Fannie Mae and Freddie Mac need to have their affordable housing missions redefined, including being required to set aside a percentage of their annual net profits as a source of capital for sponsors of affordable housing.
That suggestion was just one of 12 reached by a bipartisan group that came together to outline proposals for a national housing policy. The group consisted of Democrats Henry Cisneros, former secretary of the U.S. Department of Housing and Urban Development and Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University as well as Republicans Jack Kemp, former HUD secretary, and Kent Colton, former CEO and EVP of the National Association of Home Builders.
Fannie and Freddie, two housing government-sponsored entities, currently must have a certain percentage of their mortgage purchases be for financing housing for low- and moderate-income borrowers, and borrowers in underserved areas.
“While we recognize that percent-of-business goals have helped to assure the distribution of benefits to low- and moderate-income households and the communities in which they live, it has also become clear this approach has weaknesses,” the group wrote. “First, as Fannie Mae and Freddie Mac have grown, their percent-of-business goals – which include loans for purchasing as well as refinancing homes have become less aligned with the targeted housing needs of the nation. Second, to the extent that goals are inconsistent with the levels of affordable housing lending in the broader marketplace, they may create incentives for the two corporations to invest in ways that distort the market.”
The percent-of-business goals, for example, may result in Fannie and Freddie over-investing in certain market segments, reducing access to their lower-cost credit for families who are not targeted by the goals.
Additionally, single-family refinancings should be removed from Fannie and Freddie’s calculations for affordable housing goals, the group said. The authors contend that would emphasize purchase-money mortgages and increase home ownership for lower-income and minority families.
The authors also took aim at predatory lending, recommending that federal legislation be passed that differentiates between legitimate subprime lending and predatory lending. The legislation needs to make clear that “predatory practices involve lending with no demonstrable benefit to the borrower, no consideration of the borrower’s ability to repay and steering of ‘prime’ borrowers to subprime products.”
Federal legislation also should eliminate certain lending practices such as asset-based lending, repeated refinancing of loans within a short period of time with no benefit to the borrower and the financing of single-premium credit insurance that benefits the lender but not the borrower.
As of January, 25 states, 11 localities and the District of Columbia had enacted anti-predatory lending legislation, and other states are considering similar laws, according to the study. Such measures create safe havens for some borrowers, but they don’t eliminate abusive lending and threaten to push those practices into unregulated areas.
Federal legislation would help with that, as well as provide consistency for lenders and assuring a steady flow of capital to underserved areas. Local regulations often inhibit access to capital and unintentionally limit access of subprime borrowers to legitimate subprime loans.
A recently released study by the Mortgage Bankers Association found that North Carolina’s 1999 anti-predatory lending law has caused lending to decline among minority and low-income borrowers.
The group also suggested Congress establish a flexible home-ownership tax credit. The current tax considerations that encourage households to choose home ownership over renting, such as the mortgage interest deduction, primarily benefit households whose itemized deductions exceed the standard deductions. That typically doesn’t include lower-income borrowers.
Government also must vigorously enforce the nation’s fair housing and fair lending laws. That should include taking steps to assure that credit information accurately reflects borrower risk. Regular payments for items such as rent and utilities are not traditionally reported to credit bureaus and not included in consumers’ credit history. That could give an inaccurate view of a consumer’s risk when applying for loans, such as mortgages.
“The consequences of such incomplete information are greatest for minority and low-income households,” the report states.
The group said one way to ensure payment histories are complete would be to require electric, gas and water utilities, cable and telephone companies to report customers’ payment histories to credit bureaus.
An estimated 50 million American consumers don’t have enough of a credit history to warrant a credit score. Some companies have begun responding to that need, including Pay Rent, Build Credit. The company launched in December and generates a bill payment score based on a payment history of rent, utilities and other recurring bills supplied by the consumer and verified by a third party.
Fair Isaac Corp., whose FICO score is the leading measure of credit worthiness, launched its FICO Expansion Score at the end of July. The score can include payment performance data on financial activities such as deposit accounts, pay-day loans and product-purchase payment plans.
Some of the group’s other recommendations for a national housing policy included:
- Strengthening the current administration’s policy for ending chronic homelessness by continuing to fund new units of permanent supportive housing while assuring the renewal funding for the rental and operation of those units. States and localities should be held responsible for using resources for demonstrable results.
- Encouraging communities to eliminate regulatory barriers by linking funding incentives with federal transportation programs. Local and state efforts should be encouraged to eliminate barriers and promote coalitions of public, private and nonprofit organizations to break down those barriers.
- Expanding existing federal programs to encourage employer-assisted housing by enacting tax incentives to support employer-assisted housing programs. The government-sponsored entities, Fannie Mae and Freddie Mac, should be encouraged to continue tailoring mortgage products to employer assisted housing.
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