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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2017

Reducing Barriers to Homeownership

Freddie Mac’s Duty to Serve proposal addresses affordable-housing challenges

Reducing Barriers to Homeownership

Although many believe the economy and the housing market have rebounded from the 2008 global financial crisis, numerous areas of the country will continue to experience housing challenges for years to come. This is particularly true for families in need of afford-able housing.

The lack of suitable affordable housing is even more pronounced in rural markets. This impacts millions of American families, and the problem is expected to continue to grow as long as wages remain relatively stagnant and home prices continue to rise.

Freddie Mac is attempting to address the nation’s housing-affordability woes through its Duty to Serve proposal, which seeks to bring liquidity, stability and affordability to three underserved markets: rural housing, manufactured housing and affordable-housing preservation. The government-sponsored enterprise (GSE) is working with mortgage originators and other dedicated 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.

Program background

Freddie Mac’s increased focus on affordable-housing issues is an extension of its overall efforts to facilitate the financing of housing for very low-, low- and moderate-income families. Freddie Mac will work to increase loan purchases in the underserved market sectors mentioned; develop new offerings; conduct market research; build technical skills for industry participants; and expand homebuyer education, community engagement and local outreach.

A cornerstone of Freddie Mac’s plan is its intention to work with mortgage originators and other dedicated industry participants who are deeply knowledgeable about these communities. The Housing and Economic Recovery Act (HERA), enacted in 2008, established for GSEs Freddie Mac and Fannie Mae a duty to increase liquidity and improve the distribution of capital available for mortgage financing in those markets.

Congress charged the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), with implementing a program to meet this obligation. The agency published its Duty to Serve final rule on Dec. 13, 2016, which directed the GSEs to establish plans to lead the development of loan products and flexible underwriting guidelines to facilitate secondary financing in the three targeted sectors. Pending FHFA feedback, Freddie Mac’s Duty to Serve plan is slated to become effective as early as Jan. 1, 2018.

Manufactured housing

Manufactured homes are a crucial source of affordable-housing stock for American families. The average price of a new manufactured home in the U.S. is $71,600, while the average price of a new, single-family, site-built home is $372,900, according to the U.S. Census Bureau. More than 17 million Americans lived in 6.9 million manufactured homes in 2010, the Corporation for Enterprise Development, which recently changed its name to Prosperity Now, says.

Manufactured homes are unique in that they may be titled as either personal property (also known as chattel) or real property. This distinction can have significant ramifications for taxation, financing, consumer protections and remedies in case of default. Approximately 80 percent of new manufactured homes are titled as personal property, according to the U.S. Census Bureau.

In public outreach that took place as Freddie Mac developed its plan, the GSE repeatedly heard concerns about the limited number of lenders that provide financing to manufactured home-buyers. Market participants encouraged the GSE to expand liquidity, implement standardization measures and enhance consumer protections. 

As a result of this feedback, Freddie Mac plans on doing the following in connection with manufactured housing titled as real property:

  • Work with lenders to increase Freddie Mac’s purchases of loans in this market;
  • Increase access to education and resources for future homebuyers;
  • Identify best practices and provide technical assistance to market participants;
  • Develop additional product features to meet the market’s needs; and
  • Increase purchases of loans secured by manufactured homes titled as real property.
    For manufactured housing titled as personal property, Freddie Mac plans to work with market participants to:
  • Promote greater understanding of the market by conducting research and publishing the results;
  • Initiate a chattel pilot offering; and
  • Develop homebuyer education to support chattel financing.

Freddie Mac formed the Manufactured Housing Initiative Taskforce last year and invited a diverse group of participants, including the Manufactured Housing Institute, to work with the GSE. Freddie Mac is increasing its understanding of this market as the GSE explores ways to expand lender participation and improve targeted offerings.

The gaps in affordable housing across the country threaten to overwhelm individuals, families and communities.

Freddie Mac also partnered with Next Step, a nonprofit housing intermediary, to roll out a consumer education pilot in Kentucky for buyers of manufactured homes titled as real property. In addition, Freddie Mac is actively seeking new lenders interested in making real property loans for energy-efficient manufactured homes in connection with Next Step.

Rural housing

Rural areas encompass over 90 percent of America. Duty to Serve encourages Freddie Mac to focus on “high needs” rural regions, which it identifies as Middle Appalachia, the Lower Mississippi Delta, the colonias (parts of Arizona, California, New Mexico and Texas along the U.S.-Mexico border) and rural tracts located in counties with persistent poverty. It also encourages housing support for high-needs rural populations, specifically Native Americans and agricultural workers.

Although they’re socially, economically and geographically diverse, these areas face many common challenges. During information-gathering sessions, Freddie Mac officials learned of the multifaceted scope of these challenges, which affect virtually all residents of these regions. Moreover, these issues extend beyond housing affordability to encompass persistent poverty, declining employment opportunities and limited access to financial services, among other factors.

In light of this information, Freddie Mac proposes undertaking the following activities in rural areas:

  • Increase financing for homebuyers;
  • Expand research to better understand the rural market and enrich the national conversation by sharing information about the housing needs of these communities;
  • Review loan offerings and underwriting parameters to address consumer needs; and
  • Increase efforts to provide comprehensive homebuyer education and technical training to industry professionals.

Energy efficiency

Freddie Mac’s efforts to preserve affordable single-family options will focus on two fronts: energy-efficient home improvements and shared-equity programs.

Heating and cooling costs are the largest utility expenses for most U.S. homes, according to the Department of Energy, accounting for more than half of the energy used in a typical home. While there are several new financing options for energy-efficient improvements on residential properties, this market remains relatively small.

Freddie Mac’s outreach efforts determined that the most significant challenge is the lack of standardization among financing products, which makes it difficult for lenders and investors to support this segment in a scalable way. It’s also difficult to assess both the risk and the impact of energy-efficient improvements on property values.

That’s why Freddie Mac plans to study the effects of energy-efficient features on single-family property values and loan performance. These two key factors should help inform the GSE’s product design and underwriting policy decisions.

Shared equity

Although shared-equity programs have achieved limited scale so far, research shows that, when properly constructed, they can be an effective way to provide income-eligible families with sustainable homeownership opportunities. This, in turn, enables them to build wealth while ensuring that home prices remain affordable to subsequent buyers. To address the limited scale, Freddie Mac proposes building both the capabilities and infrastructure necessary to facilitate growth.

As with energy-efficiency financing programs, it seems that existing shared-equity programs also lack standardization. Organizations develop highly customized programs based on their unique geographic needs, existing partnerships, available budgets and funding mechanisms. This siloed development process generates a relatively small number of loans, both individually and in aggregate.

Freddie Mac believes a more standardized program will achieve broader benefits. In addition, shared-equity homeownership programs are not widely understood, causing lenders to shy away from financing them due to their nontraditional structures.

Therefore, Freddie Mac proposes the following steps to preserve affordable housing:

  • Identify the current market infrastructure and develop financing standards;
  • Provide data and underwriting guidance that can be leveraged by other market participants;
  • Enhance consumer awareness about financing options and boost lender awareness about Freddie Mac’s product capabilities;
  • Minimize operational complexity and incorporate automation, where feasible; and
  • Leverage pilots to test new product features and underwriting options.

•  •  •

The gaps in affordable housing across the country threaten to overwhelm individuals, families and communities. Freddie Mac is looking to deploy innovative, creative solutions, but can’t do it alone. Freddie Mac looks forward to working with a wide range of market participants, including mortgage originators, small financial institutions, appraisers, nonprofits, housing-finance agencies, title companies and nonprofit organizations to be sure the GSE approaches these markets in ways that are creative, practical and efficient.

Ultimately, Freddie Mac believes it can bring liquidity, stability and affordability to these underserved, but deserving, markets. The goal is clear: Freddie Mac wants to help more American families with their housing needs by developing effective solutions to some of society’s most persistent housing problems.


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