ARLINGTON, Va. – NAFCU and CUNA both commented on HUD's advance notice of proposed rulemaking concerning setting housing goals for Fannie Mae and Freddie Mac during periods of high refinance activity, and the two trade associations offered similar recommendations. In November, HUD finalized a rule requiring the two housing Government Sponsored Enterprises to increase their purchase of mortgages for low- and moderate-income families and underserved communities. The new rule, effective Jan. 1, 2005, sets annual housing goals and new subgoals for Fannie Mae and Freddie Mac over the next four years, with the goals to increase consistently each year from 2005-2008. To attain the new housing goals, HUD projects the GSEs will together have to purchase an additional 400,000 goal-qualifying home loans over the four years above what they would purchase without the increase. Before the rule was finalized, HUD received more than 300 comments from Fannie Mae, Freddie Mac, Congress, and others in the mortgage lending industry. Many of the comments stated that HUD's proposed goals for the housing GSEs would be unattainable in high-refinance periods when higher income homeowners represent a larger share of the market. The agency is currently considering issuing a regulatory provision that takes into consideration the effect of high volumes of refinance transactions on the GSEs' ability to achieve HUD's housing goals. HUD wants to implement an efficient mechanism for dealing with refinance volumes and published with its housing goals rule an Advance Notice of Proposed Rulemaking asking for suggestions on an appropriate regulatory mechanism to address high refinance volumes. . Both NAFCU and CUNA recommended HUD either remove the single-family refinances from the housing goals scoring calculation, or impose a refi cap in years when refinances make up a large share of the single family housing market. "Single-family refinance mortgage levels are quite volatile from year to year. Abrupt changes in the market are dictated by interest rate paths and are difficult to predict.When the goals and the market are not aligned, there is a high risk of creating undesirable, market-distorting incentives to over-invest in goals-rich market segments, like FHA loans and multifamily housing, causing GSEs to withdraw from the middle-income market of borrowers and communities that do not qualify for the goals." wrote NAFCU President/CEO Fred Becker. "If refinance loans are eliminated from the goals, NAFCU believes that the goal levels will provide a more accurate representation of what HUD intends to accomplish with its housing goals.," Becker added. CUNA Assistant General Counsel Jeffrey Bloch also addressed this point, stating that, "Changes in the levels of single-family refinance mortgages change the size of the affordable housing goals market. As single-family refinances rise, the percentage of goals-eligible households in the market declines. This is because higher-income households refinance more readily and goals-rich multifamily units decline as a share of the total market.One option may be to remove single-family refinance mortgages altogether from the housing goals scoring calculation." As for the trade associations' recommendation for HUD to impose a refinance cap, Becker wrote that "under this approach, in years when refinances make up a large share of the single-family market, HUD would reweigh single-family mortgages in the housing goals calculation so that they do not climb above a certain threshold share of business." For purposes of market sizing, Becker stated that HUD assumes the share of refinance mortgages will only reach a 35% level of all single-family mortgage loans. But Becker noted that Home Mortgage Disclosure Act data shows that in the past 10 years, the refinance share of the single-family market has only dropped below 35% once – in 1995 to 34% – and on average, refinance mortgages accounted for almost 55% of the single-family loans during the past decade. In 2003 they reached as high as 76%. "Given HUD's assumption in the market sizing for purposes of setting the new goal levels, HUD could set a refinance cap of 35%. The goals profile for all the refinance business of the GSEs would be applied to their respective units financed for purposes of calculating their housing goals scores," wrote Becker. CUNA also suggested HUD consider imposing a refinance cap "or incorporate some mechanism that will make adjustments when refinancings are not at or near the 35% threshold, as envisioned by HUD." For example, wrote Bloch, in years when refinancings make up a large share of the single-family market, "HUD could re-weight single-family refinance mortgages in the housing goals scoring calculation so that they do not climb above a certain threshold." -

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