MBA Comments on GSE Proposed ‘Duty to Serve' Plans

Mike Sorohan msorohan@mba.org

July 11, 2017

The Mortgage Bankers Association yesterday offered comments to the Federal Housing Finance Agency in response to proposed Underserved Market Plans of Fannie Mae and Freddie Mac.

The proposed plans provide an overview of steps to be taken by Fannie Mae and Freddie Mac to meet their obligations under the Duty to Serve Final Rule, published in 2016. Under the rule, the Enterprises (Fannie Mae and Freddie Mac)

"MBA strongly supports efforts to improve liquidity in secondary markets for affordable housing preservation, manufactured housing and rural housing, and believes that such improvements hold the potential to benefit very low-, low- and moderate-income borrowers," wrote MBA President and CEO David Stevens, CMB. "As the Enterprises progress through the three-year timeline covered by the Plans, MBA urges that they engage with the full spectrum of secondary market participants--including single-family and multifamily lenders of all sizes and business models, servicers and investors--to ensure that the implementation of the Plans remains aligned with market demand. We believe that such outreach and collaboration will allow the Enterprises to better identify which products and activities will be most effective in carrying out the objectives of the Duty to Serve program."

Additionally, Stevens noted MBA historically has held that the proper role of the Enterprises should be confined to the secondary mortgage market, consistent with their respective charters and the concept known as the "bright line."

"The separation of the primary and secondary markets has been an important element in developing a secondary market that effectively provides liquidity and promotes the availability of nationwide mortgage credit," Stevens said.

MBA noted the Enterprises have proposed a number of pilot programs and new product offerings in their Plans.

"MBA supports this approach, as it should encourage competition and innovation in the primary market," Stevens wrote. "In order to maximize the benefits of this approach, however, the Enterprises will need to carefully balance the trade-off between 1) flexibility in response to performance and market conditions, and 2) the desire for certainty and longer-term planning on the part of lenders and other industry stakeholders."

With respect to flexibility, MBA said some pilots and new offerings will be more successful than others, even if it is not clear at the outset which ones will fall into which category. "The Enterprises should stand ready to shift resources towards those pilots and offerings that show more promise as they progress in the implementation of their Plans," MBA said.

MBA said Fannie Mae and Freddie Mac should be mindful that developing successful secondary markets for new offerings requires resources on the part of lenders and other industry stakeholders; accordingly, MBA encouraged the Enterprises to maximize existing infrastructures and resources with their current lender partners. "The Enterprises should first engage lender partners in developing products or programs," MBA said. "Further, before a lender firm can reasonably be expected to build the infrastructure necessary to sustain a new offering, it needs assurance that the Enterprises are committed to the offering."

MBA also recommended the following:

--The Enterprises should engage with lenders and investors "early and often," including in both initial design of pilots and new offerings as well as continual feedback regarding the execution of the steps envisioned in the Plans.

--The Enterprises to make the pilots broadly available to lenders and market participants that meet transparent performance and risk standards established by the Enterprises.

--The Enterprises should pay close attention to potential incentives and returns for market participants, as these will determine lender involvement in the pilots and, ultimately, whether the pilots succeed. "For example, the development and implementation of the Enterprises' energy efficiency programs--and any related pilots--must consider the potential impacts on their lender partners as well as on other capital sources in the same markets," MBA said.

--The role of the Enterprises as capital sources should be carefully calculated as well, as their presence might impact the role of other capital sources. "There could be longer-term, unintended consequences on, for example, smaller regional markets and the lenders that operate in those markets," MBA said. "Currently, with the Enterprises in conservatorship, the objective should be to ensure that these markets continue to be served, but not by simply replacing one capital source with another."

Also, MBA questions whether replacing one capital source with another government-guaranteed capital source would suitably fulfill the Duty to Serve mission.

--Products should be designed to serve borrowers of varying credit profiles, provided that these borrowers meet the minimal thresholds for safety and soundness considerations.

"While much of the focus of the Plans is rightly directed towards product development and loan purchases, MBA is encouraged that the Enterprises have also committed to outreach and education in a number of areas," MBA said. "Improved financial literacy and homeownership education hold the promise of better enabling underserved borrowers to understand their housing options and make decisions that best suit their needs. As more borrowers become aware of new products and offerings, participation should increase and secondary market liquidity should be strengthened. MBA does not believe that outreach and education should be substitutes for product development and loan purchases, but instead that these efforts can effectively complement each other."

MBA also urged the Enterprises to gather data to better assess performance, risks and other metrics relevant to them and other market participants.

Specific to underserved markets, MBA recommended the following:

--Chattel Lending. MBA said the "unique risks" posed by the chattel market, as well as the lack of readily available historical data on chattel loans, justifies the Enterprises' approach of first conducting research and market outreach prior to implementing loan purchases. "Successful development of these pilots will require particularly strong communication and collaboration with lenders and investors," MBA said.

--Manufactured Housing Communities. MBA said FHFA should encourage the Enterprises to develop prudent underwriting standards that would permit financing of qualifying three-star and below properties and continue to explore and expand their investments beyond higher-end manufactured housing communities. "Attracting capital and liquidity to these submarkets and products will require performance information on the asset classes," MBA said. "Ultimately these steps, which require careful consideration, will expand the markets for these assets, improve liquidity and lower costs to borrowers."

--Equity Investments in LIHTC. MBA supports the Enterprises' reentry into Low-Income Housing Tax Credit equity investments so long as they will target demonstrably underserved markets (e.g. rural markets) and account for a limited market share in these regions.

--Financing of Small Multifamily Rental Properties. Should credit be provided for Duty to Serve activity in the small multifamily market, MBA recommends that qualified loans be on properties that serve households at 80 percent of Area Median Income or less. The Enterprises could also engage with community and regional banks to explore the potential to purchase pools of loans from them in order to provide liquidity in these markets.

--HUD Rental Assistance Demonstration Program. MBA said the Enterprises' participation in the HUD Rental Assistance Demonstration program could help preserve affordable housing stock, but may also consequently offset private Federal Housing Administration lenders' financing of RAD projects.

--Workforce Equity. MBA encouraged FHFA to develop standard industry definitions for affordable and workforce housing based on specific AMI levels in order to standardize how these products are counted toward the Enterprises' housing goals. "MBA believes that the proposed workforce rental housing equity product could encourage private equity investments in the 60-100 percent of AMI portion of the market," MBA said. "Nonetheless, MBA urges FHFA to clarify the scope of this proposed product with regard to appropriate levels of Duty to Serve credit as well as its targeted regions and populations. Further, MBA notes that the majority of renters have incomes at up to 100 percent of AMI, so FHFA guidance is crucial."

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