Back in 2008, Congress and the Bush Administration established that in addition to the housing goals in 1992 legislation, Fannie Mae and Freddie Mac (the GSEs) have a duty to serve very low-, low- and moderate-income households in three especially hard-to-serve markets: manufactured housing, affordable housing preservation, and rural housing. On December 15, 2015, the Federal Housing Finance Administration (FHFA), the GSEs’ regulator, released their long-awaited proposal to implement this directive. Comments are due March 17, 2016.
Under the proposed rule, each GSE must create a three-year plan that details how the company will meet each prong of the statutory duty. The plans, which will be subject to public comment and negotiation with FHFA, will detail activities for which the GSEs will get Duty to Serve (DTS) credit. Each activity must encompass at least one of four components required by statute: outreach, loan products (including more flexible underwriting), loan purchases, and grants and investments (although FHFA has determined not to include grants). Before the start of each year, FHFA will tell the GSEs how they will evaluate each activity and then provide a grade of exceeds, high satisfactory, low satisfactory or fails at the end of the year. The GSEs will submit multiple reports during the year to FHFA on their performance. These will hopefully be public—although that’s not in the proposed rule.
FHFA has been bold and creative in their statutory interpretation. They have, for example, included shared equity programs for construction of new housing in structures such as community land trusts that preserve the housing’s affordability for 30 years as “preserving affordable housing.” And FHFA has said the GSEs will be given “extra credit” for activities that promote “residential economic diversity.” But ensuring the rule will have the impact the FHFA, as well as those who authored the statute, desire, will require patience and cooperation from others.
The rule’s success depends on lenders and their regulators
The statute demands that the GSEs “provide leadership.” But the GSEs’ interest in purchasing loans that get DTS credit is no guarantee the primary market will want or find it profitable to make—and sell--such loans, including real property loans on manufactured housing, loans on manufactured housing communities with pad lease protections, loans to community land trusts and their homeowners, or loans to support rehabilitation of homes in remote rural areas. However, if federal and state bank and credit union regulators and the Consumer Financial Protection Bureau work together and with FHFA to encourage lenders to make the loans that will earn DTS credit, the rule’s potential impact can be significantly increased.
The departments of Housing and Urban Development and Agriculture, and the Community Development Financial Institutions Fund (all of which have programs that intersect with the DTS rule), as well as community development financial institutions, community-based developers and others, can also push lenders to develop, test and market DTS products.
The rule is complex, especially when combined with the GSEs’ housing goals
Like any organization, the GSEs have limited management time and talent and we should want them to spend it on the outreach, product development and production, and partnership support the statute requires. Both FHFA and those commenting on the rule should consider whether there are ways, such as simplifying the scoring system, to reduce the rule’s complexity while retaining both its strength and its involvement of the public.
A measurable impact will take time
Since conservatorship, the GSEs have not put a great deal of emphasis on the creative product development the new rule demands. Even if they now staff up, there will be a significant learning curve. And they will need to reach out to partners through channels that have become rusty. FHFA must encourage—perhaps through specific inclusion in the 2017 and later scorecards—regeneration of these functions. Doing so may subject FHFA to political risk, but it is essential to DTS success in any reasonable timeframe.
Duty to Serve's success in the future will depend on getting GSE reform right
DTS’s success is important not just for today’s underserved markets, but for the longer term development of a post-conservatorship mortgage finance system. The market has demonstrated that it will not serve the DTS financing needs effectively without prodding. FHFA can be a particularly effective prod today because the GSEs are in conservatorship and have no countervailing shareholder demands. But the Community Reinvestment Act (CRA) shows that the efficacy of requirements that private enterprises with public benefits meet public goals demands a strong implementing statute and well-crafted regulations, as well as regulatory vigilance and a belief by the regulated entities that they will be held accountable. To get “duty to serve” right, GSE reform will need to learn from the CRA experience.
Ellen Seidman is a senior fellow at the Urban Institute. Barry Zigas is director of housing policy at the Consumer Federation of America (CFA). He also works with nonprofit organizations to facilitate strategic planning and program development through his consulting firm. He was Senior Vice President of Community Lending at Fannie Mae from 1995-2006.