3 479 260 239 260 129 73 24
$17,800..................................................... 60 24 3 479 266 239 266 123 74 24
$18,100..................................................... 61 24 4 479 272 273 273 116 76 24
$18,400..................................................... 62 24 4 479 278 273 278 111 77 24
$18,700..................................................... 63 24 4 479 284 273 284 105 78 24
$19,000..................................................... 64 24 4 479 290 273 290 99 79 24
$19,300..................................................... 65 24 4 479 296 273 296 93 81 24
$19,600..................................................... 66 26 5 479 335 310 335 54 89 26
$19,900..................................................... 67 26 5 479 341 310 341 48 90 26
$20,200..................................................... 68 26 5 479 348 310 348 41 91 26
$20,500..................................................... 69 26 5 479 354 310 354 35 93 26
$20,800..................................................... 70 26 5 479 361 310 361 28 94 26
$21,100..................................................... 71 26 6 479 367 348 367 22 95 26
$21,400..................................................... 72 26 6 479 374 348 374 15 97 26
$21,700..................................................... 73 26 6 479 380 348 380 9 98 26
$22,000..................................................... 74 26 6 479 387 348 387 2 100 26
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
This outcome is not undesirable: borrowers with higher incomes
receive less assistance as their incomes increase, while borrowers at
the lower end of the spectrum receive a capped amount of assistance,
helping to ensure that the housing needs of low-income families are met
at reasonable cost to the taxpayer and the level of assistance provided
decreases as family income increases.
However, the second phenomenon that occurs with certain increases
in income is problematic: for borrowers whose payments are based on the
floor payment, a small increase in income can lead to a large decrease
in payment assistance. This happens because the required floor payment
is divided into three tiers that increase at a much greater rate than
income. For example, when a borrower's income increases from 50 percent
of AMI to 50.01 percent, the required floor payment jumps from 22
percent of income to 24 percent; when borrower income increases from 65
percent of AMI to 65.01 percent, the floor payment jumps to 26 percent
of income. Exhibit 7
[[Page 8528]]
illustrates the impact on payment assistance of a $300 increase in AAI
that also pushes the borrower into the next tier of floor payments:
Exhibit 7.--Impact of Marginal Increases in Income on Payment Assistance, Current Formula*
--------------------------------------------------------------------------------------------------------------------------------------------------------
PITICost
with Annualized
Adjusted AAI as a assistance Payment payment Net Loss of
Example annual percent of PITI as a assistance assistance annual
income AMI percent of amount amount income
AAI
--------------------------------------------------------------------------------------------------------------------------------------------------------
Income....................................................... $14,800 50 $479 22 $208 $2,496 ...........
Increase 1................................................... 15,100 51 479 24 177 2,124 ...........
Change....................................................... 300 1 ........... 2 -31 -372 $72
Income....................................................... 19,300 65 479 24 93 1,116 ...........
Increase 2................................................... 19,600 66 479 26 54 648 ...........
Change....................................................... 300 1 ........... 2 -39 -468 $168
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Some figures are rounded.
The first income increase of $300 gets offset by a loss of $372 in
payment assistance, while the second income increase of $300 gets
offset by a loss of $468 in payment assistance. The overall trend to
decrease payment assistance as income increases is logical; as
borrowers' earnings increase, they need less Government assistance.
However, the unfortunate consequence of staggering the floor payments
in two percent increments is that borrowers who are already at the
lower end of the income scale can suffer a financial setback when they
earn a pay increase; sometimes they have more to lose than gain when
their AAI rises. A more equitable formula would leave the borrower at
least as well off as he or she was before the pay increase.
Changing the Initial Principal Amount, Holding Other Factors Constant
When only the principal amount varies and all other factors are
held constant, payment assistance increases at a faster rate relative
to increases in principal when the borrower pays based on the floor
payment than when he or she pays based on the equivalent interest rate.
The following exhibit illustrates this dynamic.
Exhibit 8.--Impact of Changes in Principal Amount on Borrower's Contribution, Current Formula
--------------------------------------------------------------------------------------------------------------------------------------------------------
Borrower's
Borrower's PITI cost
Payment @ Original Floor Floor Payment @ Borrower's Assistance PITI with
Initial principal amount note rate PITI payment of payment of EIR contribution amount portion assistance
PITI PI to PI (percent) as percent
of AAI
--------------------------------------------------------------------------------------------------------------------------------------------------------
$50,000........................... $324 $414 $380 $290 $228 $290 $34 92 24.0
52,400............................ 340 430 380 290 239 290 50 88 24.0
54,800............................ 355 445 380 290 249 290 65 85 24.0
57,200............................ 371 461 380 290 260 290 81 82 24.0
59,600............................ 386 476 380 290 271 290 96 80 24.0
62,000............................ 402 492 380 290 282 290 112 77 24.0
64,400............................ 417 507 380 290 293 293 124 76 24.2
75,200............................ 487 577 380 290 342 342 145 75 27.3
86,000............................ 557 647 380 290 391 391 166 74 30.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
The exhibit shows that, given the formula inputs used in the
sensitivity analysis, when the principal amount is between $50,000 and
$62,000, the borrower's PITI cost with payment assistance equals 24.0
percent. Within this range of principal amounts, the borrower's
contribution for principal and interest is fixed at the floor payment
of $290 per month, while payment assistance increases to make up the
difference between the borrower's contribution and the note rate. Thus,
the borrower has the strongest incentive to purchase the $62,000 house
rather than a cheaper one within the 24 percent range. Once the
principal is greater than $62,000 and the borrower pays based on the
EIR, the borrower's contribution is no longer fixed but increases as
principal increases. Payment assistance also increases with principal,
but not as quickly as when the borrower pays at the floor rate.
Thus, the current formula provides an incentive to borrowers to
purchase the most expensive home within a fixed range of principal
amounts'in this example, the $62,000 house. It is important to note,
however, that the optimal purchase price has nothing to do with the
housing market and will vary with each buyer's income, AMI, taxes and
insurance, and the market rate on the loan--it is not uniform across
RHS borrowers. In addition, while the inputs to the formula create an
economically optimal purchase price for each borrower, this price is
not necessarily the one at which a buyer will purchase a house. There
are many other important and potentially overriding factors in the
borrower's decision-making process, including the availability of
appropriate housing at a price he or she can afford, the location of
the housing, quality of the neighborhood and schools, and safety, among
others. It is possible that a house at the buyer's optimal price is not
available and does not meet his or her other criteria. The optimal
price is solely based on the four inputs to the
[[Page 8529]]
payment assistance formula and does not reflect any market or quality
factors.
Changing Tax and Insurance (T&I) Cost, Holding Other Factors Constant
The analysis indicates that when a borrower's payment is based on
the floor payment, the payment assistance amount matches the increase
in T&I dollar-for-dollar. When a borrower's payment is based on EIR,
the payment assistance amount is not affected by the change in T&I. As
a result, very low-income borrowers must bear the burden of increased
taxes and insurance without an increase in payment assistance, while
low income borrowers receive a dollar-for-dollar match. This formula
characteristic makes it difficult not only for very low-income
borrowers to adjust to increased tax and insurance costs, but also for
RHS to provide servicing assistance to very low-income borrowers who
get behind in their payments as a result of a tax or insurance
increase. Sixty-two percent of borrowers in the historic dataset pay
based on the EIR and thus do not receive extra payment assistance when
their T&I amount increases.
Market Research
Included in the assessment of the payment assistance formula was a
comparative analysis to identify other affordable housing programs
whose features could be compared to and contrasted with the section 502
program. None of the programs reviewed offered the same depth of
subsidy available through the section 502 program, although many were
similar in other respects. The single most important differentiating
factor is the target market served by the section 502 program. The
following programs were the primary focus of the comparative analysis:
HUD Housing Choice Voucher Programs--Homeownership and
Tenant Based
Minnesota Housing Finance Agency, Minnesota Mortgage
Program, Homeownership Assistance Fund
HUD Home Investment Partnerships Program (HOME)
Virginia Department of Housing and Community Development--
Share Homeless Intervention Program
Habitat for Humanity International
City of Longmont/Boulder County, Colorado Downpayment
Assistance Program
City of Livermore, California Downpayment Assistance
Program
Illinois Housing Development Authority, First Time
Homebuyer Program (Revenue Mortgage Bond Program)
Exhibit 9 shows how key features of these various programs compared
to those of the section 502 program.
Exhibit 9.--Program Features of the Section 502 and Comparable
Affordable Single Family Housing Programs
------------------------------------------------------------------------
Comparative analysis
Program feature Section 502 observations
------------------------------------------------------------------------
Use of HUD AMI.............. HUD AMI is used as --Eligibility
an eligibility criterion.
criterion, for --Assistance limits.
targeting purposes, --Financing terms.
and as a payment --Targeting.
assistance formula
factor.
Use of Housing Cost-PITI-to- PITI-to-income --Repayment ability.
Income Ratios. ratios are used --Program
during the eligibility.
underwriting --Assistance
process to eligibility.
determine repayment --Participant
ability. contribution.
Assistance Calculation...... Payment Assistance --Participant need
is calculated by is met up to a
first determining limit.
the borrower's PI --Participant need
contribution. is met up to a
Payment Assistance limit after a
covers the required
difference between participant
PI and this contribution.
contribution.
Assistance Administration... Continual --Continual
Assistance, given assistance.
that borrowers meet --Limited
income and assistance.
occupancy --Limited, deceasing
eligibility assistance with
requirements. eventual cut-off.
--One time
assistance.
Assistance Recapture........ Entire amount of --Entire amount.
payment assistance --Pro-rated
is subject to percentage.
recapture, given --Recapture due
that it is less within a finite
than the adjusted timeframe.
appreciation value.
Payment assistance
is always subject
to recapture.
------------------------------------------------------------------------
The most noteworthy finding of the market research was that while
all of the homeownership and rental subsidy programs used income as a
percentage of AMI as an eligibility criterion, none of the programs
used the figure as a determinant of the amount of assistance received,
as under the section 502 Program.
Other uses of AMI in program administration include:
Income eligibility, including income floors, to determine
repayment capacity and program eligibility;
Assistance limit/financing term determination; and
Targeting specific parts of the population for assistance.
Public Forum
On February 3, 2004, RHS hosted a forum of rural housing industry
leaders at which it presented the findings of the sensitivity and
historical analyses and market research, proposed preliminary
alternatives to the current payment assistance formula, and solicited
feedback from the participants to address inequities in the current
formula.
Preliminary Alternatives for Calculating Payment Assistance
RHS directed that alternatives to the current payment assistance
formula meet the following criteria:
Alternatives must provide service to the same target
market currently eligible to receive assistance,
Alternatives must be subsidy neutral, and
Alternatives must simplify the method of determining the
levels of payment assistance received.
Given these criteria and the feedback from the industry forum, five
alternatives were developed. Because of the distributional inequities
created by
[[Page 8530]]
basing payment assistance on AMI, and the lack of precedent for using
AMI as a determinant of payment assistance in comparable affordable
housing programs, none of the alternatives include AMI in the formula
for calculating payment assistance.
The alternatives are as follows:
Alternative 1: Calculate Monthly Payment Assistance based only on
the borrower's AAI.
Alternative 2: Calculate Monthly Payment Assistance based on the
borrower's AAI (building on Alterative 1) but the borrower's
contribution equals the greater of (a) 25 percent of AAI for PITI; and
(b) principal and interest payment based on a one percent interest
rate, plus taxes and insurance.
Alternative 3: Calculate Monthly Payment Assistance as the
difference between principal and interest at the note rate and
principal and interest calculated at a below-market interest rate that
is tied to the borrower's AAI.
Alternative 4: Calculate Monthly Payment Assistance as the
difference between PITI at the note rate and the greater of (a) 24
percent of the borrower's AAI plus utilities and maintenance costs; and
(b) principal and interest payment based on a one percent interest
rate, plus taxes and insurance.
Alternative 5: Offer an up-front principal reduction that results
in a borrower's payment being 24 percent of AAI, with the up-front
principal reduction amount being provided as a zero-interest loan to be
repaid in full upon graduation from the section 502 program.
Analyses of the five options eliminated Alternatives 1, 4, and 5.
Alternative 4 was found to be very similar to Alternative 2, but
difficult to explain because of the utility and maintenance cost
component. In addition, an accurate utility and maintenance allowance
would be difficult to establish on a nationwide basis. Alternative 1
was eliminated because it would not serve the same target market. This
is because alternative 1 is based only on the borrower's income,
without regard to loan amount or taxes and insurance. Alternative 5 was
not subsidy neutral in any year but the first.
The contractor performed a sensitivity analysis to compare
treatment of borrowers by the current formula, Alternative 2, and
Alternative 3 along the same dimensions as the sensitivity analysis
performed on the current formula. Based on borrower and loan
characteristics for FY 2003, the sensitivity analyses were performed
under the following assumptions:
Borrower's AAI: $21,000
AMI: $44,000
Initial Principal Amount: $90,000
Loan Term in Years: 33
Market Rate: 7 percent
Monthly Taxes and Insurance: $120 (1.6 percent of Initial
Principal Amount/12 months)
The results are as follows:
Changing AMI, Holding Other Factors Constant
Since Alternatives 2 and 3 both eliminate AMI by design, there is
no variability in the amount of payment assistance borrowers receive
based on AMI under either of these alternatives. Under the current
payment assistance formula, the amount of payment assistance varies
with AMI.
Changing AAI, Holding Other Factors Constant
Under the current formula and the two alternatives, there is a
maximum payment assistance amount. The current formula and Alternative
2 provide fairly similar amounts of payment assistance while
Alternative 3 provides a greater amount of payment assistance to almost
all borrowers whose incomes are above the cap.
Exhibit 10 shows this effect.
Exhibit 10.--Impact of Changes in Income on Payment Assistance, Current
Formula and Alternatives
BILLING CODE 3410-XV-P
[[Page 8531]]
[GRAPHIC] [TIFF OMITTED] TP17FE06.000
Assumptions for Exhibit 10:
(1) Loan amount = $90,000
(2) T&I = 1.6 percent of loan amount
(3) Note rate = 7 percent
(4) AMI = $44,000
[[Page 8532]]
Under the current formula, the cap is determined by the ratio of
AAI to AMI. When the ratio increases, the amount of payment assistance
drops by more than the increase in income. This effect does not occur
under either Alternative 2 or Alternative 3. The table below shows a
borrower's monthly payments when income equals $21,000, $22,000, and
$23,000, with tax and insurance payments ranging from 0.5 percent to
3.5 percent of the loan. Borrower payments that are not bolded are
based on 25 percent of income. In this example, the borrower pays 25
percent when T&I is relatively low. The borrower payments that are
bolded are based on a one percent interest rate.
Exhibit 11.--Impact of Change in Income on Borrower Payment and Payment Assistance, Alternative 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Income = $21,000 Income = $22,000 Income = $23,000
T&I as -----------------------------------------------------------------------------
Number percent of T&I PITI Borrower Borrower Borrower
loan payment for Payment payment for Payment payment for Payment
PITI assistance PITI assistance PITI assistance
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................... 0.50 $38 $621 $438 $183 $458 $162 $479 $142
2.......................................... 0.70 53 636 438 198 458 177 479 157
3.......................................... 0.90 68 651 438 213 458 192 479 172
4.......................................... 1.10 83 666 438 228 458 207 479 187
5.......................................... 1.30 98 681 438 243 458 222 479 202
6.......................................... 1.50 113 696 438 258 458 237 479 217
7.......................................... 1.70 128 711 438 273 458 252 479 232
8.......................................... 1.90 143 726 438 288 458 267 479 247
9.......................................... 2.10 158 741 438 303 458 282 479 262
10......................................... 2.30 173 756 439 316 458 297 479 277
11......................................... 2.50 188 771 454 316 458 312 479 292
12......................................... 2.70 203 786 469 316 469 316 479 307
13......................................... 2.90 218 801 484 316 484 316 484 316
14......................................... 3.10 233 816 499 316 499 316 499 316
15......................................... 3.30 248 831 514 316 514 316 514 316
16......................................... 3.50 263 846 529 316 529 316 529 316
--------------------------------------------------------------------------------------------------------------------------------------------------------
Thus, when the borrower's payment is based on 25 percent of income,
and the borrower's annual income goes from $21,000 to $22,000, the
monthly payments increase by $20, for an annual increase of $240 and a
net gain in income of $760. When the borrower's payment is based on the
one percent interest rate, the amount of the payment does not change.
Similarly, when the borrower's payment is based on 25 percent of income
and income goes from $21,000 to $23,000, the monthly payment increases
by $40, for an annual increase of $480 and a net gain in income of
$1,520. When the borrower's payment is based on the one percent rate,
his or her payment does not change.
Under Alternative 3, the EIR scale increases so gradually relative
to increases in income that the borrower will not face a situation in
which a loss in payment assistance exceeds an increase in earnings.
Exhibit 12 shows how borrower payments increase with income, assuming
the loan and borrower characteristics described at the beginning of
this section. The payments do not change with taxes and interest,
unlike under Alternative 2.
Exhibit 12.--Impact of Change in Income on Borrower Payment and Payment Assistance, Alternative 3
----------------------------------------------------------------------------------------------------------------
Borrower
Income payment for Payment PITI
