Tag Archives: Adam Levitin

The Duty to Serve Underserved Markets

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Riverview Homes Inc

The Federal Housing Finance Agency has issued a Notice of Proposed Rulemaking and Request for Comments regarding Enterprise Duty to Serve Underserved Markets.  The “Enterprises” are Fannie and Freddie and this duty to serve is a highly contested one, with some on the right blaming it for pretty much the whole financial crisis and some on the left arguing that it is the key rationale for keeping the government involved in the mortgage market.

This debate is complicated by the fact that Fannie and Freddie are in conservatorship for the foreseeable future. Whatever one believes the duty to serve should be for the two companies if they were operating independently, one might have a different view of it while they are operating as government instrumentalities.

The Notice provides the following summary:

The Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) to establish a duty for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to serve three specified underserved markets—manufactured housing, affordable housing preservation, and rural markets—to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for very low-, low-, and moderate-income families in those markets. The Federal Housing Finance Agency (FHFA) is issuing and seeking comments on a proposed rule that would provide Duty to Serve credit for eligible Enterprise activities that facilitate a secondary market for mortgages related to: Manufactured homes titled as real property; blanket loans for certain categories of manufactured housing communities; preserving the affordability of housing for renters and homebuyers; and housing in rural markets. The proposed rule would establish a method for evaluating and rating the Enterprises’ compliance with the Duty to Serve each underserved market.

Written comments must be received on or before March 17, 2016, so get crackin’.

Duties to Serve in Housing Finance

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Adam Levitin and Janneke Ratcliffe have posted Rethinking Duties to Serve in Housing Finance to SSRN (also on the Harvard Center for Housing Studies site here). The paper states that

an important question going forward concerns the role of duties to serve (DTS) — obligations on lending institutions to reach out to traditionally underserved communities and borrowers. Should there be DTS, and if so, who should have the responsibility to serve whom, with what, and how? (2)

These are, indeed, important questions as regulators chart a course between requiring safe underwriting by lenders and ensuring access to credit for communities that have historically had little access to sustainable credit. The authors distinguish fair lending from duties to serve, with the former being an obligation not to discriminate and the latter being an affirmative duty to address the “disparity of financial opportunity.” (2) The paper describes two main DTS regimes,the Community Reinvestment Act and the Fannie/Freddie housing goals, as well as their limitations.

The paper concludes that the “aftermath of the housing bubble presents an opportunity to rebuild DTS” and proposes a set of reforms. (29) I highlight the first two here:

  1. “DTS should apply universally to the entire primary market,” covering both depositories and non-depositories in order to avoid incentives to engage in regulatory arbitrage. (30)
  2. “DTS should apply equally for all secondary market entities,” not just the Fannies and Freddies of the world. (30)

This paper has a lot to offer thoughtful policymakers. As with everything to do with our massive housing finance system, however, the devil is in the details of any regulatory regime. Mandatory duties to serve must be drafted to so that they are consistent with safe underwriting practices. This paper starts a conversation about doing just that.