Federal Register, Volume 77 Issue 36 (Thursday, February 23, 2012)

[Federal Register Volume 77, Number 36 (Thursday, February 23, 2012)]
[Proposed Rules]
[Pages 10695-10707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3934]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Chapter II

[Docket No. FR-5572-N-01]

Federal Housing Administration (FHA) Risk Management Initiatives:
Revised Seller Concessions

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

ACTION: Request for comments.

-----------------------------------------------------------------------

SUMMARY: On July 15, 2010 (75 FR 41217), 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. On September 3, 2010 (75 FR 54020), HUD published a
follow-up final rule implementing the proposal to introduce a minimum
credit score and reduce the maximum loan-to-value ratio for FHA single
family mortgage insurance. HUD is in the process of implementing
another notice tightening the underwriting standards for mortgage loan
transactions that are manually underwritten. This document addresses
the third proposal; namely, the proposal to reduce the amount of
closing costs a seller may pay on behalf of a homebuyer purchasing a
home with financing insured by the Federal Housing Administration
(FHA). This document takes into consideration the public comments on
the July 15, 2010, final rule regarding the proposed cap on ``seller
concessions'' and revises the proposed cap in response. HUD is seeking
comment for 30 days on this revised proposal for limiting seller
concessions.

DATES: Comment Due Date March 26, 2012.

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 202-708-4308 (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 Relay Service at 800-877-
8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. HUD's July 15, 2010 Notice

On July 15, 2010, at 75 FR 41217, 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. 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: (1) To reduce
the amount of closing costs a seller (or other interested third
parties) may pay on behalf of a homebuyer purchasing a home with FHA-
insured mortgage financing for the purposes of calculating the maximum
mortgage amount; (2) 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 (3) to tighten underwriting standards for mortgage loan
transactions that are manually underwritten.
Over the past 3 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 was estimated
at 17 percent (33 percent for home purchase mortgages) in Fiscal Year
(FY) 2010, up from 3.4 percent in FY 2007, and the dollar volume of
insurance written has jumped from the $77 billion issued in FY 2007 to
$319 billion in FY 2010. The growth in the MMIF portfolio over such a
short period of time coincided with worsening

[[Page 10696]]

economic conditions that have seen high levels of defaults and
foreclosures and, consequently, unacceptable risks of loss to the
MMIF.\1\ The National Housing Act (12 U.S.C. 1701 et seq.), which
authorizes FHA's mortgage insurance, envisions that FHA will adjust
program standards and practices, as necessary, to operate the MMIF on a
financially sound basis.
---------------------------------------------------------------------------

\1\ 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 these back-up funds in the MMIF capital reserve
account, a special reserve account.
---------------------------------------------------------------------------

The independent actuarial study conducted in 2009 showed that the
MMIF capital ratio has fallen below its statutorily mandated
threshold.\2\ Consistent with HUD's responsibility under the National
Housing Act to ensure that the MMIF remains financially sound, HUD
published the July 15, 2010, notice and sought public comment on the
three proposals described above. The July 15, 2010, notice represented
another step in HUD's effort to preserve the MMIF and preserve FHA as a
source of available credit for affordable home mortgages. Interested
parties are referred to the July 15, 2010, notice for details regarding
the proposed changes to FHA requirements.
---------------------------------------------------------------------------

\2\ 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 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:
http://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf.
---------------------------------------------------------------------------

B. The September 3, 2010 Final Rule Implementing New Credit Score and
Loan-to-Value Requirements

At the close of the public comment period on August 16, 2010, HUD
had received 902 public comments in response to the July 15, 2010,
notice. The majority of the public comments focused on the reduction in
seller concessions. In order to provide the necessary additional time
to consider the issues raised by the commenters, HUD decided to
separately implement the three proposals contained in the July 15,
2010, notice.
On September 3, 2010, at 75 FR 54020, HUD published a final rule
implementing the introduction of a minimum credit score and the
reduction in the maximum LTV ratio for FHA single family mortgage
insurance. The September 3, 2010, final rule also contained a
discussion of the public comments received in response to the new
credit score and LTV requirements. The final rule advised that HUD's
decision on the two other proposals described in the July 15, 2010,
notice would be addressed separately.
Commencing on October 4, 2010, borrowers were required to have a
minimum decision credit score of no less than 500 to be eligible for
FHA financing. The LTV for FHA-insured mortgage loans (purchase and
refinance) is limited to 90 percent for borrowers with a decision score
between 500 and 579. Maximum FHA-insured financing (96.5 percent LTV
for purchase transactions and 97.75 percent for rate-and-term refinance
transactions) continues to be available for borrowers with credit
scores at or above 580. However, 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. Interested readers are referred to the
September 3, 2010, final rule and HUD Mortgagee Letter 2010-29 for
additional information regarding the new credit score and LTV
requirements. All HUD Mortgagee Letters are available at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/.

C. Proposed Final Rule Implementing Revised Manual Underwriting
Requirement

HUD is in the process of finalizing a rule implementing the revised
manual underwriting requirements and addressing the public comments
received on this proposal in response to the July 15, 2010, notice. The
new manual underwriting requirements will reduce the risk to the MMIF
and ensure that homebuyers are offered mortgage loans that are
sustainable.
As discussed in the July 15, 2010, notice, the purpose of mortgage
underwriting is to determine a borrower's ability and willingness to
repay the debt and to limit the probability of default. An underwriter
must consider a borrower's credit history, evaluate the borrower's
capacity to repay the loan based on income and current debt, determine
if cash to be used for closing is sufficient and from an acceptable
source, and determine if the value of the collateral supports the
amount of money being borrowed. In cases where the borrower has a very
limited or nontraditional credit history, a credit score may not have
been issued by the credit bureaus, or the credit score may be based on
references that are few in number or do not effectively predict future
credit worthiness. Mortgage loans for borrowers in this category are
manually underwritten as are all ``Refer'' risk classifications
provided by FHA's TOTAL Mortgage Score Card. These categories of
borrowers require a more extensive review that can be tailored to
circumstances to discern the level of risk. Manual underwriting
guidelines are generally more stringent to address that higher risk
level. The final rule will consider factors for manually underwritten
mortgage loans.

II. This Notice--Reduction of Seller Concession: Revised Proposal for
Reducing Seller Concessions

This notice revises the third proposal contained in the July 15,
2010, notice; namely, the proposed cap on the amount of ``seller
concessions'' that can be considered as offsets to actual closing costs
rather than inducements to purchase. When a homeseller pays all or part
of the buyer's closing costs and other fees, such payments are referred
to as seller concessions. Seller concessions include any payment toward
the borrower's closing costs and other fees, by any third party with an
interest in the transaction, including the seller, builder, developer,
mortgage broker, lender, or Settlement Company. HUD's existing policy
defining seller concessions provides that any concessions exceeding 6
percent must be treated as inducements to purchase, resulting in a
reduction in the FHA mortgage amount.

A. Changes to the July 15, 2010, Notice

In the July 15, 2010, notice, HUD proposed to cap the seller
concessions in FHA-insured, single-family mortgage transactions at 3
percent of the lesser of the sales price or appraised value, for the
purpose of calculating the maximum insured mortgage amount, reducing it
from the 6 percent limitation currently in place. As discussed in the
July 15, 2010, notice, conventional mortgage lenders have capped
allowances for seller concessions at 3 percent of the sales price on
loans with LTV ratios similar to FHA. Loans guaranteed by the
Department of Veterans Affairs have a cap on seller concessions of 4
percent of the sales price. In the July 15, 2010, notice, HUD also
provided statistical data illustrating a higher incidence of home loss
for borrowers who received seller concessions in excess of 3 percent.
The proposed cap was designed to align FHA's single-family mortgage

[[Page 10697]]

insurance programs to industry practice and reduce home loss among
homebuyers relying on FHA-insured financing. Of the homebuyers with
FHA-insured mortgages, 82 percent of such homebuyers make only the
minimum required downpayment of 3.5 percent. It is important,
therefore, for HUD to assure that allowable mortgage amounts are
appropriately adjusted for what may actually be inducements to
purchase. For borrowers having more than the minimum required
downpayment of 3.5 percent, this rule may or may not affect them.
As noted in the preamble, the majority of the 902 public comments
received in response to the July 15, 2010, notice pertained to the
proposed cap on seller concessions. Comments were submitted by mortgage
lenders, credit unions, realtors, home builders, state housing finance
agencies, and other interested organizations. After careful
consideration of the issues raised by the commenters, HUD has decided
to make the following changes to the proposed cap to seller concessions
and seek public comment on those changes:
Reduce the amount of seller concessions permitted as
offsets to actual closing costs to 3 percent \3\ or $6,000, whichever
is greater, but not allow the offsets, in any event, to exceed the
borrower's actual costs. This reduction in concession allowances does
not apply to HUD's Real Estate Owned homes and Neighborhood
Stabilization programs, for which the allowance remains at 6 percent.
---------------------------------------------------------------------------

\3\ The percentage is based on the lesser of sales price or
appraised value.
---------------------------------------------------------------------------

Limit acceptable uses of seller concessions to payments
toward borrower closing costs, prepaid items, discount points, the FHA
Up Front Mortgage Insurance Premium, and any Interest Rate Buydown.
This revised definition eliminates payment supplements such as
homeowner or condominium association fees, mortgage interest payments,
and mortgage payment protection plans.
To address potential future increases in closing costs, the $6,000
cap established in this notice is not static but tied to an index. The
dollar limitation may increase annually, and at the same percentage
rate as the FHA national loan limit floor, rounded up to the nearest
$100 for anything at or above $50 increments and rounded down to the
nearest $100 for anything below $50 increments. For example, should the
FHA national loan limit floor rise by 1.5 percent, then the cap may
increase to $6,100. Any increase in the dollar limitation will be
announced via mortgagee letter, most likely in the same mortgagee
letter that announces the new FHA loan limits for the upcoming calendar
year.
This revised proposal takes into consideration the
disproportionately negative impact an across-the-board reduction to 3
percent would have had on borrowers with low and moderate incomes who
are purchasing modestly priced homes. It also appropriately limits the
dollar amount of seller concessions on higher-priced homes, which under
currently policy could be as high as $43,785.\4\ Concession amounts
above the revised-proposal limit would not be prohibited, but rather
would result in a dollar-for-dollar reduction in the sales price for
the purpose of calculating the maximum insured loan amount.
---------------------------------------------------------------------------

\4\ That amount is 6 percent of FHA's current national mortgage
limit ceiling of $729,750.
---------------------------------------------------------------------------

B. Definition of Acceptable Concessions

As part of the revised proposal on reducing seller concessions, HUD
is also proposing to narrow the definition of acceptable concessions.
In this new definition, HUD continues to permit sellers to pay for the
borrower's actual costs to close on the loan, as well as pay the Up
Front Mortgage Insurance Premium due on the loan and fund an Interest
Rate Buydown.\5\ What HUD proposes to eliminate are payment supplements
offered by sellers, such as a year's worth of homeowner association
fees, 6 months' worth of mortgage interest, or mortgage payment
protection plans. HUD believes that these types of payment supplements,
while permissible under current seller concession guidance, are really
inducements to purchase and should be treated as such. The impact of
this revised definition should be minimal on the housing market since
the loan level review of FHA-insured loans revealed that sellers
typically offer concessions that pay for borrowers' actual costs to
acquire the property, and not payment supplements.
---------------------------------------------------------------------------

\5\ Interest Rate Buydowns are designed to reduce the borrower's
monthly payment during the early years of the mortgage. At
settlement, an escrow account is established and each month, the
servicing lender draws down an amount equal to the difference
between the principal and interest payment (P&I) at the Note rate,
and the P&I at the buydown rate. For more information on FHA
requirements for Interest Rate Buydowns, see HUD Handbook 4155.1
6.A.2.

------------------------------------------------------------------------
Current seller concession Proposed seller concession
definition definition
------------------------------------------------------------------------
The seller and/or interested third The seller and/or interested third
party may contribute towards the party may contribute towards the
buyer's: buyer's:
Closing Costs Closing Costs
Prepaid Expenses Prepaid Expenses
Discount Points Discount Points
Interest Rate Buydowns UFMIP
and other payment supplements Interest Rate Buydowns
(i.e. Homeowner Association fees) All other third-party contributions
Payments of mortgage are considered inducements to
interest for fixed-rate mortgages purchase, resulting in a dollar-
Mortgage Payment for-dollar reduction to the lesser
Protection Insurance and Up-Front of sale price or appraised value
Mortgage Insurance Premium before applying the appropriate
All other third-party contributions LTV factor (96.5%). This excludes
are considered inducements to closing costs and prepaid items
purchase, resulting in a dollar- paid by the lender through premium
for-dollar reduction to the lesser (rebate) pricing.
of sale price or appraised value
before applying the appropriate
LTV factor (96.5%). This excludes
closing costs and prepaid items
paid by the lender through premium
(rebate) pricing.
------------------------------------------------------------------------

Closing costs vary from borrower to borrower, lender to lender, and
state to state. These costs even vary from closing cost study to
closing cost study, because each study defines closing costs in
slightly different ways. The definition of closing costs for HUD's
analysis included fixed and variable closing costs, but not prepaid
expenses, because prepaid expenses are typically financed. Fixed costs
are those that are a fixed dollar amount, are not tied to a percentage
of the loan amount, and are generally offered within a dollar range.
Variable costs are those that are based

[[Page 10698]]

on a percentage of the loan amount, or property value. Prepaid items
include funds needed to establish an escrow account, as well as state
and local property taxes and per diem interest. FHA's Upfront Mortgage
Insurance Premium is also included in this category, and it is
typically prepaid by financing into the mortgage amount.

Categories of Closing Costs
------------------------------------------------------------------------
Fixed Variable Prepaid
------------------------------------------------------------------------
Appraisal..................... Adjusted Hazard/Homeowners
Origination Insurance.
Charge.
Credit Report................. Lender's Title Flood Insurance.
Insurance.
Survey........................ Lender's Title Homeowners/
Insurance. Condominium
Association Fees.
Pest Inspection............... Owner's Title Upfront Mortgage
Insurance. Insurance Premium.
Title Services................ Transfer Tax..... Taxes.
Lien Certification............ ................. Per Diem Interest.
Flood Certification
Flood Determination
Lender Inspection
------------------------------------------------------------------------

In the July 15, 2010, notice, HUD clarified the definition of
Interested Third Party. HUD is not revising the definition of
Interested Third Party but clarifying the definition where it was vague
and possibly subject to varied interpretation.

------------------------------------------------------------------------
Current interested third party Clarification of interested
definition third party definition
------------------------------------------------------------------------
Seller or other interested parties such Seller or other interested
as real estate agents, builders, party such as a real estate
developers, etc., or combination of agent, builder, developer,
these parties. mortgage broker, lender, and/
or settlement company.
------------------------------------------------------------------------

C. Statutory Authority

FHA has determined that maintaining the amount of eligible seller
concessions at 6 percent of the sales price of the property increases
the risk of default and claim payment by FHA from the insurance fund.
FHA's determination is solidly based on statutory grounds in both the
National Housing Act and the Department of Housing and Urban
Development Act (42 U.S.C. 3531 et seq.) There are five specific
statutory areas that support the action by FHA to reduce the amount of
allowable seller concessions for FHA purposes: (1) The mortgagor's
ability to pay the mortgage; (2) the amount of funds the mortgagor must
have available to close; (3) the Secretary's fiduciary duty to the
MMIF; (4) the capital ratio of the MMIF; and (5) FHA risk management.
Each one of these five statutory grounds is explained in more detail
below.
1. Ability to pay mortgage payment. Section 203(b)(4) of the
National Housing Act provides that the mortgage, in order to be
eligible for insurance, must contain complete amortization provisions
satisfactory to the Secretary requiring periodic payments by the
mortgagor not in excess of his reasonable ability to pay as determined
by the Secretary. FHA has found that seller concessions can, in some
instances, affect the borrower's ability to make monthly mortgage
payments some time after the mortgage loan is closed. An example is
when certain reoccurring homeownership costs are prepaid on a temporary
basis, but then, after the prepayment period ends, become the financial
burden of the mortgagor. FHA has found that the seller concessions such
as prepayment of taxes or homeowner association fees, which then become
due a year or two later, can result in mortgagors experiencing mortgage
payment shock and subsequent default. This example of an impact on a
mortgagor's reasonable ability to pay illustrates a clear statutory
basis under section 203(b)(4) of the National Housing Act for issuing
this notice.
2. Money to close. Section 203(b)(9)(A) of the National Housing
Act, as amended by the Housing and Economic Reform Act of 2008 (Pub. L.
110-289, approved July 30, 2008), addresses the need for a mortgagor to
make a minimum investment in the purchase of the mortgaged property.
Under section 203(b)(9)(A) of the National Housing Act, the mortgagor
shall have paid on account of the property an amount equal to not less
than 3.5 percent of the appraised value of the property or such larger
amount as the Secretary may determine. The reduction in seller
concessions impacts on the funding that the homebuyer has to bring to
the table to close. Indirectly, by reducing the amount of seller
concessions, the Secretary is determining that the mortgagor must pay
on account of the property an amount that can be greater than the
minimum 3.5 percent. Requiring, directly or indirectly, that the
mortgagor must come to the closing table with more of his own funds is
clearly rooted in this statutory provision of the National Housing Act.
3. Fiduciary Duty to the MMIF. The determination to decrease the
allowable amount of seller concessions is part of FHA's ongoing risk
management practices. FHA is a large government insurance corporation,
and has statutorily mandated requirements placed upon it to manage its
financial affairs prudently. One of the statutes with such a mandate is
found at section 202(a)(3) of the National Housing Act. Under that
section, the Secretary has a fiduciary duty to ensure that the MMIF
remains financially sound. Taking action such as issuing this Notice
regarding seller concessions furthers the Secretary's obligation to
meet the requirements of this section of the National Housing Act.
Reducing defaults and subsequent claims for insurance benefits payments
from the MMIF logically should financially help the MMIF.
4. Capital Ratio of the MMIF. Coupled with the fiduciary duty to
preserve the MMIF is the statutory requirement to maintain an adequate
MMIF capital ratio. Under section 205(f)(2) of the National Housing
Act, the Secretary shall ensure that the capital ratio of the MMIF is
maintained at not less than 2 percent. The ratio has fallen below this
threshold, and this is one action of many that FHA is taking to address
this statutory requirement.
5. FHA Risk Management. Under section 4(b) of the Department of
Housing and Urban Development Act,

[[Page 10699]]

the Secretary shall ensure that managers of the FHA are held
accountable for program operations and risk management along with other
duties. Because the action proposed by this Notice addresses risk
management directly, reducing the amount of eligible seller concessions
is authorized under this statutory provision. As is more fully
addressed in Section III of this Notice, which discusses the public
comments received on the July 15, 2010, notice, some program
participants have expressed concerns that reducing the amount of seller
concessions may impact the housing market at a time when the market is
depressed. However, FHA also has obligations to manage the MMIF soundly
and prudently. The reduction in the amount of seller concessions is
specifically being implemented to directly meet these statutory
mandates, and is being done in accordance with specific statutory
authority governing required funds to close and the mortgagor's ability
to make the monthly mortgage payments. FHA officials would be remiss in
their fiscal responsibilities if this action, after thoughtful study
and analysis of program data and careful review of and taking into
account the public comments, was not implemented.

D. Reducing Seller Concessions

Many of the commenters on the July 15, 2010, notice suggested that
the primary illustration of credit risk for loans with high rates of
seller concessions was not appropriate because it focused on loans
insured from 2005 to 2008, and those insurance endorsements had large
shares with seller-funded downpayment assistance and with lower
borrower credit scores than are acceptable to HUD today. In response,
HUD has completed an analysis of 2009 and 2010 loans. These latter
loans were originated after the use of seller-funded downpayments was
made illegal, and after lenders tightened their own internal credit
guidelines to eliminate the low credit score loans that made up a
sizable portion of FHA insurance activity in the 2005-to-2008 period.
Loans outside of current HUD policy on minimum borrower credit scores
also were excluded from the analysis, though they comprised only a
small number of the 2009 and 2010 loan originations.\6\
---------------------------------------------------------------------------

\6\ These are loans for which borrower credit scores are below
500, or for which the credit scores are below 580 if the loan-to-
value ratio is above 90 percent.
---------------------------------------------------------------------------

In this new analysis, HUD addresses four key areas: (1) The
distribution of closing costs and concessions in dollar amounts and in
percent of property value, for different sized loans; (2) the
introduction into the FHA portfolio of loans for much larger amounts
than had been insured in previous years; (3) the juxtaposition of
closing costs and concessions, by percent of property value; and (4)
the credit risk associated with different levels of seller concessions.
To prepare this revised proposal, HUD updated its data analysis to
use more recent loan originations. While this does not provide the type
of loan seasoning that demonstrates long-run performance and credit
risk, as was shown in Table C of the July 15, 2010, notice, it does
permit differentiation between low- and high-balanced loans to a degree
not possible with earlier loan originations. Prior to passage of the
Economic Stimulus Act of 2008, the FHA national loan limit ceiling was
$369,720; after that, it rose to $729,750, where it remains today,
which causes HUD to be concerned about credit risk from high dollar
concession amounts on high balanced loans with high loan-to-value
ratios.
For this analysis, HUD developed a data set of borrower-required
closing costs and seller concessions that covers 74 percent of the two
million FHA insured home purchase loans originated in 2009 and 2010.\7\
To measure credit risk on these loans, HUD focused only on 2009 loan
originations, which now have as much as 26 months of seasoning.
Patterns of credit risk already seen in this population are likely to
persist over the life of the loans.
---------------------------------------------------------------------------

\7\ Loans were excluded from this analysis primarily because HUD
was not able to discern from the various data submitted by lenders
the amounts of total borrower required closing costs and/or the
presence of seller concessions. A small number of loans were
excluded because borrower credit scores were below current limits
for FHA eligibility.
---------------------------------------------------------------------------

Table A shows the distribution of borrower-required closing costs
as a percentage of home value. That information highlights how fixed-
cost factors tend to create percentage amounts that are greatest for
small balance loans. More than 70 percent of loans of up to $180,000
have closing costs in excess of 3 percent of property value, while
among loans above $240,000, the share is just 26 percent.

Table A--Borrower Closing Costs--by Loan Amount and Percent of Property Value
[2009-2010 FHA-insured loan originations]
----------------------------------------------------------------------------------------------------------------
Percent of property value (rows sum to 100%) \a\
Loan amt. ($000) ----------------------------------------------------------------------------
<=1 2 3 4 5 6 >6
----------------------------------------------------------------------------------------------------------------
<=180.............................. 1.35 8.42 19.12 25.51 19.37 11.36 14.88
181-240............................ 4.50 20.23 35.59 22.50 9.55 4.25 3.39
241-360............................ 8.63 29.80 35.40 15.35 6.26 2.88 1.68
>360............................... 11.81 33.51 29.13 14.02 6.95 3.14 1.44
----------------------------------------------------------------------------
All............................ 4.45 18.57 30.22 22.03 11.97 6.18 6.57
----------------------------------------------------------------------------------------------------------------
\a\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here,
except for the final one, represents amounts up to the percentage shown in the column heading.

Concessions are present in 65 percent of FHA-insured home purchase
loans. That rate appears to have been fairly constant over time; data
samples taken by HUD on FY 2000 to 2002 home purchase loans insured by
FHA show a similar rate of concessions. Table B provides a companion to
Table A, highlighting the distribution of seller concessions, by size,
in percent of home value. The greatest rate of use of concessions is
for loan amounts up to $240,000, and the greatest share of concessions
for amounts above 3 percent of property value are for the lowest loan
amount categories shown there, and especially for loan amounts up to
$180,000.

[[Page 10700]]

Table B--Seller Contributions as a Percent of Property Value
[2009-2010 FHA-insured loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent of property value \a\ (rows sum to 100%)
Loan amt. ($000) ---------------------------------------------------------------------------------------
0 \a\ 1 2 3 4 5 6 >6 \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180........................................................... 34.02 2.55 8.29 21.25 16.43 8.95 8.03 0.48
181-240......................................................... 32.74 6.04 16.43 27.59 11.98 3.47 1.65 0.09
241-360......................................................... 38.79 9.52 21.51 21.38 6.18 1.58 0.99 0.05
>360............................................................ 47.28 12.54 18.96 13.93 3.73 1.91 1.61 0.04
All............................................................. 34.66 5.76 14.76 24.15 12.15 4.81 3.50 0.20
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here, except for the final one, represents
amounts up to the percentage shown in the column heading.
\b\ Shares of loans with rates of closing costs and concessions above 6 percent rose in 2010 in conjunction with a higher share of loans on properties
with purchase prices below $50,000.

Table C juxtaposes information from Tables A and B to show how
concession rates align with closing-cost rates. Shaded cells represent
loans for which concessions are generally larger than the closing
costs. Those account for 7 percent of all loans and 10 percent of loans
with concessions. Table C also shows that the largest single
concentration of loans (13.77 percent) is found where both closing
costs and concessions are between 2 and 3 percent of home value. As
seen in Table A, closing costs occur in this range for more than 30
percent of all home-purchase loans insured by FHA. Table B shows that
concessions in this range represent 24 percent of all subject loans,
and 37 percent of loans with concessions. The next largest
concentrations seen in Table C (for loans with positive concessions)
are for loans where closing costs and concessions are both between 1
and 2 percent of property value (7.62 percent), and those where each
measure is between 3 and 4 percent of property value (7.21 percent).
The next highest concentrations also are adjacent to the most populated
group.

Table C--Borrower Closing Costs and Concessions, in Percentage of Property Value a
[2009-2010 FHA-insured loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Concessions rates (% of value)
Closing cost rate (% of value) ---------------------------------------------------------------------------------------- All
0 \b\ <=1 2 3 4 5 6 >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.................................................... 2.21 1.10 0.33 0.50 0.21 0.06 0.04 0.00 4.45
2.................................................... 7.03 1.57 7.62 1.52 0.57 0.15 0.10 0.01 18.57
3.................................................... 8.99 1.66 4.00 13.77 1.23 0.35 0.20 0.01 30.22
4.................................................... 6.74 0.81 1.66 4.72 7.21 0.49 0.37 0.02 22.03
5.................................................... 4.06 0.35 0.65 1.98 1.67 2.84 0.41 0.02 11.97
6.................................................... 2.38 0.15 0.27 0.88 0.72 0.53 1.23 0.02 6.18
9.................................................... 3.25 0.12 0.23 0.77 0.54 0.39 1.15 0.13 6.57
All.................................................. 34.66 5.76 14.76 24.15 12.15 4.81 3.50 0.20 100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Property value is the lesser of purchase price and appraisal amount.
\b\ Any amount up to $500 is considered zero.

Table D provides summary statistics on the dollar amounts of
closing costs and concessions, by the same four loan-amount classes
shown in Tables A and B.

Table D--Borrower Closing Costs and Seller Concessions Descriptive Statistics by Loan Amount
----------------------------------------------------------------------------------------------------------------
Percentiles
Loan amt. ($000) Cost or Loans ------------------------------------------------------
concession 5th 25th 50th 75th 95th
----------------------------------------------------------------------------------------------------------------
Dollar Amounts
----------------------------------------------------------------------------------------------------------------
<=180........................ Cost........... 449,548 1,489 2,561 3,435 4,476 6,904
Concession..... 449,548 0 0 2,049 3,251 4,900
181-240...................... Cost........... 748,048 1,789 3,385 4,571 6,054 9,594
Concession..... 748,048 0 0 3,000 4,703 7,012
241-360...................... Cost........... 203,623 2,335 4,759 6,586 8,933 14,610
Concession..... 203,623 0 0 3,150 6,468 10,062
>360......................... Cost........... 69,346 3,209 6,794 9,795 14,253 23,702
Concession..... 69,346 0 0 1,527 8,155 16,453
----------------------------------------------------------------------------------------------------------------
Percentage of Home Value
----------------------------------------------------------------------------------------------------------------
<=180........................ Cost........... 449,548 1.60 2.84 3.82 5.09 8.01
Concession..... 449,548 0.00 0.00 2.44 3.50 5.71

[[Page 10701]]

181-240...................... Cost........... 748,048 1.04 2.01 2.71 3.56 5.53
Concession..... 748,048 0.00 0.00 1.75 2.87 4.04
241-360...................... Cost........... 203,623 0.81 1.66 2.27 3.05 4.90
Concession..... 203,623 0.00 0.00 1.11 2.23 3.49
>360......................... Cost........... 69,346 0.70 1.51 2.12 3.03 4.92
Concession..... 69,346 0.00 0.00 0.33 1.83 3.54
----------------------------------------------------------------------------------------------------------------

Tables E-G parallel Tables A-C and provide performance information
for loans originated in 2009.\8\ The defining metric is a ``failure''
rate, which includes all loans that have either resulted in an
insurance claim (as of March 31, 2011), are presently in foreclosure
processing, or else have gone through the foreclosure process but the
insurance claim has not yet been filed or processed. HUD adopted this
metric because present economic circumstances are resulting in delays
both in foreclosure completions and in claim filings. In addition,
focusing on such ``failures'' is more directly associated with losses
to the FHA insurance operations than are delinquency rate measures.\9\
---------------------------------------------------------------------------

\8\ Loans originated in 2010 are still too new for there to be
defined performance patterns. The 2009 loans comprise 51.6 percent
of the cases in this analysis.
\9\ HUD recognizes that not all loans for which a foreclosure
process is started will result in loss of a home to the borrower and
claim payment from FHA. However, the various rates at which
foreclosure actions have been initiated do provide a valid measure
for differentiating credit risk across groups of loans.
---------------------------------------------------------------------------

These tables show that, within each loan amount category, credit
risk is highest for loans with larger closing costs and with larger
concessions. For loan amounts above $240,000, credit risk rises faster
and higher than it does for lower loan amounts, as closing cost and
concessions each exceed 3 percent of property value. Table F shows that
while the lowest risk loans are those in the highest loan amount
category (above $360,000), when no concessions are present, the highest
risk is for the same category of loans when concessions are above 4
percent of property value, and especially when they are above 5
percent. In Table E, the highest loan-amount group also shows the
highest credit risk of all is when closing costs exceed 4 percent.

Table E--To-Date Failure Rates a by Loan Amount and Borrower Closing Cost Rates
[2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Borrower closing cost (percent of property value \b\)
Loan amt ($000) ------------------------------------------------------------------------------------------- All
<=1 2 3 4 5 6 >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180........................................... 0.92 0.81 0.99 1.11 1.11 1.19 0.99 1.04
181-240......................................... 0.65 0.70 0.79 0.91 0.74 1.04 0.98 0.79
241-360......................................... 0.61 0.79 0.92 1.03 1.12 1.24 1.48 0.88
>360............................................ 0.63 0.62 0.86 1.22 1.70 3.73 2.32 0.93
All............................................. 0.66 0.73 0.85 1.00 0.98 1.20 1.02 0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
completed and a claim filing is pending. Data as of March 31, 2011.
\b\ Property value is measured as the lesser of the purchase price and the appraisal amount. Each category here, except for the final one, represents
amounts up to the percentage shown in the column heading.

Table F--To-Date Failure Rates a by Loan Amount and Seller Concessions Rates
[2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Seller concessions (percent of property value \b\)
Loan amt. ($000) ---------------------------------------------------------------------------------------- All
0 \b\ <=1 2 3 4 5 6 >6
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180................................................ 0.72 1.12 1.01 1.03 1.18 1.41 1.58 2.15 1.04
181-240.............................................. 0.62 0.67 0.73 0.87 1.04 1.09 1.45 1.71 0.79
241-360.............................................. 0.70 0.79 0.82 1.03 1.48 1.85 1.51 2.27 0.88
>360................................................. 0.58 0.91 0.76 1.15 1.53 2.24 6.70 \c\ 0.00 0.93
All.................................................. 0.66 0.77 0.80 0.94 1.14 1.32 1.66 2.02 0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
completed and a claim filing is pending. Data is as of March 31, 2011.
\b\ Any amount up to $500 is considered zero; other categories represent amounts greater than the next lower limit, and up to the percentage listed;
rows add to 100 percent.
\c\ There are just 19 loans in this cell.

[[Page 10702]]

Table G--To-Date Failure Rates a by Closing Cost (CC) and Seller Concessions (SC) Rates b
[2009 Loan originations]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Seller concessions (%)
Closing costs (%) ---------------------------------------------------------------------------------------- by CC
0 \c\ <=1 2 3 4 5 6 >6 rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
<= 1................................................. 0.55 0.69 0.57 0.80 1.05 1.36 1.28 4.35 0.66
2.................................................... 0.63 0.70 0.80 0.73 0.79 1.32 1.11 0.00 0.73
3.................................................... 0.65 0.84 0.70 0.99 1.06 1.08 1.40 1.11 0.85
4.................................................... 0.73 0.85 1.00 0.89 1.25 1.02 1.88 2.68 1.00
5.................................................... 0.61 1.00 0.90 0.80 0.90 1.44 1.64 2.74 0.98
6.................................................... 0.80 0.87 1.22 1.07 1.09 1.18 1.86 3.25 1.20
>6................................................... 0.73 1.41 1.26 0.85 0.75 1.38 1.48 1.70 1.02
by SC rate........................................... 0.66 0.13 0.39 0.73 0.43 0.20 0.19 0.01 0.89
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Failure is defined as a loan having either resulted in an insurance claim, or in foreclosure processing today, or else a foreclosure action has been
completed and a claim filing is pending. Shaded cells represent loans for which concessions are larger than closing costs. Data is as of March 31,
2011.
\b\ Rates are in percent of property value (lesser of purchase price and appraisal amount).
\c\ Any amount up to $500 is considered zero; other categories represent amounts greater than the next lower limit, and up to the percentage listed;
rows add to 100 percent.

E. Establishing the Seller Concession Percentage Cap and Dollar
Limitation

The Department recognizes that an across-the-board reduction in
concession allowances could have a large negative impact on the ability
of low- and moderate-income households to purchase moderate-priced
homes. Thus, HUD is revising its proposed limitation on seller
concessions to address comments to that effect that were provided in
response to the July 15, 2010, notice. Many comments recommended that
HUD combine a percentage cap with a dollar limitation. Such a two-part
proposal could directly address the higher credit risk of high-balance
loans with large seller concessions, while maintaining a sufficiently
high allowance for the reasonable range of closing costs found on
moderate-priced homes. Such a two-part approach would:
(1) Reduce the amount of concessions a seller (or other interested
third party) could provide that would be considered in excess of actual
closing costs or inducements to sale, and
(2) Minimize the impact that such a reduction might have on
affordability and access to homeownership for first-time homebuyers
needing the low downpayments permitted by FHA in what is still a
fragile housing market.
To determine a reasonable percentage cap and dollar limitation, HUD
compared the range of actual closing costs for homebuyers with FHA-
insured mortgages, as seen in Table D, with the credit risk
characteristics of loans with high concessions found in Tables F and G.
The result is a new proposal permitting concessions as offsets to
actual closing costs on individual loans up to the greater of 3 percent
or $6,000 of the lesser of the sales price or appraised value. In
mathematical terms, this limitation can be described as:
Minimum [closing--cost, maximum ($6,000, 0.03* property--value)]
where property--value = min (sale price, appraised value) except for
203k where property--value = appraised--value.
Under this proposal, the limiting factor on the allowable dollar
amount of concessions will be:
Closing costs, when the amount is less than $6,000;
Closing costs, when they are above $6,000 but less than 3
percent of property value;
$6,000, when that is more than 3 percent of property value
and less than total closing costs; or
3 percent of property value, when that amount is both
greater than $6,000 and less than closing costs.
Table H provides some benchmark values for understanding how this
proposal would affect homebuyers with minimum downpayments, at
different loan amounts. For the homebuyer with a $120,000 mortgage
(buying a $126,000 home), concessions would be considered offsets to
actual closing costs where closing costs are as high as $6,000, or 4.78
percent of the home value. The loan amount after which the 3 percent of
property value is greater than $6,000 is $194,930 (buying a $200,000
home). For all larger loan amounts, a borrower may use concessions as
offsets to actual closing costs up to 3 percent of property value. At
$360,000, concessions may be used to offset actual closing costs, up to
$11,304. For a very high loan amount of $600,000, the 3 percent
concessions allowance is $18,000.

Table H--Components of the Proposed Limit on Seller Concessions
[Examples at various loan amounts]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Loan Amount \a\................................ $120,000 $180,000 $194,930 $240,000 $360,000
Property Value \b\............................. $125,596 $188,394 $200,000 $251,192 $376,788
$6,000 as a % of Value......................... 4.78% 3.18% 3.00% 2.39% 1.59%
3.0% of Value.................................. $3,768 $5,652 $6000 $7,536 $11,304
----------------------------------------------------------------------------------------------------------------
\a\ Presumed to include the FHA Upfront Mortgage Insurance Premium of 1 percent.
\b\ Based upon borrower making the minimum downpayment of 3.5 percent. (Calculated as loan--amount/(0.965/1.01),
to also account for the typical financing of the 1 percent upfront insurance premium.)

Referring again to Table D, the $6,000 limitation is generous to
borrowers with loan amounts up to $180,000. In that range, $6,000 is
beyond the 90th percentile of all borrower closing costs. Thus, less
than 10 percent of borrowers with loan amounts under $180,000 would
have concession allowances that are less than their actual closing
costs. For borrowers in the next loan amount category ($180,000-
240,000), $6,000 nearly reaches the 75th percentile of

[[Page 10703]]

closing costs. However, $6,000 is not the binding limit for borrowers
with loan amounts of $195,000 or greater (see Table H). In that range,
3 percent of the property value is greater than $6,000 and becomes the
amount that is compared with actual closing costs to determine maximum
allowable concessions.
Table I illustrates the impact of this revised proposal to the
existing concessions limitation and at different sales prices under the
proposed reduction. Concessions are more generous than the existing 6
percent limitation for sales prices below $100,000. For sales prices
between $100,000 and $200,000, the dollar cap allows for seller
concessions greater than 3 percent. Any sales price above $200,000 is
limited to the 3 percent cap.

Table I--Comparison of Limitations on Seller Concessions
----------------------------------------------------------------------------------------------------------------
Existing Proposed reduction of seller Proposed
seller concessions is the greater of percentage cap
concessions -----------------------------------------------
Sales price limitation
---------------- 3.0 percent $6,000 %
6 percent
----------------------------------------------------------------------------------------------------------------
$100,000........................................ $6,000 $3,000 $6,000 6.0
$120,000........................................ 7,200 3,600 6,000 5.0
$140,000........................................ 8,400 4,200 6,000 4.3
$160,000........................................ 9,600 4,800 6,000 3.75
$180,000........................................ 10,800 5,400 6,000 3.3
$200,000........................................ 12,000 6,000 6,000 3.0
$220,000........................................ 13,200 6,600 6,000 3.0
$240,000........................................ 14,400 7,200 6,000 3.0
$260,000........................................ 15,600 7,800 6,000 3.0
$280,000........................................ 16,800 8,400 6,000 3.0
$300,000........................................ 18,000 9,000 6,000 3.0
----------------------------------------------------------------------------------------------------------------

The actual effects of the proposed limitation, when applied to the
2009 and 2010 loan originations used in this analysis, are shown in
Tables J and K. Overall, the limitation would have affected just 13.4
percent of those home purchase loans. The dollar size of the resulting
excess contributions is shown in Table J. For the lowest loan amount
group, the median effect is under $1,000; for the highest loan amount
group, it is above $4,000. However, as seen in Table K, among the 9.7
percent of borrowers with loan amounts up to $180,000 that are
affected, the binding constraint that creates excess concessions is the
actual amount of closing costs in nearly all of those situations (93.4
percent). For the fewer than 7 percent of the affected borrowers in
this group, the $6,000 dollar limitation is greater than their closing
costs. For loan amounts above $240,000, the share of affected loans
constrained by closing costs is more closely balanced with the share
that is constrained by 3 percent of property value (56 and 44 percent,
respectively).

Table J--Proposed Concessions Limitation, Affects by Loan Size Category
[2009-2010 FHA-insured loans]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dollar reductions--at various percentiles (affected loans only)
Loan amt. ($000) Number of Share of loans -------------------------------------------------------------------------------
loans affected affected % 5th 25th 50th 75th 95th
--------------------------------------------------------------------------------------------------------------------------------------------------------
<=180................................... 43,592 9.7 $86 $480 $988 $1,670 $3,018
181-240................................. 114,726 15.3 116 664 1,434 2,562 4,900
241-360................................. 30,499 15.0 150 1,001 2,247 4,106 8,160
>360.................................... 8,819 12.7 327 1,850 4,138 7,541 14,635
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table K--Proposed Concessions Limitation Source of Constraint on Affected Loans, by Loan Size Category
----------------------------------------------------------------------------------------------------------------
Binding constraint
-----------------------------------------------
Loan amt. ($000) Property value
Closing cost % % Dollar limit %
----------------------------------------------------------------------------------------------------------------
<=180........................................................... 93.4 0.11 6.5
181-240......................................................... 61.9 12.7 25.5
241-360......................................................... 57.0 43.0 0.04
>360............................................................ 54.2 45.7 0.05
All............................................................. 67.7 16.0 16.2
----------------------------------------------------------------------------------------------------------------
Note: Rows sum to 100%.

[[Page 10704]]

F. Considering Alternative Approaches

There were a variety of alternative approaches suggested by
commenters. Some commenters recommended that HUD defer instituting a
cap in favor of monitoring the performance of loans with seller
concessions for a period of 2 years. Others suggested adopting the cap
used by other federal programs such as the Department of Veterans
Affairs Home Loan Program or capping seller concessions based on the
buyer's credit score. While these alternatives to the proposed
reduction all had merit, HUD believes that they do not sufficiently
address the risk to the MMIF and/or they do not adequately mitigate the
impact that a reduction in seller concessions may have had on the
housing market. In considering all of the alternative approaches, HUD
sought to achieve both of these goals. The comments that recommended
combining a percentage cap with a dollar limitation met these goals and
provided HUD the opportunity to revise this proposal in a manner that
would both benefit the housing market and FHA's Mutual Mortgage
Insurance Fund.
Section III of this notice discusses all of the significant issues
raised by the public comments regarding the July 15, 2010, notice's
proposed reduction in the allowable amount of seller concessions, and
HUD's responses to these issues.

III. Discussion of the Public Comments Regarding Proposed Reduction in
Sellers Concessions

A. Support for Proposed Limit on Seller Concessions

A minority of the comments expressed support for reducing seller
concessions. The commenters wrote that the cap would require a more
serious commitment from borrowers and should also help reduce risks to
the FHA insurance funds.
HUD Response. HUD appreciates the support for reducing seller
concessions. It believes that this reduction will reduce risk to the
MMIF, while at the same time preserving FHA's mission of helping
underserved borrowers obtain affordable home financing.

B. Proposed Cap Will Be Ineffective and Harmful

Comment: HUD failed to provide adequate justification for the
proposed reduction, and reducing seller concessions will not result in
reduced risk to FHA. Several commenters questioned HUD's stated
rationale for limiting seller concessions. The commenters wrote that
the data provided in the July 15, 2010, notice regarding the seller
concession cap failed to demonstrate a significant risk to the FHA
portfolio to justify the change. Further, commenters questioned the
accuracy of the statistical data illustrating the correlation between
higher seller concessions and an increased rate of default.
HUD Response. HUD has amended its proposal in response to these
comments. The Department conducted a more complex analysis of portfolio
performance involving seller concessions, which revealed that the risk
to the MMIF increased for loans with larger closing costs and
concessions. Table E demonstrates that for loan amounts in excess of
$240,000 for FY 2009, credit risk rises faster and higher than it does
for lower loan amounts when closing costs and concessions exceed 3
percent. Table F shows that the highest risk exists with loans greater
than $360,000 and concessions are above 4 percent.
Comment: Proposed cap does not address true problems in the housing
market. Several commenters wrote that the proposed cap will be
ineffective because it fails to address the true causes of increased
defaults. Some of these commenters wrote that unscrupulous lending
practices were primarily responsible for the increased mortgage
defaults, while other commenters pointed at artificially inflated
appraisals and sales prices.
HUD Response. HUD has amended its proposal in response to these
comments. The Department agrees that reducing seller concessions alone
will not address the true problems associated with increased defaults
and the volatility in the housing market. However, this revised
proposal, in conjunction with other efforts to strengthen enforcement
actions and reduce risk, will help ensure that borrowers relying on
FHA-insured financing have sufficient investment in their home
purchases and are therefore less likely to default. This revised
proposal will also help curtail a practice where seller concessions are
offered an amount above the borrower's actual costs as an offset to a
higher sales price.
Comment: Proposed cap will harm the housing market. Several
commenters wrote that the proposed cap could have a chilling effect on
the origination of new mortgages. Commenters wrote that reducing seller
concessions from 6 percent to 3 percent would reduce the qualified
borrower pool and remove a large portion of borrowers who would
otherwise be approved under stringent underwriting requirements. The
commenters wrote that many FHA buyers require the seller's contribution
in order to proceed with the purchase of the home. Additionally the
reduction in sellers concessions, some commenters argued, could result
in less money available for post-purchase incidentals including home
improvements and emergencies.
HUD Response. HUD amended its proposal in response to these
comments. HUD recognizes that borrowers with lower loan amounts were
more negatively impacted by the initial proposal from the July 15,
2010, notice than borrowers with high loan amounts. However, as
evidenced in Tables A, B, C, and D, the impact of any change to seller
concessions would not be as great as indicated by the commenters. As
shown in Table C, the largest single concentration of loans (13.77
percent) is where both closing costs and concessions are between 2 and
3 percent of home value. In Table A, closing costs occur in this range
for more than 30 percent of all home purchase loans insured by FHA.
Table B shows that concessions in this range represents 37 percent of
loans with concessions. The next largest concentration is for loans
where closing costs and concessions are between 1 and 2 percent of
property value (7.62 percent). Table A highlights how fixed cost
factors tend to create percentage amounts that are greatest for small
balance loans. Over 70 percent of loans of up to $180,000 have closing
costs in excess of 3 percent of property value. This difference is
attributed to the fact that many closing costs are fixed (e.g.,
appraisals, title services, inspections, and flood and lien
certifications), and not a percentage of loan amount (e.g., origination
charge, title insurance). Therefore, the revised proposal allows for
greater than 6 percent seller concessions on loans with a sales price
of less than $100,000 and allows for seller concessions greater than 3
percent for loans with a sales price up to $200,000. It is anticipated
that this revised proposal will minimize, if not eliminate, the
concerns that a reduction in seller concessions would have a negative
impact on the housing market. Also, this proposal will assist borrowers
who are less able to absorb the post-purchase financial costs of home
improvements and emergency repairs, by not requiring them to devote all
available funds to the acquisition of the home.
Comment: Reduction in seller's cap will disproportionately impact
low-income and first-time homebuyers. Several commenters suggested that
the proposed seller concession cap will unfairly impact low-income and
first-time homebuyers. The reduction from 6 percent to 3 percent will
impact less

[[Page 10705]]

expensive properties and have a disparate impact on lower income
borrowers and potential homeowners purchasing homes worth less than
$150,000. The cap will burden low income buyers and require a higher
percentage of cash relative to buyers purchasing more expensive homes.
Additionally, commenters wrote that first-time homebuyers are less
likely to have cash available to meet closing costs. The commenters
wrote that these buyers rely heavily on the 6 percent seller's
concessions and will experience a greater decrease in buying power than
second- or third-time buyers.
HUD Response. HUD has amended its proposal in response to these
comments and agrees that an across-the-board reduction in seller
concessions had a disproportionately negative impact on low- and
moderate-income borrowers purchasing lower priced homes. As noted in
previous responses, this revised proposal allows for greater than 6
percent seller concessions on loans with sales prices less than
$100,000 and allows for seller concessions greater than 3 percent for
loans with sales prices up to $200,000 (See Table I).
Comment: Proposed cap fails to consider regional differences in
housing markets. Several commenters wrote that the reduction in seller
concessions to 3 percent should be reevaluated to account for varying
home prices regionally. Commenters wrote that closing costs, taxes, and
insurance vary greatly by state. The commenters wrote that the 3
percent cap will have a variable impact on buyers depending on the
regional market and that HUD should consider a more flexible market-
driven approach.
HUD Response. HUD does not engage in regional eligibility and
underwriting standards based on local market conditions. FHA's role in
stabilizing the current housing market is due to the fact that its
programs are available under the same terms and conditions regardless
of the borrower's and subject property's location. However, HUD does
recognize that there are regional differences in the housing market
and, therefore, it crafts its policies by taking these differences into
consideration. HUD analyzed FHA loans from both high-cost and low-cost
states and used a reasonable range (25th percentile to 75th percentile)
to determine the appropriate cutpoints. HUD also reviewed various
external closing cost studies such as by Bankrate.com and analyzed
additional external data provided by an FHA-approved lender. HUD is
confident that its own analysis is consistent with other reliable
closing costs studies.

C. Alternative Approaches

Comment: HUD should defer instituting a cap. Several commenters
wrote that the analysis provided in the July 15, 2010, notice was
conducted prior to the implementation of other recently enacted FHA
risk management initiatives and, therefore, does not take the
beneficial impact of such changes into account. The commenters
questioned whether the increase in average default rates was caused by
the difference in seller concessions or by some other factor such as
lower borrower credit scores. The commenters proposed that HUD delay
implementing the 3 percent cap until the results and impacts of the
other recently implemented FHA risk change can be tracked. Commenters
suggested that HUD analyze the performance of loans left at a 6 percent
cap for 2 years prior to instituting the change.
HUD Response. HUD has amended its proposal in response to these
comments. HUD believes that it has completed the necessary due
diligence in proposing a reduction in seller concessions, from
analyzing the impact on its portfolio to the impact a reduction would
have on the housing market. As part of the analysis for this revised
proposal, which includes performance data from FYs 2009 and 2010, HUD
did not include loans it no longer insures, such as those with credit
scores below 580 and LTVs greater than 90 percent, as well as those
with seller-funded downpayment assistance. By eliminating these loans
from the analysis, HUD was able to analyze seller concessions and their
impact on the portfolio without skewing the data with known factors
that more likely contributed to the default and claim. Readers are
referred to the discussion in Section II that illustrates the need to
make these reductions while at the same time preserving the 6 percent
cap for those borrowers who need it the most; i.e., low- and moderate-
income borrowers purchasing lower priced homes.
Comment: HUD should allow for gradual reduction of seller
concessions. Commenters recommended that if HUD plans to implement the
reduction in seller concessions, that a gradual approach be used.
Commenters argued that the 3 percent reduction would result in many
buyers being priced out of the market. Commenters argued that a gradual
approach would protect potential buyers and would allow HUD to study
the impact of each change.
HUD Response. HUD believes that its revised proposal has
essentially the same effect the commenters are seeking, ensuring that a
reduction to seller concessions has minimal impact on the housing
market and that borrowers who need additional assistance in purchasing
a home may receive it. As stated previously, this revised proposal
allows for seller concessions greater than 6 percent on loans with
sales prices less than $100,000 and permits seller concessions greater
than 3 percent for loans with sales prices up to $200,000 (See Table
I).
Comment: Cap seller concessions by dollar amount in addition to
percentage. Several commenters wrote that providing a dollar range in
addition to a percentage would resolve regional and economic disparity
issues posed by the proposed 3 percent cap.
HUD Response. HUD has amended its proposal based on these comments
and has proposed that seller concessions be reduced to 3 percent or
$6,000, whichever is the greater (but not to exceed the borrower's
actual costs). Like the commenters, the Department believes that
combining a cap based on percentage with a cap based on a dollar amount
addresses the regional and economic disparities that may have occurred
with an across-the-board reduction. Readers are directed to the
discussion in Section II regarding this revised proposal.
Comment: Base seller concessions on buyer credit score. Several
commenters suggested that FHA adopt a graduated system for determining
the allowable amount of seller concessions. Commenters suggested basing
this graduated system either on income level or credit score.
Commenters suggested that a graduated approach will more directly speak
to the correlation between poor credit and default. Rather than reduce
the seller contribution of FHA transactions to 3 percent universally,
commenters suggested that FHA adjust the cap using other risk
identifiers such as correlating the seller concession with credit
scores.
HUD Response. HUD believes that limiting seller concessions based
on the borrower's income level and credit score would not achieve its
mission of assisting low-income borrowers overcome a chief obstacle to
purchasing a home: having sufficient funds for a downpayment, as well
as for paying all of their closing costs. With this revised proposal,
HUD is striking the appropriate balance between its historic role of
making it easier for families to purchase their homes, while at the
same time ensuring that they have sufficient investment in their home
purchases and are therefore less likely to default.
Comment: HUD should align the seller concession cap with other
federal programs. Several commenters

[[Page 10706]]

suggested that if HUD implements a reduction in the allowable amount of
seller concessions, that it should be reduced to 4 percent. This
reduction would align it with the Department of Veterans Affairs
Veterans' Home Loan Program.
HUD Response. HUD did consider aligning itself with the Department
of Veterans Affairs Veterans' Home Loan Program but found in its
analysis that doing so would have resulted in a disproportionately
negative impact on borrowers purchasing lower priced homes. By
combining a percent cap with a dollar amount cap, HUD believes that it
has addressed such disparities and minimizes the impact a reduction in
seller concessions may have on the market.

IV. Findings and Certification

Executive Order 12866, Regulatory Planning and Review

The Office of Management and Budget (OMB) reviewed this notice
under Executive Order 12866 (entitled ``Regulatory Planning and
Review''). The notice 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).
As discussed in this preamble, this notice proposes to reduce the
amount of closing costs a seller may pay on behalf of a homebuyer
purchasing a home with financing insured by FHA. The increased role of
FHA in the mortgage lending marketplace, combined with the economic
difficulties faced by many FHA borrowers, has increased the risk to the
FHA insurance funds. While HUD has undertaken several steps to mitigate
this risk and strengthen the financial soundness of the FHA programs, a
reduced cap on seller concessions remains a vitally needed reform.
As provided in the economic analysis that accompanies this notice,
the combined compliance cost for borrowers and sellers under HUD's
proposal to reduce seller concessions ranges from $21 million to $97
million. The actual cost of compliance depends greatly on the state of
the housing mortgage market. Where the mortgage market is healthier and
private lending is available, the cost of compliance will be at the
lower end of the range, and concomitantly at the higher end of the
range in a slowed market in which private lending is substantially
reduced. With respect to benefits, HUD expects its proposal to help
prevent foreclosures in the amount of approximately $25 million, and
prevention of foreclosures means sustainable homeownership. Another
highly important benefit will be to reduce the net losses to the FHA
insurance fund resulting from high rates of insurance claims. The total
gain to FHA from the implementation of HUD's proposal as presented in
this notice is expected to range from $60 million to $70 million. As
the current housing market has shown, the importance of maintaining FHA
as a source of credit for homeownership is a highly important benefit,
which cannot be overstated.
Because of the downturn in the housing market, FHA loans are now in
higher demand as a result of the absence of sufficient private lending
in the mortgage market. The volume of FHA insurance increased rapidly
as private sources of mortgage finance retreated from the market. As
noted earlier in this preamble, FHA's share of the single-family
mortgage market today is approximately 33 percent--up from 3 percent in
2007, and the dollar volume of insurance written has jumped from the
$77 billion issued in that year to $319 billion in 2010. Accordingly,
over the last several years, FHA's primary contribution to the public
is to provide a financing source for affordable and sustained
homeownership when the market is not achieving this goal on its own.
FHA cannot, however, contribute to sustained homeownership if FHA
itself is not sustained.
As has been reported, FHA's capital reserve ratio has fallen below
the statutorily mandated minimum capital reserve ratio of 2 percent. A
primary reason why is that the recent demands placed on FHA have
resulted in increased losses to the FHA insurance fund. FHA has a
fiduciary duty, imposed by statute, to preserve the MMIF and to
maintain the capital ratio of the MMIF at not less than 2 percent. In
brief, FHA must take action to reduce risks and eliminate losses. FHA
has already taken several steps to reduce risks, and this proposal on
reduced seller concessions is another such measure to do so and restore
the MMIF to the statutory minimum capital reserve ratio.
The full economic analysis is available for review at
www.regulations.gov. 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 Relay
Service at 800-877-8339.

Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) (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.
The notice reduces the seller concessions cap. The benefit of this
action will be to reduce the net losses due to mortgage defaults. As
noted in the economic analysis for the notice, few borrowers are served
in the categories that would be excluded under the new policies,
relative to the total FHA portfolio. Further, as noted by many of the
public commenters on the July 15, 2010, notice, the policy changes
being made by FHA aligns the seller concession cap with that found in
the conventional mortgage market. The impact of the policy changes
will, therefore, largely be limited to conforming FHA standards to
widespread industry practice.

Environmental Impact

A Finding of No Significant Impact (FONSI) with respect to the
environment was prepared for the July 15, 2010, notice, 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 remains applicable to
this notice and 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.

Executive Order 13132, Federalism

Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any document that has federalism implications if the
document either imposes substantial direct

[[Page 10707]]

compliance costs on state and local governments and is not required by
statute, or preempts state law, unless the agency meets the
consultation and funding requirements of section 6 of the Executive
Order. This document would not have federalism implications and would
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 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments, and on the private sector. This document would not
impose any federal mandates on any state, local, or tribal governments,
or on the private sector, within the meaning of the UMRA.

Dated: January 30, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 2012-3934 Filed 2-22-12; 8:45 am]
BILLING CODE 4210-67-P