If Repurposed for Their Intended Use, Guarantee Fees Can Help Advance Racial Equity in Housing
With the Senate seeking to finalize a proposed bipartisan $1 trillion infrastructure bill before leaving on August recess, one large question still looms: how to pay for it. One idea proposed by the Environment and Public Works chairman would be renewing and redirecting a portion of Fannie Mae and Freddie Mac guarantee fees (g-fees) toward infrastructure. But doing so will significantly reduce the Biden administration’s capacity to harness the enormous potential of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), to achieve its racial equity goals.
In 2011, Congress imposed a temporary 10-year, 10 basis-point (0.1 percent) tax, a boost in the g-fee, on new home loans acquired by Fannie Mae and Freddie Mac, remitted to the US Treasury at end of each quarter until October 1, 2021. Now, with less than two months before the g-fee’s lapse, lawmakers have suggested repurposing the fee to raise an estimated $21 billion over a 10-year extension, less than 4 percent of the new money needed to fund the deal.
In a recent blog post, I suggested an alternative scenario where the acting director of the Federal Housing Finance Agency (FHFA), in her capacity as conservator of the GSEs, could retain and redirect this expiring fee to support affordable housing and underserved market priorities. By taking this route, the g-fee could be repurposed to fund a part of the “human infrastructure” that the administration has also championed.
Instead of extending the tax for reasons unrelated to housing, the g-fee can support affordable housing by helping hundreds of thousands of families with down payment grants, creating short-term wealth-building mortgages, providing liquidity to lenders who want to narrow the racial homeownership gap, and expanding homebuyer education and preventive servicing programs to increase sustainable homeownership.
How to invest the g-fee to advance equitable homeownership
For the g-fee to serve its original purpose of advancing equitable homeownership, the director of the FHFA and the GSEs can take four critical steps to promote affordable housing.
- Increase access to home equity through wealth-building mortgages
Home equity represents a large share of most households’ wealth, and increasing access to homeownership and equity can close wealth gaps. With the flexible subsidy dollars from the g-fee, the GSEs can, over time, pay for as many as 1 million down payment grants to first-time, first-generation homebuyers. Alternatively, the GSEs can use these resources to bridge the savings gap and to buy down interest rates.
The latter would allow the GSEs to reduce the monthly payment on a 20-year loan to that of a 30-year loan, which would enable hundreds of thousands of borrowers with low wealth to build equity at more than twice the pace of a traditional 30-year mortgage. After just three years, a homeowner with a $200,000, 0 percent 20-year mortgage would have $30,000 in built-up equity, even with no house price appreciation, compared with $13,000 on a 30-year market-rate loan.
- Provide liquidity to special purpose credit programs
Special purpose credit programs (SPCPs) allow lenders to address racial inequities caused by generations of racially discriminatory federal housing policies through targeted mortgage programs, including relaxed underwriting guidelines, down payment assistance, and reduced interest rates. The FHFA could develop a standardized template and provide liquidity to lenders who create SPCPs consistent with the Consumer Protection Finance Bureau’s guidance (PDF). By doing so, the GSEs can also meet the requirement in the Housing and Economic Recovery Act that obligates them to make housing credit more accessible to underserved families.
- Pilot and expand innovative loan products
With additional affordable housing resources, the GSEs can foster innovation to address barriers to affordability and equity. The FHFA can help address the severe shortage of affordable starter homes by greenlighting previously denied GSE product requests, such as a Fannie Mae integrated construction-to-permanent affordable single-family loan product. By going through community banks and small local developers who tend to focus on the starter home market, the product could ease critical supply shortages.
Another product innovation, proposed by both GSEs as part of their respective Duty to Serve plans, involved purchasing “chattel” loans on manufactured housing units, which are titled as personal property. Chattel lending is the dominant source of manufactured housing finance, arguably the largest untapped affordable housing finance market. But the FHFA abruptly canceled the project in 2019 following extensive work to determine whether and how it can serve this high-impact market.
- Ending LLPAs for first-time, first-generation homebuyers
Since the 2008 financial crisis, the FHFA has required the GSEs to charge risk-based fees called loan-level pricing adjustments (LLPAs). These fees vary based on a borrower’s credit score, mortgage type, and down payment and boost the interest rates charged to borrowers with low and moderate incomes and with less savings. Although high LLPAs on riskier loans limit losses to Fannie Mae and Freddie Mac, they also price many borrowers, disproportionately people of color, out of the market.
Ending LLPAs for first-time, first-generation homebuyers—a leading agenda item for some progressives—is not straightforward. The GSEs use low-risk loans to subsidize the prices of high-risk loans, which effectively caps the maximum price discounts they can make available to those borrowers. But with the redirected money from the g-fee extension, the GSEs would not need to raise premiums on low-risk loans and could eliminate risk-based fees for the most underserved borrowers.
Using g-fees for housing would advance the adminstration’s racial equity goals
As they finalize a funding plan, policymakers can consider how extending the g-fee can best advance racial equity. If policymakers want to make unprecedented and long-lasting gains in affordable housing, they can let the FHFA redirect the lapsing g-fee to fund human infrastructure rather than a small portion of the hard infrastructure package.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.
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