Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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Fannie Mae housing equity plan won’t expand credit box

Official touted results of positive rental payment history reporting: 2,000 loan applications eligible for purchase that otherwise would not have made the grade

Can Fannie Mae’s housing equity plan make a meaningful dent in the 30 percentage point racial homeownership gap without a broad review of loan pricing? Top brass at Fannie Mae, in a Thursday webinar discussing its new equitable housing finance plans, argued it can.

“The list of potential obstacles across the Black housing journey — it’s long,” said Katrina Jones, Fannie Mae’s vice president of racial equity strategy and impact. “Our plan is a good roadmap of where we, Fannie Mae, can start to knock down those barriers.”

Notably, decision-makers at Fannie Mae believe they can effect change without expanding eligibility criteria. Instead, the agency will focus on better identifying mortgage-ready applicants, and helping other borrowers become mortgage-ready, said Malloy Evans, single-family senior vice president at Fannie Mae.

“Importantly, neither of these two outcomes is something that translates into expanding our credit box, or compromising on safety and soundness,” Evans said.

One way Fannie Mae hopes to broaden its pool of mortgage-ready borrowers is through its initiative to include positive rental payment history in its underwriting.

Since Fannie Mae implemented the program nearly a year ago, Evans said 2,000 loan applications became eligible for purchase which otherwise wouldn’t have before its inception. More than 40% of those borrowers are Black or Latino, he added.

Another cornerstone of Fannie Mae’s equity plan is the use of targeted lending programs. Fannie Mae sought feedback while its plan was in development and learned some lenders were hesitant to implement special purpose credit programs, which can target lending products based on a protected class.

But many lenders remain skeptical of targeted lending programs, preventing widespread adoption. Some may be reluctant after years of perceived regulatory uncertainty, or because regulators in the past used them to settle charges of redlining. Nonetheless, Evans said Fannie Mae representatives have spoken with several lenders who have come around to developing the programs and are “executing SPCPs in the market today.”

Fannie Mae intends to learn from the lenders that have already implemented special purpose credit programs, Evans said. Among them are Chase Home Lending — which last year started providing grants toward down payments and closing costs in minority neighborhoods — and TD Bank, which provides grants for closing costs and expanded underwriting in certain geographic areas. LISC San Diego, a community development financial institution, launched a grant program for eligible Black first-time homebuyers, also in 2021.

By the end of 2022, Fannie Mae plans to introduce three to five special purpose credit programs of its own. The forthcoming programs will focus on enhancing borrower eligibility, by potentially reducing mortgage insurance costs or loan-level price adjustments. It’s possible Fannie Mae’s programs may also provide down payment assistance or reduced appraisal and title insurance costs.

Special purpose credit programs are “very well suited” to the problems Fannie Mae is trying to attack, Evans said. Targeted lending programs also figure prominently in the recently proposed overhaul of the Community Reinvestment Act.

“The steps we’ve taken to date have not gotten to the results that we need to get to,” Evans said. “So we’re trying to think about things differently, understand the root cause problems, and … the targeted solutions that can help attack those things.”

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