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FHFA makes it official: Fannie, Freddie required to open credit box to "underserved"

FHFA unveils final "Duty to Serve" rule

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Eight years after the passage Housing and Economic Recovery Act of 2008 mandated that Fannie Mae and Freddie Mac increase lending to three specific “underserved” markets, the Federal Housing Finance Agency announced Tuesday that the government-sponsored enterprises must work to open the credit box for certain very low-, low-, and moderate-income families.

The requirement, called the “Duty to Serve” rule, stipulates that Fannie and Freddie must “provide leadership” to facilitate a secondary mortgage market for three specified “underserved” markets – manufactured housing, affordable housing preservation, and rural housing.

The GSEs are required to improve the “distribution and availability of mortgage financing in a safe and sound manner” for residential properties that serve very low-, low-, and moderate-income families in those three markets.

On Tuesday, the FHFA released the final version of the “Duty to Serve” rule, just shy of one year from first announcing an actual plan to put that requirement in place.

According to the FHFA, the final rule sets forth “specific activities that the Enterprises may consider undertaking, at their discretion, to be eligible to receive Duty to Serve credit, and provides that the Enterprises may propose additional activities.”

The final rule does not direct the GSEs to engage in any particular activities, the FHFA said. Rather, the final rule requires that GSEs to consider ways to better serve families in the three underserved markets and formalize those plans.

As part of the “Duty to Serve” rule, the GSEs must each submit a three-year “Underserved Markets Plan” to the FHFA. Those plans must describe the activities and objectives each of the GSEs will engage in to meet their “Duty to Serve” requirements.

The plans will be made available to the public, which is also invited to comment on the proposed plans.

According to the FHFA, the plans will become effective January 2018.

Once the plans are in place, the FHFA will evaluate the GSEs’ compliance with their underserved markets plans, considering these factors for each underserved market: development of loan products, use of more flexible underwriting guidelines and other innovative approaches, the extent of the GSEs’ outreach to qualified loan sellers and other market participants, the volume of loans purchased by the Enterprise relative to available market opportunities, and the amount of investments in eligible projects.

According to the FHFA, the GSEs can earn “Duty to Serve” credit in the following ways:

  • For the manufactured housing market, the final rule provides eligibility for Duty to Serve credit for Enterprise activity supporting manufactured homes titled as real property, manufactured homes titled as personal property (also known as chattel), and blanket loans for certain categories of manufactured housing communities
  • For the affordable housing preservation market, the final rule provides eligibility for Duty to Serve credit for Enterprise activity supporting the preservation of affordable rental housing and affordable homeownership opportunities. These categories include Enterprise activities under the programs specified in the Safety and Soundness Act, as well as activities supporting small multifamily rental properties, energy efficiency improvements on multifamily rental and single-family first-lien properties, shared equity homeownership programs, purchase or rehabilitation of certain distressed properties, and activities under the U.S. Department of Housing and Urban Development’s Choice Neighborhoods Initiative and Rental Assistance Demonstration program
  • For the rural housing market, the final rule provides eligibility for Duty to Serve credit for Enterprise activity supporting housing in high-needs rural regions and for high-needs rural populations, financing of housing by small rural financial institutions, and activities related to small multifamily rental properties in rural areas

“With this final rule, which reflects extensive input from a wide variety of stakeholders, FHFA is fulfilling its statutory requirement to implement the Duty to Serve provisions in the Housing and Economic Recovery Act,” said FHFA Director Mel Watt.

“We look forward to working with Fannie Mae and Freddie Mac to help meet the critical housing needs for very low-, low-, and moderate-income American families around the country in the manufactured housing, affordable housing preservation, and rural housing markets,” Watt added. “As we do so, we of course will evaluate each Enterprise proposal to ensure that it will not compromise safety and soundness.”

In a statement, Freddie Mac CEO Donald Layton said that GSE is ready and willing to fulfill its requirement.

“We look forward to working with the Federal Housing Finance Agency and stakeholders to implement the Duty to Serve provisions,” Layton said.

“We’re proud to responsibly increase our activities involving manufactured housing, affordable housing preservation and rural housing to help more American families,” Layton continued.

“This is an opportunity for the entire mortgage industry to work together to address some of the toughest issues in housing, including the distribution and availability of both mortgage financing and affordable rental housing for working families,” Layton concluded. “The Duty to Serve provisions align with our mission to build both a better Freddie Mac and a better housing finance system for this country.”

Fannie Mae CEO Timothy Mayopoulos shared similar sentiments.

“Fannie Mae embraces the FHFA rule to implement the new Duty to Serve provisions, which address the needs of American families in search of solutions to their housing challenges,” Mayopoulos said. “Fannie Mae is committed to working with our partners to help families in underserved markets across the United States."

Addendum: For additional clarification on the FHFA’s rule, here is how the terms “very low-, low-, and moderate-income” are defined:

The term ‘‘low-income’’ means—(A) in the case of owner-occupied units, income not in excess of 80 percent of area median income; and(B) in the case of rental units, income not in excess of 80 percent of area median income, with adjustments for smaller and larger families

The term ‘‘moderate-income’’ means— (A) in the case of owner-occupied units, income not in excess of area median income; and (B) in the case of rental units, income not in excess of area median income, with adjustments for smaller and larger families

The term ‘‘very low-income’’ means— (i) in the case of owner-occupied units, families having incomes not greater than 50 percent of the area median income; and (ii) in the case of rental units, families having incomes not greater than 50 percent of the area median income

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