MReport August 2019

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32 | TH E M R EP O RT FEATURE moderate-income households, targeting three specific areas: manufactured housing, affordable housing preservation, and rural housing. Under HERA, FHFA was responsible for creating a process for evaluating whether the GSEs were fulfilling their "duty to serve" mandates for the identi- fied markets. After some delay, in 2016, FHFA issued a final rule to implement the DTS statutory mandates. The next year, FHFA approved separate DTS plans for Fannie and Freddie, with the execution of the programs to start at the beginning of 2018. Fannie's and Freddie's DTS plans are lengthy and include dozens of distinct proposals, each appearing under one of the three DTS target areas of manufactured housing, affordable housing preservation, and rural housing. While it is difficult to sum up the GSEs' DTS programs, several of the programs are a commitment to the purchase of loans originating in various federal programs, or from small financial institutions, or secured by a particular type of housing. For example, Fannie's Affordable Housing Preservation goals include a commitment to the purchase of mortgages secured by properties involved in the Section 8 and Low-income Housing Tax Credit programs. Its Rural Housing objectives include increasing the purchase of loans from "high-needs rural regions" and those secured by "multifamily housing for Native Americans and agricultural workers." In addition to loan purchases, the GSEs' DTS plans commit to conduct research on underserved markets, outreach to various market participants, and to development of new loan pro- grams. Two examples may serve to illustrate: Freddie's plan prom- ises to develop a "rural property mapping tool" to more accurately pinpoint high-needs rural areas and release some components of the tool for public use. Freddie believes the mapping tool "lays the groundwork for other rural lending activities," because it will "allow for the better focusing of private capital in rural areas." Fannie's plan includes outreach to owners of mobile home com- munities, and their lenders, on the topic of FHFA requirements for tenant pads. The ultimate goal of the outreach is to create a program for the purchase of loans secured by FHFA-compliant mobile home communities. The Impact of Replacement T he major headline of Sen. Mike Crapo's three-page outline for housing finance reform envisions the future Fannie and Freddie as private corporations, competing with other secondary market participants, and able to fail. The former GSEs would still guarantee timely payments to in- vestors of MBS in exchange for a fee. Moreover, as part of privatiza- tion, the DTS requirements would no longer be imposed. In their place will be a Market Asset Fund (MAF). The purpose of the MAF is to "provide grants, loans, and credit enhancement to address the homeownership and rental housing needs in under- served and low-income com- munities." Funding for the MAF will be derived from an annual assessment of 10 basis points (one- tenth of 1%) of the total annual loan volume guaranteed by each guarantor. The Crapo outline offers no further details regarding the MAF. The MAF is not entirely a new concept. It was one component of the Corker-Warner mortgage reform proposal circulated in 2018. According to that 2018 proposal, the MAF would be used to assist underserved borrowers to pur- chase homes with down payment assistance, interest rate reductions, providing mortgage insurance, the funding of home repairs, hous- ing counsel, and loss mitigation activities. Corker-Warner gave the administration of the MAF to FHFA, requiring the agency to develop yearly plans for the pay- ments from the Fund. One of the best sources of advocacy for the concept of replacing the DTS requirements with the MAF is "Access and Affordability in the New Housing Finance System," written by Jim Parrott, Michael Stegman, Phillip Swagel, and Mark Zandi in 2018. In discussing the MAF as it appeared in the Corker- Warner draft bill, the authors asserted that the idea possessed greater benefits to the public than DTS provides under the current system. No longer will assistance to low-to-moderate income (LMI) loan groups be achieved by cross- subsidization—that is charging higher risk loans the same level of pricing as lower risk loans outside of the LMI market. The private guarantors of the future would be able to set pricing of guarantee fees to truly match the risk of the default new borrowers pose, presumably reducing the cost of mortgage loans to many low-risk borrowers. In place of the cross-subsidy, guarantors will fund a program that is dedicated to assisting LMI borrowers—the MAF. The MAF would be purely dedicated to LMI borrowers, even those with solid credit history. The current system, on the other hand, may benefit high- risk, high-income borrowers to the detriment of low-risk LMI borrowers. Also, the MAF may better address impediments to homeownership by addressing not only mortgage payments, but also providing down payment assistance, post-purchase expenses, and counseling as to housing options. Finally, the authors de- termined that under the proposed system, the average LMI borrow- ers would benefit more, "with a savings of 29 basis points in their interest rates relative to the system we have today." It is worth noting that one of the authors, Mark Zandi, Chief Economist of Moody's Analytics, appeared before Housing Banking and Urban Affairs committee in late March, shortly after the Crapo outline was released. He commented positively on the Crapo's proposal generally but cited his group's 2018 finding that the MAF would generate more than $5 billion a year to lower housing costs for LMI borrowers, which is more than the current system provides. A Critical View T he idea of a housing system without the DTS mandates imposed on future guarantors has its critics. Andrew Jakabovics, The MAF may better address impediments to homeownership by addressing not only mortgage payments, but also providing down payment assistance, post-purchase expenses, and counseling as to housing options.

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