Housing Finance Reform Doesn’t Need to Start with Congress

Later this month, as every reader no doubt knows, the Senate Banking committee will mark up the bipartisan housing finance reform bill put forward by Chairman Tim Johnson and Ranking Member Michael Crapo. There has been a lot of commentary on the bill in these pages and elsewhere by housing advocates, including some rather strong critics of the bill’s complexity, servicing regimes and perceived risk to the economy. As the bill is not, of course, the final word on housing finance, for manufactured housing there are some positive pieces that should be preserved or built upon as the process goes forward.

That the bill recognizes that manufactured housing plays an important role in the provision of affordable housing is a critical, and easily overlooked, milestone. As the Manufactured Housing Institute remarked when the text of the bill was released, manufactured housing loans have made up less than one percent of Fannie Mae and Freddie Mac’s secondary market efforts, which seems woefully inadequate in light of the outsized share the sector makes up as homeownership for low- and moderate-income Americans.

In its direction to the new Federal Mortgage Insurance Corporation (FMIC) to develop rules to support underserved markets, the bill cites manufactured housing as an example. The mandate sounds a bit like the yet-to-be-adopted Duty to Serve (DTS) regulations that Congress required the GSEs’ regulator to issue to support manufactured housing, rural markets and housing preservation. So while the paucity of GSE activity on manufactured housing in the past and the fact that proposed DTS rules have lingered for four years should give us pause, we should be hopeful that the secondary market will at some point more fully embrace manufactured homes and their long-ignored owners.

The committee and staff did tremendous work on the bill, regardless of the criticisms of it. Specifically, CFED commends the staff for including manufactured housing advocates and others in its discussions in the run up to the bill’s release. One noteworthy mention is that manufactured housing is explicitly cited as eligible for the Market Access Fund (MAF).
The MAF should be more than just a pool for funding any type of manufactured home loan. The bill specifically states that the fund can offer “grants and loans, including through the use of pilot programs of sufficient scale, to support the research and development of sustainable homeownership and affordable rental programs, which programs shall include manufactured homes.”

Sustainable homeownership is what CFED’s Innovations in Manufactured Homes (I’M HOME) is all about, and we’re optimistic that the MAF could help support innovative pilots to site new, high-quality homes through high-quality, safe mortgage lending. Furthermore, the fund could be used to provide credit enhancement, something that is desperately needed to help transform the market. Fannie Mae and Freddie Mac currently have authority to do these things, but the uncertain environment gives them unnecessary pause. The fund’s potential support for manufactured home lending research also holds promise.

Despite the obvious progress that the proposed legislation offers manufactured homebuyers, regulators and other stakeholders do not have to wait for President Obama’s signature before real progress in lending can occur.

Housing Finance Reform Now

The Federal Housing Finance Agency still has an opportunity to revisit DTS rulemaking, likely by issuing new proposed rules, which may vary from the ones issued in 2010 in the wake of the housing crisis. Advocates, including CFED, who are working to improve the liquidity market the three underserved segments identified in 2008, see that finalized DTS rules could go a long way to support manufactured home lending. FHFA should recognize that the housing and regulatory environments are not what they were in 2010. CFED view has also evolved based how the market has developed.

The 2010 proposal states that “chattel loans on manufactured homes not be considered towards the duty to serve the manufactured housing market as these loans are inconsistent with  Enterprise conservatorship,” which began in 2008. Therefore, FHFA proposed limiting DTS to fee-simple, real estate mortgages for manufactured homes. But because the FHFA has not finalized even these very narrow rules, the GSEs have had little reason to invest in or support this small but important part of the affordable housing market. Had the FHFA done so, even in just the small segment of the loans that are fee-simple transactions, it could have furthered the housing recovery, especially for low- and moderate-income borrowers. FHFA should retain the eligibility of fee-simple mortgages, but enhance DTS though a careful review of the personal property loan market.

By excluding all chattel loans, the FHFA would remove about 75 percent of manufactured home loans from GSE consideration. Clearly not all or even most of today’s chattel loans should qualify for government support, tacit or otherwise. In many cases, these loans have high fees and rates and the homeowners’ lack of security on the land, if not owned outright, jeopardizes the stability of their housing. Developments in the manufactured housing market offer regulators some guidance on how the GSEs, and their successors, can support chattel loans for low- and moderate-income homeowners.

Titling reform, as proposed by the Uniform Law Commission, would likely spur interest by lenders, like what has happened in New Hampshire, where all homes are titled as real estate. Private lenders in New Hampshire are making mortgages in resident-owned communities, with the support of a Fannie Mae pilot. Resident-owned communities across the country offer a perfect opportunity for the GSEs to pilot chattel investment in an environment that fosters affordability and long-term security. Long-term leases, which are rare in investor-owned communities but are supported by some industry players, would also hasten interest by originators and investors.

Finally, the Consumer Finance Protection Bureau’s Qualified Mortgage rule also provides some assurance. QM already defines what safe and good quality chattel loans are, and also takes into account the lot rent in a family’s ability to repay a mortgage.

The possibility of wholesale housing finance reform doesn’t mean we have to stop working on the options we have now. In fact, a final DTS rule, substantive pilots and new thinking in the housing market could set the table for transformative innovation when a new system is finally in place.

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