Fannie Mae, Freddie Mac launch plans to close racial homeownership gap

Fannie Mae and Freddie Mac’s first equitable housing plans will rely on mortgage company uptake of experimental underwriting strategies around credit, appraisals and more to address the wide homeownership gap between white and minority borrowers.

In the plans released Wednesday, the two government-related agencies said they’d be taking a test-and-learn approach in their efforts to bridge a divide that’s starkest between Black and white households. For years, the homeownership rate for Black households has run around 30 percentage points lower than their white counterparts.

The format of the three-year plans for equitable housing goals is similar to the GSEs’ Duty to Serve programs. The equitable housing plan efforts will likely start out small and may be adapted as their regulator reviews them with financial safety and soundness considerations in mind. The FHFA has not yet done a full review of the plans floated Wednesday. Given past criticism around a lack of transparency around some GSE pilots, the FHFA also announced that the GSEs will provide public lists of its test-and-learn activities.

Freddie Mac has proposed minimizing loan-level price adjustments in areas with predominantly minority populations through a special purpose credit program, and experimenting with automatic payment deferrals. Fannie plans to conduct portfolio monitoring reviews to identify and work with servicers that are outliers in forbearance and loss mitigation activity. Fannie Mae also plans to test out appraisal reimbursement through a special purpose credit program. Both GSEs have plans to address appraisal inequities, including an examination of the uniform appraisal dataset they use in valuations to ensure it is focused on “data-centric” rather than “subjective” measures.

Special purpose credit programs in the plans are the most directly positioned to support the GSEs’ new equitable housing goals through suggested application to areas with predominantly minority populations. (Mortgage lenders have not historically been heavily involved in special purpose credit programs but the Biden administration has been working to encourage industry use of them.)

Other initiatives in the equitable housing plans are positioned to address affordability challenges Black and Latino borrowers commonly face due to systemic inequities, such as a lack of traditional credit history and a need for rent and other cash-flow based underwriting. This could reduce reliance on traditional underwriting, which recently proved subject to risk when a coding error at one of the credit bureaus affected loans processed for some borrowers.

The experimental nature of the equitable housing plans seems to acknowledge the need for  innovations given the ineffectiveness of what’s been done to date to chip away at the stubbornly wide homeownership gap.

The report arrives a day after the government-sponsored enterprises’ regulator, the Federal Housing Finance Agency, noted in an annual report on mission-related activity that “the gap in home loan application accept-rates remains persistent for Black and Latino borrowers.”

Just 6.3% of the loans the GSEs purchased in the fourth quarter of last year went to Black borrowers, and 14.2% went to Latino households, who have been subject to a slightly smaller but generally similar homeownership gap relative to their white counterparts, the FHFA noted.

The effectiveness of the equitable housing plans depends largely on mortgage company participation.

“The enterprises cannot achieve our shared goal of creating an equitable housing finance system without the willingness, cooperation and commitment of the entire mortgage industry,” the agency said in a document summarizing the plans.

FHFA extended assurances that it would not experiment with underwriting to the point where the financed housing involved would be extended beyond borrowers ability to meet their obligations long-term.

“The plans recognize that unsustainable credit is not equitable credit. The activities are focused on removing unnecessary barriers and using technology to identify ways to responsibly serve more borrowers, without weakening credit standards,” the agency said.