Editor's Note: This print feature first appeared in the August issue of MReport, available now.
Freddie Mac has a duty to serve the American homebuyer, and with a series of action plans that’s just what the GSE plans to do.
Duty to Serve is a broad mandate for creating sustainable housing opportunities for very low-income, low-income, and moderate-income families in rural areas, and for those buying manufactured homes. It’s also a guide to preserving more affordable housing throughout the country.
To us, Duty to Serve is a welcome opportunity to guide the mortgage industry in looking at housing issues in new ways, understanding the broader problems facing these markets, and applying a new generation of solutions.
We recognize that the challenges of providing a stable supply of affordable homes are many and complex—the distribution and availability of affordable mortgage financing among them.
Duty to Serve addresses many areas of affordable housing on both the single-family and multifamily fronts, and both Freddie Mac divisions are actively working to address the unique challenges in these areas. Freddie Mac’s single-family business is already engaged with seller/servicers, industry groups, community organizations, multiple levels of government, and other dedicated organizations that are deeply knowledgeable about these underserved markets. Together, we’re testing, refining, and implementing innovative ways to responsibly support affordable housing opportunities.
Defining Duty to Serve
The Housing and Economic Recovery Act (HERA) of 2008 established for both Fannie Mae and Freddie Mac a duty to increase liquidity and improve the distribution of capital for mortgage financing in rural housing, manufactured housing, and affordable housing preservation. Congress charged the Federal Housing Finance Agency (FHFA) with implementing this obligation.
The FHFA regulation directs Freddie Mac and Fannie Mae to establish plans to lead the development of loan products and flexible underwriting guidelines to facilitate secondary financing in these three markets. We will be working throughout the remainder of the year to finalize our plan by incorporating the feedback we receive from interested parties and FHFA. Our activities may change based on public and FHFA input, safety and soundness considerations, and market and economic conditions. We want to be responsive to feedback, mindful of protecting the taxpayer, and nimble in the face of changes to the broader market. We hope to implement our Duty to Serve plan as early as January 1, 2018.
The Affordable Housing Crisis
The gaps in affordable housing across the country threaten to overwhelm individuals, families, and communities. Often called an affordable housing crisis, it’s impacting millions of American families, and the problem is expected to continue to grow.
It’s generally accepted that families shouldn’t devote more than 30 percent of their income to housing, yet it’s unavoidable for many Americans. The U.S. Department of Housing and Urban Development estimates that 12 million households pay more than 50 percent of their annual income for housing. This housing cost burden is among the most significant barriers to homeownership, making it difficult to save for a down payment and pay down other debts.
Home affordability has three primary components: home prices, borrower income, and interest rates. Home prices are increasing, and the inventory of for-sale homes is low. U.S. house price growth averaged 6.4 percent from March 2016 to March 2017, according to the Freddie Mac House Price Index. Total housing starts through the first quarter of 2017 were the highest since 2007, but they’re still low relative to long-run demand. For-sale housing inventory, especially of starter homes, is currently at its lowest level in over 10 years.
Unfortunately, incomes aren’t keeping up with the rising prices. Since January 2000, home prices have risen a bit faster than incomes, though recently home price growth has outpaced income growth by a wider margin.
Interest rates, the last component of home affordability, are also increasing. On June 14, the Federal Reserve raised its benchmark interest rate by a quarter-point, the third such increase in six months. These factors reinforce the importance of our focus on rural housing, manufactured housing, and affordable housing preservation.
We’re approaching Duty to Serve in the spirit of our broader community mission, which includes our efforts to stabilize communities, prevent foreclosures, responsibly expand access to credit, educate future borrowers, counsel current borrowers, and support affordable single-family housing. Last year, for example, we financed nearly 1.7 million single-family mortgages and made homeownership possible for 268,000 first-time buyers.
Below is an overview of the challenges in these markets and the ways we plan on working to increase loan purchases in them, develop new offerings, conduct market research, provide technical skill-building for industry participants, and expand homebuyer education, community engagement, and local outreach. We believe that over time, we can provide liquidity, stability, and affordability to these communities in need.
Challenges in Manufactured Housing
Manufactured homes are a crucial source of affordable housing stock for American families. The average price of a new manufactured home in the U.S. is $71,600, while the average price of a new, single-family, site-built home is $372,900, according to the U.S. Census Bureau. More than 17 million Americans lived in 6.9 million manufactured homes in 2010, according to Prosperity Now, formerly known as the Corporation for Enterprise Development.
Manufactured homes are unique in that they may be titled as either personal property (also known as chattel) or real property. This distinction can have significant ramifications for taxation, financing, consumer protections, and remedies in case of default. Approximately 80 percent of new manufactured homes are titled as personal property, the Census Bureau reports.
In public outreach that took place as we developed our plan, we repeatedly heard concerns about the limited number of lenders that provide financing to manufactured homebuyers. Market participants encouraged us to expand liquidity, implement standardization measures, and enhance consumer protections.
As a result of this feedback, we plan on doing the following in connection with manufactured housing titled as real property:
Work with lenders to increase our purchases of loans to this important market segment,
Increase access to education and resources for future homebuyers,
Identify best practices, and provide technical assistance to market participants,
Develop additional product features to meet the market’s needs, and
Increase purchases of loans secured by manufactured homes titled as real property.
For manufactured housing titled as personal property, we plan to work with market participants to:
Promote a greater understanding of the market by conducting research and publishing the results,
Initiate a chattel pilot offering, and
Develop homebuyer education to support chattel financing.
We formed the Manufactured Housing Initiative Taskforce (MHIT) last year and invited a diverse group of participants, including the Manufactured Housing Institute, to work with us. We’re increasing our understanding of this market as we explore ways to expand lender participation and improve targeted offerings.
We’ve also partnered with Next Step, a nonprofit housing intermediary, to roll out a consumer education pilot in Kentucky for buyers of manufactured homes titled as real property. In addition, we’re actively seeking new lenders interested in making real property loans for energy-efficient manufactured homes in conjunction with Next Step.
Challenges in Rural Housing
The Duty to Serve final rule encourages us to focus on “high-needs” rural regions, which it identifies as Middle Appalachia, the Lower Mississippi Delta, the Colonias (parts of Arizona, California, New Mexico and Texas along the U.S.-Mexico border), and rural tracts located in counties with persistent poverty. It also encourages housing support for high-needs rural populations, specifically Native Americans in Indian areas and agricultural workers.
Although they’re socially, economically and geographically diverse, these areas face many common challenges. During information-gathering sessions with a wide range of rural market participants, we learned of the multifaceted scope of these challenges, which affect virtually all residents of these regions. Moreover, they extend beyond housing affordability to encompass persistent poverty, declining employment, and limited access to financial services, among other factors.
In light of this information, we propose undertaking the following activities in rural areas:
Increase financing for homebuyers,
Expand our research to better understand the rural market, and enrich the national conversation by sharing information about the housing needs of these communities nationwide,
Review our loan offerings and underwriting parameters to address consumer needs, and
Increase our efforts to provide comprehensive homebuyer education and technical training to industry professionals.
Challenges in Affordable Housing Preservation
Our efforts to preserve affordable single-family housing will focus on two fronts: energy-efficient home improvements and shared equity programs.
Energy Efficiency: Heating and cooling costs are the largest utility expenses for most U.S. homes, according to the Department of Energy, accounting for more than half of the energy used in a typical home. While there are several new financing options for energy-efficient improvements on residential properties, the market remains relatively small.
During our outreach, we learned that one significant challenge is the lack of standardization among financing products, which makes it difficult for lenders and investors to support this segment in a scalable way. It’s also difficult to assess both the risk and the impact of energy-efficient improvements on property values.
That’s why we plan to study the effects of energy-efficient features on single-family property values and loan performance—two key factors that should help inform our product design and underwriting policy decisions, according to our Energy Efficiency Task Force.
Shared Equity: Although shared equity programs have achieved limited scale so far, research shows that, when properly constructed, they can be an effective way to provide income-eligible families with sustainable homeownership opportunities. This, in turn, allows them to build wealth while ensuring that home prices remain affordable to subsequent buyers. To address the limited scale, we propose building both the capabilities and infrastructure necessary to facilitate growth.
As with energy efficiency financing programs, it seems that existing shared equity programs also lack standardization. Organizations develop highly customized programs based on their unique geographic needs, existing partnerships, available budgets, and funding mechanisms. This siloed development process generates a relatively small number of loans, both individually and in aggregate. We believe a more standardized program will achieve broader benefits.
In addition, shared equity homeownership programs are not widely understood, causing lenders to shy away from financing them due to their non-traditional structures. Therefore, we propose the following steps to preserve affordable housing: Identify the current market infrastructure and develop financing standards; provide data and underwriting guidance that can be leveraged by other market participants; enhance consumer awareness about financing options; boost lender awareness about Freddie Mac’s product capabilities; minimize operational complexity and incorporate automation, where feasible; and leverage pilots to test new product features and underwriting options.