Fannie Mae has announced an update to its Single Family Selling Guide stating it will now accept HomeReady® and HFA Preferred® mortgage loans with lender-funded grants, including down payment assistance (DPA), closing costs and financial reserves. The announcement marked a significant change to the government-sponsored enterprise’s (GSE’s) policy because, until now, Fannie Mae would only allow lenders to contribute toward consumers’ closing costs. 

The decision creates an incentive for both banks and non-bank mortgage lenders to support minority and low- to moderate-income (LMI) borrowers with lender-funded homebuyer assistance. At the same time, it opens more doors for lenders to sell servicing rights to avoid layoffs and budget cuts in a shrinking, post-refinance boom purchase market. However, the implications of this decision are much deeper than they may initially appear.

A regulatory warning

One major impact of Fannie Mae’s policy change is that it could offer lenders a way to avoid being accused of redlining. Redlining, or the discriminatory practice of denying credit in areas with a sizable racial or ethnic minority population, is prohibited by the 1977 Community Reinvestment Act (CRA). While non-banks are not subject to CRA requirements, federally-insured institutions are periodically evaluated to ensure they are meeting the credit needs of their service area without bias.     

However, federal regulators have historically taken a lackadaisical approach to policing instances of redlining — only taking action when a transgressor seeks a merger or acquisition. Even when a redlining bank applies for a merger, the typical response is for regulators to call the offending institution and personally warn its leaders of the investigation. This gives discriminatory lenders an opportunity to withdraw their applications without facing public scrutiny.

Even though the CRA does not apply to non-bank lenders, these institutions’ reputations (and wallets) would still suffer greatly if they were accused of redlining. Non-banks may take Fannie Mae up on its offer to purchase lender-funded DPA loans to show their dedication to inclusive mortgage lending.

Why should lenders foot the bill?

While this announcement gives lenders an opportunity to distance themselves from accusations of redlining, it is still unclear why a lender would offer down payment and homebuyer assistance grants using its own funds when state FHAs already offer these types of programs. One explanation could be that funding for HFA programs is subject to availability, whereas a lender-funded program is controlled by the bank or financial institution behind it. As shown in our Q2 2022 Homeownership Program Index (HPI) report, the number of inactive and temporarily suspended homebuyer assistance programs in the U.S. grew during Q2 of this year, but this minor decrease in available funding was offset by 35 programs that were added in the same timeframe. 

As inflation, high home prices and economic uncertainty cause more would-be borrowers to put their homeownership goals on the back burner, lenders can further offset any lost HFA assistance programs by creating their own self-funded programs. This approach would not only provide much-needed support for homebuyers but also help lenders sustain their pipelines in an intensely competitive purchase market.

Another potential benefit of Fannie Mae’s acceptance of lender-funded homebuyer assistance is that it incentivizes lenders to establish programs that target a particular underserved group in their service region. For example, if a lender wanted to support Native American homebuyers, but their state HFA did not offer such a program, that lender could establish a special purpose credit program (SPCP) to address that unmet need. Doing so could offer a particularly attractive benefit to banks, which could potentially use self-funded programs to earn credit toward their CRA exams. However, this depends on the outcome of the CRA’s pending rewrite.

Seeing the big picture

Fannie Mae’s policy change to accept mortgage loans with lender-funded homebuyer assistance came as an unexpected surprise to many lenders. Lenders are already tightening their budgets and laying off staff by the thousands; allocating additional funds to grants for LMI borrowers was not on their minds until this the release of this announcement. So, why now? 

A representative from Fannie Mae attributed the change to heightened lender interest in supporting prospective homebuyers with DPA programs. Although not explicitly stated in the announcement, another likely explanation is that the decision is foreshadowing a federal crackdown on redlining. According to HousingWire, a contact at the U.S. Department of Justice reported it is investigating a significant number of redlining cases, some even targeting non-bank lenders.

The decision to accept loans with lender-funded assistance programs could be a nudge to both bank and non-bank lenders to seize this opportunity to make a proactive effort to expand inclusive homeownership. Those who do not heed the suggestion and continue redlining may harm their reputations — or worse, find themselves in court. 
Above all, this decision from Fannie Mae is yet another testament to the enterprise’s large and growing focus on initiatives designed to expand homeownership for minority and LMI borrowers. This course of action is also backed by the Federal Housing Finance Agency (FHFA) and notably offers zero downsides to banks that abide by the law. Between this announcement and the release of Fannie Mae and Freddie Mac’s 3-year housing equity plans, it is clear that DPA and homebuyer assistance are here to stay.

With closing the racial homeownership gap a top priority for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, down payment assistance (DPA) is on the mortgage industry’s radar in a big way. Lenders who have not yet had an opportunity to dig into the enterprises’ plans at length should understand that there is a greater emphasis on DPA in the industry than ever before. If your mortgage business hasn’t already, it’s time to jump on the DPA bandwagon.  

The Fannie Mae Plan

The Black homeownership gap is the largest racial homeownership gap. Notably, this disparity is not improving over time — it’s widening. According to the U.S. Census Bureau, the homeownership gap between Black and White Americans grew to over 30% last year, showing a greater disparity than in 1960 when racial housing discrimination was still legal. 

To address this growing problem, Fannie Mae developed a 3-year equitable housing plan focused on improving the housing experience for Black homebuyers specifically. The plan is comprised of 17 explicit actions that Fannie Mae will take to improve the Black homebuying experience, and one of those actions relates directly to DPA. 

Action 4 of its 3-year housing equity plan states that Fannie Mae will pilot Special Purpose Credit Programs (SPCPs) to empower Fannie Mae and participating lenders to provide resources that support the expansion of Black homeownership eligibility, while exploring strategies to reduce SPCP participation hurdles for lenders. 

Although SPCPs do not have to include DPA programs, Fannie Mae suggests that DPA be written into SPCPs to help more Black homebuyers afford down payments — a significant financial barrier to homeownership. The enterprise will execute two to three SPCP pilots this year, and at least one will include DPA and expanded eligibility for Black homebuyers.

Addressing knowledge gaps will be a critical step to improving the Black housing experience. Fannie Mae’s consumer research shows that people of color are more likely to lack information about credit eligibility and down payment costs. The enterprise also found that Black renters want to learn more about the entire homebuying process, but are most interested in learning about DPA and determining how much home they can afford.

Due to longstanding racial disparities in financial education, Fannie Mae acknowledged it will require extensive outreach to ensure its plan is successful and has committed to producing content to raise awareness of its SPCP pilots. The enterprise will release three to five content pieces this year focusing on pain points in the pre-purchase phase — which includes DPA — and plans to release two to four more in 2023. 

It is also important to note that this plan wasn’t created in a vacuum. Nonprofits, community groups, government agencies and lenders all submitted feedback to the Federal Housing Finance Agency (FHFA) formal Request for Information (RFI) on the enterprise equitable housing plans, which was released in September 2021. Notably, there was active interest from these groups in expanding access to DPA programs, and responses to Fannie Mae’s RFI included calls for the enterprises to actively connect lenders and borrowers with DPA programs. 

The Freddie Mac Plan

Generations of segregation and unequal economic and social opportunities have carved a deep wealth and income gap between white and Black/Latino Americans. According to Freddie Mac, the average white family has accumulated seven times the wealth of the average Black family and five times that of the average Latino family. As a result, Black and Latino borrowers are less likely to gain access to sustainable homeownership or have generational wealth they can tap into for a down payment. 

Freddie Mac’s Equitable Housing Finance Plan was built to advance equitable and sustainable housing opportunities to address wealth disparities in Black and Latino families. The plan outlines strategies for improving access to credit, economic mobility and financial assistance through five broad action areas: addressing the homeownership gap, supporting formerly redlined areas, creating and preserving affordable housing, increasing credit-building opportunities for renters and eliminating housing disparities in Black and Latino communities. 

Much like Fannie Mae, Freddie Mac argues that SPCPs can be an effective way to address racial and ethnic homeownership gaps. As such, Freddie Mac has prepared a model SPCP plan and will begin implementation planning this year. Following its development, the enterprise intends to launch an SPCP program that offers benefits such as DPA, reduced pricing and expanded credit eligibility to borrowers with special social needs. 

To ensure its SPCP program has the strongest impact possible, Freddie Mac is refining its marketing and demographic geo-tracking to identify concentrated communities of mortgage-ready Black and Latino consumers who may benefit from an SPCP. The enterprise has also identified growing interest among lenders to originate loans under an SPCP and then sell those loans to Freddie Mac. As a result, Freddie Mac also plans to incentivize SPCP participation by purchasing loans originated through lenders’ SPCPs.

Because fees and compensation are only realized once a loan closes, some loan officers (LOs) may feel disincentivized to work with smaller loans, first-time borrowers and DPA programs. This not only makes loans more expensive for lenders to manufacture, but also increases the chances of costly borrower fall-out. To increase affordability for historically underserved racial and ethnic groups, Freddie Mac will evaluate potential pricing incentives, including minimizing borrower-risk-based loan-level price adjustments (LLPAs) for SPCP loans, to help the enterprise achieve its housing equity objectives while maintaining compliance. 

Freddie Mac also acknowledges that saving for a down payment remains a significant barrier for Black and Latino borrowers. In the enterprise’s consumer survey of 1600 Black and Latino respondents, one-in-five reported having to step away from the homebuying process because they were still trying to save for a down payment — the second most common reason behind having an insufficient credit score.

The Benefit of DPA

In summary, DPA is intertwined with many aspects of the GSE 3-year housing equity plans, with both enterprises developing SPCP programs to support the availability of DPA and expansion of homeownership eligibility. Lenders that offer DPA programs and tools can unlock a gold mine of diverse lending opportunities — and set themselves up to profit from incentives and partnerships with enterprises laser-focused on housing equity.