On March 17, the Center for American Progress and the Consumer Federation of America submitted comments to the Federal Housing Finance Agency on the proposed Duty to Serve rule. Read the full comment letter here.
The “Duty to Serve” rule recently proposed by the Federal Housing Finance Agency, or FHFA, has been a long time coming for the housing market. The rule would govern how Fannie Mae and Freddie Mac—two government-chartered corporations that purchase mortgages made across the country—would fulfill their duty under the law to facilitate the financing of affordable housing in underserved areas. As FHFA reviews public comments and finalizes the rule, it has a powerful opportunity to help promote a more affordable, fair, and accessible housing market.
After the housing crisis of 2008, the U.S. Congress passed the Housing and Economic Recovery Act, or HERA, which allowed the government greater oversight of Fannie Mae and Freddie Mac in order to help restore their financial soundness. HERA also established a duty for both corporations to facilitate a secondary market for very low-, low-, and moderate-income families in three underserved housing markets: manufactured housing, affordable housing preservation, and rural markets. Eight years later, the nation is one step closer to a final rule that explains exactly how FHFA will hold Fannie and Freddie accountable for this statutory duty.
FHFA’s proposed Duty to Serve rule has several important elements and is a major improvement from the version of the rule that the agency proposed in 2010. Here are five objectives that the final Duty to Serve rule could accomplish if FHFA maintains or strengthens provisions in its recent proposal.
1. Increase access to neighborhoods that promote economic mobility
Where people live can have a significant impact on their ability to climb the economic ladder. Recent research shows that moving a young child to a low-poverty area can result in a significant increase in that child’s lifetime earnings. Access to low-poverty neighborhoods, however, varies sharply by race and ethnicity. High-poverty neighborhoods have disproportionate shares of African American and Latino residents. One study finds that black people living in poverty are more than three times more likely to call an extremely poor neighborhood home than white people living in poverty. Hispanic people living in poverty are more than twice as likely to live in such a neighborhood as their white counterparts.
The Duty to Serve rule has a powerful opportunity to deconstruct barriers that low-income families and families of color face in accessing low-poverty neighborhoods and the jobs, good schools, grocery stores, and health services found in them. Under the currently proposed rule, FHFA would provide extra credit when scoring Fannie’s and Freddie’s compliance under Duty to Serve for activities that promote “residential economic diversity.” The Center for American Progress recommends that FHFA interpret this term as a) affordable housing in high-cost, low-poverty areas or b) affordable or mixed-income housing tied to the Choice Neighborhoods initiative or the Promise Zones initiative—two federal community revitalization plans—in areas of concentrated poverty. By targeting the extra credit provision in this way, FHFA could incentivize Fannie and Freddie to help reverse segregation and promote fair housing.
2. Support residents who live in manufactured housing communities
Manufactured homes, which are built in factories and transported to their sites, are a critical source of affordable housing across the country. Often thought of as mobile homes or trailers, manufactured homes today actually include a diverse range of styles and can closely resemble traditional homes. Manufactured homes are often arranged into communities where residents lease plots of land in addition to either owning or renting their manufactured home. Residents in these communities can face many problems, including excessive rent hikes, park closures, poor management and maintenance, prohibitive rules, and limited access to city services.
CAP recommends that FHFA build on its proposed rule by focusing Fannie’s and Freddie’s support for manufactured housing communities on those with key tenant protections and those owned by residents, nonprofits, or governmental units or agencies. Communities owned by residents help homeowners build wealth and security, and nonprofit- or government-owned communities also prioritize residents over profits. FHFA can promote a safe version of affordable housing for the most vulnerable populations by including support for these types of manufactured housing communities in its final rule.
3. Create a market for affordable homeownership mortgages
The conversation on affordable housing often focuses on renters, but strategies that promote long-term affordable homeownership are an important piece of the puzzle as well. Shared equity mortgages ensure that a home is affordable for the current homebuyer and successive homebuyers by either restricting the property’s resale value or by channeling a portion of the home’s appreciation back to the homebuyer as a subsidy or second mortgage.
The proposed Duty to Serve rule would provide credit for Fannie Mae and Freddie Mac activities that support shared equity programs offered through nonprofits and state or local governments, a provision that CAP strongly recommends FHFA retain in its final rule. When done right, shared equity mortgages can provide low-income families with a pathway to sustainable homeownership. One longitudinal study found that more than 93 percent of households who participated in shared equity programs sustained homeownership for at least five years. The Duty to Serve rule can encourage Fannie and Freddie to create a safe market for shared equity mortgages so that more families can afford to buy homes.
4. Provide critical support for housing in Native American communities
Native American people are disproportionately more likely to live in poor housing conditions than the rest of the country, and Native American tribes tend to lack strong housing and lending markets. One study found 17 major barriers to accessing capital in these communities.
In the proposed Duty to Serve rule, FHFA designates members of federally recognized American Indian tribes located in American Indian areas as comprising a “high-needs population” that Fannie and Freddie must address in their plans for the rural underserved market. This provision is a powerful way for FHFA to encourage much-needed support for Native American communities. CAP strongly advocates for FHFA to include this provision in its final rule and recommends that Fannie and Freddie support Native American communities through activities that include providing outreach and technical assistance on financial products to tribal entities. The corporations could also partner with nonprofits that help tribal authorities build the internal capacity needed to promote housing finance in their communities.
5. Incorporate public input and transparency into the Duty to Serve process
For the Duty to Serve rule to most effectively regulate Fannie’s and Freddie’s statutory requirement to support manufactured housing, affordable housing preservation, and rural markets, the process for evaluating and scoring plans should be as transparent and public as possible. Under the proposed rule, FHFA would provide an evaluation guide to judge the corporations’ annual efforts. The guide should be made public so that advocates, housing industry members, and others can understand how FHFA will evaluate Fannie and Freddie. Additionally, FHFA should consult with Fannie and Freddie, the housing industry, and the public throughout the Duty to Serve evaluation and enforcement process in order to collect feedback on how best to modify and target the rule over time.
By properly structuring the final Duty to Serve rule, FHFA can accomplish the five powerful objectives discussed above and help provide critical support for underserved housing markets. It has been eight years since Congress created the Duty to Serve through HERA, and strategically finalizing the rule could help facilitate the fair, inclusive, and affordable housing market that the country needs today.
Shiv Rawal is a Research Assistant for Housing Policy at the Center for American Progress. Sarah Edelman is the Director of Housing Policy at the Center.