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FHFA Releases Proposed Duty to Serve Rule for Fannie and Freddie

Published on December 15, 2015 by Greg Zagorski
FHFA Releases Proposed Duty to Serve Rule for Fannie and Freddie

Earlier today the Federal Housing Finance Agency (FHFA) released its proposed “Duty to Serve” rule, which would require the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac to support housing for lower income families in three underserved segments of the housing finance market: manufactured housing, affordable housing preservation, and homeownership opportunities in rural areas.

Under the proposed rule, both GSEs would be required to submit a plan to FHFA every three years outlining their strategies for increasing the amount of mortgage credit available for properties that provide housing to very low-, low-, and moderate-income families in the specified markets. The GSEs’ plans would be subject to a public comment period and review by FHFA. 

Manufactured Housing

The rule would require the GSEs to adopt policies that help lower income borrowers purchase manufactured homes. The firms would only receive credit for purchasing loans where the manufactured home is classified as real estate, though FHFA seeks comment on whether the GSEs should also receive credit for chattel loans. The rule would also require the GSEs to work to increase their purchase of loans that support certain manufactured housing communities.

Affordable Housing Preservation  

The GSEs would also be required to increase their support of the secondary market for loans that finance the preservation of single-family and multifamily affordable homes. This includes loans that finance the preservation of affordable housing that was developed through a number of federal housing programs, including the Low Income Housing Tax Credit (Housing Credit), Section 8 Rental Assistance, McKinney-Vento Homeless Assistance, and Section 811. 

With regard to the Housing Credit, the proposed rule notes that, while both Fannie Mae and Freddie Mac currently offer specialized programs designed to support the refinancing and rehabilitating of Housing Credit properties, they are currently not permitted to invest in the Housing Credit. The proposed rule seeks public comment about whether this restriction should be lifted, noting that the Housing Credit is a valuable tool for supporting affordable housing and also represents a liquid investment.

The GSEs would also be required to develop strategies for purchasing pools of small bank loans that finance small multifamily properties (those between 5 and 50 units), energy retrofit loans for affordable single-family and multifamily housing, eligible shared-equity homeownership loans, and public housing properties that use HUD’s Rental Assistance Demonstration Program. 

Rural Housing  

The proposed rule would also require that the GSEs take action to increase the availability of affordable mortgage credit for lower income families in rural areas. For the purposes of the rule, “rural areas” would be defined as those census tracts outside of a Metropolitan Statistical Area (MSA) as designated by the Office of Management and Budget, or census tracts in an MSA, but outside of the MSA’s Urbanized Areas and Urban Clusters, as designated by the U.S. Department of Agriculture’s Rural Urban Commuting Area codes. The GSEs would also have a duty to support credit for high-needs rural areas, such as the Lower Mississippi Delta, and high-needs rural populations, such as Native Americans and seasonal migrant workers.

Under the rule, for each market segment, the GSEs would be eligible to receive additional credit toward meeting their duties for activities that lessen the economic isolation of lower, low-, and moderate-income families, such as those supporting mixed-income housing. Such activities would not be mandatory.

FHFA will evaluate each GSE’s performance in each underserved market for 2010 and subsequent years by assessing:

• The development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing;

• The extent of outreach to qualified loan sellers and other market participants;

• The volume of loans purchased relative to the market opportunities available, subject to the statutory condition that FHFA not establish specific quantitative targets; and

• The amount of investments and grants in projects that assist in meeting the needs of the underserved markets.

Housing Bonds

The proposed rule would allow both Fannie Mae and Freddie Mac to apply purchases of Mortgage Revenue Bonds (MRBs) to their loan purchase requirements, as long as the GSE can demonstrate the loans financed by the bonds or the underlying securities assist very low-, low- or moderate-income families in a particular underserved market. The GSE will also be allowed to claim towards their loan purchase requirements any credit enhancement they provide on housing bonds to guarantee that investors receive timely payments.

FHFA will be soliciting comments on the proposed rule for up to 90 days after it is published in the Federal Register. NCSHA is planning to submit comments on behalf of all HFAs and will hold a conference call soon to solicit HFA input. If you have any comments you would like to share in the meantime, please email Greg Zagorski.