MBA Submits Residential, Multifamily Comments on GSE ‘Duty to Serve’ Proposed Rule

The Mortgage Bankers Association submitted a comment letter yesterday to the Federal Housing Finance Agency, conveying its views from both a residential real estate finance and multifamily real estate finance perspective on a proposed Federal Housing Finance Agency proposed rule to implement Duty to Serve requirements for Fannie Mae and Freddie Mac.

“Duty to Serve is an important element of the GSEs’ role in the market,” wrote MBA President and CEO David Stevens, CMB. “MBA supports the GSEs’ Duty to Serve mandate and believes the Proposal represents notable progress toward serving underserved markets.”

Duty to Serve was enacted as part of the Housing and Economic Recovery Act of 2008 as part of an effort to explicitly define the government-sponsored enterprises’ expected role in facilitating a broad, liquid, and stable national housing market accessible to all credit-worthy borrowers. Serving underserved markets, albeit without specific numerical goals, are elements of the GSEs’ affordable housing goals.

“The absence of numerical goals, while affording qualitative flexibility in determining how best to fulfill the Duty to Serve, have made it more difficult for FHFA to implement and measure progress,” MBA wrote. “Given these considerations, MBA applauds FHFA for remaining faithful to the statute and offering a reasonable framework for accountability through its Proposal.”

The statute requires the GSEs to “provide leadership to the market in developing loan products and flexible underwriting guidelines” that serve target markets. The Proposal would implement this mandate by requiring the GSEs to establish three-year Underserved Market Plans to detail how they intend to serve very low-, low- and moderate income borrowers in these target markets. Target markets are Manufactured Housing, Affordable Housing Preservation and Rural Areas. Under the Proposal, the GSEs would be able to serve these markets through approved activities identified in their Underserved Market Plans.

“MBA believes the GSEs’ role as secondary market investors can be amplified under this Proposal through the explicit encouragement of the GSEs ability to leverage their secondary market role in the assessment of new product opportunities,” the letter said. “This can be achieved through either the expansion or increase in the relative weight and scope of new product development and the facilitation of shared market knowledge by the GSEs with the broader industry.”

To ensure initial implementation is successful, MBA recommended FHFA direct the GSEs to incorporate products and programs previously or currently under development, maintain flexibility in grading the GSEs progress, and ensure plans are drafted in a way that can be easily and accurately communicated through the GSEs’ Guide framework.

“MBA believes successful implementation will provide an opportunity to demonstrate how the GSEs can serve underserved markets through viable and measurable activities,” Stevens said.

In its residential-specific comments, MBA said it supports FHFA’s Proposal as a positive step toward improving the availability of mortgage credit in underserved markets.

“The Proposal strikes a balance consistent with the statutory mandate; while strongly encouraging the GSEs to undertake activities identified by Congress and FHFA as fulfilling the spirit of the Duty to Serve mandate, it recognizes that some programs may not be workable at times,” MBA wrote. “Most encouragingly, the Proposal allows the GSEs the freedom to develop Additional Activities, leveraging the enterprises’ substantial role in the market to aid or spur the innovation of new products and services.”

The residential section urged FHFA to give consideration to the following issues of implementation:

–MBA strongly recommends that FHFA direct the GSEs to incorporate any programs or products that have been or are currently under development that would further the GSEs’ Duty to Serve mission in their first Underserved Market Plan.
–FHFA should be flexible in grading the GSEs’ progress against an Underserved Market Plan in order to account for subtleties that may not be captured in raw purchase data.
–FHFA should ensure that the GSEs’ Underserved Market Plans, especially those related to product or program development, be drafted in a way that can be easily and accurately communicated through the GSEs’ Guide framework.

In its multifamily comments, MBA called for public policy that supports and maintains a broad range of capital sources in the multifamily housing finance market, including private capital and government-sponsored sources. “The diversification of debt capital sources in multifamily finance is robust,” the letter said. “We encourage FHFA to continue to support GSE multifamily activities that strengthen liquidity, stability and affordability in the multifamily rental markets, while refraining from intervention that would be harmful to the competitive landscape and compromise the safe and sound operations of the GSEs’ multifamily businesses.”

The letter noted the multifamily businesses of Fannie Mae and Freddie Mac already incorporate significant private capital through risk-sharing and risk transfer mechanisms. “Any Duty to Serve mandates should take into account the risk taken by the government and private sector GSE partners,” MBA said. “MBA believes that FHFA should be sensitive to the role of the GSEs as it might impact the role of other capital sources.

Regarding Low-Income Housing Tax Credits, MBA said the GSEs should continue to focus on their traditional role in providing access to credit, noting that when the GSEs exited the multifamily market several years, ago, “substantial disruption” resulted.

“Currently, there is robust investor interest in LIHTC properties which has caused the pricing of tax credits to soar to high levels,” MBA said. “If FHFA were to consider allowing the GSEs to return to making equity LIHTC investments, MBA recommends that such activity be permitted in targeted markets only, such as rural markets that are demonstrably underserved and only for a modest portion of the market.”

MBA also noted that its data confirm that one of the largest multifamily rental segments is the small multifamily loans segment, which typically serves multifamily properties in the 5 to 50 unit size; of the 40,974 multifamily loans closed in 2014, 18,840 (46 percent) were loans for $1 million or less. “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% of AMI or less which is consistent with FHFA’s 2016 Scorecard for the GSEs,” MBA said.

On energy-efficient housing, MBA said FHFA should ask the GSEs to balance the rewards for energy efficiency and the cost of acquiring and maintaining the certification. “For example, one approach would be to develop a sliding scale model of energy efficiency so that an older, smaller multifamily property adopting intermediate energy consumption improvements through loan proceeds could also be rewarded,” MBA said.

Finally, regarding manufactured housing, MBA said it supports FHFA’s proposed 150 unit number maximum because the need for financing in this market is the older or rural communities that tend to be smaller in size.