Fannie Mae and Freddie Mac should be doing more to ensure underserved borrowers get access to affordable mortgages. That’s the key takeaway from a new set of goals the Federal Housing Finance Agency (FHFA) announced for the mortgage giants.

New components of Fannie and Freddie’s single-family housing goals for 2022-2024 include ensuring that 10 percent of their loans in that period are for properties in minority census tracts, and that an additional 4 percent of loans are in low-income census tracts. Fannie and Freddie back the majority of mortgages issued in the U.S., so the rules they set can have a big impact on who gets a mortgage and at what rate.

While the government says these benchmarks will promote a more equitable national housing market, minority housing experts are wary. They say the effectiveness of these new policies will depend largely on how they are administered.

A closer look at the FHFA subgoals

According to the FHFA, these subgoals are meant to replace previous low-income lending benchmarks for Fannie and Freddie, and make more funds available to minority mortgage borrowers.

“The new subgoal for minority census tracts was designed to help preserve and support affordable housing in communities of color. The subgoal benefits families at or below area median income, allowing them to stay in the communities they helped build,” Sandra L. Thompson, FHFA’s acting director said in a statement. “The Enterprises’ housing goals over the next three years should support equitable access to sustainable affordable housing opportunities in a safe and sound manner that bolsters the health of communities.”

The previous goals, which targeted low-income census tracts exclusively without any regard for the borrower’s race or the demographics of the area, in some ways reinforced existing disparities in the housing market.

“Whites and Asian borrowers are overrepresented in the underserved market that the GSE’s are targeting,” said Nikitra Bailey, senior vice president of public policy at the National Fair Housing Alliance. She added that historically, borrowers of color are denied mortgages at higher rates than white applicants with similar financial profiles.

The new goals are meant to address that disparity, but Bailey said it’s crucial to track how they are being implemented.

“The point is to be careful not to assume that goals targeted at minority census tracts will reach Black and brown families in those census tracts,” she said. “The data tells us what’s happening.”

Goals are often unmet

The U.S. real estate market has an inherently unequal foundation thanks to the history of policies like redlining, which for decades restricted bank lending in many minority neighborhoods. The result is that white families in general have more intergenerational wealth than families of color, and are seen as stronger mortgage applicants in part because traditional credit reports tend to treat them more favorably.

While fair housing experts agree the sub-goals are an encouraging step toward addressing the entrenched, they worry about how they will be implemented and enforced.

“The goals are set, they don’t meet the goals, they put out a report that says they didn’t meet the goals, and then they move on to the next year,” said Mark Alston, chairman of the public affairs committee for the National Association of Real Estate Brokers (NAREB).

He said he worries that these new sub-goals could similarly not make it from press release to actuality.

Bailey agreed, and said that if these programs are not targeted properly, they might reinforce housing and wealth gaps along racial lines.

“These are positive developments, and there’s more to be done,” she said. “We know that previous discrimination, particularly discrimination in the housing sector, has had an impact on Black and brown families.”

How can the government ensure fair mortgage distribution?

Bailey and Alston said a few key things should happen to make sure these sub-goals are met and that funds get into the hands of the borrowers they’re meant to help.

First, Bailey said, it’s important to collect data on mortgage distribution and track who is actually getting the funds in the targeted census tracts. Beyond that, she added, the practice of loan-level price adjustments often make it more expensive for non-white borrowers to secure a mortgage.

In short, loan-level price adjustments mean lenders can tweak pricing between applicants based on their individual profiles, rather than having set terms that are offered to everyone.

“Loan level price adjustments that FHFA put out after the Great Recession had a disproportionate impact on Black and brown families,” she said.

For Alston, the key is incentivizing Fannie and Freddie to worry less about profit.

“Fannie and Freddie should stimulate the marketplace by providing products that may not provide market-rate returns,” he said. “They need to start doing that stuff as opposed to acting like a profit-based system of finance.”

Bailey agreed that the lenders should extend credit availability in underserved communities to boost homeownership rates. Doing so, she added, could also provide a big lift to the national economy.

“We have the chance to grow the economy by a trillion dollars a year,” she said. “It makes sense to make sure these families can have access to the mortgages they desire because the health of the overall market will depend on how they are served.”

Bottom line

The new FHFA sub-goals for Fannie and Freddie are part of the Biden administration’s effort to make the American housing market more equitable. While experts and advocates agree they’re a step in the right direction, they also say more work must be done to level the playing field.

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