Adjustable Rate and Home Equity Conversion Mortgages-Additional Index, 40048-40050 [E7-14030]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 72, Number 139 (Friday, July 20, 2007)]
[Rules and Regulations]
[Pages 40048-40050]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14030]



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Part III





Department of Housing and Urban Development





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24 CFR Parts 203 and 206



 Adjustable Rate and Home Equity Conversion Mortgages--Additional 
Index; Final Rule

Federal Register / Vol. 72, No. 139 / Friday, July 20, 2007 / Rules 
and Regulations

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 206

[Docket No. FR-4969-F-02]
RIN 2502-AI32


Adjustable Rate and Home Equity Conversion Mortgages--Additional 
Index

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This final rule adds: The one-year London Interbank Offered 
Rate (LIBOR) as an acceptable index for the HUD-insured one-, 3-, 5-, 
7-, and 10-year Adjustable Rate Mortgage (ARM) products, and the one-
month Constant Maturity Treasury (CMT), the one-month LIBOR, and the 
one-year (12-month) LIBOR as acceptable indices to adjust interest 
rates on the HUD-insured Home Equity Conversion Mortgage (HECM). Under 
current regulations, only the weekly average yield of U.S. Treasury 
securities, adjusted to a constant maturity of one year (commonly 
referred to as the one-year CMT), may be used to adjust interest rates 
on HUD-insured ARMs and HECMs. This final rule follows a June 19, 2006, 
proposed rule and includes HECMs in response to public comment on the 
June 19, 2006, proposed rule.

DATES: Effective Date: August 20, 2007.

FOR FURTHER INFORMATION CONTACT: James Beavers, Deputy Director, Single 
Family Program Development, Office of Single Family Housing, Office of 
Housing, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410-8000; telephone number (202) 708-2121 
(this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION

 I. Background

    The previous policy of HUD's Federal Housing Administration (FHA) 
Single Family mortgage programs had been to use the weekly average 
yield of U.S. Treasury securities adjusted to a constant maturity of 
one year as the basis for interest rate adjustments on HUD-insured ARM 
loans and to determine interest rates on HECM loans. HUD believed that 
indices calculated and published by the U.S. Government were 
appropriate for mortgage loans insured by the U.S. Government (see 
HUD's responses to public comments on hybrid ARMs, as presented in the 
final rule published on March 10, 2004, at 69 FR 11500). However, the 
growing popularity of the LIBOR index, including its acceptance in the 
secondary mortgage market, has led to a change in HUD's policy on this 
issue.
    LIBOR is both an international index determined on the basis of the 
world economy and an index that has recently become widely used for ARM 
loans in the United States. LIBOR-based loans have become very popular 
in the secondary market, and this greater liquidity allows lenders to 
offer lower margins to borrowers.
    The LIBOR indices and the corresponding CMT indices have 
historically tracked each other closely over time. While the LIBOR rate 
may often be slightly higher, the better margins available for LIBOR-
indexed loans often make LIBOR-based loans a better deal for consumers.
    In addition, as LIBOR loans become more popular, it is necessary 
for HUD to offer a LIBOR option to remain competitive in the secondary 
market. With the large number of lenders now offering LIBOR-based ARM 
loans, to be competitive it no longer makes economic sense for FHA to 
restrict itself to the Treasury index.
    Under the authority of section 251(a) of the National Housing Act 
(12 U.S.C. 1715z-16(a)), HUD may set by regulation a national interest 
rate index, and information on the index must be readily available to 
mortgagors. The one-month LIBOR and the one-year LIBOR are widely 
published and meet this availability requirement. Information on LIBOR 
rates is readily available through a variety of media, including the 
Internet.

II. The June 19, 2006, Proposed Rule

    On June 19, 2006, HUD published a proposed rule that would amend 
HUD's regulations at 24 CFR 203.49(b) to add the LIBOR index as an 
acceptable index for determining interest rate adjustments of HUD-
insured ARMs (see 71 FR 35370). The proposed rule did not cover HECM 
loans, which are governed by separate regulations at 24 CFR part 206.

III. This Final Rule; Significant Changes to the June 19, 2006, 
Proposed Rule

    In response to public comments, which are discussed in Section IV, 
this final rule adds HECM loans as eligible to use the LIBOR indices.

IV. Discussion of Public Comments Received on the June 19, 2006, 
Proposed Rule

    The public comment period of the June 19, 2006, proposed rule 
closed on August 18, 2006, and HUD received five comments on the 
proposed rule. Comments were received from three trade organizations 
representing mortgage bankers and home builders, the home mortgage 
division of a bank, and a residential mortgage group.
    All five commenters supported HUD's proposal to add LIBOR as an 
acceptable index for adjusting the interest rate of HUD-insured ARM 
products. The commenters wrote that the inclusion of the LIBOR allows 
lenders greater flexibility in offering ARM products, provides an 
incentive for more lenders to use the FHA program, and broadens 
mortgage options for FHA borrowers. Two of the commenters requested 
that HUD extend the availability of the LIBOR index to HUD's HECM 
products. The commenters wrote that the same reasoning and benefits 
apply for allowing the LIBOR indices to be used with the HECM program.
    After careful consideration of the comments requesting that the 
LIBOR index be allowed for HUD's HECM products, HUD has decided to 
include the aforementioned LIBOR indices as an option in HUD's HECM 
programs. Inclusion of the LIBOR as acceptable indices for HECM 
products does not impose any requirement on regulated entities or on 
the public. Rather, it permits the use of alternative indices for 
calculating interest rate adjustments and the expected average mortgage 
interest rate on HECM loans. Mortgage lenders that do not wish to use 
the LIBOR indices as the basis for the interest rate adjustments on 
HUD-insured HECMs can continue using the current one-year CMT index. 
HUD's HECM regulations are also being amended to allow the one-month 
CMT or one-month LIBOR as an option for lenders and borrowers. 
Similarly, while this rule adds another option for determining interest 
rate adjustments and expected average mortgage interest rates, members 
of the public continue to have access to HUD-insured HECMs based on the 
U.S. Treasury security indices. Further, as administered, the loans 
provided today under the HECM program are predominantly ARMs. Allowing 
the LIBOR indices to be used for HECMs is consistent with current HUD 
policy, as expressed in this final rule. Not only does the inclusion of 
the LIBOR indices for HECMs foster consistency within HUD's 
regulations, but it also conforms HUD practice to that of the rest of 
the

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mortgage industry, which offers LIBOR-based ARM and reverse mortgage 
loans.
    Section 255 of the National Housing Act, 12 U.S.C. 1715z-20, 
provided for the establishment of the HECM program. The HECM provides 
elderly homeowners with an opportunity to convert home equity into 
monthly streams of income and/or lines of credit. In establishing the 
HECM loan, the lender must compute two interest rates. The first 
interest rate is the expected average mortgage interest rate, which is 
a rate that remains fixed for the life of the loan and is used to 
calculate the loan's principal limit and payment plan. A long-term rate 
is utilized as the benchmark for the expected average mortgage interest 
rate, as it better predicts performance for the life of the loan than 
does a short-term rate. The second interest rate computed is the 
mortgage interest (accrual or note) rate, which is a short-term rate. 
Currently, the fixed HECM expected rate and the adjustable HECM 
mortgage interest rates are both tied to yields on U.S. Treasury 
securities, which are adjusted to a constant maturity of one year for 
the mortgage interest rate and to a constant maturity of 10 years for 
the expected average mortgage interest rate.
    HUD's regulations at 24 CFR 206.3 are being amended to add the 
LIBOR index as an acceptable index for determining interest rate 
adjustments of HECM loans. The rule now adds the one-month CMT, the 
one-month LIBOR, and the one-year LIBOR as acceptable indices to adjust 
interest rates on the HECM, and to require use of the 10-year LIBOR 
swap rate to establish the expected average mortgage interest rate on 
the HECM product, if the note is indexed to either the one-month or 
one-year LIBOR rate. The rule provides additional options in the case 
of monthly adjusting HECM loans, in that it provides for the option, 
which may be preferable, of using the one-month LIBOR index or one-
month CMT index to adjust the interest rate of monthly adjusting HECM 
loans. However, the one-year CMT may continue to be used to adjust the 
interest rate of monthly adjustable HECM loans. The rule also provides 
for the option of using the one-year LIBOR index or one-year CMT index 
to adjust the interest rate of annually adjusting HECM loans.
    In order to calculate the expected average mortgage interest rate 
on either monthly adjusting or annually adjusting HECMs indexed to 
LIBOR, the U.S. dollar denominated 10-year LIBOR swap rate will be 
used. Since LIBOR rates are short-term rates (ranging from maturities 
of one week through 12 months), the financial community relies on the 
LIBOR ``swap rate curve'' to calculate the LIBOR-based interest rate 
yield curve for maturities greater than one year. The U.S. dollar-
denominated LIBOR swap rate curve shows the fixed-rate leg (i.e., 
portion of the swap) of ordinary fixed-for floating rate swap contracts 
where the floating-rate leg is the 6-month LIBOR rate expressed in 
dollars.
    A swap is a financial derivative under which two parties exchange 
two streams of future cash flows. The transaction is called a ``plain 
vanilla'' interest-rate swap if both cash flow streams are in the same 
currency and involve an exchange of fixed-rate for floating-rate 
interest payments on the same hypothetical (or ``notional'') loan 
amount. For example, in the case of a plain vanilla interest rate swap 
with a term of 10 years, the banks could agree to swap fixed-rate 
dollar payments at 5.1 percent on a notional loan amount of $100,000 in 
exchange for dollar-denominated 6-month LIBOR payments on the same 
notional loan amount. The 5.1 percent fixed-rate leg of the swap 
contract would correspond to the 10-year point on the LIBOR swap rate 
curve.
    As such, the U.S. dollar-denominated 10-year LIBOR swap rate is a 
long-term market-based interest rate calculation that is driven by 
factors similar to those that affect the 10-year CMT. Not only does the 
10-year LIBOR swap rate derive from a calculation of what the one-year 
LIBOR index would be if it operated on a long-term basis, but it also 
has historically performed closely to the 10-year CMT.
    The addition of the LIBOR indices is beneficial to homeowners as 
well as entities in the mortgage community. Use of the LIBOR indices 
would attract new investors to HECMs, thus increasing liquidity in the 
secondary mortgage market, which in turn would drive down costs and 
interest rates for the mortgagor. Therefore, HUD believes it is 
reasonable to permit the use of LIBOR indices for HECM loans at the 
final rule phase.
    In addition to the comments requesting the availability of the 
LIBOR index in HUD's HECM program, the following two comments were also 
made.
    Comment: Borrowers need sufficient information so that they can 
make informed decisions. One commenter wrote that HUD should include in 
the regulation a disclosure requirement to ensure that prospective FHA 
borrowers receive sufficient information to make informed decisions as 
to indices, based on historical and prospective borrowing costs.
    HUD Response: HUD agrees that borrowers choosing ARMs, for forward 
and reverse mortgages, should be provided with sufficient disclosures 
regarding adjustable rate mortgage products, and will continue to 
require that lenders provide ARM disclosures prescribed by the Federal 
Reserve. However, HUD will not require lenders to develop ARM 
disclosures specific to FHA mortgage insurance programs.
    Comment: Increasing the annual cap to 2 percentage points and a 
life-of-loan cap of 6 percentage points would benefit consumers. One 
commenter wrote that HUD should allow HUD's 5/1 ARM product to be 
offered with 2/6 caps. The commenter realized that this is current HUD 
policy, but that FHA sponsors have not yet made these products 
available.
    HUD Response: The HUD regulation at 24 CFR 203.49(f)(2) allows for 
5-, 7-, and 10 year ARMs to adjust as much as 2 percentage points 
annually after the initial contract period, and a maximum of 6 
percentage points over the life of the loan. HUD makes insured interest 
rate products such as ARM loans available to the market; however, HUD 
does not mandate that any lender offer any or all of the ARM products 
available. Whether or not a lender offers a particular product depends 
on market demand and other economic factors. For example, in a rising 
interest rate environment, 2/6 ARMs may not be desirable for borrowers. 
However, the product requested by the comment is, in fact, legally 
available.

V. Findings and Certifications

Impact on Small Entities

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities.
    This rule would permit greater flexibility for lenders that, in 
offering ARMs and HECMs to homebuyers, want to have a choice of indices 
for determining interest rate adjustments for the ARM and HECM, and for 
establishing the expected mortgage interest rate on HECM loans. 
However, this rule would not require any small business to take any 
action or meet any requirements. Therefore, this rule would create no 
impact on small entities. Accordingly, the undersigned certifies that 
this final rule will not have a significant economic impact on a 
substantial number of small entities,

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and an initial regulatory flexibility analysis is not required.

Environmental Impact

    This final rule involves the discretionary establishment of 
interest rates and external administrative or fiscal requirements or 
procedures that do not constitute a development decision that affects 
the physical condition of specific project areas or building sites. 
Accordingly, under 24 CFR 50.19(c)(6), this rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321 et seq.).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This final 
rule does not have federalism implications and does not impose 
substantial direct compliance costs on state and local governments or 
preempt state law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531-1538) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and the private sector. This final rule would not 
impose any federal mandates on any state, local, or tribal government, 
or the private sector within the meaning of UMRA.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number applicable to this 
rule is 14.175.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 206

    Aged, Condominiums, Loan programs--housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.


0
Therefore, for the reasons stated in the preamble, HUD amends 24 CFR 
parts 203 and 206, as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for 24 CFR part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 
U.S.C. 3535(d).


0
2. Amend Sec.  203.49 by revising the first sentence of Sec.  203.49(b) 
to read as follows:


Sec.  203.49  Eligibility of adjustable rate mortgages.

* * * * *
    (b) Interest rate index. Changes in the interest rate charged on an 
adjustable rate mortgage must correspond either to changes in the one-
year London Interbank Offered Rate (LIBOR) or to changes in the weekly 
average yield on U.S. Treasury securities, adjusted to a constant 
maturity of one year. * * *
* * * * *

PART 206-HOME EQUITY CONVERSION MORTGAGE INSURANCE

0
3. The authority citation for 24 CFR part 206 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).


0
4. Amend Sec.  206.3 by revising the definition of ``Expected average 
mortgage interest rate'' and adding, in proper alphabetical order, 
definitions of ``LIBOR'' and ``One-month Constant Maturity Treasury 
(CMT) Index'' to read as follows:


Sec.  206.3  Definitions.

* * * * *
    Expected average mortgage interest rate means the interest rate 
used to calculate the principal limit and the future payments to the 
mortgagor and is established based on the date on which the initial 
loan application is signed by the borrower. For fixed rate HECMs, it is 
the fixed mortgage interest rate. For adjustable rate HECMs, it is 
either the sum of the mortgagee's margin plus the weekly average yield 
for U.S. Treasury securities adjusted to a constant maturity of 10 
years, or it is the sum of the mortgagee's margin plus the 10-year 
LIBOR swap rate, depending on which interest rate index is chosen by 
the mortgagor. The margin is determined by the mortgagee and is defined 
as the amount that is added to the index value to compute the mortgage 
interest rate. The index type (i.e., CMT or LIBOR) used to calculate 
the expected average mortgage interest rate must be the same index type 
used to calculate mortgage interest rate adjustments--commingling of 
index types is not allowed (e.g., it is not permissible to use the 10-
year CMT to determine the expected average mortgage interest rate and 
use the one-year LIBOR index to adjust the interest rate). The 
mortgagee's margin is the same margin used to determine the periodic 
adjustments to the interest rate.
* * * * *
    LIBOR means the London Interbank Offered Rate.
* * * * *
    One-month Constant Maturity Treasury (CMT) Index means the average 
weekly yield of U.S. Treasury securities adjusted to a constant 
maturity of one month.
* * * * *
0
5. In Sec.  206.21, revise paragraphs (b)(1) and (b)(2) to read as 
follows:


Sec.  206.21  Interest rate.

* * * * *
    (b) * * *
    (1) A mortgagee offering an adjustable interest rate shall offer a 
mortgage with an interest rate cap structure that limits the periodic 
interest rate increases and decreases as provided in Sec.  203.49(a), 
(b), (d), and (f) of this chapter, except that reference to mortgagor's 
first debt service payment in Sec.  203.49(d) shall mean closing, and 
references in Sec.  203.49(f)(1) to one percentage point shall mean two 
percentage points.
    (2) If a mortgage meeting the requirements of paragraph (b)(1) of 
this section is offered, the mortgagee may also offer a mortgage which 
provides for monthly adjustments to the interest rate, corresponding to 
an index as provided in Sec.  203.49(a), (b), and (f)(1), or to the 
one-month CMT index or one-month LIBOR index, and which sets a maximum 
interest rate that can be charged without limiting monthly or annual 
increases or decreases. The first adjustment must occur on the first 
day of the second full month after closing.
* * * * *

    Dated: July 13, 2007.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. E7-14030 Filed 7-19-07; 8:45 am]
BILLING CODE 4210-67-P