Doing Their Duty: Should Fannie, Freddie Invest More in Underserved Markets?

Fannie Mae and Freddie Mac are under a congressional mandate to improve investment in three specific kinds of housing markets—but Congress didn’t say by how much, and advocates say they could be doing far more.

Three red pails hanging on black hooks, by a blue door with a sign that says "private," illustrating article on Fannie Mae and Freddie Mac's Duty to Serve
Photo by Flickr user Art Crimes, CC BY-NC-ND 2.0

Fannie Mae and Freddie Mac have a duty to serve low-income Americans. That might sound like a corporate mission statement, but it’s actually a Congressional mandate. The 2008 Housing and Economic Recovery Act includes what is known as the “duty to serve” provision that requires Fannie and Freddie to invest more resources into three underserved markets—affordable housing preservation, rural housing, and manufactured housing (often called mobile homes).

In response, in the last several years, Fannie and Freddie have helped fund the preservation of affordable housing that was at risk of being lost to the open market, strengthened protections for manufactured homeowners, and eased some of the challenges rural homeowners face when having homes appraised for mortgage underwriting, among other accomplishments.

But are they doing enough to satisfy the intent behind Duty to Serve? A newly formed group of big-name housing advocates—calling themselves the Underserved Mortgage Market Coalition—don’t think so, and they’ve called on Fannie, Freddie, and the Federal Housing Finance Agency (FHFA) to be more transparent about their plans and more aggressive about how they will pursue that mission going forward.

“Amid a housing affordability crisis that requires bold and aggressive action, Fannie Mae and Freddie Mac have set forth plans that fail to effectively reach those not served or not served well by the conventional mortgage market” the coalition’s members wrote in a letter to FHFA Acting Director Sandra L. Thompson. 

How Duty to Serve Works

Congress created the current version of Duty to Serve in 2008, but it took another seven years for FHFA—the agency that oversees Fannie Mae, Freddie Mac, and Duty to Serve—to begin writing the regulations to launch the program. And it wasn’t until 2017 that Fannie and Freddie began implementing their first three-year Duty to Serve plans.

Duty to Serve requires that the two government-sponsored enterprises (referred to as the GSEs or Enterprises for short) focus their attention and resources on the three aforementioned markets. Within those markets, there are many activities that FHFA regulations allow Fannie Mae and Freddie Mac to do.

For example, to support affordable housing preservation, the GSEs can help finance the purchase, refinancing, and renovation, of existing subsidized and unsubsidized multifamily housing, especially those with soon-to-expire affordability restrictions, by organizations that will keep it affordable. They can also back mortgages for shared-equity homeownership, such as community land trusts; energy- and water-efficiency improvements in multifamily and single-family affordable properties; and more.

To serve rural markets, the GSEs can take steps to reduce the barriers to and costs of financing single-family ownership and multifamily rental properties in high-need rural areas, support housing for agricultural workers or high-need rural members of a federally recognized Native American nation, and help small financial institutions fund the creation of new rural housing.

To serve manufactured housing markets, Fannie Mae and Freddie Mac were told to focus on challenges around titling mobile homes (which often aren’t given mortgages at all) and on strengthening rights for mobile home community residents.

Oddly, in creating Duty to Serve, Congress explicitly forbid FHFA to set numerical targets for Fannie Mae and Freddie Mac to reach, such as ensuring that a certain percentage of their total business focus on Duty to Serve markets. Instead, FHFA requires the GSEs to each submit a three-year strategic plan setting their own targets within each of the three underserved markets.

How Fannie Mae and Freddie Mac Work

To understand what Fannie Mae and Freddie Mac have accomplished and what the coalition believes they could accomplish in the Duty to Serve markets, it’s important to understand what they do. Neither Fannie Mae nor Freddie Mac provide loans directly to customers to buy homes. Instead, they purchase mortgages from financial institutions to either hold or repackage as mortgage-backed securities that get sold to investors. The financial institutions use the money they make from selling mortgages to the Enterprises to in turn make more loans to homebuyers. This process is called the secondary mortgage market. The infusion of cash, along with the reassurance of government backing, helps provide the liquidity and stability necessary to keep the mortgage industry chugging along.

To make these purchases at the scale they do, Fannie Mae and Freddie Mac require streamlining and standardization of the qualifications borrowers must meet, maximum mortgage amounts, minimum downpayments, appraisal practices, and more. This helps increase efficiency and reduces costs for lenders and borrowers with easy “check the box” mortgage products.

This works well for the relatively homogenous world of middle- and upper-class homebuying and multifamily construction. But trickier, less-standardized markets—like the ones targeted in Duty to Serve—tend to require a more labor-intensive, manual underwriting process that financial institutions are less interested in taking on and the GSEs were typically less interested in purchasing, which added to banks’ reluctance to originate those loans. And if banks are unwilling to provide loans for low-income apartment buildings, manufactured home communities, or rural homes, a whole subset of lower-income Americans who can’t afford traditional homebuying prices or market-rate apartment rents will be left in the cold.

“I would love to see the types of products and activities that start as a result of Duty to Serve grow to be part of the plain vanilla housing finance systems,” says Andrew Jakabovics, vice president for policy at Enterprise Community Partners, a member of the Underserved Mortgage Market Coalition. “When the lender is faced with something hard to do and something easy to do and the payout is the same, they’re going to do the easy thing all day long. So how do you make what looks hard today easy, so everybody’s access is equitable?”

What Has Duty to Serve Accomplished?

Over the course of their first three-year Duty to Serve plans, Fannie Mae and Freddie Mac made significant investments in rural single and multifamily housing, LIHTC equity, and manufactured housing loans. They helped strengthen rights for manufactured housing tenants and eased homebuying for rural and shared-equity homebuyers, among other successes.

For example, both Fannie Mae and Freddie Mac increased their purchase of manufactured housing loans. In 2019, Fannie Mae purchased 11,976 loans on manufactured housing units titled as real property, compared to a previous average annual baseline of 8,072. That same year, Freddie Mac purchased 4,390 loans, up from a previous annual baseline of 2,985 loan purchases. This brings more capital and standardization into the manufactured housing space, encouraging further participation by lenders.

However, the loans they bought were primarily on manufactured housing already titled as real property, which is the exception. Most manufactured housing receives a “chattel” mortgage, where the home is considered personal property the same way a boat or even jewelry is, which comes with fewer rights and less-beneficial tax implications than a traditional home mortgage. As part of Duty to Serve, the Enterprises briefly launched then aborted a pilot project to purchase chattel loans on manufactured homes. The Underserved Mortgage Market Coalition is pushing them to relaunch it.

“Manufactured housing is considerably less expensive than site-built housing,” says Jim Gray, a senior fellow at the Lincoln Institute of Land Policy, which is also part of the coalition, and a former FHFA employee who helped write the regulations for Duty to Serve. “If Fannie Mae could bring [to it] the standardization—the low-interest rates, the ability to resell property, the consumer protections—that the rest of the mortgage market has, that would be a huge breakthrough. . .The purpose for the Enterprises is to bring that same standardization that they’ve brought to middle-class America to more difficult markets.”

Both GSEs made equity investments in rural Low Income Housing Tax Credit projects. In 2019, Fannie Mae made equity investments in 98 LIHTC projects, accounting for 4,263 units of affordable housing. That same year, Freddie Mac invested $111.9 million in LIHTC equity investments in 13 rural properties.

Also in 2019, Fannie Mae increased its purchase of rural single-family home loans to 9,431, totaling $1.1 billion, up from 7,104 in 2018 and its purchase of rural small multifamily loans from 60 to 82.

Fannie Mae also introduced a solution to the so-called rural appraisal gap. Home appraisers often establish home value by comparing the property to similar nearby properties. Because of the low density in rural areas, there may not be any similar properties nearby to draw comparison from. As part of Duty to Serve, Fannie Mae began allowing mortgage sellers to use home inspections as an alternative to appraisals when setting home values and determining risk.

Through Duty to Serve, the Enterprises also implemented some creative ways to address nonfinancial issues through their investments. For example, owners of manufactured homes typically rent the concrete pads their homes sit on. Because it’s often prohibitively expensive to move the homes, tenants can lose the equity on their home if they’re forced to move because of eviction or rising lot rents. Fannie Mae and Freddie Mac implemented requirements for pad lease protections for tenants in manufactured housing loans they purchase, including renewable lease terms, written notice of rent increase, and grace periods for late payment.

Duty to Serve was also an opportunity for the Enterprises to simply introduce new products, such as one for a Freddie Mac–approved shared-equity mortgage. In doing so, Freddie Mac is helping ensure that would-be homebuyers can actually get a loan for a community land trust property, the lack of which has long limited the scale of CLT development.

“That’s a pretty substantial change for the field,” says Emily Thaden, Grounded Solutions vice president of national strategy. (Editor’s Note: Thaden is chair of Shelterforce’s board of directors.) “It means that these small nonprofits aren’t having to go beg and plead for a boutique product offering from a local bank and can give buyers access to a conventional mortgage. Oftentimes the terms tend to be better with the standard offering.”

The Coalition Wants More

Though Duty to Serve clearly spurred increased spending and creativity at the Enterprises, it still pales in contrast to the need. “A lot of the elements in the Enterprises’ plans were fairly timid, just given the scope of what they were already doing,” says Jakabovics.

The Enterprises released their draft plans for the next three-year Duty to Serve cycle in May 2021. The Underserved Mortgage Market Coalition wasn’t impressed and hopes it can push FHFA and the Enterprises alike to be bolder in their goals and be more transparent in the development and execution of the Duty to Serve plans.

In early 2022, FHFA rejected both Enterprises’ proposed 2022-2024 Duty to Serve plans, requiring Fannie Mae and Freddie Mac to strengthen their plans to “improve the plan’s impact on all three … underserved markets” before resubmitting for approval.

In response to a request for comment, Fannie Mae and Freddie Mac deferred to FHFA, which provided Shelterforce with a comment by email. “FHFA shares the Coalition’s concerns about the vital importance of expanding affordable housing opportunities for low- and moderate-income families, especially in the underserved markets targeted under Duty to Serve. All households should have equitable access to long-term, affordable housing opportunities. FHFA has a duty to identify and overcome barriers to sustainable homeownership and affordable rental housing—we expect the Enterprises to actively engage in this work.”

When the draft plans were released last year, FHFA provided a 60-day public comment period and held three public listening sessions in July 2021. Still, the coalition wants to see more opportunity for input from the those who work most closely to Duty to Serve markets.

The coalition also wants to see more transparency in how the plans are written and how performance is reported. Gray says the plans themselves are needlessly long and complex, making it harder than necessary for stakeholders to provide meaningful feedback. Fannie Mae’s first-cycle plan was 178 pages, while Freddie Mac’s was 242.

There’s also a lack of consistency in how progress is measured in reports. “One report will come out and say we did 100,000 LIHTC units and another will say we did 21 LIHTC deals,” Thaden says. “How can you understand performance if we don’t have the same metrics?”

Further contributing to the transparency challenge, the Enterprises haven’t released annual reports for each year of the three-year Duty to Serve cycle, something the coalition wants them to do in the future.

Perhaps most importantly, the coalition wants to see Fannie Mae and Freddie Mac aim far higher in the future with their Duty to Serve goals.

“Given what we know about the tremendous need for affordability in so many ways and so many places, especially in places that have been historically and chronically left out of equitable access, I don’t care if you meet your target because you set it low,” says Jakabovics. “Let’s figure out what the actual need is and how can we put the resources of these tremendous institutions behind tackling these problems. Let’s aim high and get 90 percent of the way towards a meaningful target rather than 200 percent of an obvious one.”

Josh Cohen is Shelterforce’s policy fellow. Cohen, based in the San Francisco Bay Area, is a freelance journalist covering housing and homelessness.

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