With landmark GSE equity plans, FHFA confronts legacy of redlining
The Federal Housing Finance Agency (FHFA), under the leadership of Director Sandra Thompson, on Wednesday unveiled landmark equitable housing finance plans for Fannie Mae and Freddie Mac.
The plans establish a flexible framework for the government-sponsored enterprises to address barriers to sustainable housing and close the racial homeownership gap. The 2022 to 2024 plans will be updated annually, FHFA said in a statement, and will pay special attention to barriers to homeownership in Black and Latino communities.
The FHFA also unveiled a pilot transparency framework for the Enterprises, requiring them to publish and maintain a list of pilots on their websites.
“The Equitable Housing Finance Plans represent a commitment to sustainable approaches that will meaningfully address the racial and ethnic disparities in homeownership and wealth that have persisted for generations,” said FHFA Director Sandra Thompson. “We look forward to working with the enterprises, lenders, and other housing industry participants to further develop the ideas described in these plans.”
Both plans rely heavily on special purpose credit programs, which allow lenders to target lending to protected classes without violating the Equal Credit Opportunity Act.
“A central element of our plan is the deployment of special purpose credit programs aimed at enabling access to credit and encouraging sustainable homeownership for Black consumers,” the Fannie Mae plan said. Special purpose programs will be focused on people living in formerly redlined and other underserved areas with majority Black populations, per Fannie Mae’s plan.
“We do hope the GSEs start exercising market leadership [on special purpose credit programs],” a FHFA official said on a press call today.
A September 2021 request for input ahead of the equitable housing finance plans indicated the FHFA would implement the plans by January 1, 2022. The more than six-month delay, FHFA officials said, was due to the development of the pilot transparency program, and the time it took to scrub proprietary information from the plans.
The Fannie Mae plan includes five special purpose credit program pilots: one for down payment assistance; another for expanded eligibility features, a program to reduce closing costs for Black homebuyers; a program to test ongoing education and counseling; and another for “add-on features,” which would help borrowers deal with unexpected expenses and repairs, or temporary disruptions to income.
In its plan, Freddie Mac said it would purchase loans made with special purpose credit programs by lenders. It will also develop a special purpose credit program of its own, which may include down payment assistance, improved pricing or reduced fees, expanded underwriting, reserve funds for borrower hardship and expanded loan servicing.
Fair housing advocates, including the National Fair Housing Alliance, have long called for the GSEs to spur adoption of special purpose credit programs.
NFHA senior vice president of public policy Nikitra Bailey, upon an initial read, called the plans “promising,” and said they were a “major, significant step forward.”
Bailey said she was especially excited to see special purpose credit programs featured so prominently in both plans, as well as the importance of incorporating rental payment history into underwriting, support for first-generation down payment assistance and data transparency around pilot programs.
“We applaud FHFA for its leadership working to make sure [the GSEs] produce the plans, and for recognizing that these financial giants have an affirmative responsibility to further fair housing,” Bailey said.
Mortgage industry stakeholders, including the Mortgage Bankers Association, have also pushed for the adoption of special purpose credit programs.
“The use of SPCPs will be particularly important for core mission borrowers, especially minority groups who may not have generational wealth to use to save for a down payment,” said Bob Broeksmit, CEO of the MBA.
So far, lenders have been slow to adopt special purpose credit programs, although they have been legal since 1976. Lenders have balked at the possibility of increased regulatory scrutiny if they develop the programs, since lenders must provide a rationale for the targeting — which some view as an admission of guilt.
Earlier this year, the Department of Housing and Urban Development pointedly told lenders that the programs do not violate fair lending law.
Selling mortgages made under special purpose credit programs to Fannie Mae and Freddie Mac would alleviate much of the regulatory risk, according to David Dworkin, president of the National Housing Conference, a mortgage trade association.
“Fannie Mae and Freddie Mac as successor organizations to the Federal National Mortgage Association have a historic responsibility for redlining,” said Dworkin. “And they can fulfill that responsibility to right past wrongs, that is part of the spirit of [the Equal Credit Opportunity Act], without unrealistically expecting modern banks to volunteer mea culpas.”
Freddie Mac will also conduct research on formerly redlined areas, to more effectively target its equity plan.
Both GSEs also plan to take action to reduce bias in appraisals, in part by doubling down on appraisal automation. Freddie Mac will conduct research to “explore root cause(s) that contribute to [the appraisal gap], and to consider if, how and why automated valuation might be part of the solutions.” Fannie Mae will analyze “disparities in the frequency and severity of undervaluation relative to borrower race and neighborhood demographics.”
Freddie Mac will consider expanding its use of its automated appraisal platform for purchase transactions with higher loan-to-value ratios, which it said “should mitigate appraisal gaps for Black and Latino borrowers.”
While the plans are wide-ranging, they do not address overall adjustments to risk-based loan pricing, which affordable housing advocates argue disproportionately impact borrowers of color.
“Broad pricing changes are outside the scope of this Plan,” Fannie Mae wrote in its plan. Fannie Mae has in the past argued that risk-based pricing is not the largest contributor to the cost of homeownership.
Thompson, in 2021, indicated she would conduct a broad review of loan pricing at the GSEs, but that has not yet happened.
“Loan level price adjustments can have a disproportionate impact on families that are underserved,” said Bailey. “FHFA has the ability to eliminate loan level price adjustments and should do so, especially in light of the reality that the enterprises have fully repaid the government for their initial bailout.”
Banking regulatory agencies recently proposed an update to the Community Reinvestment Act, the most substantive update to the anti-redlining statute in decades, highlighting special purpose credit programs as a way to serve communities that have faced “systemic inequities.”