Can Fannie Mae, Freddie Mac racial equity programs move the needle?

Abstract

These are game-changing developments in the residential mortgage industry, utilizing tools that have never before been employed on this scale. The most notable feature of the plans is the strong endorsement of special purpose credit programs, which are programs authorized by the Equal Credit Opportunity Act that allow institutions to "Prefer members of economically disadvantaged classes" who would otherwise experience difficulty qualifying for loans under traditional credit standards. These special terms are designed to address socio-economic credit barriers to accessing the mortgage market, such as wealth, income, and financial literacy. Freddie Mac indicates that it may go further by making its SPCPs available to all consumers seeking mortgage loans in majority minority census tracts, or to individuals who self-identify as Black, Latino, or Native American. Not only does the GSEs' endorsement of SPCPs signal an important opportunity for qualified borrowers, it also forecasts a significant opportunity for the hundreds of mortgage lenders nationwide who sell their mortgage loans to Fannie Mae and Freddie Mac. The modern residential mortgage market is dominated by an "Originate-and-sell" model of doing business, where a lender originates a mortgage loan, sells that loan to an investor, and uses that capital to make more mortgage loans to more consumers. Many unknowns lie ahead. But it is assured that the new approach by the GSEs-the entities that most significantly guide national standards for conventional residential mortgage lending - has the potential to narrow racial and ethnic differences in American homeownership.