“Duty to Serve” Rule Would Expand Affordable Housing Options

Written by Amanda Maher

Seven years post-recession, Americans are still grappling with the effects of the foreclosure crisis. More than 6 million homeowners remain underwater, and many cities are still plagued by vacant and abandoned properties. Just as new housing policies were used to stabilize the economy after the Great Depression, new housing policies are being considered today.

In 1938, Fannie Mae was established as a private corporation that would expand the secondary mortgage market by securitizing mortgages, allowing lenders to reinvest their assets into more lending. Fannie Mae is considered a “government-sponsored enterprise” (GSE) because it was founded by the U.S. Congress and offers an implied guarantee to private lenders, which reduces the risk to investors and other capital providers. Freddie Mac was created in 1970 with a similar purpose, and until the Great Recession, the two GSEs largely fulfilled their missions to promote homeownership and affordable rental opportunities for all Americans.

The 2007 mortgage crisis threw the GSEs into a tailspin. As the number of foreclosures rose, the GSEs – which at that time backed the majority of U.S. mortgages – absorbed massive losses. By August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90 percent from the year prior. The following month, the GSEs were forced into conservatorship under the Federal Housing Finance Agency (FHFA), which has since regulated the activities of both GSEs.

Though controversial, the regulatory takeover of the GSEs has helped to stabilize the U.S. housing market. Now, FHFA is refocusing its efforts on how the GSEs will comply with their statutory requirement to increase their secondary market activities to help very low-, low-, and moderate-income families buy or rent a home. In December 2015, FHFA proposed a new “Duty to Serve” (DTS) rule. As written, the new DTS rule would require Fannie and Freddie to develop plans to support lending by financial intuitions for three underserved markets that the GSEs should have a duty to serve: 

• Manufactured housing: The average cost of a new manufactured home is just $64,000 – well below the average home price in the U.S. Still, only 12.8 percent of new homes built in 2014 were manufactured homes. Part of the problem is there is currently no secondary market for manufactured housing loans that aren’t secured by land. And loans for manufactured homes (“chattel loans”) tend to be more volatile than traditional, “real property” loans – so it’s no surprise lenders have steered clear of these loans in recent years.

  Now, the FHFA has proposed issuing DTS credit to the GSEs if they open secondary market activities that promote the purchase and finance of manufactured homes. Noteworthy, though, is that FHFA will not extend DTS credit for chattel loans to buyers of manufactured housing units that are not secured by land. That means a person must also own the land he/she is intending to put the manufactured home on—they cannot rent the land. Given this restriction, some have questioned whether the GSEs will really be able to expand access to credit to lower- and moderate-income consumers.

• Affordable housing preservation: Nearly 40 million U.S. households are considered “housing burdened,” meaning they spend more than 30 percent of their income on housing-related expenses. An astonishing 18 million householders are considered “severely burdened,” spending more than 50 percent on such costs.Under the new DTS rule, Fannie and Freddie would be given credit for activities that facilitate a secondary market for mortgages on residential properties for very low-, low- and moderate-income families consisting of affordable rental housing preservation and affordable homeownership preservation.

  The rule acknowledges that while most consider “preservation” as applicable only to existing units, the preservation of existing affordable units isn’t enough to keep pace with demand. “The population has been expanding while the stock of affordable rental housing has been shrinking,” the rule states. “The rate of new construction of affordable rental housing has not kept pace with the demand. Further, more desirable markets face particular upward rent pressure.” As a result, the rule proposes extending DTS credit to newly constructed rental units where long-term affordability is required by regulatory agreements.

  Other eligible activities would include: financing of energy efficiency improvements, financing of shared equity homeownership programs, permanent financing for HUD’s Choice Neighborhoods Initiative and permanent financing for HUD’s Rental Assistance Demonstration program.

• Rural housing: Language in the proposed DTS rule elaborates:

  (Rural) regions and populations tend to lack the public-private development and financing infrastructure necessary to sustain improvements in housing conditions. Enterprise focus on these regions and populations could help provide increased financial infrastructure that facilitates improvements in housing conditions and affordability.

  As such, FHFA has proposed extending DTS credit for eligible GSE activities related to housing in rural areas and the high-needs populations of Native American tribes located in a Native American area and migrant and seasonal agricultural workers. “In rural areas, there is not a lot of new single-family homes or a large stock of multifamily rental units,” Senator Tom Cotton (R-Ark.) told the Senate Banking Committee, arguing for incentive to promote rural housing activities.

For 90 days following the release of the proposed DTS rule, the public was invited to submit comments to FHFA for consideration. In recent months, a series of roundtable conversations have also been underway to solicit additional input from various stakeholder groups. The proposed DTS rule is complex, and will require the best thinking as to how Fannie and Freddie can increase the availability of and access to lending products that provide housing for very-low, low- and moderate-income households.

Nonetheless, FHFA is taking a proactive approach to promoting an array of financing tools that would create new affordable housing opportunities for the low-income families who need it most, including those in inner cities. While the housing market is stronger today than it was just a few years ago, not everyone has rebounded equally.