Rules and Regulations. Final rule

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BILLING CODE 3410-34-P DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Office of Federal Housing Enterprise Oversight 12 CFR Part 1750 RIN 2550-AA26 Risk-Based Capital; Technical Amendment AGENCY: Office of Federal Housing Enterprise Oversight, HUD. ACTION: Final rule. SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is adopting technical amendments to Appendix A to Subpart B of 12 CFR part 1750 Risk-Based Capital. The amendments are intended to enhance the accuracy of the calculation of the risk-based capital requirement for the Enterprises.

EFFECTIVE DATE: November 1, 2002. FOR FURTHER INFORMATION CONTACT: Jeannine Schroeder, Manager of Operations, Office of Risk Analysis and Model Development, telephone

(202)414-8881 or Jamie Schwing, Associate General Counsel, telephone

(202)414-3787 (not toll free numbers), Office of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone number for the Telecommunications Device for the Deaf is

(800)877-8339. SUPPLEMENTARY INFORMATION: Background OFHEO published a final regulation setting forth a risk-based capital stress test on September 13, 2001, 12 CFR part 1750 (the Rule), which formed the basis for determining the risk-based capital requirement for the federally sponsored housing enterprises—Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises). 1 1 Risk-based Capital, 66 FR 47730 (September 13, 2001), 12 CFR part 1750, *as amended* , 67 FR 11850 (March 15, 2002), 67 FR 19321 (April 19, 2002). On September 12, 2002, OFHEO published a notice of proposed rulemaking (NPRM), 67 FR 57760, which proposed twelve technical and corrective amendments to the Rule. One commenter, Freddie Mac, expressed concern regarding the appropriate effective date for a proposed technical amendment that corrected a table that utilized original loan-to-value ratios rather than amortized original loan-to-value ratios (amendment number eight in the list of 12 amendments in the preamble of the NPRM). Freddie Mac also requested a delay in the effective date for two amendments relating to the implementation of Financial Accounting Standard 133 (FAS 133) in the Rule (amendments numbered 11 and 12 in the list of 12 amendments in the preamble of the NPRM). 2 OFHEO also received comments requesting additional time to comment upon these two amendments. Subsequently, OFHEO reopened and extended the comment period regarding the two FAS 133-related proposed amendments, noting that it might move to final action on any of the other ten. 3 OFHEO is also reviewing, and will delay action on, a proposed technical amendment regarding the definition of “unamortized balance” (amendment number seven in the list of 12 amendments in the preamble of the NPRM). OFHEO has determined to adopt as final immediately, the following eight proposed amendments as to which there were no issues remaining and to defer final action on the other four proposed amendments until after the extended comment period closes on October 29, 2002. 2 Financial Account Standards Board Statement of Financial Accounting Standard 133, “Accounting for Derivative Instruments and Hedging Activities,” June 1998. 3 Risk-Based Capital, 67 FR 61300 (September 20, 2002).

(1)Provisions relating to new activities are updated to cross-reference the Prompt Supervisory Response and Corrective Action regulation, 12 CFR part 1777, in paragraph 3.11.3[c] and to correct a typographical error in paragraph 3.11.2[a];

(2)Out-of-date third party sources of information related to interest rate indexes ( *e.g.* 30-year CMT, Bloomberg Tickers) are updated to reflect currently available indexes and to update the Rule to incorporate a reference to the applicable U.S. Treasury Department methodology. Specifically, the 30-year constant maturity yield is no longer reported by the Federal Reserve in the H.15 Release. In its place, the U.S. Treasury Department has developed a methodology using its “Long-Term Average Rate” and “Extrapolation Factors” designed to generate a substitute for the 30-year CMT yield series discontinued in February 2002. Similarly, the Bloomberg tickers for the Federal Agency Cost of Funds are being updated. Table 3-18 and paragraphs 3.3.1[b] and 3.3.2 are amended to reflect these changes;

(3)Credit Ratings in Table 3-30 are updated to include certain credit ratings used in the marketplace that were not listed in the original table. Specifically, Moody's assigns an additional rating from VMIG1 through VMIG3 to quantify the risks of the demand feature of variable-rate demand obligations and Standard & Poor's rates short term issuances as SP-1+, SP-1, SP-2, and SP-3;

(4)Paragraph 3.6.3.4.3.1 [a] 3. a. on single family default and prepayment explanatory variables is replaced in full, including equations, to correct the parenthetical (q= −7, −6,...0, 1,...40);

(5)Table 3-35, in which the explanatory variable categories for Relative Spread (RS q ) in the explanatory variable column were identified incorrectly, is replaced and a typographical error in paragraph 3.6.3.6.3.3[a]1. is corrected;

(6)The equation related to mortgage credit enhancement procedures at paragraph 3.6.3.6.4.3 is corrected to reflect the fact that in extreme circumstances ( *i.e.* , when defaults are zero), an equation in section 3.6.3.6.4.3 Mortgage Credit Enhancement Procedures produces “divide by zero” errors in the computer code;

(7)A typographical error in the equation in 3.7.3.1[g]2. for calculating haircuts for mortgage backed securities is corrected by changing a specified addition sign (+) to a multiplication sign (×); and

(8)Table 3-68 is revised to reflect that the Table relates to long caps and floors. In order to make these eight adjustments applicable to the first fully enforceable risk-based capital calculation for each Enterprise, OFHEO has determined that the amendments shall be effective immediately and shall apply to any data submissions from the Enterprises received after the effective date. Waiver of the normal 30-day delay in effective date is in the public interest because these changes rectify errors in the code and in the language of the rule that could mislead the public if left unamended. In some cases they simply reflect changes that have already been implemented in the computer software used to implement the stress test and are necessary for the stress test to be operational. Moreover, both Enterprises have participated in data and software validation processes with OFHEO for the past year and have been aware of the pendency of these technical changes, which have no material impact on capital requirements, for many months. Regulatory Impact Executive Order 12866, Regulatory Planning and Review This document contains amendments to the Rule, which was designated a major rule by the Office of Management and Budget (OMB). The amendments address provisions of the Rule that are out-of-date, incorrect or contain typographical errors. OFHEO has determined that the amendments to the Rule are not economically significant for purposes of Executive Order 12866. Further, they implement technical changes and do not involve novel policy issues. Therefore, these amendments are not a “significant rule” under Executive Order 12866. Paperwork Reduction Act These amendments do not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 3501 *et seq.* ). Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 *et seq.* ) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation does not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the regulation under the Regulatory Flexibility Act. The General Counsel of OFHEO certifies that this regulation is not likely to have a significant economic impact on a substantial number of small business entities because the regulation is applicable only to the Enterprises, which are not small entities for purposes of the Regulatory Flexibility Act. List of Subjects in 12 CFR Part 1750 Capital classification, Mortgages, Risk-based capital. Accordingly, for the reasons stated in the preamble, OFHEO amends 12 CFR part 1750 as follows: PART 1750—CAPITAL 1. The authority citation for part 1750 continues to read as follows: Authority: 12 U.S.C. 4513, 4514, 4611, 4612, 4614, 4615, 4618. 2. Amend Appendix A to subpart B of part 1750 as follows: a. Revise Table 3-18 in paragraph 3.1.3.1[c]; b. Revise paragraph 3.3.1[b]; c. In paragraph 3.3.2, add the following sentence after the word “Appendix.”: “Inputs for the 30-year CMT yield after February 15, 2002 are estimated according to the Department of Treasury methodology using long-term average rates and extrapolation factors.” d. Revise Table 3-30 in paragraph 3.5.3[a]2.a.; e. Revise paragraph 3.6.3.4.3.1[a]3.a.; f. Revise Table 3-35 in paragraph 3.6.3.4.3.2[a]1.; g. In paragraph 3.6.3.6.3.3[a]1., remove the term “GL m ” both places it appears and replace it with the term “GLS m ”; h. In paragraph 3.6.3.6.4.3[a]5., after the words “Defaulted UPB:” and before the equation, add the following equation: ER85AD02.000 i. Revise paragraph 3.7.3.1[g]2.; j. Revise Table 3-68 in paragraph 3.8.3.6.1[e]2.; k. In paragraph 3.11.2[a], remove the cross-reference “1750.2(c)” and replace it with the cross-reference “1750.12(c)”; and l. Revise paragraph 3.11.3[c]. The revisions and additions read as follows: Appendix A to Subpart B of Part 1750—Risk-Based Capital Test Methodology and Specifications 3.1.3.1 * * * [c] * * * Table 3-18—Interest Rate and Index Inputs Interest Rate Index Description Source 1 MO Treasury Bill One-month Treasury bill yield, monthly simple average of daily rate, quoted as actual/360 Bloomberg Generic 1 Month U.S. Treasury bill Ticker: GB1M (index). 3 MO CMT Three-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 6 MO CMT Six-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 1 YR CMT One-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 2 YR CMT Two-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 3 YR CMT Three-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 5 YR CMT Five-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 10 YR CMT Ten-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 20 YR CMT Twenty-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield Federal Reserve H.15 Release. 30 YR CMT Thirty-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yield; after February 15, 2002, estimated according to the Department of Treasury methodology using long-term average rates and extrapolation factors as referenced in OFHEO guideline 402 Federal Reserve H.15 Release, Extrapolation Factors used for estimation, U.S. Dept. of Treasury. Overnight Fed Funds (Effective) Overnight effective Federal Funds rate, monthly simple average of daily rate Federal Reserve H.15 Release. 1 Week Federal Funds 1 week Federal Funds rate, monthly simple average of daily rates Bloomberg Term Fed Funds U.S. Domestic Ticker: GFED01W(index). 6 Month Fed Funds 6 month Federal Funds rate, monthly simple average of daily rates Bloomberg Term Fed Funds U.S. Domestic Ticker: GFED06M(index). Conventional Mortgage Rate FHLMC (Freddie Mac) contract interest rates for 30 YR fixed-rate mortgage commitments, monthly average of weekly rates Federal Reserve H.15 Release. FHLB 11th District COF 11th District (San Francisco) weighted average cost of funds for savings and loans, monthly Bloomberg Cost of Funds for the 11th District Ticker: COF11 (index). 1 MO LIBOR One-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360 British Bankers Association. Bloomberg Ticker: US0001M (index). 3 MO LIBOR Three-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360 British Bankers Association. Bloomberg Ticker: US0003M (index). 6 MO LIBOR Six-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360 British Bankers Association. Bloomberg Ticker: US0006M (index). 12 MO LIBOR One-year London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360 British Bankers Association. Bloomberg Ticker: US0012M (index). Prime Rate Prevailing rate as quoted, monthly average of daily rates Federal Reserve H.15 Release. 1 MO Federal Agency COF One-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360 Bloomberg Generic 1 Month Agency Discount Note Yield. Ticker: AGDN030Y (index). 3 MO Federal Agency COF Three-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360 Bloomberg Generic 3 Month Agency Discount Note Yield. Ticker: AGDN090Y (index). 6 MO Federal Agency COF Six-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360 Bloomberg Generic 6 Month Agency Discount Note Yield. Ticker: AGDN180Y (index). 1 YR Federal Agency COF One-year Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360 Bloomberg Generic 12 Month Agency Discount Note Yield. Ticker: AGDN360Y (index). 2 YR Federal Agency COF Two-year Federal Agency Fair Market Yield, monthly simple average of daily rates Bloomberg Generic 2 Year Agency Fair Market Yield. Ticker: CO842Y (index). 3 YR Federal Agency COF Three-year Federal Agency Fair Market Yield, monthly simple average of daily rates Bloomberg Generic 3 Year Agency Fair Market Yield. Ticker: CO843Y (index). 5 YR Federal Agency COF Five-year Federal Agency Fair Market Yield, monthly simple average of daily rates Bloomberg Generic 5 Year Agency Fair Market Yield. Ticker: CO845Y (index). 10 YR Federal Agency COF Ten-year Federal Agency Fair Market Yield, monthly simple average of daily rates Bloomberg Generic 10 Year Agency Fair Market Yield. Ticker: CO8410Y (index). 30 YR Federal Agency COF Thirty-year Federal Agency Fair Market Yield, monthly simple average of daily rates Bloomberg Generic 30 Year Agency Fair Market Yield. Ticker: CO8430Y (index). 15 YR fixed-rate mortgage FHLMC (Freddie Mac) contract interest rates for 15 YR fixed-rate mortgage commitments, monthly average of FHLMC (Freddie Mac) contract interest rates for 15 YR Bloomberg FHLMC 15 YR, 10 day commitment rate. Ticker: FHCR1510 (index). 7-year balloon mortgage rate Seven-year balloon mortgage, equal to the Conventional Mortgage Rate less 50 basis points Computed. 3.3.1 * * * [b] The process for determining Interest Rates is as follows: first, identify the values for the necessary Interest Rates at time zero; second, project the ten-year CMT for each month of the Stress Period as specified in the 1992 Act; third, project the 1-month Treasury yield, the 3-month, 6-month, 1-, 2-, 3-, 5-, 20-year, and 30-year CMTs; fourth, project non-treasury Interest Rates, including the Federal Agency Cost of Funds Index; and fifth, project the Enterprises Cost of Funds Index, which provides borrowing rates for the Enterprises during the Stress Period, by increasing the Agency Cost of Funds Index by 10 basis points for the last 108 months of the Stress Test. Guidance in determining interest rates is available under OFHEO Guideline No. 402, “Risk Based Capital Process for Capturing and Utilizing Interest Rates Files,” which is available on OFHEO's Web site, *http://www.OFHEO.Gov.* 3.5.3 * * * [a] * * * 2. * * * a. * * * Table 3-30—Rating Agencies Mappings to OFHEO Ratings Categories OFHEO Ratings Category AAA AA A BBB Below BBB and Unrated Standard & Poor's Long-Term AAA AA A BBB Below BBB and Unrated Fitch Long-Term AAA AA A BBB Below BBB and Unrated Moody's Long-Term Aaa Aa A Baa Below Baa and Unrated Standard & Poor's Short-Term A-1+ SP-1+ A-1 SP-1 A-2 SP-2 A-3 SP-3, B or Below and Unrated Fitch Short-Term F-1+ F-1 F-2 F-3 B and Below and Unrated Moody's 1 Prime-1 MIG1 VMIG1 Prime-1 MIG1 VMIG1 Prime-2 MIG2 VMIG2 Prime-3 MIG3 VMIG3 Not Prime, SG and Unrated Fitch Bank Individual Ratings A B A/B C B/C D C/D E D/E Moody's Bank Financial Strength Rating A B C D E 1 Any rating that appears in more than one OFHEO category column is assigned the lower OFHEO rating category. 3.6.3.4.3.1 * * * [a] * * * 3. * * * a. Compare mortgage rates for each quarter of the Stress Test and for the eight quarters prior to the start of the stress test (q = −7, −6,...0, 1,...40): ER85AD02.001 *Note:* For this purpose, MCON m is required for the 24 months (eight quarters) prior to the start of the Stress Test. Also, MIR m = *MIR* 0 for *m* < 0. 3.6.3.4.3.2. * * * [a] * * * 1. * * * Table 3-35—Coefficients for Single Family Default and Prepayment Explanatory Variable Explanatory Variable

(V)30-Year Fixed-Rate Loans Default Weight (β v ) Prepayment Weight (γ v ) Adjustable-Rate Loans

(ARMs)Default Weight (β v ) Prepayment Weight (γ v ) Other Fixed-Rate Loans Default Weight (β v ) Prepayment Weight (γ v ) A q 0 ≤ A q ≤ 4 −0.6276 −0.6122 −0.7046 −0.5033 −0.7721 −0.6400 5≤ A q ≤ 8 −0.1676 0.1972 −0.2259 0.1798 −0.2738 0.1721 9≤ A q ≤ 12 −0.05872 0.2668 0.01504 0.2744 −0.09809 0.2317 13 ≤ A q ≤ 16 0.07447 0.2151 0.2253 0.2473 0.1311 0.1884 17 ≤ A q ≤ 20 0.2395 0.1723 0.3522 0.1421 0.3229 0.1900 21 ≤ A q ≤ 24 0.2773 0.2340 0.4369 0.1276 0.3203 0.2356 25 ≤ A q ≤ 36 0.2740 0.1646 0.2954 0.1098 0.3005 0.1493 37 ≤ A q ≤ 48 0.1908 −0.2318 0.06902 −0.1462 0.2306 −0.2357 49 ≤ A q −0.2022 −0.4059 −0.4634 −0.4314 −0.1614 −0.2914 LTV ORIG LTV ORIG ≤ 60 −1.150 0.04787 −1.303 0.08871 −1.280 0.02309 60<LTV ORIG ≤70 −0.1035 −0.03131 −0.1275 −0.005619 −0.06929 −0.02668 70<LTV ORIG ≤ 75 0.5969 −0.09885 0.4853 −0.09852 0.6013 −0.05446 75<LTV ORIG ≤80 0.2237 −0.04071 0.1343 −0.03099 0.2375 −0.03835 80<LTV ORIG ≤90 0.2000 −0.004698 0.2576 0.004226 0.2421 −0.01433 90< LTV ORIG 0.2329 0.1277 0.5528 0.04220 0.2680 0.1107 PNEQ q 0< PNEQ q ≤ 0.05 −1.603 0.5910 −1.1961 0.4607 −1.620 0.5483 0.05< PNEQ q ≤ 0.1 −0.5241 0.3696 −0.3816 0.2325 −0.5055 0.3515 0.1< PNEQ q ≤ 0.15 −0.1805 0.2286 −0.1431 0.1276 −0.1249 0.2178 0.15< PNEQ q ≤ 0.2 0.07961 −0.02000 −0.04819 0.03003 0.07964 −0.02137 0.2< PNEQ q ≤ 0.25 0.2553 −0.1658 0.2320 −0.1037 0.2851 −0.1540 0.25< PNEQ q ≤ 0.3 0.5154 −0.2459 0.2630 −0.1829 0.4953 −0.2723 0.3< PNEQ q ≤ 0.35 0.6518 −0.2938 0.5372 −0.2075 0.5979 −0.2714 0.35< PNEQ q 0.8058 −0.4636 0.7368 −0.3567 0.7923 −0.3986 B q 1.303 −0.3331 0.8835 −0.2083 1.253 −0.3244 RLS 0<RLS ORIG ≤ 0.4 −0.5130 −0.4765 −0.4344 0.4<RLS ORIG ≤ 0.6 −0.3264 −0.2970 −0.2852 0.6<RLS ORIG ≤ 0.75 −0.1378 −0.1216 −0.1348 0.75<RLS ORIG ≤ 1.0 0.03495 0.04045 0.01686 1.0<RLS ORIG ≤ 1.25 0.1888 0.1742 0.1597 1.25<RLS ORIG ≤ 1.5 0.3136 0.2755 0.2733 1.5<RLS ORIG 0.4399 0.4049 0.4045 IF 0.4133 −0.3084 0.6419 −0.3261 0.4259 −0.3035 RS q RS q ≤ −0.20 −1.368 −0.5463 −1.195 −0.20 <RS q ≤ −0.10 −1.023 −0.4560 −0.9741 −0.10 < RS q ≤ 0 −0.8078 −0.4566 −0.7679 0< RS q ≤ 0.10 −0.3296 −0.3024 −0.2783 0.10 < RS q ≤ 0.20 0.8045 0.3631 0.7270 0.20 < RS q ≤ 0.30 1.346 0.7158 1.229 0.30 < RS q 1.377 0.6824 1.259 PS q PS q ≤ −0.20 0.08490 0.6613 −0.20 < PS q ≤ −0.10 0.3736 0.4370 −0.10 < PS q ≤ 0 0.2816 0.2476 0< PS q ≤ 0.10 0.1381 0.1073 0.10 < PS q ≤ 0.20 −0.1433 −0.3516 0.20 < PS q ≤ 0.30 −0.2869 −0.5649 0.30 < PS q −0.4481 −0.5366 YCS q YCS q < 1.0 −0.2582 −0.2947 −0.2917 1.0 ≤ YCS q < 1.2 −0.02735 −0.1996 −0.01395 1.2 ≤ YCS q < 1.5 −0.04099 0.03356 −0.03796 1.5 ≤ YCS q 0.3265 0.4608 0.3436 IREF q 0.1084 −0.01382 PROD ARMs 0.8151 0.2453 Balloon Loans 1.253 0.9483 15−Year FRMs −1.104 0.07990 20−Year FRMs −0.5834 0.06780 Government Loans 0.9125 −0.5660 BCal LTV LTV ORIG ≤ 60 2.045 2.045 2.045 60<LTV ORIG ≤70 0.3051 0.3051 0.3051 70<LTV ORIG ≤ 75 −0.07900 −0.07900 −0.07900 75<LTV ORIG ≤80 −0.05519 −0.05519 −0.05519 80<LTV ORIG ≤90 −0.1838 −0.1838 −0.1838 90< LTV ORIG 0.2913 0.2913 0.2913 Intercept (β 0 , γ 0 ) −6.516 −4.033 −6.602 −3.965 −6.513 −3.949 3.7.3.1 * * * [g] * * * 2. Compute: ER85AD02.002 3.8.3.6.1 * * * [e] * * * 2. * * * Table 3-68—Calculation of Monthly Cash Flows for Long Caps and Floors Instrument Cash Flows Cap (I−K) × N × D if I > K; O if I ≤K Floor (K−I) × N × D if I < K; O if I ≥K 3.11.3 * * * [c] OFHEO will provide the Enterprise with its estimate of the capital treatment as soon as possible after receiving notice of the New Activity. In any event, the Enterprise will be notified of the capital treatment in accordance with the notice of proposed capital classification provided for in § 1777.21 of this chapter. Dated: October 17, 2002. Armando Falcon, Jr. Director, Office of Federal Housing Enterprise Oversight. [FR Doc. 02-26863 Filed 10-31-02; 8:45 am]

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