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The Federal Housing Finance Agency (FHFA) has proposed replacing its existing Duty to Serve (DTS) regulation with an outcome-based framework that would change how Fannie Mae and Freddie Mac support manufactured housing, affordable housing preservation and rural housing.
The proposal, released in a notice of proposed rulemaking on Wednesday, would emphasize chattel loans, broaden how Low-Income Housing Tax Credit (LIHTC) activities are treated and expand “high-needs” coverage, FHFA said. Public comments are due July 24. Any final rule is expected to take effect by Jan. 1, 2028, but could be extended.
FHFA said the current regulation, in place since 2016, has produced a “compliance-centric” approach focused on detailed benchmarks rather than market impact.
“The proposed rule aims to encourage and enable the Enterprises to better serve the needs of very low-, low-, and moderate-income families in the underserved markets through greater innovation and with less administrative burden,” the regulator stated.
Manufactured housing creation
The proposal would place new emphasis on chattel loans, which FHFA estimates account for 70% to 80% of new manufactured homes. These loans are often used when borrowers do not own the underlying land, including in land-lease communities.
Chattel borrowers face a denial rate of 65.6%, compared with 8.8% for site-built home loans, according to FHFA. Approved chattel borrowers pay an average interest rate of 9.24%, versus 6.63% for traditional mortgages. FHFA characterized this “financing gap” as offsetting the lower purchase price of manufactured homes.
“The chattel lending market remains underdeveloped, with limited liquidity, the absence of a securitization infrastructure, and a lack of robust performance data,” the FHFA stated.
Despite chattel lending being designated as an “extra credit” activity, neither GSE has purchased chattel loans for Duty to Serve purposes. But under the proposed framework, chattel lending would no longer be an optional bonus category, and Fannie and Freddie would be expected to develop “robust, responsible” initiatives.
Affordable housing preservation
The proposed rule also responds to growing pressure on affordable rental stock. Between 2014 and 2024, the U.S. lost a net 2.5 million rental units with rents below $600 per month, according to FHFA.
More than 500,000 LIHTC properties are scheduled to exit their compliance periods between 2025 and 2038, increasing the risk that restricted units will convert to market-rate housing, the agency estimates.
Under the new framework, the GSEs could receive DTS credit for subordinate liens on multifamily properties for any purpose, removing the existing restriction that limited such liens to energy or water efficiency improvements.
LIHTC equity in all underserved markets could be eligible for DTS credit, not just in rural areas, FHFA said. The agency also proposed allowing permanent construction take-out loans to be used across all DTS evaluation areas.
Rural housing and Indian areas
FHFA noted that home prices in rural areas rose more than 35% from March 2020 to March 2023, and that the annual income needed to afford a median-priced rural home has more than doubled since 2019.
The agency cited Freddie Mac’s HeritageOne product, which is designed to provide conventional financing in Indian areas, as an example of how current rules can constrain GSE activity.
Because widespread poverty depresses area median income in many Indian areas, borrowers who are clearly low income on a national or state basis may not qualify as “low income” under existing DTS definitions, FHFA said.
To address this, FHFA proposes to revise income calculations so lenders can use the highest of county, state or national median income figures. The agency also proposes to explicitly expand the definition of “high-needs rural regions” to include Indian areas, reversing its 2016 position that such a change would be “over-inclusive.”
