December 17, 2004


Regulations Division
Office of the General Counsel, Room 10276
Department of Housing and Urban Development
451 Seventh Street, SW
Washington, DC 20410

    RE: Docket Number FR-4960-A-01
           RIN 2501-AD12

    HUD Regulation of the Federal National Mortgage Association (Fannie Mae) and the     Federal Home Loan Mortgage Corporation (Freddie Mac): GSE Housing Goals-Advance     Notice of Proposed Rulemaking

Dear Sir or Madam:

On behalf of the National Housing Conference (NHC), I appreciate the opportunity to comment on the Department of Housing and Urban Development’s Advance Notice of Proposed Rulemaking (ANPR), and its intention of considering alternative mechanisms to address the potential impact of high levels of single family refinancing on Fannie Mae and Freddie Mac’s ability to meet affordable housing goals.

The National Housing Conference is a nonprofit 501(c) (3) membership association dedicated to advancing affordable housing and community development causes. A membership drawn from every industry segment forms the foundation for NHC’s broad, nonpartisan advocacy for national policies and legislation that promote suitable housing in safe, decent environments across the nation.

NHC supports strong stretch goals for Freddie Mac and Fannie Mae—especially, goals that ensure that housing choices are made easier for low- and moderate-income families.  However, as we mentioned in our July 8th comment letter, NHC believes that the goals as currently structured could have some unintended ramifications to low- and moderate-income families. 

Working Families are Already at Risk

In our recent comments on affordable goals for Fannie Mae and Freddie Mac, I referred the Department to NHC’s Center for Housing Policy article “Working Families With Children: A Closer Look at Homeownership Trends.”   That study defined the challenges that low- to moderate-income working families with children experience when looking for affordable housing.  It concludes that stagnant income and the rising costs of homeownership likely play important roles in the inability of the average working family to achieve the American dream of homeownership.

NHC strongly believes that these findings are indicative of the state of housing as we move into 2005 and, in fact, indications are that this trend will continue.  Homeownership is becoming more expensive, and working families are finding it harder to make their “housing ends meet.” 

While NHC supports strong affordable housing goals for the GSEs, HUD’s assumptions about future refinance levels do not account for the inherent volatility in the mortgage market.   NHC is therefore recommending some changes.

The New Rule Should Reflect Market Volatility

The rules, as promulgated, use a static estimate of the market level of refinances at 35 percent.  This static estimate appears to ignore the hindsight of the past decade where refinances have ranged from a low 20 percent refinance rate to 70 percent in 2003.  With this rigid approach to refinances, NHC fears that Freddie Mac and Fannie Mae could be forced to limit mortgage purchases from middle income and working families in high refinance years in order to meet the goals. 

Market experience has shown that percent-of-business affordable housing goals are difficult to achieve when single family refinances are high.  For purposes of market sizing, HUD assumes the share of refinance mortgages will only reach a level of 35 percent of all single family mortgage loans. However, review of HMDA data over the last ten years reveals that only once during that period did single family refinance mortgages drop this low. On average, refinance mortgages comprised 52 percent of the single family loans over the decade. If the share of refinance mortgages in the market is closer to this historical 52 percent average, rather than HUD’s assumption of 35 percent, it means that the mix of business available for Fannie Mae and Freddie Mac to purchase will be much lower in goals business than HUD is projecting.

Rather than serve working families’ needs in high refinance years, the GSEs instead will be forced to “manage the denominator,” or limit the availability of the best and most affordable mortgage products to those populations.  NHC does not believe that this kind of “choice” was intended when HUD enacted the rules, but we do believe that it is a possible outcome in a high refinance year.  While there were good intentions in creating this rule, NHC believes there could be troubling outcomes: limited choice and increased cost to working families.

NHC recommends that HUD remove refinances from the goal equation.  Doing so still maintains the integrity of the goal process, and could actually increase the availability of affordable mortgages for the low- to moderate-income, underserved, and special affordable markets.  This approach also preserves the secondary market liquidity currently available to the working family. 

Additionally, NHC believes that Freddie Mac and Fannie Mae, still having the new tough goals, will focus more on purchase money mortgages to actually increase homeownership levels.   The net effect is increasing opportunities for new homeowners, and ensuring that the GSEs adequately address the needs of the “entire” market. 

In the alternative, HUD could consider indexing the refinance weight in the housing goals scoring calculation.  Assuming the neutral point is set at 35 percent, the refinance weight would be adjusted annually against that point.  If, for example, the actual refinance level in a given year were 50 percent, the weight would be 0.70.  Correspondingly, if the actual level were 28 percent, the weight would be 1.25.

Whatever relief HUD decides to provide for high refinance markets, there are certain principles that should be followed:

• Simple: ease of implementation is important to avoid burdening the primary market
• Predictable: the ability to develop and manage business plans is important to the GSEs and the primary market
• Timely: metrics must allow for timely decision making to avoid negative market consequences

Of the options available to HUD, removing single family refinance mortgages altogether from the housing goals scoring calculation is the option that best meets these three principles and maintains Fannie Mae and Freddie Mac’s ability to meet affordable housing goals.

The National Housing Conference is pleased to submit these comments.  If further information would be helpful, please feel free to contact me.

Sincerely,






Conrad E. Egan
President and CEO