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Rule

Risk-Based Capital; Technical Amendment

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Start Preamble

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 Start Printed Page 66534risk-based capital requirement for the Enterprises.

EFFECTIVE DATE:

November 1, 2002.

Start Further Info

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.

End Further Info End Preamble Start Supplemental Information

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]

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.

(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 (RSq) 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 Start Printed Page 66535regulation 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.

Start List of Subjects

List of Subjects in 12 CFR Part 1750

End List of Subjects Start Amendment Part

Accordingly, for the reasons stated in the preamble, OFHEO amends

End Amendment Part Start Part

PART 1750—CAPITAL

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1. The authority citation for part 1750 continues to read as follows:

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Authority: 12 U.S.C. 4513, 4514, 4611, 4612, 4614, 4615, 4618.

End Authority Start Amendment Part

2. Amend Appendix A to subpart B of part 1750 as follows:

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a. Revise Table 3-18 in paragraph 3.1.3.1[c];

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b. Revise paragraph 3.3.1[b];

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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.”

End Amendment Part Start Amendment Part

d. Revise Table 3-30 in paragraph 3.5.3[a]2.a.;

End Amendment Part Start Amendment Part

e. Revise paragraph 3.6.3.4.3.1[a]3.a.;

End Amendment Part Start Amendment Part

f. Revise Table 3-35 in paragraph 3.6.3.4.3.2[a]1.;

End Amendment Part Start Amendment Part

g. In paragraph 3.6.3.6.3.3[a]1., remove the term “GL

End Amendment Part Start Amendment Part

h. In paragraph 3.6.3.6.4.3[a]5., after the words “Defaulted UPB:” and before the equation, add the following equation:

End Amendment Part

Start Amendment Part

i. Revise paragraph 3.7.3.1[g]2.;

End Amendment Part Start Amendment Part

j. Revise Table 3-68 in paragraph 3.8.3.6.1[e]2.;

End Amendment Part Start Amendment Part

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

End Amendment Part Start Amendment Part

l. Revise paragraph 3.11.3[c].

End Amendment Part

The revisions and additions read as follows:

Start Appendix

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 IndexDescriptionSource
1 MO Treasury BillOne-month Treasury bill yield, monthly simple average of daily rate, quoted as actual/360Bloomberg Generic 1 Month U.S. Treasury bill Ticker: GB1M (index).
3 MO CMTThree-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
6 MO CMTSix-month constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
1 YR CMTOne-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
2 YR CMTTwo-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
3 YR CMTThree-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
5 YR CMTFive-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
10 YR CMTTen-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
20 YR CMTTwenty-year constant maturity Treasury yield, monthly simple average of daily rate, quoted as bond equivalent yieldFederal Reserve H.15 Release.
Start Printed Page 66536
30 YR CMTThirty-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 402Federal 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 rateFederal Reserve H.15 Release.
1 Week Federal Funds1 week Federal Funds rate, monthly simple average of daily ratesBloomberg Term Fed Funds U.S. Domestic Ticker: GFED01W(index).
6 Month Fed Funds6 month Federal Funds rate, monthly simple average of daily ratesBloomberg Term Fed Funds U.S. Domestic Ticker: GFED06M(index).
Conventional Mortgage RateFHLMC (Freddie Mac) contract interest rates for 30 YR fixed-rate mortgage commitments, monthly average of weekly ratesFederal Reserve H.15 Release.
FHLB 11th District COF11th District (San Francisco) weighted average cost of funds for savings and loans, monthlyBloomberg Cost of Funds for the 11th District Ticker: COF11 (index).
1 MO LIBOROne-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360British Bankers Association. Bloomberg Ticker: US0001M (index).
3 MO LIBORThree-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360British Bankers Association. Bloomberg Ticker: US0003M (index).
6 MO LIBORSix-month London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360British Bankers Association. Bloomberg Ticker: US0006M (index).
12 MO LIBOROne-year London Interbank Offered Rate, average of bid and asked, monthly simple average of daily rates, quoted as actual/360British Bankers Association. Bloomberg Ticker: US0012M (index).
Prime RatePrevailing rate as quoted, monthly average of daily ratesFederal Reserve H.15 Release.
1 MO Federal Agency COFOne-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360Bloomberg Generic 1 Month Agency Discount Note Yield. Ticker: AGDN030Y (index).
3 MO Federal Agency COFThree-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360Bloomberg Generic 3 Month Agency Discount Note Yield. Ticker: AGDN090Y (index).
6 MO Federal Agency COFSix-month Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360Bloomberg Generic 6 Month Agency Discount Note Yield. Ticker: AGDN180Y (index).
1 YR Federal Agency COFOne-year Federal Agency Cost of Funds, monthly simple average of daily rates, quoted as actual/360Bloomberg Generic 12 Month Agency Discount Note Yield. Ticker: AGDN360Y (index).
2 YR Federal Agency COFTwo-year Federal Agency Fair Market Yield, monthly simple average of daily ratesBloomberg Generic 2 Year Agency Fair Market Yield. Ticker: CO842Y (index).
3 YR Federal Agency COFThree-year Federal Agency Fair Market Yield, monthly simple average of daily ratesBloomberg Generic 3 Year Agency Fair Market Yield. Ticker: CO843Y (index).
5 YR Federal Agency COFFive-year Federal Agency Fair Market Yield, monthly simple average of daily ratesBloomberg Generic 5 Year Agency Fair Market Yield. Ticker: CO845Y (index).
Start Printed Page 66537
10 YR Federal Agency COFTen-year Federal Agency Fair Market Yield, monthly simple average of daily ratesBloomberg Generic 10 Year Agency Fair Market Yield. Ticker: CO8410Y (index).
30 YR Federal Agency COFThirty-year Federal Agency Fair Market Yield, monthly simple average of daily ratesBloomberg Generic 30 Year Agency Fair Market Yield. Ticker: CO8430Y (index).
15 YR fixed-rate mortgageFHLMC (Freddie Mac) contract interest rates for 15 YR fixed-rate mortgage commitments, monthly average of FHLMC (Freddie Mac) contract interest rates for 15 YRBloomberg FHLMC 15 YR, 10 day commitment rate. Ticker: FHCR1510 (index).
7-year balloon mortgage rateSeven-year balloon mortgage, equal to the Conventional Mortgage Rate less 50 basis pointsComputed.
* * * * *

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 CategoryAAAAAABBBBelow BBB and Unrated
Standard & Poor's Long-TermAAAAAABBBBelow BBB and Unrated
Fitch Long-TermAAAAAABBBBelow BBB and Unrated
Moody's Long-TermAaaAaABaaBelow Baa and Unrated
Standard & Poor's Short-TermA-1+ SP-1+A-1 SP-1A-2 SP-2A-3SP-3, B or Below and Unrated
Fitch Short-TermF-1+F-1F-2F-3B and Below and Unrated
Moody's 1Prime-1 MIG1 VMIG1Prime-1 MIG1 VMIG1Prime-2 MIG2 VMIG2Prime-3 MIG3 VMIG3Not Prime, SG and Unrated
Fitch Bank Individual RatingsAB A/BC B/CD C/DE D/E
Moody's Bank Financial Strength RatingABCDE
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):

Note: For this purpose, MCONm is required for the 24 months (eight quarters) prior to the start of the Stress Test. Also, MIRm = MIR0 for m < 0.

* * * * *

3.6.3.4.3.2. * * *

[a] * * *

1. * * *Start Printed Page 66538

Table 3-35—Coefficients for Single Family Default and Prepayment Explanatory Variable

Explanatory Variable (V)30-Year Fixed-Rate LoansAdjustable-Rate Loans (ARMs)Other Fixed-Rate Loans
Default Weight (βv)Prepayment Weight (γv)Default Weight (βv)Prepayment Weight (γv)Default Weight (βv)Prepayment Weight (γv)
Aq
0 ≤ Aq ≤ 4−0.6276−0.6122−0.7046−0.5033−0.7721−0.6400
5≤ Aq ≤ 8−0.16760.1972−0.22590.1798−0.27380.1721
9≤ Aq ≤ 12−0.058720.26680.015040.2744−0.098090.2317
13 ≤ Aq ≤ 160.074470.21510.22530.24730.13110.1884
17 ≤ Aq ≤ 200.23950.17230.35220.14210.32290.1900
21 ≤ Aq ≤ 240.27730.23400.43690.12760.32030.2356
25 ≤ Aq ≤ 360.27400.16460.29540.10980.30050.1493
37 ≤ Aq ≤ 480.1908−0.23180.06902−0.14620.2306−0.2357
49 ≤ Aq−0.2022−0.4059−0.4634−0.4314−0.1614−0.2914
LTVORIG
LTVORIG ≤ 60−1.1500.04787−1.3030.08871−1.2800.02309
60<LTVORIG ≤70−0.1035−0.03131−0.1275−0.005619−0.06929−0.02668
70<LTVORIG ≤ 750.5969−0.098850.4853−0.098520.6013−0.05446
75<LTVORIG ≤800.2237−0.040710.1343−0.030990.2375−0.03835
80<LTVORIG ≤900.2000−0.0046980.25760.0042260.2421−0.01433
90< LTVORIG0.23290.12770.55280.042200.26800.1107
PNEQq
0< PNEQq ≤ 0.05−1.6030.5910−1.19610.4607−1.6200.5483
0.05< PNEQq ≤ 0.1−0.52410.3696−0.38160.2325−0.50550.3515
0.1< PNEQq ≤ 0.15−0.18050.2286−0.14310.1276−0.12490.2178
0.15< PNEQq ≤ 0.20.07961−0.02000−0.048190.030030.07964−0.02137
0.2< PNEQq ≤ 0.250.2553−0.16580.2320−0.10370.2851−0.1540
0.25< PNEQq ≤ 0.30.5154−0.24590.2630−0.18290.4953−0.2723
0.3< PNEQq ≤ 0.350.6518−0.29380.5372−0.20750.5979−0.2714
0.35< PNEQq0.8058−0.46360.7368−0.35670.7923−0.3986
Bq1.303−0.33310.8835−0.20831.253−0.3244
RLS
0<RLSORIG≤ 0.4−0.5130−0.4765−0.4344
0.4<RLSORIG≤ 0.6−0.3264−0.2970−0.2852
0.6<RLSORIG≤ 0.75−0.1378−0.1216−0.1348
0.75<RLSORIG≤ 1.00.034950.040450.01686
1.0<RLSORIG≤ 1.250.18880.17420.1597
1.25<RLSORIG≤ 1.50.31360.27550.2733
1.5<RLSORIG0.43990.40490.4045
Start Printed Page 66539
IF0.4133−0.30840.6419−0.32610.4259−0.3035
RSq
RSq ≤ −0.20−1.368−0.5463−1.195
−0.20 <RSq ≤ −0.10−1.023−0.4560−0.9741
−0.10 < RSq ≤ 0−0.8078−0.4566−0.7679
0< RSq ≤ 0.10−0.3296−0.3024−0.2783
0.10 < RSq ≤ 0.200.80450.36310.7270
0.20 < RSq ≤ 0.301.3460.71581.229
0.30 < RSq1.3770.68241.259
PSq
PSq ≤ −0.200.084900.6613
−0.20 < PSq ≤ −0.100.37360.4370
−0.10 < PSq ≤ 00.28160.2476
0< PSq ≤ 0.100.13810.1073
0.10 < PSq ≤ 0.20−0.1433−0.3516
0.20 < PSq ≤ 0.30−0.2869−0.5649
0.30 < PSq−0.4481−0.5366
YCSq
YCSq < 1.0−0.2582−0.2947−0.2917
1.0 ≤ YCSq < 1.2−0.02735−0.1996−0.01395
1.2 ≤ YCSq < 1.5−0.040990.03356−0.03796
1.5 ≤ YCSq0.32650.46080.3436
IREFq0.1084−0.01382
PROD
ARMs0.81510.2453
Balloon Loans1.2530.9483
15−Year FRMs−1.1040.07990
20−Year FRMs−0.58340.06780
Government Loans0.9125−0.5660
BCalLTV
LTVORIG ≤ 602.0452.0452.045
60<LTVORIG ≤700.30510.30510.3051
70<LTVORIG ≤ 75−0.07900−0.07900−0.07900
75<LTVORIG ≤80−0.05519−0.05519−0.05519
80<LTVORIG ≤90−0.1838−0.1838−0.1838
90< LTVORIG0.29130.29130.2913
Intercept (β0, γ0)−6.516−4.033−6.602−3.965−6.513−3.949
Start Printed Page 66540
* * * * *

3.7.3.1 * * *

[g] * * *

2. Compute:

* * * * *

3.8.3.6.1 * * *

[e] * * *

2. * * *

Table 3-68—Calculation of Monthly Cash Flows for Long Caps and Floors

InstrumentCash 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.

* * * * *
End Appendix Start Signature

Dated: October 17, 2002.

Armando Falcon, Jr.

Director, Office of Federal Housing Enterprise Oversight.

End Signature End Supplemental Information

Footnotes

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).

Back to Citation

2.  Financial Account Standards Board Statement of Financial Accounting Standard 133, “Accounting for Derivative Instruments and Hedging Activities,” June 1998.

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3.  Risk-Based Capital, 67 FR 61300 (September 20, 2002).

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[FR Doc. 02-26863 Filed 10-31-02; 8:45 am]

BILLING CODE 4220-01-P