Households with low and moderate incomes and households of color have long faced systemic barriers in the mortgage market. The Federal Housing Finance Agency (FHFA) recently proposed a rule to strengthen its equitable housing finance efforts, in alignment with its mandate to promote equitable access to mortgage credit (PDF). But the rule needs strengthening to achieve its goals.

The FHFA has continued to adjust the operations of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to work better for historically excluded households. The GSEs’ Equitable Housing Finance Plans (EHFPs) have been a key vehicle for these actions since their introduction in 2021. The FHFA’s proposed rule codifies the GSEs’ fair lending and fair housing functions, as well as the EHFPs, and subjects the GSEs’ operations to clearer and more appropriate oversight, compliance, and enforcement.

With households of color poised to drive all homeownership gains through 2040, improvements to the FHFA’s equitable housing finance efforts are vital to the long-term health of homeownership. Several strategies, outlined in our June comment letter, could improve the accountability, transparency, and impact of the EHFPs in the proposed rule and ultimately help uproot systemic inequities in the mortgage market.

1. Ensure equity goals are measurable and meaningful

The FHFA’s proposed rule has a strong focus on outcome measurement and performance evaluation. Data-driven measures of the GSEs’ equity-enhancing programs are essential to effecting change, but for program evaluation measures and processes to be effective, the outcomes being measured must be meaningful and goal oriented.

To this end, the FHFA should consider identifying overarching North Star measures of equity—like reducing the racial homeownership gap—that can prioritize the GSEs’ EHFP activities and guide the entire housing system toward a shared, measurable vision of equity. The GSEs cannot be expected to achieve these goals alone, but linking these goals to multiple significant outcomes the GSEs are accountable for, such as increasing purchase mortgages made to borrowers of color, could be effective.

2. Hold the GSEs accountable to more equitable results

Baking equity into all aspects of the FHFA’s programs—from goals to data collection and reporting, to implementation, to outcome measurement—can help ensure it is meeting its targets.

• Define “meaningful.” The FHFA prioritizes “meaningful actions” to advance equitable outcomes. Clarifying what is considered “meaningful” could help ensure the FHFA achieves this goal. Definitions could include identifying historical baselines and assessing changes in the equity of outcomes over time and encouraging the GSEs to use their intellectual capital (e.g., research and development capabilities, technology, and research and data capacity) to advance access and equity market-wide.
• Mandate race and ethnicity data collection and reporting. About a third of all mortgage applications to Freddie Mac in 2022 (PDF) reported in the Home Mortgage Disclosure Act lacked data on applicant race (34 percent) and ethnicity (30 percent). Moreover, neither Fannie Mae nor Freddie Mac collects data on the tenants of the multifamily units they finance. The FHFA has already included new data collection and reporting requirements around language preference, housing counseling, and more, and it could mandate the same for race and ethnicity to ensure reported equity outcomes reflect actual results.
• Address barriers in program implementation. The GSEs have pioneered promising innovations, such as including positive rental payment history in underwriting decisions, but further analysis suggests the implementation of this innovation is inequitable and underused. For example, among applicants who provided rental data, significantly more white applicants (32 percent) than Black applicants (24 percent) had their denials converted into acceptances. In addition, the program has a low adoption rate, with only 8.8 percent of white applicants and 7.7 percent of Black applicants responding to requests from Freddie Mac to provide access to rental payment records.
  
  The FHFA’s proposed rule could encourage the GSEs to identify and address process inequities in mortgage sourcing, production, and servicing. In the case of positive rental payment history, for example, the GSEs could target resources to increase Black applicants’ participation. Using strategies informed by the historical mistrust of financial institutions within Black communities to do so could begin to address the disparate outcomes from this program.
  
  The FHFA could also broaden its use of metrics to paint a more complete picture of equitable outcomes by reporting race and ethnicity data for each step in the origination process, from loan application to loan decision, loan funding, and servicing.

3. Leverage the FHFA’s influence on the housing finance industry

Because of its dominant and standard-setting role, the FHFA is an influential force in the industry, and it could further advance its equitable housing finance goals by engaging with financial institutions, the Federal Home Loan Banks (FHLBanks), and other industry stakeholders.

• Promote adoption of special purpose credit programs (SPCPs). Decades ago, the Equal Credit Opportunity Act enabled SPCPs, which facilitate lending on favorable terms to economically disadvantaged borrowers or those with shared racial or income characteristics. Yet SPCPs remain an underused mortgage solution to equitable housing finance. Continuing to center these in the EHFPs would leverage the GSEs’ standard-setting power in the industry, which will accelerate broader adoption of SPCPs.
• Incorporate the FHLBanks in proposed solutions. Given the FHLBanks’ outsize influence on the mortgage market, neglecting them from equitable housing finance considerations is a missed opportunity. At the least, the FHFA could obligate the FHLBanks to implement strategic plans, targeted lending, and community investment strategies to account for racial and ethnic disparities and bolster smaller financial institutions in underserved markets.
• Establish an advisory committee. The FHFA previously noted its intent to expand its public engagement with respect to the EHFPs. To ensure input from diverse stakeholders, the FHFA could consider following through on its promise of establishing a Federal Advisory Committee on Affordable, Equitable, and Sustainable Housing. 

The FHFA’s proposed rule is a big step toward a data-driven, outcomes-oriented approach to a more equitable housing finance system. But to continue narrowing the racial homeownership gap and other disparities, the agency must take additional steps to root inequities out of its processes, ensure it is measuring progress accurately, and continue to influence the industry to advance equity.