On June 24, the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back a majority of home loans in the United States, released a proposed amendment to the Duty to Serve (DTS) Underserved Markets rule. The amendment would significantly change what FHFA requires of the two GSEs under the Housing and Economic Recovery Act of 2008 (HERA). Of particular importance to Shelterforce readers, the amended rule would weaken the GSEs’ duty to serve homebuyers in underserved markets.
FHFA is allowing only a 30-day comment period, which is short for such consequential changes. Comments are due July 24, 2026.
What Does the Duty to Serve Rule Do?
As mentioned, Duty to Serve was a provision of HERA, a measure passed at the peak of the housing meltdown and signed into law by President George W. Bush. The act authorized the creation of FHFA and its federal conservatorship (direct control) of Fannie and Freddie, which continues to this day. In exchange for the federal backstop, the act created an obligation for Fannie and Freddie to improve their lending efforts in underserved markets.
It took eight years, but in 2016 FHFA finalized a rule implementing the Duty to Serve program. The rule requires Fannie and Freddie to serve three underserved markets: manufactured housing, affordable housing preservation, and rural housing.
The current rule requires both GSEs to develop three-year plans to serve the markets. The current plans run through Dec. 31, 2027.
What the New Proposal Would Do
The proposed rule changes the required activities for the GSEs, the evaluation processes, and the scoring metrics. FHFA proposes that the new rule take effect on Jan. 1, 2028. The GSEs’ planning processes would be shortened from eight to six months, and the public input period would be reduced from the standard 60 days to 45 days.
FHFA’s rule would eliminate the series of prescribed statutory and regulatory requirements that Fannie and Freddie must address. In essence, under the proposed rule, FHFA agrees to accept that GSEs are meeting their obligations if they take “any eligible action” under HERA that FHFA has not determined as ineligible for credit.
FHFA argues in its discussion of the proposed changes that the “proposed rule aims to encourage and enable the Enterprises [Fannie and Freddie] to better serve the needs of very low-, low-, and moderate-income families in the underserved markets through greater innovation and with less administrative burden.” But it is unclear how a proposal that offers no clear guidance on specific activities—beyond expanding Low Income Housing Tax Credit investments, crediting certain second mortgages, and funding chattel loans—supports the GSEs’ statutory requirements to deliver housing financing to the underserved markets.
Unlike the existing regulation, the proposed rule is silent on the GSEs and the single-family shared equity first mortgage market. Currently, support for the shared equity mortgage market is explicitly authorized in the Duty to Serve rule. Both Fannie and Freddie have shared equity programs.
The proposed rule details how for shared equity homeownership “subordinate liens [second mortgages] on single-family properties will be treated as mortgage purchases. But to date Fannie and Freddie have purchased first liens on shared equity properties, not second liens. This component needs clarification.
The proposal also appears to require Fannie and Freddie to fund personal property, or chattel, loans for manufactured homes. These loans, secured only by the homes, account for an overwhelming majority of manufactured home loans. They also carry higher interest rates, denial rates, and default rates than standard mortgages. The GSEs’ reentry into this market could benefit families, but data on chattel loan performance is limited, and the market is dominated by a handful of lenders.
The proposed rule would also grant Duty to Serve credit for purchasing subordinate liens on multifamily properties, a category currently limited to water and energy efficiency improvement loans. The proposed rule would end that limit. FHFA also proposes granting Duty to Serve credit for GSE equity investments in low-income housing tax credit projects beyond the current limitation to rural areas.
The problem with these proposed changes is that, without limits on the types of projects or market conditions, needed capital may be redirected to projects and markets that already have access to resources. For instance, in the section of the proposed rule where it solicits comments, FHFA has sought input on whether Fannie and Freddie should earn Duty to Serve credit for investing in New Market Tax Credits, which primarily supports nonhousing projects.
The current rule would benefit from modifications that would help GSEs expand beyond their current efforts to provide access to affordable housing finance. However, the proposed rule risks slowing the progress of the last decade, undercutting the spirit of the post-Great Recession reforms, and further isolating under-resourced communities.
To date, this proposed regulatory rule change has largely flown under the radar. While an Office of Management and Budget proposed rule change regarding federal grant disbursements has (understandably) attracted considerable attention—more than 290,000 comments to date—only 3 comments have been submitted regarding this rule change as of July 13. Especially for those working in manufactured housing, rural housing, and/or community land trusts, this rule change on how GSEs support—or fail to support—their duty to serve obligation merits attention before the comment deadline expires on July 24.
About the Author
Comments