Federal Housing Administration Risk Management Initiatives: New Loan-to-Value and Credit Score Requirements, 54020-54023 [2010-22133]
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54020
Federal Register / Vol. 75, No. 171 / Friday, September 3, 2010 / Rules and Regulations
Ractopamine in
grams/ton
Combination in
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Indications for use
Limitations
(xiii) Not to exceed 800; to
provide 70 to 400 mg/
head/day.
Monensin 10 to 40 to
provide 0.14 to 0.42
mg monensin/lb of
body weight, depending on severity of
coccidiosis challenge,
up to 480 mg/head/
day, plus tylosin 8 to
10.
Cattle fed in confinement for
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(e)(2)(i) of this section; for prevention and control of coccidiosis
due to Eimeria bovis and E.
zuernii; and for reduction of incidence of liver abscesses caused
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Top dress ractopamine in a minimum of 1.0 lb of medicated feed
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*
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Dated: August 31, 2010.
Elizabeth Rettie,
Deputy Director, Office of New Animal Drug
Evaluation, Center for Veterinary Medicine.
[FR Doc. 2010–22071 Filed 9–2–10; 8:45 am]
BILLING CODE 4160–01–S
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Ch. II
[Docket No. FR–5404–N–02]
Federal Housing Administration Risk
Management Initiatives: New Loan-toValue and Credit Score Requirements
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner, HUD.
ACTION: Final rule.
AGENCY:
On July 15, 2010, HUD issued
a notice seeking comment on three
initiatives that HUD proposed would
contribute to the restoration of the
Mutual Mortgage Insurance Fund
(MMIF) capital reserve account. This
document is limited to implementation
of HUD’s proposal to introduce a
minimum credit score threshold and
reduce the maximum LTV. At the end
of the public comment period on August
16, 2010, HUD received 902 comments.
The overwhelming majority of these
comments focused on HUD’s proposal
to cap seller concessions. HUD is
continuing to review and consider the
issues raised by commenters on capping
seller concessions as well as those
pertaining to HUD’s proposal to tighten
manual underwriting guidelines. HUD’s
final decision on these two proposals
will be addressed separately.
DATES: Effective Date: October 4, 2010.
FOR FURTHER INFORMATION CONTACT:
Karin Hill, Director, Office of Single
Family Program Development, Office of
Housing, Department of Housing and
Urban Development, 451 7th Street,
SW., Room 9278, Washington, DC
20410; telephone number 202–708–2121
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SUMMARY:
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(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—HUD’s July 15, 2010
Notice
On July 15, 2010, at 75 FR 41217,
HUD issued a proposed rule seeking
comment on three initiatives that HUD
proposed would contribute to the
restoration of the Mutual Mortgage
Insurance Fund (MMIF) capital reserve
account. The proposed changes were
developed to preserve both the
historical role of the Federal Housing
Administration (FHA) in providing a
home financing vehicle during periods
of economic volatility and HUD’s social
mission of helping underserved
borrowers. In the July 15, 2010, notice,
HUD proposed the following: To reduce
the amount of closing costs a seller may
pay on behalf of a homebuyer
purchasing a home with FHA-insured
mortgage financing for the purposes of
calculating the maximum mortgage
amount; to introduce a credit score
threshold as well as reduce the
maximum loan-to-value (LTV) for
borrowers with lower credit scores who
represent a higher risk of default and
mortgage insurance claim; and to
tighten underwriting standards for
mortgage loan transactions that are
manually underwritten.
A recently issued independent
actuarial study shows that the MMIF
capital ratio has fallen below its
statutorily mandated threshold.1
1 On November 13, 2009, HUD released an
independent actuarial study that reported that FHA
will likely sustain significant losses from mortgage
loans made prior to 2009, due to the high
concentration of seller-financed downpayment
assistance mortgage loans and declining real estate
values nationwide, and that the MMIF capital
reserve relative to the amount of outstanding
insurance in force had fallen below the statutorily
mandated 2 percent ratio. The capital reserve
account serves as a back-up fund, where FHA holds
additional capital to cover unexpected losses. The
capital ratio generally reflects the reserves available
(net of expected claims and expenses), as a
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Consistent with HUD’s responsibility
under the National Housing Act to
ensure that the MMIF remains
financially sound, HUD published the
July 15, 2010 document and sought
public comment on the three proposals
described above designed to address
features of FHA mortgage insurance that
have resulted in high mortgage
insurance claim rates and present an
unacceptable risk of loss to FHA.
Over the past two years, the volume
of FHA insurance has increased rapidly
as private sources of mortgage finance
retreated from the market. FHA’s share
of the single-family mortgage market
today is approximately 30 percent—up
from 3 percent in 2007, and the dollar
volume of insurance written has jumped
from the $56 billion issued in that year
to more than $300 billion in 2009. The
growth in the MMIF portfolio over such
a short period of time coincided with
worsening economic conditions that
have seen high levels of defaults and
foreclosures, and consequently
unacceptable risks of loss to the MMIF.
Given these conditions and concerns,
FHA, in managing the MMIF, must be
especially vigilant in monitoring the
performance of the portfolio, enhancing
risk controls, and tightening standards
to address portions of the business that
expose homeowners to excessive
financial risks. FHA’s authorizing
statute, the National Housing Act (12
U.S.C. 1701 et seq.), envisions that FHA
will adjust program standards and
practices, as necessary, to operate the
MMIF, with reasonable expectations of
financial loss. Within the past year,
FHA has adjusted several program
standards and practices so that the
MMIF is preserved and FHA is
operating the MMIF with acceptable
risks of financial loss, not unacceptable
risks.2
percentage of the current portfolio, to address
unexpected losses. The report can be found at:
https://www.hud.gov/offices/hsg/
fhafy09annualmanagementreport.pdf.
2 While the Federal Credit Reform Act of 1990
requires that FHA (and all other government credit
agencies) estimate and budget for the anticipated
cost of mortgage loan guarantees, the National
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Federal Register / Vol. 75, No. 171 / Friday, September 3, 2010 / Rules and Regulations
The July 15, 2010, notice represents
another step in HUD’s effort to preserve
the MMIF and preserve FHA as a source
of available credit for affordable home
mortgages. Interested readers are
referred to the July 15, 2010 notice for
details regarding the proposed changes
to FHA requirements.
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II. This Notice—Addressing Solely
Minimum Credit Score and New LTV
Requirements
As noted in the preceding section,
this document is limited to
implementation of the revised credit
score and LTV requirements, and takes
into consideration the public comments
received on HUD’s proposal to establish
a minimum decision credit score and
reduce LTV, as set forth in the July 15,
2010 notice. The majority of the public
comments that HUD received in
response to the July 15, 2010, focused
on the other two proposals (the
reduction in seller concessions and
revised manual underwriting
requirements). HUD is continuing to
review and consider the issues raised by
the comments on these two proposals,
as well as alternative proposals raised
by commenters. HUD’s final decision on
these two proposals will be addressed
separately. Section III of this document
discusses the significant issues raised by
the public comments regarding the new
credit score and LTV requirements, as
well as HUD’s responses to these issues.
The separate document to address
capping seller concessions and
tightening underwriting guidelines will
address the public comments on these
proposals.
The July 15, 2010 notice more fully
addresses the reasons for the
establishment of a minimum decision
credit score and reduction in LTV for
FHA mortgage insurance, and readers
are referred to the notice for the more
in-depth discussion of this proposal (see
75 FR 41220–41222). As discussed in
the July 15, 2010, notice, FHA serves
very few borrowers with credit scores
below 500; however, the performance of
these borrowers is very poor. FHA data
indicate that insured mortgages with
decision credit scores below 580 have
significantly worse default and claim
experience than do loans at or above
580. The revised credit score and LTV
requirements increase the likelihood
that borrowers who are offered FHAinsured mortgages are capable of
Housing Act imposes a special requirement that the
MMIF hold an additional amount of funds in
reserve to cover unexpected losses. FHA maintains
the MMIF capital reserve in a special reserve
account. The MMIF capital reserve account serves
as a back-up fund, where FHA holds additional
capital to cover unexpected losses.
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repaying these mortgages. Under this
document, effectively, a borrower with
a decision credit score between 500 and
579 will be required to make a greater
downpayment [at minimum, 10 percent]
than a borrower with a higher score, for
the purchase of a home with the same
sales price.3 Borrowers with credit
scores below 500 will not be eligible for
FHA-insured financing. The new LTV
and credit score requirements will
reduce the risk to the MMIF and ensure
that home buyers are offered mortgage
loans that are sustainable. Section IV of
this document implements the
minimum decision credit score and new
LTV requirements. HUD will also issue
additional guidance through Mortgagee
Letter to assist in implementation of
these new requirements.
III. Discussion of the Public Comments
on the July 15, 2010 Proposal
At the close of the public comment
period on August 16, 2010, HUD
received 902 public comments on the
issue of establishing a minimum
decision credit score and new LTV
requirements. This section discusses the
most significant issues raised by the
commenters on these proposals, and
HUD’s responses to these issues.
Comment: Support for revised credit
score and LTV requirements. Several
commenters wrote in support of the
proposed revised credit score and LTV
requirements. The commenters agreed
that proposed changes to FHA
requirements would help ensure that
borrowers do not assume more mortgage
debt than they are able to afford.
HUD Response. HUD appreciates the
support expressed by commenters, and
agrees that the changes will reduce the
risk to the MMIF and ensure that
homebuyers are offered FHA-insured
mortgage loans that are sustainable.
Comment: The proposed revisions do
not go far enough. Several commenters,
while supportive of the proposed
changes, recommended that HUD adopt
more stringent credit score and LTV
requirements. The measures
recommended by the commenters
varied, with suggested minimum
decision scores most commonly ranging
between 580 and 625. The commenters
3 FHA will continue to allow borrowers to use
permissible sources of funds, as described in FHA
Handbook 4155.1, paragraph 5.B.1, to meet the
minimum cash investment in the form of a
downpayment. Gifts from family members,
charitable organizations, employers, and
government entities are also permitted, provided
that none of the parties financially benefit from the
sales transaction. In addition, governmental
entities, including instrumentalities thereof, as
described in Section 528 of the National Housing
Act, may offer secondary financing to cover the
borrowers’ cash investment.
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54021
were in agreement that a higher
minimum credit score would further
protect borrowers and the FHA
insurance funds.
HUD Response. HUD has not revised
its proposal in response to these
comments. In establishing the revised
credit score requirements, HUD has
endeavored to balance the need to
protect the MMIF capital reserve
account, while at the same time
preserving the historical role of FHA in
providing home financing vehicles
during periods of economic volatility.
Too high of a minimum score would
undermine HUD’s mission of expanding
affordable homeownership opportunity,
while too low a score would fail to
replenish the MMIF capital reserves. As
noted above, and discussed in more
detail in the July 15, 2010, notice, the
minimum credit score of 500 to
determine eligibility for FHA financing
was selected after a careful analysis of
FHA mortgage performance data. This
data indicates that while FHA serves
few borrowers with credit scores below
500 their performance is clearly very
poor. The data also indicates that
insured mortgages with decision credit
scores below 580 have significantly
worse default and claim experience than
do loans at or above 580.
Comment: Opposition to revised
credit score requirements. In contrast to
the preceding comments, several
commenters opposed any changes to the
FHA credit score and LTV requirements.
These commenters wrote that the
changes would only make it more
difficult for borrowers in difficult
economic times to obtain mortgage
financing. The commenters also
expressed concerns that the changes
would hurt the overall economy by
further restricting the availability of
mortgage financing.
HUD Response. As noted in the
response to the preceding comments,
FHA takes seriously its mission to help
underserved borrowers. As discussed
above, HUD also has a statutory
obligation to protect the MMIF capital
reserve accounts by ensuring that
borrowers who are offered FHA-insured
mortgages are capable of repaying these
mortgages. The changes balance the
twin goals of protecting the financial
health of the MMIF, while continuing to
meet FHA’s historic role of providing a
vehicle for mortgage lenders to provide
affordable mortgages. Moreover, as also
noted, sustainable homeownership is
essential to a healthy and wellfunctioning housing market. These
changes will promote that goal by
helping to ensure that FHA homeowners
are able to afford their mortgage loans.
HUD based the revised credit score
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Federal Register / Vol. 75, No. 171 / Friday, September 3, 2010 / Rules and Regulations
requirements on a careful analysis of
historical data that indicates FHA serves
few borrowers with a credit score below
the new minimum of 500. Moreover,
HUD has taken steps to mitigate the
impacts of establishing a minimum
decision credit score. First, HUD has
established a threshold score for FHAinsured mortgages that is below the cutoff score of 620 used by many private
lenders. Second, HUD is providing a
special, temporary allowance to permit
a higher LTV when refinancing
mortgage loans for certain borrowers
with decision credit scores between 500
and 579. HUD is providing this special
exemption in recognition of the fact that
even homeowners who have been able
to make their monthly payments may
have had their credit scores negatively
impacted by the downturn in the
economy.
Comment: A revision to the credit
score requirements will have minimal
effect. Many commenters questioned the
need of establishing a minimum
decision credit score of 500, given that
most mortgage lenders have adopted a
higher minimum credit score. The
commenters cited to several industry
standards, and most commonly to a
minimum credit score of 620. These
commenters wrote that HUD’s proposal
would have little impact since mortgage
lenders will not provide mortgage loans
to borrowers with credit scores below
the minimums they have established.
HUD Response. HUD has not revised
its proposal based on these comments.
Unlike private mortgage lenders, HUD
has an important historical
countercyclical position of supporting
the private sector when access to capital
is constrained, and an equally important
social mission of helping unserved
borrowers. HUD takes these
responsibilities seriously and, as
discussed more fully in the responses to
the preceding comments, continues to
believe that the revised credit score
requirements strike the appropriate
balance between fulfilling HUD’s
historical and social responsibilities, as
well as its statutory duty to preserve the
MMIF capital reserves.
Comment: Acceptable score ranges for
other scoring models. The July 15, 2010,
notice invited comment on the best
means for FHA to provide guidance on
acceptable score ranges for scoring
models other than FICO-based decision
scores, to ensure that the scales used for
all scoring systems are consistent and
appropriate for FHA borrowers (see 75
FR 41220). In response, a few
commenters wrote to suggest alternative
scoring models. For example, one
commenter (the developer of a
consumer credit score model) proposed
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a calibration analysis of the FHA loan
portfolio using its credit score model.
Another commenter advocated that
HUD provide further guidance on risk
thresholds, decision points and pricing
tiers, so that developers of risk
assessment services can initiate new
processes. The majority of these
commenters, however, questioned the
usefulness of using any credit score
model, writing that credit scores are an
imperfect indicator of risk and often not
reflective of a person’s ability to pay.
The commenters also wrote that credit
scores sometimes have disparate impact
on minorities compared to other
borrowers.
HUD Response. HUD has not revised
the July 15, 2010, notice in response to
these comments. With respect to the use
of other credit scoring models, HUD
greatly appreciates the suggestions
offered by the commenters. However,
HUD believes that additional analysis of
this issue is required given the
complexity of the proposed approaches
as well as the need to provide sufficient
notice to the industry of such a
significant change to current FHA
requirements. HUD is not
unsympathetic to the concerns
expressed by the commenters that
questioned the utility of credit models,
and reiterates that it has taken several
steps to mitigate the impacts of
establishing a minimum decision credit
score. As noted, HUD has established a
threshold below the threshold score
widely used by many private lenders
and is providing a temporary allowance
to permit a higher LTV when
refinancing mortgage loans for certain
borrowers. Further, in response to many
of the concerns expressed by these
commenters, FHA requires the use of
manual underwriting to address cases
where the borrower has very limited or
nontraditional credit history, a FICObased credit score may not have been
issued, or the credit score may be based
on references that are few in number or
do not effectively predict future credit
worthiness.
IV. Establishment of Minimum Decision
Credit Score and New LTV
Requirements
Commencing on the effective date:
1. Minimum Credit Score. Borrowers
will be required to have a minimum
decision credit score of no less than 500
to be eligible for FHA financing.
The decision credit score used by
FHA is based on methodologies
developed by the FICO Corporation.
FICO scores, which range from a low of
300 to a high of 850, are calculated with
input by each of the three National
Credit Bureaus and are based upon
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credit-related information reported by
creditors, specific to each applicant.
Lower credit scores indicate greater risk
of default on any new credit extended
to the applicant. The decision credit
score is based on the middle of three
National Credit Bureau scores or the
lower of two scores when all three are
not available, for the lowest scoring
applicant.
2. LTV requirements. The LTV for
FHA-insured mortgage loans (purchase
and refinance) will be limited to 90
percent for borrowers with a decision
score between 500 and 579. Maximum
FHA-insured financing (typically, 96.5
percent LTV for purchase transactions
and 97.75 percent for rate and term
refinance transactions) will continue to
be available for borrowers with credit
scores at or above 580.
3. Temporary Exemption for
Borrowers Seeking to Refinance. As
indicated in the July 15, 2010 notice,
FHA is providing a special, temporary
allowance to permit higher LTV
mortgage loans for borrowers with lower
decision credit scores, so long as they
involve a reduction of existing mortgage
indebtedness pursuant to FHA program
adjustments announced in HUD
Mortgagee Letter 2010–23.4 In
accordance with Mortgagee Letter 2010–
23, the current mortgage lender will
need to agree to accept a short pay off,
accepting less than the full amount
owed on the original mortgage in order
to satisfy the outstanding debt.
This temporary exemption recognizes
that, given current economic conditions,
the decision credit scores announced in
this notice may be counterproductive in
helping existing homeowners refinance
to obtain more affordable mortgages and
save their homes. FHA recognizes that
even homeowners who have been able
to make their monthly payments may
have had their credit scores negatively
impacted by the downturn in the
economy which has so seriously
affected the housing market.
This exemption is applicable only to
borrowers with credit scores between
500 to 579. Further, the exemption is
applicable only to refinance transactions
originated pursuant to Mortgagee Letter
2010–23 and closed on or before
December 31, 2012.
V. Findings and Certification
Executive Order 12866, Regulatory
Planning and Review
The Office of Management and Budget
(OMB) reviewed this document under
Executive Order 12866 (entitled
4 The Mortgagee Letter is available at: https://
www.hud.gov/offices/adm/hudclips/letters/
mortgagee/
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‘‘Regulatory Planning and Review’’). The
document was determined to be a
‘‘significant regulatory action,’’ as
defined in section 3(f) of the Order
(although not economically significant,
as provided in section 3(f)(1) of the
Order).
FHA is implementing one change to
replenish the MMIF capital reserve
account. FHA is establishing a two-part
credit-score threshold, with one lower
bound for loans with loan-to-value
ratios of 90 percent or less, and a higher
threshold for those with loan-to-value
ratios up to the statutory maximums.
This is the first time that FHA has ever
instituted an absolute lower-bound for
borrower credit scores. Borrowers with
low credit scores present higher risk of
default and mortgage insurance claim.
Such transactions that lack the
additional credit enhancements
announced in this document result in
higher mortgage insurance claim rates
and present an unacceptable risk of loss.
The benefit of the revised credit score
and LTV requirements will be to reduce
the net losses due to high rates of
insurance claims on affected loans,
while the cost will be the value of the
homeownership opportunity denied to
the excluded borrowers. HUD prepared
an economic analysis assessing costs
and benefits in conjunction with
development of the July 15, 2010,
Federal Register notice. As noted above,
HUD is implementing the proposed
credit score and LTV requirements
without change and, therefore that
analysis remains applicable to this
document. HUD’s full analysis can be
found at https://www.hud.gov/offices/
hsg/sfh/hsgsingle.cfm.
The docket file is available for public
inspection in the Regulations Division,
Office of General Counsel, Department
of Housing and Urban Development,
451 7th Street, SW., Room 10276,
Washington, DC 20410–0500. Due to
security measures at the HUD
Headquarters building, please schedule
an appointment to review the docket file
by calling the Regulations Division at
202–402–3055 (this is not a toll-free
number). Individuals with speech or
hearing impairments may access this
number via TTY by calling the Federal
Information Relay Service at 800–877–
8339.
Environmental Impact
A Finding of No Significant Impact
(FONSI) with respect to the
environment has been made in
accordance with HUD regulations at 24
CFR part 50, which implement section
102(2)(C) of the National Environmental
Policy Act of 1969 (42 U.S.C.
4332(2)(C)). The Finding of No
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Significant Impact is available for public
inspection between the hours of 8 a.m.
and 5 p.m. weekdays in the Regulations
Division, Office of General Counsel,
Department of Housing and Urban
Development, 451 7th Street, SW.,
Room 10276, Washington, DC 20410.
Due to security measures at the HUD
Headquarters building, please schedule
an appointment to review the FONSI by
calling the Regulations Division at
202–708–3055 (this is not a toll-free
number). Individuals with speech or
hearing impairments may access this
number via TTY by calling the Federal
Information Relay Service at 800–877–
8339.
Dated: August 31, 2010.
David H. Stevens,
Assistant Secretary for Housing—Federal
Housing Commissioner.
[FR Doc. 2010–22133 Filed 9–2–10; 8:45 am]
BILLING CODE 4210–67–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 117
[Docket No. USCG–2010–0800]
Drawbridge Operation Regulation;
Atlantic Intracoastal Waterway, Camp
Lejeune, NC
Coast Guard, DHS.
Notice of temporary deviation
from regulations.
AGENCY:
ACTION:
The Commander, Fifth Coast
Guard District, has issued a temporary
deviation from the regulations
governing the operation of the Onslow
Beach Swing Bridge, across the Atlantic
Intracoastal Waterway, mile 240.7, at
Camp Lejeune, NC. The deviation is
necessary to facilitate urgent
replacement of the main hydraulic
system. This deviation allows the bridge
to be in the closed-to-navigation
position.
DATES: This deviation is effective from
1 a.m. on September 8, 2010 to 11:59
p.m. on September 14, 2010.
ADDRESSES: Documents mentioned in
this preamble as being available in the
docket are part of docket USCG–2010–
0800 and are available online by going
to https://www.regulations.gov, inserting
USCG–2010–0800 in the ‘‘Keyword’’ box
and then clicking ‘‘Search’’. They are
also available for inspection or copying
at the Docket Management Facility (M–
30), U.S. Department of Transportation,
West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
SUMMARY:
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54023
Washington, DC 20590, between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays.
If
you have questions on this rule, call or
e-mail Bill H. Brazier, Bridge
Management Specialist, Fifth Coast
Guard District; telephone 757–398–
6422, e-mail Bill.H.Brazier@uscg.mil. If
you have questions on viewing the
docket, call Renee V. Wright, Program
Manager, Docket Operations, telephone
202–366–9826.
FOR FURTHER INFORMATION CONTACT:
The
Onslow Beach Swing Bridge at Atlantic
Intracoastal Waterway, mile 240.7, at
Camp Lejeune NC, has a vertical
clearance in the closed position to
vessels of approximately 12 feet, above
mean high water.
The U.S. Marine Corps at Camp
Lejeune NC, who owns and operates
this swing-type drawbridge, has
requested a temporary deviation from
the current operating regulations set out
in 33 CFR 117.821(a)(1) to facilitate
urgent replacement of the main
hydraulic system.
Under this temporary deviation, the
Onslow Beach Swing Bridge will be
maintained in the closed-to-navigation
position from 1 a.m. on Wednesday,
September 8, 2010 through 11:59 p.m.
on Tuesday, September 14, 2010.
Vessels that can pass under the bridge
without a bridge opening may do so at
anytime. There are no alternate routes
for vessels transiting this section of the
Atlantic Intracoastal Waterway and the
drawbridge will be unable to open in
the event of an emergency.
The Coast Guard has coordinated the
restrictions with the local users of the
waterway, the Steamship Trade
Committee, the Virginia Maritime
Association, and marinas and will
inform unexpected users through our
Local and Broadcast Notices to Mariners
of the closure period for the bridge so
that vessels can arrange their transits to
minimize any impact caused by the
temporary deviation.
In accordance with 33 CFR 117.35(e),
the drawbridge must return to its regular
operating schedule immediately at the
end of the designated time period. This
deviation from the operating regulations
is authorized under 33 CFR 117.35.
SUPPLEMENTARY INFORMATION:
Dated: August 18, 2010.
Waverly W. Gregory, Jr.,
Bridge Administrator, Fifth Coast Guard
District.
[FR Doc. 2010–22033 Filed 9–2–10; 8:45 am]
BILLING CODE 9110–04–P
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Agencies
[Federal Register Volume 75, Number 171 (Friday, September 3, 2010)]
[Rules and Regulations]
[Pages 54020-54023]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-22133]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Ch. II
[Docket No. FR-5404-N-02]
Federal Housing Administration Risk Management Initiatives: New
Loan-to-Value and Credit Score Requirements
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: On July 15, 2010, HUD issued a notice seeking comment on three
initiatives that HUD proposed would contribute to the restoration of
the Mutual Mortgage Insurance Fund (MMIF) capital reserve account. This
document is limited to implementation of HUD's proposal to introduce a
minimum credit score threshold and reduce the maximum LTV. At the end
of the public comment period on August 16, 2010, HUD received 902
comments. The overwhelming majority of these comments focused on HUD's
proposal to cap seller concessions. HUD is continuing to review and
consider the issues raised by commenters on capping seller concessions
as well as those pertaining to HUD's proposal to tighten manual
underwriting guidelines. HUD's final decision on these two proposals
will be addressed separately.
DATES: Effective Date: October 4, 2010.
FOR FURTHER INFORMATION CONTACT: Karin Hill, Director, Office of Single
Family Program Development, Office of Housing, Department of Housing
and Urban Development, 451 7th Street, SW., Room 9278, Washington, DC
20410; 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--HUD's July 15, 2010 Notice
On July 15, 2010, at 75 FR 41217, HUD issued a proposed rule
seeking comment on three initiatives that HUD proposed would contribute
to the restoration of the Mutual Mortgage Insurance Fund (MMIF) capital
reserve account. The proposed changes were developed to preserve both
the historical role of the Federal Housing Administration (FHA) in
providing a home financing vehicle during periods of economic
volatility and HUD's social mission of helping underserved borrowers.
In the July 15, 2010, notice, HUD proposed the following: To reduce the
amount of closing costs a seller may pay on behalf of a homebuyer
purchasing a home with FHA-insured mortgage financing for the purposes
of calculating the maximum mortgage amount; to introduce a credit score
threshold as well as reduce the maximum loan-to-value (LTV) for
borrowers with lower credit scores who represent a higher risk of
default and mortgage insurance claim; and to tighten underwriting
standards for mortgage loan transactions that are manually
underwritten.
A recently issued independent actuarial study shows that the MMIF
capital ratio has fallen below its statutorily mandated threshold.\1\
Consistent with HUD's responsibility under the National Housing Act to
ensure that the MMIF remains financially sound, HUD published the July
15, 2010 document and sought public comment on the three proposals
described above designed to address features of FHA mortgage insurance
that have resulted in high mortgage insurance claim rates and present
an unacceptable risk of loss to FHA.
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\1\ On November 13, 2009, HUD released an independent actuarial
study that reported that FHA will likely sustain significant losses
from mortgage loans made prior to 2009, due to the high
concentration of seller-financed downpayment assistance mortgage
loans and declining real estate values nationwide, and that the MMIF
capital reserve relative to the amount of outstanding insurance in
force had fallen below the statutorily mandated 2 percent ratio. The
capital reserve account serves as a back-up fund, where FHA holds
additional capital to cover unexpected losses. The capital ratio
generally reflects the reserves available (net of expected claims
and expenses), as a percentage of the current portfolio, to address
unexpected losses. The report can be found at: https://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf.
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Over the past two years, the volume of FHA insurance has increased
rapidly as private sources of mortgage finance retreated from the
market. FHA's share of the single-family mortgage market today is
approximately 30 percent--up from 3 percent in 2007, and the dollar
volume of insurance written has jumped from the $56 billion issued in
that year to more than $300 billion in 2009. The growth in the MMIF
portfolio over such a short period of time coincided with worsening
economic conditions that have seen high levels of defaults and
foreclosures, and consequently unacceptable risks of loss to the MMIF.
Given these conditions and concerns, FHA, in managing the MMIF, must be
especially vigilant in monitoring the performance of the portfolio,
enhancing risk controls, and tightening standards to address portions
of the business that expose homeowners to excessive financial risks.
FHA's authorizing statute, the National Housing Act (12 U.S.C. 1701 et
seq.), envisions that FHA will adjust program standards and practices,
as necessary, to operate the MMIF, with reasonable expectations of
financial loss. Within the past year, FHA has adjusted several program
standards and practices so that the MMIF is preserved and FHA is
operating the MMIF with acceptable risks of financial loss, not
unacceptable risks.\2\
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\2\ While the Federal Credit Reform Act of 1990 requires that
FHA (and all other government credit agencies) estimate and budget
for the anticipated cost of mortgage loan guarantees, the National
Housing Act imposes a special requirement that the MMIF hold an
additional amount of funds in reserve to cover unexpected losses.
FHA maintains the MMIF capital reserve in a special reserve account.
The MMIF capital reserve account serves as a back-up fund, where FHA
holds additional capital to cover unexpected losses.
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[[Page 54021]]
The July 15, 2010, notice represents another step in HUD's effort
to preserve the MMIF and preserve FHA as a source of available credit
for affordable home mortgages. Interested readers are referred to the
July 15, 2010 notice for details regarding the proposed changes to FHA
requirements.
II. This Notice--Addressing Solely Minimum Credit Score and New LTV
Requirements
As noted in the preceding section, this document is limited to
implementation of the revised credit score and LTV requirements, and
takes into consideration the public comments received on HUD's proposal
to establish a minimum decision credit score and reduce LTV, as set
forth in the July 15, 2010 notice. The majority of the public comments
that HUD received in response to the July 15, 2010, focused on the
other two proposals (the reduction in seller concessions and revised
manual underwriting requirements). HUD is continuing to review and
consider the issues raised by the comments on these two proposals, as
well as alternative proposals raised by commenters. HUD's final
decision on these two proposals will be addressed separately. Section
III of this document discusses the significant issues raised by the
public comments regarding the new credit score and LTV requirements, as
well as HUD's responses to these issues. The separate document to
address capping seller concessions and tightening underwriting
guidelines will address the public comments on these proposals.
The July 15, 2010 notice more fully addresses the reasons for the
establishment of a minimum decision credit score and reduction in LTV
for FHA mortgage insurance, and readers are referred to the notice for
the more in-depth discussion of this proposal (see 75 FR 41220-41222).
As discussed in the July 15, 2010, notice, FHA serves very few
borrowers with credit scores below 500; however, the performance of
these borrowers is very poor. FHA data indicate that insured mortgages
with decision credit scores below 580 have significantly worse default
and claim experience than do loans at or above 580. The revised credit
score and LTV requirements increase the likelihood that borrowers who
are offered FHA-insured mortgages are capable of repaying these
mortgages. Under this document, effectively, a borrower with a decision
credit score between 500 and 579 will be required to make a greater
downpayment [at minimum, 10 percent] than a borrower with a higher
score, for the purchase of a home with the same sales price.\3\
Borrowers with credit scores below 500 will not be eligible for FHA-
insured financing. The new LTV and credit score requirements will
reduce the risk to the MMIF and ensure that home buyers are offered
mortgage loans that are sustainable. Section IV of this document
implements the minimum decision credit score and new LTV requirements.
HUD will also issue additional guidance through Mortgagee Letter to
assist in implementation of these new requirements.
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\3\ FHA will continue to allow borrowers to use permissible
sources of funds, as described in FHA Handbook 4155.1, paragraph
5.B.1, to meet the minimum cash investment in the form of a
downpayment. Gifts from family members, charitable organizations,
employers, and government entities are also permitted, provided that
none of the parties financially benefit from the sales transaction.
In addition, governmental entities, including instrumentalities
thereof, as described in Section 528 of the National Housing Act,
may offer secondary financing to cover the borrowers' cash
investment.
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III. Discussion of the Public Comments on the July 15, 2010 Proposal
At the close of the public comment period on August 16, 2010, HUD
received 902 public comments on the issue of establishing a minimum
decision credit score and new LTV requirements. This section discusses
the most significant issues raised by the commenters on these
proposals, and HUD's responses to these issues.
Comment: Support for revised credit score and LTV requirements.
Several commenters wrote in support of the proposed revised credit
score and LTV requirements. The commenters agreed that proposed changes
to FHA requirements would help ensure that borrowers do not assume more
mortgage debt than they are able to afford.
HUD Response. HUD appreciates the support expressed by commenters,
and agrees that the changes will reduce the risk to the MMIF and ensure
that homebuyers are offered FHA-insured mortgage loans that are
sustainable.
Comment: The proposed revisions do not go far enough. Several
commenters, while supportive of the proposed changes, recommended that
HUD adopt more stringent credit score and LTV requirements. The
measures recommended by the commenters varied, with suggested minimum
decision scores most commonly ranging between 580 and 625. The
commenters were in agreement that a higher minimum credit score would
further protect borrowers and the FHA insurance funds.
HUD Response. HUD has not revised its proposal in response to these
comments. In establishing the revised credit score requirements, HUD
has endeavored to balance the need to protect the MMIF capital reserve
account, while at the same time preserving the historical role of FHA
in providing home financing vehicles during periods of economic
volatility. Too high of a minimum score would undermine HUD's mission
of expanding affordable homeownership opportunity, while too low a
score would fail to replenish the MMIF capital reserves. As noted
above, and discussed in more detail in the July 15, 2010, notice, the
minimum credit score of 500 to determine eligibility for FHA financing
was selected after a careful analysis of FHA mortgage performance data.
This data indicates that while FHA serves few borrowers with credit
scores below 500 their performance is clearly very poor. The data also
indicates that insured mortgages with decision credit scores below 580
have significantly worse default and claim experience than do loans at
or above 580.
Comment: Opposition to revised credit score requirements. In
contrast to the preceding comments, several commenters opposed any
changes to the FHA credit score and LTV requirements. These commenters
wrote that the changes would only make it more difficult for borrowers
in difficult economic times to obtain mortgage financing. The
commenters also expressed concerns that the changes would hurt the
overall economy by further restricting the availability of mortgage
financing.
HUD Response. As noted in the response to the preceding comments,
FHA takes seriously its mission to help underserved borrowers. As
discussed above, HUD also has a statutory obligation to protect the
MMIF capital reserve accounts by ensuring that borrowers who are
offered FHA-insured mortgages are capable of repaying these mortgages.
The changes balance the twin goals of protecting the financial health
of the MMIF, while continuing to meet FHA's historic role of providing
a vehicle for mortgage lenders to provide affordable mortgages.
Moreover, as also noted, sustainable homeownership is essential to a
healthy and well-functioning housing market. These changes will promote
that goal by helping to ensure that FHA homeowners are able to afford
their mortgage loans. HUD based the revised credit score
[[Page 54022]]
requirements on a careful analysis of historical data that indicates
FHA serves few borrowers with a credit score below the new minimum of
500. Moreover, HUD has taken steps to mitigate the impacts of
establishing a minimum decision credit score. First, HUD has
established a threshold score for FHA-insured mortgages that is below
the cut-off score of 620 used by many private lenders. Second, HUD is
providing a special, temporary allowance to permit a higher LTV when
refinancing mortgage loans for certain borrowers with decision credit
scores between 500 and 579. HUD is providing this special exemption in
recognition of the fact that even homeowners who have been able to make
their monthly payments may have had their credit scores negatively
impacted by the downturn in the economy.
Comment: A revision to the credit score requirements will have
minimal effect. Many commenters questioned the need of establishing a
minimum decision credit score of 500, given that most mortgage lenders
have adopted a higher minimum credit score. The commenters cited to
several industry standards, and most commonly to a minimum credit score
of 620. These commenters wrote that HUD's proposal would have little
impact since mortgage lenders will not provide mortgage loans to
borrowers with credit scores below the minimums they have established.
HUD Response. HUD has not revised its proposal based on these
comments. Unlike private mortgage lenders, HUD has an important
historical countercyclical position of supporting the private sector
when access to capital is constrained, and an equally important social
mission of helping unserved borrowers. HUD takes these responsibilities
seriously and, as discussed more fully in the responses to the
preceding comments, continues to believe that the revised credit score
requirements strike the appropriate balance between fulfilling HUD's
historical and social responsibilities, as well as its statutory duty
to preserve the MMIF capital reserves.
Comment: Acceptable score ranges for other scoring models. The July
15, 2010, notice invited comment on the best means for FHA to provide
guidance on acceptable score ranges for scoring models other than FICO-
based decision scores, to ensure that the scales used for all scoring
systems are consistent and appropriate for FHA borrowers (see 75 FR
41220). In response, a few commenters wrote to suggest alternative
scoring models. For example, one commenter (the developer of a consumer
credit score model) proposed a calibration analysis of the FHA loan
portfolio using its credit score model. Another commenter advocated
that HUD provide further guidance on risk thresholds, decision points
and pricing tiers, so that developers of risk assessment services can
initiate new processes. The majority of these commenters, however,
questioned the usefulness of using any credit score model, writing that
credit scores are an imperfect indicator of risk and often not
reflective of a person's ability to pay. The commenters also wrote that
credit scores sometimes have disparate impact on minorities compared to
other borrowers.
HUD Response. HUD has not revised the July 15, 2010, notice in
response to these comments. With respect to the use of other credit
scoring models, HUD greatly appreciates the suggestions offered by the
commenters. However, HUD believes that additional analysis of this
issue is required given the complexity of the proposed approaches as
well as the need to provide sufficient notice to the industry of such a
significant change to current FHA requirements. HUD is not
unsympathetic to the concerns expressed by the commenters that
questioned the utility of credit models, and reiterates that it has
taken several steps to mitigate the impacts of establishing a minimum
decision credit score. As noted, HUD has established a threshold below
the threshold score widely used by many private lenders and is
providing a temporary allowance to permit a higher LTV when refinancing
mortgage loans for certain borrowers. Further, in response to many of
the concerns expressed by these commenters, FHA requires the use of
manual underwriting to address cases where the borrower has very
limited or nontraditional credit history, a FICO-based credit score may
not have been issued, or the credit score may be based on references
that are few in number or do not effectively predict future credit
worthiness.
IV. Establishment of Minimum Decision Credit Score and New LTV
Requirements
Commencing on the effective date:
1. Minimum Credit Score. Borrowers will be required to have a
minimum decision credit score of no less than 500 to be eligible for
FHA financing.
The decision credit score used by FHA is based on methodologies
developed by the FICO Corporation. FICO scores, which range from a low
of 300 to a high of 850, are calculated with input by each of the three
National Credit Bureaus and are based upon credit-related information
reported by creditors, specific to each applicant. Lower credit scores
indicate greater risk of default on any new credit extended to the
applicant. The decision credit score is based on the middle of three
National Credit Bureau scores or the lower of two scores when all three
are not available, for the lowest scoring applicant.
2. LTV requirements. The LTV for FHA-insured mortgage loans
(purchase and refinance) will be limited to 90 percent for borrowers
with a decision score between 500 and 579. Maximum FHA-insured
financing (typically, 96.5 percent LTV for purchase transactions and
97.75 percent for rate and term refinance transactions) will continue
to be available for borrowers with credit scores at or above 580.
3. Temporary Exemption for Borrowers Seeking to Refinance. As
indicated in the July 15, 2010 notice, FHA is providing a special,
temporary allowance to permit higher LTV mortgage loans for borrowers
with lower decision credit scores, so long as they involve a reduction
of existing mortgage indebtedness pursuant to FHA program adjustments
announced in HUD Mortgagee Letter 2010-23.\4\ In accordance with
Mortgagee Letter 2010-23, the current mortgage lender will need to
agree to accept a short pay off, accepting less than the full amount
owed on the original mortgage in order to satisfy the outstanding debt.
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\4\ The Mortgagee Letter is available at: https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
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This temporary exemption recognizes that, given current economic
conditions, the decision credit scores announced in this notice may be
counterproductive in helping existing homeowners refinance to obtain
more affordable mortgages and save their homes. FHA recognizes that
even homeowners who have been able to make their monthly payments may
have had their credit scores negatively impacted by the downturn in the
economy which has so seriously affected the housing market.
This exemption is applicable only to borrowers with credit scores
between 500 to 579. Further, the exemption is applicable only to
refinance transactions originated pursuant to Mortgagee Letter 2010-23
and closed on or before December 31, 2012.
V. Findings and Certification
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this document
under Executive Order 12866 (entitled
[[Page 54023]]
``Regulatory Planning and Review''). The document was determined to be
a ``significant regulatory action,'' as defined in section 3(f) of the
Order (although not economically significant, as provided in section
3(f)(1) of the Order).
FHA is implementing one change to replenish the MMIF capital
reserve account. FHA is establishing a two-part credit-score threshold,
with one lower bound for loans with loan-to-value ratios of 90 percent
or less, and a higher threshold for those with loan-to-value ratios up
to the statutory maximums. This is the first time that FHA has ever
instituted an absolute lower-bound for borrower credit scores.
Borrowers with low credit scores present higher risk of default and
mortgage insurance claim. Such transactions that lack the additional
credit enhancements announced in this document result in higher
mortgage insurance claim rates and present an unacceptable risk of
loss. The benefit of the revised credit score and LTV requirements will
be to reduce the net losses due to high rates of insurance claims on
affected loans, while the cost will be the value of the homeownership
opportunity denied to the excluded borrowers. HUD prepared an economic
analysis assessing costs and benefits in conjunction with development
of the July 15, 2010, Federal Register notice. As noted above, HUD is
implementing the proposed credit score and LTV requirements without
change and, therefore that analysis remains applicable to this
document. HUD's full analysis can be found at https://www.hud.gov/offices/hsg/sfh/hsgsingle.cfm.
The docket file is available for public inspection in the
Regulations Division, Office of General Counsel, Department of Housing
and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC
20410-0500. Due to security measures at the HUD Headquarters building,
please schedule an appointment to review the docket file by calling the
Regulations Division at 202-402-3055 (this is not a toll-free number).
Individuals with speech or hearing impairments may access this number
via TTY by calling the Federal Information Relay Service at 800-877-
8339.
Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment has been made in accordance with HUD regulations at 24 CFR
part 50, which implement section 102(2)(C) of the National
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of
No Significant Impact is available for public inspection between the
hours of 8 a.m. and 5 p.m. weekdays in the Regulations Division, Office
of General Counsel, Department of Housing and Urban Development, 451
7th Street, SW., Room 10276, Washington, DC 20410. Due to security
measures at the HUD Headquarters building, please schedule an
appointment to review the FONSI by calling the Regulations Division at
202-708-3055 (this is not a toll-free number). Individuals with speech
or hearing impairments may access this number via TTY by calling the
Federal Information Relay Service at 800-877-8339.
Dated: August 31, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-22133 Filed 9-2-10; 8:45 am]
BILLING CODE 4210-67-P