What FHFA's ban on SPCPs mean for lenders, borrowers

Federal Housing Finance Agency Director Bill Pulte has banned Fannie Mae and Freddie Mac from participating in special purpose credit programs.

"The current level of support for SPCPs is inappropriate for regulated entities in conservatorship," Pulte said in the memo posted on X.

In the order, the headline of which misidentifies SPCPs as "Special Credit Purpose Programs," stated they are to be terminated immediately. Pulte also added "the Enterprises may comply with any contractual provisions regarding prior written notice to lenders."

In 2023, Fannie Mae acquired 921 loans through its HomeReady First SPCP, and purchased an additional 4,747 loans through lender-sponsored SPCPs, according to data supplied by the National Association of Mortgage Brokers.

Freddie Mac, through its BorrowSmart Access SPCP, supported 2,472 homebuyers and acquired 6,828 loans from lender-sponsored SPCPs.

Safety and soundness debate

The wording of the memo implies Pulte is making a safety and soundness argument as to why the GSEs should not be purchasing loans which come from SPCPs, which enable creditors to consider factors such as race, ethnicity, or geographic location when assessing credit eligibility—provided the program is implemented in compliance with the Equal Credit Opportunity Act.

In fact, the opposite is the case, argued Laurie Benner, associate vice president of housing and community development at the National Fair Housing Alliance.

"They contribute to the safety and soundness of the housing finance ecosystem through risk mitigation and enhanced credit access," Benner said. "The SPCPs are critical tools that are desperately needed right now, we're in a housing crisis."

As a result, those who are hurt by Pulte's actions are working class individuals, middle income families, people of color, members of communities which have already been harmed by disinvestment, she continued.

SPCPs live on despite memo

What Pulte's action doesn't do is end these offerings entirely.

A close reading of Pulte's statement indicates it does not apply to the Federal Home Loan Banks, which the FHFA also regulates. Those entities are not in conservatorship and while some might offer a SPCP, they typically don't assume the credit risk the way a secondary market mortgage purchaser does.

SPCPs have been around for some time but had limited use because of conflicting interpretations between the Equal Credit Opportunities Act, which permits them, and the Fair Housing Act, which some perceived as prohibiting their use.

ECOA provided a clear framework for SPCPs in the development of mortgage products which meet the credit needs in certain underserved communities without lowering or compromising underwriting standards, said Marisa Calderon, president and CEO of nonprofit Prosperity Now.

Pulte's ruling, even though it is specific to Fannie and Freddie, "has a broader market impact, because the GSEs involvement provided regulatory clarity and a baseline for lenders who wanted to reach more borrowers who had non-traditional credit profiles," Calderon said. "Without their participation, lenders, especially smaller institutions, may hesitate to design or maintain those SPCPs because of uncertainty or the potential for perceived legal risk."

The game changer

Before a December 2021 Department of Housing and Urban Development ruling that these do not violate the Fair Housing Act, many residential lenders stayed away from SPCPs. In the last few years, a number of lenders, including Rocket and Rate, started programs.

Rocket worked directly with Freddie Mac for its offering.

The first Trump administration signaled support for SPCPs through various actions it undertook, including guidance issued by the CFPB during that period, Benner said.

A Mortgage Bankers Association spokesperson pointed out even before the FHFA encouraged the government-sponsored enterprises to support SPCPs, the organization supported their use "as a tool to increase mortgage credit availability to underserved communities.

"We launched a toolkit with [the National Fair Housing Alliance] in 2022 for lenders interested in using them and will continue to support our members who do," the spokesperson added.

Alternatives to the SPCPs

The group representing the small-to-midsized independent mortgage bankers, the Community Home Lenders of America, said at the GSEs, as well as the government agencies, other programs exist that can fill the gap.

"Even with the elimination of special purpose credit programs here, there will still be robust low down payment options available — like Fannie/Freddie loans with mortgage insurance and FHA, VA, and RHS loans," CHLA Executive Director Scott Olson said in an emailed statement, referring to the Federal Housing Administration, Veterans Affairs and U.S. Department of Agriculture Rural Housing Service.

"Separately, CHLA does appreciate Director Pulte's comments yesterday about not reducing the conforming loan limit, which is consistent with our priority of not reducing the GSEs' footprint — and we also appreciate the scrapping of the duplicative UDAP provisions," Olson added.

Mortgage brokers also affected

Even though the mortgage broker community does not deal directly with the GSEs, Pulte's decision has an impact on them as well.

"Anytime a mortgage broker loses access to a product that they utilize to help people become homeowners, you know it's going to bring some immediate concern," Brendan McKay, president of advocacy at the Broker Action Coalition.

"We're hopeful that while they're taking some options away, some additional solutions might be provided as well in the future," he said.

NAMB too said it was concerned by Pulte's actions.

"NAMB remains steadfast in its commitment to promoting responsible lending and ensuring all Americans have access to mortgage financing," Jim Nabors, its president, said in a statement. "We welcome the opportunity to engage with FHFA, policymakers, and industry partners to discuss constructive paths forward that preserve affordability, foster innovation, and support homeownership for those who need it most."

Judge orders fair housing funding restored

Pulte's announcement came the same day as a federal judge in Massachusetts granted a temporary restraining order stopping the termination of 78 Fair Housing Initiative Program contracts.

"Fair housing organizations are on the front lines of efforts to combat housing discrimination through enforcement of the Fair Housing Act," NHFA President and CEO Lisa Rice said in a statement.

"The Trump Administration's abrupt elimination of funding threatens drastic consequences for more than 75 fair housing groups around the country and creates fear, chaos, insecurity, and dysfunction in an already fragile housing market," Rice said.

Among the alternative outlets for SPCPs are portfolio lenders, but banks would have a limit on how much of these products they can hold, Calderon noted.

A role for banks, CDFIs

Another possibility are community development financial institutions. These might be able to step in with their own programs, as they too exist to serve those consumers who are overlooked by mainstream lenders, Calderon said.

"As the administration is looking for solutions to continue to serve a broad scope of borrowers that really helping to ensure that the CDFIs have access to tools and resources could be one way of addressing the potential contraction" in SPCPs the Pulte announcement is likely to cause, she said.

The majority of CDFIs are loan funds, not depositories.

"The majority of ordinary Americans won't see a headline that resonates with them about why this should matter," Calderon said. "It will reduce their options ultimately…what will affect people in the coming months, [is that they will begin] to see their options for being able to purchase their dream home evaporate and of having responsible fixed-rate 30-year mortgages. That's ultimately going to be the way that everyday families are affected."