Carrying the torch lit by the Biden Administration, Fannie Mae and Freddie Mac released their Equitable Housing Finance Plans on June 8, 2022. The plans are designed to address racial and ethnic disparities in homeownership that have persisted for generations. These are game-changing developments in the residential mortgage industry, utilizing tools that have never before been employed on this scale.
Fannie Mae and Freddie Mac, known as government-sponsored enterprises or GSEs, do not originate home mortgage loans. Instead, they purchase loans originated by private lenders that meet the standards that the GSEs — which are the largest purchasers of closed mortgage loans nationwide — establish. The most notable feature of the plans is the strong endorsement of special purpose credit programs, which are programs authorized by the Equal Credit Opportunity Act that allow institutions to “prefer members of economically disadvantaged classes” who would otherwise experience difficulty qualifying for loans under traditional credit standards. This SPCP tool has been available for decades, and although it has been used by some private lenders, it has never previously been rolled out by the GSEs.
While the details will be revealed as the plans are implemented, both GSEs contemplate SPCPs that offer down payment assistance, improved pricing, reduced fees, and expanded underwriting. These special terms are designed to address socio-economic credit barriers to accessing the mortgage market, such as wealth, income, and financial literacy. In an area of divergence between the two GSEs, the plans suggest that Fannie Mae and Freddie Mac will define the groups that may be eligible to receive the special credit benefits differently. Fannie Mae intends to deploy SPCPs focused on expanding credit access to Black consumers and communities with majority-Black populations. Freddie Mac indicates that it may go further by making its SPCPs available to all consumers seeking mortgage loans in majority minority census tracts, or to individuals who self-identify as Black, Latino, or Native American.
Significantly, the Federal Housing Finance Agency, the GSEs’ federal regulator, has created a “pilot transparency framework” that will require Fannie Mae and Freddie Mac to publish information on their websites regarding implementation of the plans. This requirement should help determinations as to whether the proposed strategies have meaningful effects on housing equity.
Not only does the GSEs’ endorsement of SPCPs signal an important opportunity for qualified borrowers, it also forecasts a significant opportunity for the hundreds of mortgage lenders nationwide who sell their mortgage loans to Fannie Mae and Freddie Mac. The modern residential mortgage market is dominated by an “originate-and-sell” model of doing business, where a lender originates a mortgage loan, sells that loan to an investor (like the GSEs), and uses that capital to make more mortgage loans to more consumers. Freddie Mac’s plan states that it will “purchase loans originated through lenders’ SPCPs” and “will review lender SPCPs and establish terms of business that will permit lenders to sell [it] loans originated under their SPCPs”; similarly, “Fannie Mae’s objective is to make our purchase of SPCP loans as routine as any other loans we currently buy.” The GSEs’ plans to purchase SPCP loans will “provide liquidity for SPCP loans” and thus may “promote adoption of SPCP among lenders.”
While it is certain that mortgage industry participants uniformly support the laudable goal of eliminating the racial and ethnic housing gap, the methodology for achieving that goal may prove to be a subject of principled disagreement. The strategy of advancing equity by granting preferences to marginalized groups is not new — having been pursued in employment, education, and other contexts — but such preferences frequently must withstand statutory and even constitutional challenges in courts. Congressional authorization for credit-preference programs in the Equal Credit Opportunity Act could mitigate, but may not totally eliminate, any similar questions that might arise from the plans.
Many unknowns lie ahead. But it is assured that the new approach by the GSEs—the entities that most significantly guide national standards for conventional residential mortgage lending — has the potential to narrow racial and ethnic differences in American homeownership.
