When the Federal Housing Finance Agency (FHFA) last month directed Fannie Mae and Freddie Mac to come up with equitable housing finance plans by the end of the calendar year, it asked for feedback.
In the six weeks that followed, industry stakeholders and housing groups offered up a staggering number of ideas, ranging from eliminating loan-level price adjustments, incorporating cash-flow or childcare payment data into underwriting, or spurring a new secondary market for acquisition, development and construction loans.
The FHFA, as both regulator and conservator of the government sponsored enterprises, shapes the conforming mortgage market. The GSEs’ influence also extends “beyond the conforming mortgage market to which their acquisitions are limited,” the National Association of Home Builders wrote.
In their comments, numerous industry stakeholders, as well as affordable and fair housing groups, said that it’s time for some new ideas. Underwriting processes don’t adequately capture today’s borrowers, who may have multiple streams of income and little traditional credit. The racial homeownership gap has not budged in decades. Even if Congress were to grant $100 billion in down payment assistance advocates seek, it would only return Black homeownership to its pre-2008 levels, the Center for Responsible Lending wrote.
Enter the FHFA. While not a cabinet-level agency, it is effectively one due to a Supreme Court decision allowing the president to fire the director at-will. Acting FHFA Director Sandra Thompson, appointed by Biden, has not been coy about addressing racial equity, and has already undone many of the previous administration’s efforts to reduce the footprint of the GSEs.
Evidently, housing advocates see those initial steps as a good start, and industry stakeholders, expectant of more change, want to log their viewpoints. What could be next at the FHFA?
Priced out
Numerous commenters supported a reevaluation of loan-level price adjustments. Suggestions varied from eliminating them altogether, to making them more transparent.
The National Fair Housing Alliance argued that the current business rationale for LLPAs “do not hold up under scrutiny,” because low credit scores and smaller down payments, which today trigger the extra fees, were largely unrelated to the massive defaults of the foreclosure crisis.
Risky lending practices — poor underwriting, little or no documentation, high fees, exploding interest rates, risk layering, and negative amortization — not risky borrowers, were to blame, the National Fair Housing Alliance contends.
“Moreover, the LLPA pricing framework is inherently unfair as it places the burden of the GSEs’ financial recovery and future catastrophic risk on Black, Latino, Asian American and Pacific Islander, and Native American borrowers, even though they were the victims of the financial crisis, not the cause,” the National Fair Housing Alliance wrote.
Thompson hinted in a recent interview with the National Housing Conference that the GSEs would be taking a hard look at the fees the agencies tack onto loans it considers riskier. But at a more recent address at the Mortgage Bankers Association expo in San Diego, Thompson did not broach the subject.
Where’s the data?
There were numerous pointed requests for the FHFA to release data on appraisals, especially as regulators take steps to address bias in valuations.
To what extent appraiser bias is present, and where and how it manifests, is not part of the public record. Media reports of appraisal bias, self-reported values, proprietary data and Freddie Mac’s recent analysis of some appraisals form the basis for public understanding of appraisal bias.
Rocket Mortgage argued that for regulators to have a uniform understanding of those data, the GSEs should share their “unprecedented trove of valuable mortgage and property data.”
Organizations including the National Community Reinvestment Coalition, as well as the Housing Policy Council, which represents large mortgage lenders, called on FHFA to fork over the GSE appraisal data.
The Urban Institute, which has also asked the GSEs to release the appraisal data, suggested the GSEs make a “equity finance-focused public use database,” to reveal gaps in equity and increase transparency.
Give it a go
Many commenters asked the FHFA to bring back a key mechanism for trying out new ideas before committing to fully implementing them: pilot programs.
A rule the FHFA proposed in 2020 under Trump appointee Mark Calabria would require Fannie Mae and Freddie Mac to obtain prior approval for any new activities — including pilots — and before launching new products. While the move did not explicitly bar pilots, it sent a strong signal that the FHFA would consider pilot programs suspect rather than encourage them.
Even before the proposed rule, both of the GSEs had abruptly ceased years-long efforts to launch pilot programs for chattel loan financing, without explanation. Commenters urged the FHFA to suspend the proposed rule and issue a new interim final rule that encourages pilots.
“Pilot programs are the best tool the Enterprises have in determining which products, services, and research can best move their numbers forward and reach the goals set in these plans,” the National Housing Conference wrote.
Pilot programs could let the GSEs experiment with offering products that the market does not, like small-balance loans. Commenters also suggested pilots to finance acquisition, development and construction loans or to explore non-traditional credit criteria.
Credit boxed-in
Fannie Mae made waves earlier this year when it incorporated positive rental payment history into its underwriting system. Yet both of the GSEs rely on a traditional credit scoring model that excludes rental payments, and numerous commenters, including the National Association of Realtors, suggested an alternative is warranted.
The FHFA is currently considering whether to allow the GSEs to use a credit scoring model other than the traditional FICO score, but “there has been little progress in adopting new scores,” wrote the National Association of Realtors.
“Until these models are updated, the benefits of underwriting with alternative data such as rent will be limited.”
In addition to an updated credit scoring model, the Housing Policy Council suggested that the FHFA continue to find additional data sources that provide a clearer picture of a borrower’s creditworthiness. The FHFA could start by looking at bank account information.
“This data has the potential to present a more reliable assessment of a borrower’s ability to satisfy housing expenses and other obligations, such as monthly telecommunications, healthcare, childcare, or other reoccurring bills,” the Housing Policy Council wrote. The Department of Veterans Affairs already uses a residual income analysis, but the Housing Policy Council noted that it is “operationally difficult.”
Capturing borrowers’ cash-flow information could also allow the enterprises to serve those who, increasingly, don’t resemble the traditional profile the mortgage was meant to serve.
“Further, a cash-flow methodology could also position the Enterprises (and thus the rest of the housing finance ecosystem) to serve the borrowers of the future, who are more reliant on irregular non-W-2 income sources of income, but who nonetheless responsibly manage their obligations,” the Housing Policy Council wrote.
