Fannie Mae and Freddie Mac are key players in promoting housing sustainability. As part of the Duty to Serve program, the secondary mortgage market duo set forth actionable goals for three key markets across the nation and here in California.
In April 2022, the Federal Housing Finance Agency (FHFA) announced Fannie and Freddie’s plans for serving struggling housing markets in a press release.
The three key housing markets Fannie and Freddie will focus their efforts on are:
- manufactured housing;
- rural housing; and
- low-income housing.
Fannie Mae’s strategy for uplifting these markets include conducting research, testing new programs, collaborating with market participants and prioritizing very low- to moderate-income renters and homeowners, according to the Fannie Mae plan report.
Freddie Mac’s strategy focuses on pouring financial resources into the mortgage industry, stabilizing the housing market throughout the economic cycle, addressing housing inequities and assisting lenders with serving their communities, according to the Freddie Mac plan report.
Both organizations recognize their duty to serve challenging markets and strive for more sustainable housing options and financing arrangements to be made available for very low-, low- and moderate-income households.
Broadly speaking, Fannie Mae and Freddie Mac plan to serve key housing markets through:
- mortgage purchases;
- mortgage products;
- outreach; and
- investment.
The two government-sponsored enterprises (GSEs) also set out specific actions they plan to take in each of the three high-risk housing categories between 2022-2024.
Manufactured housing
As an alternative to traditional site-built homes, manufactured housing offers a pathway to equity for many lower-income Californians. But access to this type of housing is marred by:
- a limited supply of manufactured homes due to diminished production levels;
- lack of mortgage financing options;
- local zoning restrictions which inhibit the installation of new manufactured homes;
- unfamiliarity of manufactured homes among buyers, agents, appraisers and lenders; and
- declining numbers of manufactured housing communities.
To support manufactured housing over the next three years, the GSEs will:
- increase purchases of single-family mortgages secured by manufactured homes titled as real property (rather than personal property);
- enhance their support of manufactured housing communities through increased purchases of those types of mortgages, especially by government entities, nonprofit organizations and tribal communities;
- support renters in manufactured housing communities through credit-building opportunities, including the reporting of rental payments to credit agencies to help build tenants’ credit scores; and
- supporting resident owned communities through purchasing more mortgages of this type and increasing outreach efforts.
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Rural housing
California’s major metro areas receive the lion’s share of media coverage regarding housing news, but its rural areas face some of the same challenges — with fewer resources. These hurdles include:
- poverty;
- lack of access to credit and lenders;
- substandard housing;
- limited employment opportunities;
- low credit scores;
- challenging appraisals; and
- overburdened housing costs due to poorer economic conditions.
To support rural housing over the next three years, the GSEs will:
- support financing options in high-need rural regions through multifamily mortgages;
- acquire single-family purchase money mortgages in high-need rural regions;
- ease financing barriers for homebuyers who do not qualify for traditional financing;
- improve knowledge of rural market conditions through outreach, collaboration, research and experimentation; and
- invest in lenders serving underserved rural markets.
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Low-income housing
In their reports, Fannie and Freddie both acknowledge the need to preserve hard-won low-income housing in California. This need runs through reasonably priced multi-family rental housing and single-family housing.
To support housing preservation among lower income groups, the GSEs propose a flurry of defenses. Over the next three years, Fannie and Freddie plan to:
- supply low-income housing tax credits;
- purchase more Section 8 mortgages;
- purchase more rural multifamily housing units in debt to national assistance programs;
- purchase mortgages from smaller institutional lenders who finance multifamily housing;
- purchase residential mortgages in areas with mixed incomes and concentrated poverty to support economic diversity;
- research the elimination of single-family zoning in areas, such as California, which have elected to do so;
- research methods of identifying high opportunity areas where more affordable units proliferate due to local market conditions;
- purchase mortgages for properties supported by state and local programs;
- develop mortgage products which provide financing for properties committed to rehabilitation;
- develop financing options for homeowners to make needed resiliency improvements on their property against natural disasters and environmental hazards;
- finance energy- and water-efficiency improvements on single-family residences and multifamily properties; and
- purchase and support shared equity mortgages and programs which subsidize homeownership through local governments and nonprofits.
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New California law incentivizes local governments to create mid-tier housing
More sustainable housing options needed for 2022-2024
The GSEs have their work cut out for them, considering an impending recession looms during the target years.
California’s housing market looks bleak in 2022. Although real estate enjoyed a peculiar boom during the last recession of 2020, it was the shortest recession in U.S. history and coincided with massive government stimulus support. Buyers, partly driven by psychological factors such as fear of missing out (FOMO), hoisted up home sales volume and prices.
But now, with rising mortgage interest rates, real estate will not be the golden ticket that it was before.
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Inventory is near historic lows throughout California, and new housing construction isn’t booming either. Construction workers are struggling to keep pace with demand due to supply chain disruptions, skilled labor shortages and rising inflation and building material prices.
A recession is bad enough. But the GSEs may also not consider the potential drawbacks of some of their plans.
Take the plan at the top of their list for addressing low-income housing, for example: the low-income housing tax credit (LIHTC).
These government tax credits may help in post-recessionary economies. However, they are not the best investments to undertake in a recessionary market.
During the years following the financial crisis of 2008, homebuyer tax credits were used in an effort to prop up the economy and housing market — but it backfired.
Many homeowners who took advantage of the program ended up owing more on their mortgages than their homes were later worth, a term called negative equity. [See RPI e-book Real Estate Economics, Chapter 4.2]
This and other detrimental factors occurred since the tax credits flooding the housing market with artificial demand. Qualified homebuyers concentrated their purchasing power during the tax incentive years and left the following year empty of demand that would have otherwise occurred had the tax credits not incentivized earlier buying.
In fact, research suggests without homebuyer tax credits during the last financial crisis, gross domestic product (GDP) would have been stronger and more sustainable.
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With a recession looming, focus on underserved markets is critical. But agents and brokers have yet to see how these GSE interventions will affect their own bottom line.
Real estate professionals: we want to hear from you. How will the GSEs’ new plans help (or hurt) your sales volume over the next three years?
Want to learn more about California’s real estate market in 2022-2024? Click the image below to download the RPI book cited in this article.
