The Housing Scene

‘Duty to Serve’ Helps Borrowers

Federal mortgage agencies Fannie Mae and Freddie Mac have long been tasked by Congress with serving areas that don’t get much attention from the private sector. And that could help you get a home loan.

Suppose you live in an underserved rural area -- Appalachia, say, or the Mississippi Delta -- or you are in the market for manufactured housing. Getting a home loan in both of those scenarios should be a little easier starting Jan. 1.

That’s the date the two giant funders of mortgage lenders have to start implementing their congressionally mandated Duty to Serve Underserved Markets plans, an idea that goes back to the start of the recovery from the mortgage market implosion of 2008.

Fannie’s and Freddie’s regulatory group, the Federal Housing Finance Agency (FHFA), started to implement “duty to serve” ideas in response to Congress’ 2008 Housing and Economic Recovery Act. But the agencies weren’t required to finalize their plans until this year, or to implement them until next year.

The new, formalized plans focus on three main areas: manufactured housing, rural housing and affordable housing preservation. Why do these companies have a “duty” to serve these areas?

“Numerous areas of the country will continue to experience housing challenges for years to come,” according to Danny Gardner, Freddie Mac’s vice president of single-family affordable housing.

Actually, Freddie and Fannie don’t work with consumers directly. You can’t apply to them for a mortgage. But they do fund the lenders that will make you a mortgage, and their reach is vast.

After a lender closes on a home loan with you, it sells it to Fannie and Freddie. Instead of waiting for you to pay it back a month at a time for 30 years, your lender gets its cash back the same day your loan is sold in what’s called a secondary market transaction. They can then use that money to make another mortgage to someone else.

In short, Freddie and Fannie are the straws that stir the mortgage cocktail. If they say they are willing to fund something -- or if Congress directs them to -- lenders will start to line up, hat in hand. And consumers are the ones who benefit. It’s said that over the years, Fannie/Freddie-funded mortgages have saved consumers an average of a quarter of one percent on their interest rates.

As part of Freddie Mac’s plan, Gardner claims his company “will seek to work to increase loan purchases in the underserved markets mentioned, develop new offerings, conduct market research, build technical skills for industry participants, and expand homebuyer education, community engagement and local outreach.”

If your loan falls in one or more of the duty to serve categories, lenders are going to be putting more spin on the ball very soon. And, like students bringing apples to teachers to gin up favorable impressions, the agencies can choose to go above and beyond.

“Certain impactful activities, including activities that promote residential economic diversity in an underserved market, are eligible for Duty to Serve extra credit,” says the FHFA.

Take manufactured housing. This is a murky area of the lending universe, because sometimes these loans are mortgages, and sometimes they are not. If the home is anchored to a permanent foundation and counted as “real” property (as in real estate), they may get mortgages that can benefit from favorable interest-rate pricing through Fannie and Freddie.

If the home can be moved, as with trailers, they are considered personal property and, in the past, have gotten “chattel” loans, which are often far more expensive than mortgages. Soon, those chattel loans will be eligible for sale to Fannie and Freddie, as will loans for manufactured housing communities. That could make those types of loans less expensive.

In the rural housing market, the duty to serve applies to middle Appalachia, the Lower Mississippi Delta, and a couple of other poorly served regions or groups or people, including agricultural workers, American Indian reservations and the “colonias” that dot the U.S.-Mexican border.

The third area, affordable housing preservation, applies to sustaining low- and moderate-income housing supplied by such federal programs as HUD Section 8 and the Low-Income Housing Tax Credit.

Though there are differences between Fannie Mae and Freddie Mac, Freddie’s plan gives you a good snapshot of the kinds of things both of them plan to do through the year 2020.

Gardner says Freddie will be “working with mortgage originators and other professionals in these communities to help more American families with their housing needs by developing and expanding solutions to some of society’s most persistent housing problems.”

Manufactured housing, for one thing. There is a lot of it. Gardner points out that in 2010, 17 million people lived in nearly 7 million manufactured units in America.

For “real” property, Freddie plans to “work with lenders to increase Freddie’s Mac’s purchases of loans in this important market.” And for “personal” property, Freddie plans to “initiate a chattel pilot offering” and “develop homebuyer education to support chattel financing.”

That’s important, because 80 percent of manufactured housing loans are chattel, so mortgages have not been a big part of that market.

Rural areas are a significant part of the country’s land base, Gardner says. And the problems there are many, not only with affordability but also with “persistent poverty, declining employment opportunities and limited access to financial services.” Freddie will seek to increase financing and homeowner education in these areas.

As for affordable housing sustainability, “Freddie Mac’s efforts to preserve affordable single-family options will focus on two fronts: energy-efficient home improvements and shared-equity programs.” Freddie plans to study both to bring some standardization to highly fragmented markets.

Ultimately, Freddie’s efforts will be to “bring liquidity, stability and affordability to these underserved but deserving markets.” So early next year, start asking your local realty agent and lender if you can get in on the action.

-- Freelance writer Mark Fogarty contributed to this report.

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