FHFA NEEDS TO “REFOCUS” ITS STRATEGIC PLAN
San Francisco, CA—Nov.15, 2017— Earlier today, 136 organizations sent a letter to Mel Watt, the director of the Federal Housing Finance Agency (FHFA), urging him to review and possibly end policies that are enabling the widespread displacement of low income people and people of color. FHFA is currently revising its strategic plan and had asked for input, which is why advocates are weighing in with the agency. The letter is signed by nonprofit organizations serving communities in more than 20 states.
“It’s no secret that working families throughout the country are facing high housing costs,” explains Kevin Stein, deputy director of the California Reinvestment Coalition. “What we’re calling attention to with this letter is that FHFA policies are exacerbating this problem. As FHFA updates its strategic plan, it has a key opportunity to change policies and to mitigate this problem of working families and households of color being displaced from their homes and their communities.”
“We know that some of the investments by the GSEs are actually increasing housing costs and the displacement of low income people and people of color. In light of this, FHFA should re-focus its strategic plan to better support homeowners and communities, not Wall Street executives that are buying up our neighborhoods,” adds Maeve Elise Brown, executive director of Housing and Economic Rights Advocates.
“The REO to Rental phenomenon has been a clear disaster for working families,” adds Merika Regan, a community leader with ACCE in East Oakland. “Renters are experiencing slum-lord conditions, unaffordable rent increases, and are being displaced as a result. There is no compelling reason for Fannie or Freddie to provide financing to companies who are exacerbating the housing crisis in communities across the country.”
In their letter, advocates are outlining how the FHFA, in its role overseeing Fannie Mae, Freddie Mac (the GSEs), and the Federal Home Loan Bank System, is failing low and moderate income households and people of color in 3 important ways:
1) GSEs are Financing Displacement via Investments in REO to Rental REO to Rental, a business model created by some of the same Wall Street actors who caused the housing meltdown, has wreaked havoc on local communities. Potential first time homeowners can’t compete against all-cash investors, meanwhile, long-term tenants are experiencing slum-lord conditions and rapidly rising rents, and/or being displaced. Yet, Fannie Mae recently invested in this harmful practice by guaranteeing a $1 billion loan by Wells Fargo Bank to Blackstone/Invitation Homes. Beyond the harm caused to consumers, the California Reinvestment Coalition also highlighted in a 2014 report how the financing structure for most REO to Rental deals is eerily similar to the financing mechanism that ultimately led to the housing meltdown.
2) Federal Home Loan Bank Funds Used for Questionable Mortgage Purchases: FHLB members are supposed to use their access to FHLB credit in order to finance affordable housing and community development. But, according to media reports, Starwood Property Trust, a Real Estate Investment Trust (REIT), is using relatively cheap funding from the Chicago Federal Home Loan Bank in order to buy non-Qualified Mortgage (QM) loans. These loans do not meet federal ability to repay standards and are therefore riskier for the borrower and the lender. Beyond safety and soundness concerns, advocates are deeply concerned Starwood and similar companies may have a perverse incentive to engage in poor mortgage servicing of these loans in order to foreclose and add more homes to its REO to Rental empire.
3) GSE Affordable Housing Goals Should Consider Gentrification Pressures: FHFA sets important annual affordable housing goals for both Fannie and Freddie that dictate the percentages of loans the GSEs should buy that are made either to low-income consumers or made in low or middle income areas. The Affordable Housing goals are hugely important to efforts to create homeownership for all Americans. But, as gentrification pressures increase, advocates are concerned about the GSEs buying mortgages that were originated to higher-income homeowners in lower income areas or in high-minority census tracts, which could be contributing to gentrification. This is a problem that even FHFA acknowledged, stating that the GSE’s share of loans to wealthier borrowers in low-income census tracts and high-minority census tracts has been increasing. Advocates suggest FHFA consider lowering the “cap” of loans to higher-income people that count for the GSEs (currently at 14%) in order to meet their affordable housing goals. In this way, FHFA would signal to the mortgage and banking industry the need to increase their efforts to serve low-income homebuyers, not just homebuyers who are purchasing in low-income communities.
Recommendations to FHFA
Advocates are urging Director Watt to review all GSE and FHLB policies with an anti-displacement lens to mitigate the displacement currently happening in low-income communities and communities of color in California and across the US.
Specifically, FHFA should:
1) Prohibit Fannie and Freddie from financing REO to Rental transactions. If FHFA will not do so, it must at the least implement significant protections. If the GSEs intend to continue with these investments, they must include safeguards against first time homebuyers being elbowed out as well as protections for tenants against shoddy maintenance, unnecessary evictions, and unaffordable rent increases.
2) Immediately prohibit REITs from using Federal Home Loan Bank advances for purchasing non-QM loans, distressed loans, or for any investments in REO to Rentalthat have the effect of destabilizing low and moderate income and of color households and communities.
3) Minimize incentives for lenders to extend mortgages to wealthier homebuyers in low income zip codes. Currently, the GSEs are allowed to “count” as part of its affordable housing goals up to 14% of their mortgage purchases that are to wealthier homebuyers in lower income or high minority census tracts, and FHFA is proposing to increase this to 15%. However, advocates suggest that if FHFA were to lower this “cap,” it would incentivize the GSEs, and the lenders they buy mortgages from, to refocus their efforts on serving low and middle income homebuyers. GSE affordable housing goals are critical and must be strengthened and refocused on low and moderate income and of color borrowers to ensure that all Americans are able to achieve the dream of homeownership and wealth accumulation, especially in communities vulnerable to gentrification pressures.
4) Increase oversight and transparency in regards to GSE foreclosures and note sales to guard against unnecessary foreclosures, especially as it relates to Wall Street and private equity companies buying and servicing mortgages as a result of financing from the GSEs.
Additional Context: In a 2014 report, the California Reinvestment Coalition detailed how REO to Rental companies are depleting affordable housing stock, elbowing out potential first-time homebuyers, and displacing long-term tenants.