Exception to Restrictions on Private Transfer Fee Covenants for Loans Meeting Certain Duty To Serve Shared Equity Loan Program Requirements

<RULE> FEDERAL HOUSING FINANCE AGENCY <CFR>12 CFR Part 1228</CFR> <RIN>RIN 2590-AB30</RIN> <SUBJECT>Exception to Restrictions on Private Transfer Fee Covenants for Loans Meeting Certain Duty To Serve Shared Equity Loan Program Requirements</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Federal Housing Finance Agency. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Federal Housing Finance Agency (FHFA) is adopting as final, without substantive change, a proposed rule amending its regulation that restricts its regulated entities—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises), and the Federal Home Loan Banks (Banks)—from purchasing, investing in, accepting as collateral, or otherwise dealing in mortgages on properties encumbered by certain types of private transfer fee covenants (PTFCs), or related securities, subject to certain exceptions (PTFC Regulation). As proposed, the final rule establishes an additional exception that authorizes the Enterprises and Banks to engage in such transactions if the loans meet the shared equity loan program requirements for Resale Restriction Programs in FHFA's Duty to Serve Underserved Markets Regulation (Duty to Serve Regulation), without regard to any household income limit. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> The final rule is effective May 13, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Ted Wartell, Associate Director, Office of Housing and Community Investment (OHCI), 202-649-3157, <E T="03">ted.wartell@fhfa.gov;</E> or Sara L. Todd, Assistant General Counsel, Office of General Counsel (OGC), 202-649-3527, <E T="03">sara.todd@fhfa.gov;</E> Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. These are not toll-free numbers. The mailing address for each contact is: Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC 20219. For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected to any of the contact numbers above. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">A. Proposed PTFC Rule</HD> On September 26, 2023, FHFA published a Notice of Proposed Rulemaking (proposed PTFC rule) in the <E T="04">Federal Register</E> to amend FHFA's PTFC Regulation. <SU>1</SU> <FTREF/> The proposed PTFC rule proposed adding an exception to the PTFC Regulation's restrictions for loans on properties with PTFCs, and related securities, if the loans meet the shared equity loan program requirements for Resale Restriction Programs, other than the 100 percent of area median income (AMI) limit, in § 1228.34(d)(4)(i)(A) and (d)(4)(ii) of FHFA's Duty to Serve Regulation. <SU>2</SU> <FTREF/> Thus, the Enterprises and Banks would be authorized to purchase, invest in, accept as collateral, or otherwise deal in loans on properties with PTFCs, or related securities, if the loans met the requirements for Duty to Serve Resale Restriction Programs, without regard to any household income limit. Relevant discussion from the proposed PTFC rule's preamble is included below. <FTNT> <SU>1</SU>  88 FR 65827 (Sept. 26, 2023). </FTNT> <FTNT> <SU>2</SU>  12 CFR 1282.34(d)(4)(i)(A), (d)(4)(ii). </FTNT> FHFA received comments on the proposed PTFC rule from Fannie Mae, Freddie Mac, three nonprofit organizations, one trade association, and one individual. The Banks did not submit any comments. The comments are further discussed in Section VI. below. <HD SOURCE="HD2">B. Statutory and Regulatory Background: Enterprises</HD> The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (Safety and Soundness Act), provides that the Director of FHFA has a duty to ensure that the operations and activities of the Enterprises foster liquid, efficient, competitive, and resilient national housing finance markets. <SU>3</SU> <FTREF/> To achieve these goals, the Enterprises purchase residential mortgages that fall within the conforming loan limits established pursuant to 12 U.S.C. 1717 and 12 U.S.C. 1454, and issue guaranteed mortgage-backed securities backed by those loans. <FTNT> <SU>3</SU>  12 U.S.C. 4513(a)(1)(B)(ii). </FTNT> In addition, the Safety and Soundness Act provides generally that the Enterprises “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families.”  <SU>4</SU> <FTREF/> Section 1129 of the Housing and Economic Recovery Act of 2008 (HERA) amended section 1335 of the Safety and Soundness Act to establish a duty for the Enterprises to serve three specified underserved markets (Duty to Serve) in order to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for certain categories of borrowers in those markets. <SU>5</SU> <FTREF/> Specifically, the Enterprises are required to provide leadership in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages on housing for very low-, low-, and moderate-income families for the manufactured housing, affordable housing preservation, and rural housing markets. <SU>6</SU> <FTREF/> FHFA's Duty to Serve Regulation, <SU>7</SU> <FTREF/> which implements these Duty to Serve statutory requirements, is discussed further below. <FTNT> <SU>4</SU>  12 U.S.C. 4501(7). </FTNT> <FTNT> <SU>5</SU>  12 U.S.C. 4565. </FTNT> <FTNT> <SU>6</SU>  12 U.S.C. 4565(a). The terms “very low-income,” “low-income,” and “moderate-income” are defined in 12 U.S.C. 4502. </FTNT> <FTNT> <SU>7</SU>  12 CFR part 1282, subpart C. </FTNT> <HD SOURCE="HD2">C. Statutory and Regulatory Background: Federal Home Loan Banks</HD> The eleven Banks are wholesale financial institutions organized under the Federal Home Loan Bank Act to support housing finance and further affordable housing and community development. <SU>8</SU> <FTREF/> The Banks are cooperatives and carry out their mission primarily by providing products and services to their member institutions. Bank members and eligible housing associates (nonmember mortgagee borrowers such as state housing finance agencies) may obtain access to secured loans, known as advances. <SU>9</SU> <FTREF/> These must be fully secured by eligible collateral at the time of issuance or renewal, which may include, among other forms of collateral, residential mortgages and mortgage-backed securities. <SU>10</SU> <FTREF/> In addition, the Banks issue standby letters of credit on behalf of members and housing associates, which may be secured by residential mortgages and mortgage-backed securities. <FTNT> <SU>8</SU>   <E T="03">See</E> 12 U.S.C. 1421 <E T="03">et seq.</E> </FTNT> <FTNT> <SU>9</SU>   <E T="03">See</E> 12 U.S.C. 1426(a)(4), 1430(a), 1430b. </FTNT> <FTNT> <SU>10</SU>   <E T="03">See</E> 12 U.S.C. 1430(a)(3), 1430(b); 12 CFR 1266.7, 1266.17, part 1269. </FTNT> Most Banks also offer Acquired Member Assets (AMA) programs, under which they acquire eligible mortgages from participating members and housing associates, subject to parameters set forth in FHFA's AMA regulation. <SU>11</SU> <FTREF/> The Banks are also authorized to invest in mortgage-backed securities and other mortgage-related investments meeting applicable requirements. <SU>12</SU> <FTREF/> Finally, the Banks may serve as pass-through entities for mortgage loans acquired by another purchaser. <FTNT> <SU>11</SU>   <E T="03">See</E> 12 CFR part 1268. </FTNT> <FTNT> <SU>12</SU>   <E T="03">See</E> 12 CFR 1267.3(a)(4)(iv), (v). </FTNT> <HD SOURCE="HD1">II. PTFC Regulation</HD> FHFA's PTFC Regulation, which was adopted in 2012, prohibits the Enterprises and Banks from purchasing, investing in, or otherwise dealing in any mortgages encumbered by PTFCs, or related securities, and prohibits the Banks from accepting such mortgages or securities as collateral for advances, unless such PTFCs are “excepted transfer fee covenants.”  <SU>13</SU> <FTREF/> Under the PTFC Regulation, the term “PTFCs” means obligations that purport to “run with the land” in the records of title to real property or to bind current owners of, and successors in title to, such real property, and that obligate a transferee or transferor to pay a private transfer fee upon transfer of the property. <SU>14</SU> <FTREF/> A “private transfer fee” is defined in the PTFC Regulation as “a transfer fee, including a charge or payment, imposed by a covenant, restriction, or other similar document and required to be paid in connection with or as a result of a transfer of title to real estate, and payable on a continuing basis each time a property is transferred (except for transfers specifically excepted) for a period of time or indefinitely.”  <SU>15</SU> <FTREF/> <FTNT> <SU>13</SU>  12 CFR 1228.2. </FTNT> <FTNT> <SU>14</SU>  12 CFR 1228.1. </FTNT> <FTNT> <SU>15</SU>  12 CFR 1228.1. The definition excludes fees, charges, payments, or other obligations imposed by or payable to the Federal government or a State or local government, or that defray actual costs of the transfer of the property, including transfer of membership in the relevant covered association. The final rule does not modify this exclusion. </FTNT> In adopting the PTFC Regulation, FHFA was concerned that private transfer fees would: (1) be used to fund purely private continuous streams of income for select market participants, either directly or through securitized investment vehicles; (2) not benefit homeowners or the properties involved; and (3) interfere with accurate determination of property va ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 39k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━