posted on 27 September 2015
from the CoreLogic
-- this post authored by Stuart Quinn
On August 19, 2015 the Federal Housing Finance Agency (FHFA) released their final rule on affordable housing goals. The FHFA took into consideration over 100 comments from a diverse set of market participants; however, the final rule did not deviate far from what was initially proposed. The balance between setting the bar too high or too low is incredibly important as it can have significant consequences during unexpected macroeconomic cyclicality.
Extending goals to levels where existing demand is not present can cause business concerns and impact safety and soundness, conversely, setting the goal too low could lead to accusations that Fannie and Freddie are not upholding the intent of their respective charters. The end result could then increase impediments to mortgage credit for deserving borrowers.
The FHFA releases goals on single-family mortgage purchases, refinancing and rental activity financed by Fannie Mae and Freddie Mac (GSEs). Each of these categories comes with its own set of metrics and targets. For purposes of this post, we will focus exclusively on single-family purchase goals. The overarching goal targets for single-family purchase are: (1) low-income purchase goals and (2) very low income purchase goals. These are defined as GSE financed conforming and conventional loans for purchase of owner-occupied, one-to-four unit housing provided to borrowers with income no greater than 80 percent of the area median income (AMI), for low-income purchase goals, and no greater than 50 percent of AMI for very low-income purchase goals. These are accompanied by sub-goals for low-income areas, high minority areas and communities that have been declared a federal disaster area within the past three years.
There are two measurements used to evaluate success for each GSE. These require both Fannie Mae and Freddie Mac to meet or exceed either of these two goals: the benchmark level or the market level. Figure one illustrates performance based on both of these metric levels by agency and goal type. Any bar exceeding either colored dot indicates achieving the target goal.
Benchmark Goal: The benchmark goal is a prospective forecast estimate based off of an FHFA econometric time-series model, which examines historical market performance, as well as factors that influence the market, including home sales, interest rates, employment and a host of additional measures. Since it is a forecast, it is sensitive to volatility and market dynamics that may be presently unobservable.1
Market Goal: The market goal is determined retrospectively. It is based on the Home Mortgage Disclosure Data (HMDA) released each year, in September of the next year. For example, 2014 HMDA data is scheduled to be released September 2015. The analysis considers not only loans purchased, but includes comparable loans that may have been eligible for purchase, sold via another conduit or privately securitized. This method enables FHFA and the industry to get a better sense of GSE market-wide penetration for goal oriented activities.
Statutory language within the Safety and Soundness Act (and modified by the 2008 Housing and Economic Recovery Act) determines the factors that the FHFA must consider when setting housing goals. The proposed rule requested comments on whether both metrics should be used for determining whether the GSEs are meeting their goals. This included discussion of whether it should only be the benchmark level or only the market level measurements. In the end, the FHFA maintained the status quo of utilizing both measures in their final ruling.
Final Rule - Benchmark Levels
Low Income Home Purchase Goal - 24 percent benchmark
For 2015, there is an increase of one percentage point from the proposed rule (23) and the final benchmark will be 1.6 percent above the market share estimate (22.4), resulting in a benchmark of 24 percent. This leaves a higher prospective benchmark, and a larger possible spread should market data result in less than 22 percent, which is the current market goal.
Very Low Income Purchase Goal -- 6 percent benchmark
The 2015 level will be one percentage point below both the 2014 benchmark level and proposed benchmark level. Both 2012 and 2013 saw relatively large downward shifts for both GSEs on a percent basis. Some possible explanations for this include: banks taking on more loans for Community Reinvestment Act purposes, fear over repurchase liability to GSEs, loans without private mortgage insurance so recourse would be owed, or increased endorsement through the Federal Housing Administration channel.
Low Income Areas Home Purchase Sub-goal -- 14 percent benchmark
The 2015 final benchmark levels are set three percentage points higher than the 2014 level of 11 percent and the same as the proposed benchmark.
Low-income Areas: defined to include census tracts with median income less than or equal to 80 percent of AMI or for families with incomes less than or equal to AMI who reside in minority census tracts (minority population of greater than 30 percent).
Federally Declared Disaster Area or "Disaster Areas Increment" -- TBD
(1) Counties declared by the Federal Emergency Management Agency during the previous three years
What to Watch For
In recent years the GSEs have had more difficulty fulfilling their very-low income obligations, particularly Freddie Mac. This bears monitoring and more analysis should be done on how much is moving through separate channels versus lower application and demand from the lower income segment of borrowers. The release of HMDA data this September will help enlighten the conversation over who is applying and receiving mortgage credit. Meanwhile, the industry will await further clarification on the disaster area increment, future solicitations on benchmark forecast model design and intently monitor mortgage rates given their impact on refinance goals for the GSEs and the overall market.
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