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Eligibility of Adjustable Rate Mortgages
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[Federal Register: March 29, 2005 (Volume 70, Number 59)]
[Rules and Regulations]
[Page 16079-16082]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr05-24]
[[Page 16080]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-4946-I-01; HUD 2005-0004]
RIN 2502-AI26
Eligibility of Adjustable Rate Mortgages
AGENCY: Office of the Assistant Secretary of Housing--Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This rule makes available a new adjustable rate mortgage (ARM)
product. In accordance with statutory authority, this rule enables the
Secretary to insure five-year hybrid ARMs with interest rates
adjustable up to two percentage points annually (this type of mortgage
is known as a 5/1 ARM). The lifetime cap on annual interest rate
adjustments for five-year ARMs is set at six percentage points.
DATES: Effective Date: April 28, 2005.
Comment Due Date: May 31, 2005.
ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, Office of General Counsel, Room
10276, Department of Housing and Urban Development, 451 Seventh Street,
SW., Washington, DC 20410-0500. Electronic comments may be submitted
through either:
? The Federal eRulemaking Portal at http://www.regulations.gov;
or
? The HUD electronic Web site at http://www.epa.gov/feddocket.
Follow the link entitled ``View Open HUD Dockets.''
Commenters should follow the instructions provided on that site to
submit comments electronically.
Facsimile (FAX) comments are not acceptable. In all cases,
communications must refer to the docket number and title. All comments
and communications submitted will be available for public inspection
and copying between 8 a.m. and 5 p.m. weekdays at the above address.
Copies are also available for inspection and downloading at
http://www.epa.gov/feddocket.
FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of
Single Family Program Development, Office of Insured Single Family
Housing, Room 9266, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410-8000; telephone (202) 708-
2121 (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 Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
Section 251 of the National Housing Act (12 U.S.C. 1715z-16)
authorizes the Secretary to insure adjustable rate mortgages (ARMs).
ARMs are mortgages that remain at a fixed interest rate for a certain
period of time, but then provide for periodic adjustments in the
interest rate charged on the mortgage. An ARM may be attractive to a
potential homebuyer because it offers a lower initial interest rate
than most fixed rate mortgage loans.
Section 251 of the National Housing Act limits the amount of the
annual interest rate adjustments on ARMs insured by HUD--Federal
Housing Administration (FHA) depending on the duration of the initial
fixed interest rate term. Section 301 of Public Law 108-186 (approved
December 16, 2003) (2003 Act), amended section 251(d) of the National
Housing Act to provide for greater flexibility in this regard. Prior to
enactment of the 2003 Act, section 251 of the National Housing Act
limited annual interest rate adjustments on FHA-insured ARMs to one
percentage point only if the initial fixed interest rate term was for a
period of five years or less. Section 301 amended section 251(d)(1)(C)
of the National Housing Act to reduce this period to three years or
less. In other words, the annual adjustment of one percent only applies
to ARMs with a fixed term for the first three or fewer years. For five-
, seven- and ten-year ARMs, the mortgagee may make an annual adjustment
that exceeds one percent.
HUD's regulations implementing section 251 of the National Housing
Act are located at 24 CFR 203.49 (entitled ``Eligibility for adjustable
rate mortgages''). Under Sec. 203.49, the types of ARMs that are
insurable are those for which the interest rate may be adjusted
annually by the mortgagee beginning after one, three, five, seven, or
ten years from the date of the mortgagor's first debt service payment.
The provisions of Sec. 203.49 governing the amount of annual interest
rate adjustments are consistent with section 251 of the National
Housing Act prior to the amendments made by the 2003 Act. In the case
of one-, three-, and five-year ARMs, Sec. 203.49(f)(1) authorizes the
mortgagee to annually adjust the interest rate by no more than one
percentage point. For seven- and ten-year ARMs, the mortgagee may
annually adjust the interest rate by two percentage points (see Sec.
203.49(f)(2)). Adjustments in the effective rate of interest over the
entire term of the mortgage may not result in a change in either
direction of more than five percentage points (for one-, three-, and
five-year ARMs) and six percentage points (for seven- and ten-year
ARMs) from the initial contract interest rate (see Sec. 203.49(f)(1)
and (2)).
II. This Interim Rule
This interim rule revises 24 CFR 203.49 to implement the
flexibility provided under section 301 of the 2003 Act for FHA-insured
five-year ARMs. As noted above, section 301 permits annual interest
adjustments of greater than one percent on ARMs with an initial fixed
interest rate period of at least five years. In the case of seven- and
ten-year ARMs, the current regulations already reflect this flexibility
by authorizing annual interest rate adjustments of two percentage
points. However, Sec. 203.49(f)(1) limits the annual interest rate
adjustment for five-year ARMs to a single percentage point. Consistent
with section 301 of the 2003 Act, this interim rule provides for annual
interest rate adjustments of two percentage points for five-year ARMs.
HUD has become aware of concerns among mortgage lenders and
borrowers regarding the current one percentage point limitation on
annual interest rate adjustments for five-year ARMs. For example, three
of the four public commenters on HUD's March 11, 2003, (68 FR 11730)
proposed rule implementing seven- and ten-year ARMs expressed support
for enactment of section 301 of the 2003 Act, which at the time was
pending approval by Congress, and urged HUD to remove the one
percentage point cap on adjustments for five-year ARMs as soon as feasible.
These concerns are based primarily on the fact that the one
percentage point limitation on FHA-insured five-year ARMs does not
accurately reflect the realities of the mortgage market. Conventional
mortgage lenders do not offer five-year ARMs with a one percentage
point cap on annual interest rate adjustments. A maximum annual
increase of one percentage point does not provide lenders with
sufficient interest rate flexibility to offer five-year ARMs at an
interest rate below the traditional 30-year fixed rate mortgage. This
inability reduces the attractiveness of FHA-insured five-year ARMs to
both borrowers and lenders since, as noted above in this preamble, the
appeal of ARMs is based on their lower initial interest rate.
Accordingly, the one percentage point limitation undercuts HUD's
ability to offer mortgage insurance for a full range of ARM loans with
standing initial interest rates lower
[[Page 16081]]
than those on conventional 30-year fixed rate mortgages.
This interim rule addresses these concerns by providing for annual
interest rate adjustments of two percentage points for five-year ARMs.
This is consistent with the annual rate adjustment authorized under the
current regulations for seven- and ten-year ARMs. The additional
flexibility provided by this interim rule will make FHA-insured five-
year ARMs more attractive to homebuyers and more closely adhere to the
conditions of the mortgage lending market.
In addition, the interim rule raises the lifetime cap on interest
rate adjustments for five-year ARMs to six percentage points. As noted
above, five-year ARMs are currently limited to a maximum lifetime-
interest rate adjustment of five percentage points. This change will
conform the lifetime cap for five-year ARMs to those applicable to
seven- and ten-year ARMs.
III. Justification for Interim Rulemaking
HUD generally publishes a rule for public comment before issuing a
rule for effect, in accordance with its own regulations on rulemaking
in 24 CFR part 10. However, part 10 provides for exceptions to the
general rule if the agency finds good cause to omit advanced notice and
public participation. The good cause requirement is satisfied when
prior public procedure is ``impractical, unnecessary, or contrary to
the public interest'' (see 24 CFR 10.1). HUD finds that good cause
exists to publish this rule for effect without first soliciting public
comment in that prior public comment is contrary to the public
interest. The reasons for HUD's determination are as follows.
This interim rule does not impose any new regulatory burdens, but
rather benefits lenders and potential homebuyers by expanding the
number of available insured mortgage options. Specifically, the interim
rule updates the requirements for FHA-insured five-year ARMs to more
accurately reflect market conditions and conform to the statutory
language of the 2003 Act. Further, as noted above in this preamble, the
changes made by this interim rule address concerns raised to HUD by the
public, including the majority of the public commenters on HUD's March
11, 2003, proposed rule on ARMs. The current one percentage point cap
on annual interest rate adjustments prevents lenders from offering FHA-
insured five-year ARMs at interest rates below those offered on
conventional fixed rate 30-year mortgages. This undercuts the appeal of
FHA-insured five-years ARMs, and denies HUD's ability to offer mortgage
insurance for a full range of ARM loans. The additional flexibility
provided by this interim rule will allow lenders to offer these five-
year ARMs thus providing potential homeowners with more options for
insured mortgage products. Delaying the effectiveness of this interim
rule to solicit prior public comment would unnecessarily perpetuate the
inability of lenders to offer a competitive and viable FHA mortgage
insurance product to potential homebuyers. Accordingly, HUD has
determined that it would be contrary to the public interest to delay
the effectiveness of this amendment to solicit prior public comment.
Although HUD has determined that good cause exists to publish this
rule for effect without prior public comment, HUD recognizes the value
of public comment in the development of its regulations. HUD,
therefore, is issuing these regulations on an interim basis and is
providing the public with a 60-day comment period. HUD welcomes
comments on the regulatory amendments made by this interim rule. The
public comments will be addressed in the final rule.
IV. Findings and Certifications
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 on 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.
This rule permits greater flexibility for all lenders, regardless of
size, to offer a revised mortgage product that is eligible for FHA
insurance. This rule imposes no additional economic or monetary
requirements on businesses. Therefore, the undersigned certifies that
this interim rule will not have a significant economic impact on a
substantial number of small entities. Notwithstanding HUD's
determination that this rule will not have a significant economic
effect on a substantial number of small entities, HUD specifically
invites comments regarding any less burdensome alternatives to this
rule that will meet HUD's objectives as described in this preamble.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implements Section 102(2)(C) of the National Environmental Policy
Act of 1969 (42 U.S.C. 4332(2)(C)). This finding is available for
public inspection between 8 a.m. and 5 p.m. weekdays in the Regulations
Division, Room 10276, Office of General Counsel, Department of Housing
and Urban Development, 451 Seventh Street, SW., Washington, DC 10240-0500.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from publishing any
rule that has federalism implications and either imposes substantial
direct compliance costs on state and local governments and is not
required by statute, or the rule preempts state law, unless the agency
meets the consultation and funding requirements of section 6 of the
Executive Order. This rule does not have federalism implications and
does 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 (UMRA) (2
U.S.C. 1531-1538) establishes requirements for federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments and the private sector. This final rule does not
impose any federal mandates on any state, local, or tribal government
or the private sector within the meaning of UMRA.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled ``Regulatory Planning and Review'').
OMB determined that this rule is a ``significant regulatory action'' as
defined in section 3(f) of the Executive Order (although not
economically significant, as provided in section 3(f)(1) of the
Executive Order). Any changes made to the rule subsequent to its
submission to OMB are identified in the docket file, which is available
for public inspection between 8 a.m. and 5 p.m. weekdays in the
Regulations Division, Room 10276, Office of General Counsel, Department
of Housing and Urban Development, 451 Seventh Street, SW., Washington,
DC 20410-0500.
[[Page 16082]]
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance numbers applicable to
this rule are 14.108, 14.117, and 14.119.
List of Subjects in 24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
? For the reasons stated in the preamble, HUD amends 24 CFR part 203 as
follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
? 1. The authority citation for 24 CFR part 203 continues to read as follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42
U.S.C. 3535(d).
? 2. Revise Sec. 203.49 (f)(1) and (2) to read as follows:
Sec. 203.49 Eligibility of adjustable rate mortgages.
* * * * *
(1) For one- and three-year adjustable rate mortgages, no single
adjustment to the interest rate shall result in a change in either
direction of more than one percentage point from the interest rate in
effect for the period immediately preceding that adjustment. Index
changes in excess of one percentage point may not be carried over for
inclusion in an adjustment for a subsequent year. Adjustments in the
effective rate of interest over the entire term of the mortgage may not
result in a change in either direction of more than five percentage
points from the initial contract interest rate.
(2) For five-, seven-, and ten-year adjustable rate mortgages, no
single adjustment to the interest rate shall result in a change in
either direction of more than two percentage points from the interest
rate in effect for the period immediately preceding that adjustment.
Index changes in excess of two percentage points may not be carried
over for inclusion in an adjustment in a subsequent year. Adjustments
in the effective rate of interest over the entire term of the mortgage
may not result in a change in either direction of more than six
percentage points from the initial contract rate.
* * * * *
Dated: March 3, 2005.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 05-6061 Filed 3-28-05; 8:45 am]
BILLING CODE 4210-27-P