The First GSE Equitable Housing Finance Plans: Four Major Issues to Watch
On June 8, Freddie Mac and Fannie Mae, the two government-sponsored enterprises (GSEs), issued their first ever Equitable Housing Finance (EHF) plans. (Read the Freddie Mac plan and the Fannie Mae plan.) Freddie Mac said the result would be to “increase sustainable homeownership and rental opportunities for traditionally underserved Black and Latino communities across the nation.” Fannie Mae said they would “knock down barriers standing in the way of greater equity in housing… to help underserved consumers attain and, importantly, sustain homeownership and quality housing.” The plans were rolled out with the goal of establishing a new, major social program for the GSEs, comparable to the long-running affordable housing goals program (from 1992) or the more recent duty-to-serve (DTS) legislation (from 2008).
The headline objective of the plans—to reduce racial homeownership gaps—is laudable. However, the question is whether and how much the programs will actually be materially effective in reducing the gaps, which will only play out over a considerable time. With that in mind, there are four major issues that industry and other observers should watch in the coming years to see how the plans strategically evolve, including whether or not the programs survive at all.
#1: The Political Durability of the EHF Plans
The earlier affordable housing goals and DTS social programs of the GSEs are founded in congressional legislation, meaning they are legal requirements placed upon the two companies. The EHF plan requirement, however, is not; it stems wholly from the Federal Housing Finance Agency (FHFA), the regulator and conservator of the GSEs, issuing a conservatorship directive to the companies to produce and implement the plans. As a reminder, the FHFA director, since June 2021, is no longer independent of the administration but can be fired by the president at any time. And that could happen as soon as January 2025, should a Republican become president.
The first time that a Republican-appointed FHFA director takes charge, the EHF program is very much at risk. The program could be cancelled, with some plausible justification, or it could be shrunk back to have very limited scope. Or perhaps, at that point, it could have enough bipartisan political support that a core program could continue to operate in a manner acceptable to both parties. We will, unfortunately, only find this out as the party in the White House (and thus the FHFA) changes, perhaps even through several political cycles, which makes this a very long-range issue to watch.
#2: The Political Durability and Impact of SPCPs
Until recently, few had heard of “special purpose credit programs” (SPCPs), a rarely-employed mechanism from the 1974 Equal Credit Opportunity Act. And yet it’s a core of the new EHF plans. Freddie Mac says it is committed “to fully explore the use of the Special Purpose Credit Program framework to expand access to mortgage funding for traditionally underserved minority communities.” Fannie Mae says it “anticipates that the first year of the Plan will be devoted to defining and launching three to five SPCP pilots.” This exploring and piloting language reflects that it is unclear how SPCPs, with little track record, will work in practice or how impactful they might prove to be.
Regardless, the focus on SPCPs reflects a heavy push by the Biden administration to use them to address racial inequities. In practical terms, this push is designed to utilize SPCPs to favor households of color as a remedy to past discrimination. This was previously considered questionable as it seemed to violate the Fair Housing Act’s prohibition on discrimination of any type. However, on December 6, 2021, the general counsel of the Department of Housing and Urban Development (HUD) issued an opinion that, as long as certain criteria were met, an SPCP would not violate the Act’s anti-discrimination provisions. Thus, it seems that SPCPs require a very careful calibration by the GSEs: to design a program that is effective in helping households of color (mainly to increase their homeownership rate) but to do so in a manner that does not violate anti-discrimination laws. Only time will tell if this can be done successfully in a broad-based program that can impact a significant number of families.
Obviously, given the controversial nature of this type of program, it is a real possibility that the HUD general counsel ruling or specific SPCP programs will generate lawsuits challenging them on the grounds they do, in fact, violate anti-discrimination laws. (A lawsuit of a similar nature is underway now, with respect to a program of debt forgiveness for Black farmers by the Department of Agriculture.)
Similar to the political durability of the plans described above, as soon as a Republican president enters office and appoints new leadership at HUD, the recent SPCP ruling could also easily be revised to reduce or effectively eliminate its impact. So, the focus on SPCPs may or may not get very far depending on the outcome of the next presidential election.
#3: Will Focusing on Selected Races Generate Pushback?
The Fannie Mae EHF plan immediately stands out for one unusual feature: it clearly states it will have “a focus on Black homeowners and renters,” openly downplaying all other families of color. This could be controversial, as Hispanic, Asian, and Native American advocates will likely feel it unfair to be left out or treated on a second-class basis. In fact, on June 13, a Wall Street Journal editorial broadly criticizing the program specifically attacked this aspect of it. The Freddie Mac plan is more expansive, referring to both Black and Latino households, but similarly treats Asian and Native American households as back-burner groups.
According to the latest data, the homeownership rate for Black households is 45.3 percent. For Hispanic households it’s a bit better at 49.1 percent, and for Asian households is 59.4 percent. For Native Americans, the data are not so readily available but at last measure the rate was around 56 percent. By comparison, the non-Hispanic white homeownership rate is currently 74 percent. Thus, all households of color can believe that a targeted effort to increase their homeownership rate is fully justifiable.
Therefore, advocates for the excluded racial groups now face a dilemma: to let the two EHF plans stand unchallenged, or fight to expand them to include all non-white households as equal priorities. The most important such case will be whether Hispanic advocacy groups challenge the Fannie Mae program, as they represent the largest ethnic group in America, accounting for about 19 percent of the population. Objections by such advocacy groups or by politicians on their behalf can be made noisily (e.g. holding press conferences, threatening lawsuits) or quietly (e.g. visiting the FHFA to complain that excluding or treating them on a second-class basis is unfair and, in its own way, discriminatory).
The timeframe for this issue to play out is nearly immediate and bears being closely watched.
#4: Will the Focus on Reducing Closing Costs Survive?
For a first-time homebuyer, the closing costs on a mortgage can be large, oftentimes even greater than the downpayment required (which can be as low as 3 percent for those who qualify for certain GSE programs designed to increase homeownership). However, as best as I can determine, the housing finance policy community has not focused on closing fees as a significant equitable housing barrier. That may change, as both EFH plans, despite their other differences, indicate that lowering the barrier of high closing costs to help increase the homeownership rate among minorities is a priority.
The issue is, however, well-known within housing finance circles to be sensitive. The largest sources of closing costs for GSE-funded loans come from title insurers and mortgage insurers, with both industries reputed to earn unusually high profit margins, and believed to have a high degree of political protection due to outsized lobbying and other political influencing activities. In fact, the two industries are broadly considered quite effective at influencing Congress in particular, with previous efforts to lower costs for homeowners being largely unsuccessful.
So, the fact that both plans specifically call out the cost of title insurance (and the Freddie Mac plan additionally calls out mortgage insurance) acts as a warning shot to those industries that their high margins may be targeted for reduction, at least with respect to EFH-related lending activities. It remains to be seen whether the title and mortgage insurance industries accept lower margins on such EHF-related loans or, fearing this is the beginning of a broader attack on their high profit margins, move aggressively to protect their interests.
After more than four decades in banking and finance, including my seven years as CEO of Freddie Mac, I have found that it took a long time—often several decades—for social programs about mortgage credit to evolve and mature to become what exists today. Because the EFH plans are not grounded in specific legislation, while the other programs are, they could suffer even more volatility as Democratic and Republican administrations cycle through the White House. Above are four major issues where the outcomes will drive much of what the plans will strategically look like in the future. I can only wish the FHFA and the two GSEs the best as they embark upon a long-term journey to evolve their just-announced EHF plans, chock full of topics to research and pilots to run, to become stable and mature programs with bipartisan support that are hopefully successful at materially reducing racial homeownership gaps.
After three years, Don Layton’s Senior Industry Fellowship with our Center is coming to a close. On July 1, he will begin a fellowship at the NYU Furman Center. To continue reading his articles and papers, please be sure to sign up for their mailing list.