FHFA’s Proposed Duty to Serve Rule – New Opportunities for Community Builders
Posted by Barry Zigas on January 8, 2016
Community housing and community development advocates could see new opportunities for financing from Fannie Mae and Freddie Mac in 2016 and beyond under a new draft rule proposed December 15, 2015.
The Federal Housing Finance Agency (FHFA), the regulator and conservator for Fannie Mae and Freddie Mac, issued the proposed rule to carry out the “duty to serve” (DTS) requirements established for the companies in the Housing and Economic Recovery Act of 2008. This proposal replaces one issued in 2010 in draft form but never finalized; it is open for comment until March 17, 2016.
Congress established the duty to serve provisions to complement the affordable housing goals first enacted in 1992. Together with the assessment to finance the Housing Trust Fund and Capital Magnet Fund for CDFI’s, the duty to serve requirements significantly broadened the range and scope of the GSEs’ obligations to serve low and moderate income borrowers and communities.
The law directs Fannie and Freddie to provide leadership and expanded financing opportunities in three specific areas: manufactured housing, affordable housing preservation and rural areas. The proposed rule also provides “extra credit” for activities in these three areas, with some exceptions, that contribute to increasing residential economic diversity. DTS activities in each area must serve very low, low or moderate income residents.
The rule would require the companies to draft and submit for both public and FHFA comment three-year plans in each of these areas. A scoring system under each will lead to FHFA assessments of their performance each year. The companies will be given one of four ratings for each underserved market–exceeds, high satisfactory, low satisfactory and fails–based on this system. Anything but a “fail” will count as being compliant with the requirement.
As the Urban Institute’s Ellen Seidman and I point out in a recent Urban Wire blog post, FHFA significantly reworked the earlier draft rule in innovative and bold ways. At the same time, we pointed out some remaining obstacles that could lessen the rule’s impact. But for community advocates and developers, the rule definitely opens up some potentially powerful new opportunities.
Affordable Housing Preservation – Rental and Homeownership Included
Under the duty to serve affordable housing preservation, for instance, the rule goes beyond the eight federal preservation programs enumerated in the statute to add affordable single family housing through shared and limited equity programs (including for new construction), energy conservation improvements, and potential financing of newly constructed rental units with at least 15-year affordability restrictions as eligible activities. Both GSEs have been willing to finance loans with limited and shared equity provisions in the past, but the new rule could stimulate significantly more interest and greater opportunities for grassroots work that creates long term affordable ownership.
The rule also would give DTS credit under this activity for purchasing loan pools financing properties with 5-50 units purchased from CDFIs and smaller community financial institutions with assets under $1.1 billion. This could significantly increase liquidity for these kinds of lenders that are often involved with more difficult properties targeted to low income residents.
For those focused on manufactured housing, a critical source of affordable homes for both renters and owners in some markets, the rule aims to stimulate an expansion of GSE financing for both individual units and for home parks that meet certain requirements and serve very low, low, or moderate income residents. Only community financing for parks with 150 pads or less; or which are owned by a state or local government, nonprofit, or its residents; or others that provide an enumerated list of consumer protections for pad renters would be eligible for DTS credit. This could give local advocates a new tool in seeking adoption of these protections by local jurisdictions, for instance, and increase opportunities to obtain blanket loans for resident and nonprofit owned parks.
The rule would not allow DTS credit for chattel loans, based on FHFA’s conclusion that such loans pose too high a risk to both consumers and the companies. The proposed rule seeks comments on specific steps that could make lending on manufactured homes titled as chattel less risky for the companies including pilot programs to do so.
Noting that preservation and development of affordable housing in rural areas faces a number of challenges, including fewer primary market lenders and underwriting challenges not common in urban areas, the rule would require the GSEs to focus on expanding their existing participation in rural loans, modify their underwriting rules and procedures where appropriate to expand their reach, and to engage in outreach education and marketing to lenders, including with community organizations, to expand mortgage lending. Rural housing groups will be paying particular attention to the definition of rural area in the proposed rule.
The rule allows the GSEs to propose activities in any of the three areas beyond those specifically enumerated in the rule, including support for products and programs sponsored by housing finance agencies and local governments. It specifically includes outreach and marketing as eligible for DTS credit, which could provide support for lenders and community-based organizations for local market activities to generate greater participation by local mortgage lenders. The rule also allows investments to be proposed by the GSEs as part of their plans, provided they are permitted under the companies’ charter act. This could include investments in CDFIs to support their lending activity in the DTS activities, for instance, and the proposed rule specifically requests comments on whether Fannie and Freddie should be allowed to make Low Income Housing Tax Credit equity investments again. Grants would not be eligible.
The rule stresses the need for GSE plans to generate measurable, time-bound results that increase financing in the DTS market segments. The law prohibits FHFA from establishing specific numeric goals under DTS, and the rule stresses a comprehensive approach that includes but is not limited to specific increases in lending volumes through expanding access to, marketing of and successful expansion and modification of existing products. This will push the companies to find ways to expand their financings and footprint in these areas, and should open up new opportunities for market innovations to better serve the targeted groups and geographies.
FHFA solicits comments on 89 specific issues in the proposed rule, and comments can be submitted beyond these. This is an important proposal in which community advocates should engage to help insure it maximizes the impact of the DTS requirement and supports efforts to preserve and increase affordable housing and strong communities.
Photo credit: Premasagar Rose via flickr, CC BY-NC 2.0)
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Barry Zigas is Director of Housing Policy for Consumer Federation of America. He was Senior Vice President for Community Lending at Fannie Mae from 1995-2006, and President of the National Low Income Housing Coalition from 1984-1993. He also works with nonprofits to facilitate strategic planning and program development through his consulting firm, Zigas & Associates.