Mortgage

The inexpensive housing goal proposed by the FHFA is simply too low

On August 25, the Federal Housing Finance Agency released a regulatory proposal setting affordable housing targets for Fannie Mae and Freddie Mac for the period 2022-24. These goals were originally set by law in 1992 and revised in 2008. They request the FHFA director to set annual targets for the GSE's minimum percentages of single-family mortgage purchases for home construction mortgages for (1) low-income families, (2) very low-income families, (3) families in low-income areas, and (4 ) Refinance mortgages for (4) low income families.

This column focuses on (3), the target that includes home mortgages for families (regardless of income) in low-income areas, defined as census areas for which the area's median income is less than or equal to 80 percent of the area's median income and for families in census counties where minority families make up at least 30 percent of the total population of the county and the median county income is less than 100 percent of the AMI. In general, the proposed regime would increase the targets for home purchase mortgages for low and very low income families and for refinancing mortgages for low income families. But the targets would be reduced from recent benefit levels for non-minority, low-income census areas, reducing the incentive for GSEs to buy mortgages for families in those areas.

The FHFA proposes splitting the existing goal of buying a home in low-income areas into two sub-goals: a minority census sub-goal for families in areas with a minority population of at least 30 percent and a median family income of no more than 100 percent of the AMI, and a low- Sub-goal of income census areas for families, regardless of income, in low-income areas that are not minority census areas, and families with an income greater than 100 percent of the AMI in low-income census areas that are also minority census areas.

The FHFA names the legal factors that must be taken into account when setting residential goals and sub-goals, including the previous performance towards the residential goal and the proportion of conventional, market-compliant, market-serving families who are subject to the goal ("market performance"). However, it appears that the FHFA did not adequately account for these two factors for the proposed sub-target of low-income census areas, and so the FHFA is proposing a sub-target of 4 percent of total mortgages for home purchases, which is far too low.

The FHFA has calculated what corporate and market performance would have been had the minority census areas sub-target and low-income census areas sub-target for 2018-20 been in effect. The sum of the performance under these two objectives was the same as the performance under the sub-target for low-income areas in force in those years.

Fannie Mae's performance on the “low-income tract” sub-goal would have been 9.1 percent in 2018, 8.8 percent in 2019 and 8.3 percent in 2020. Freddie Mac's performance on this sub-goal would have been 8.3 percent in 2018, 8.5 percent in 2019 and 8.0 percent in 2020. All previous performance figures were at least twice as high as the proposed target of 4 percent, despite the legal requirement that past performances should be taken into account when setting goals.

The FHFA has also calculated how high the market performance would have been for this sub-goal if it had been in force for the past few years. That would be 9.1 percent in 2018, 8.9 percent in 2019, and 8.5 percent in 2020, again more than double the proposed 4 percent target, and it's not forecast to be one in the future sudden, steep decline in market performance will come years. The proposed sub-goal is therefore not in line with the statutory provision that market performance must be taken into account when setting the goal.

The FHFA's reason for setting this sub-target at such a low level appears to be "concerns about incentivising loans to higher-income borrowers in lower-income areas," but no evidence is presented that a higher one Sub-goal would do this. Without this sub-target, past performance has and likely will continue to exceed 4 percent, so the proposed sub-target is unlikely to have any impact on the mortgage market.

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