|The Federal Housing Finance Agency (FHFA) recently published proposed Evaluation Guidance that outlines FHFA’s expectations for how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will develop their plans to fulfill their obligations under the "Duty to Serve" rule. The guidance also describes the evaluative process FHFA will use to determine whether each GSE has met the objectives of its Duty to Serve plan.
As NCSHA previously reported, the Duty to Serve rule requires Fannie Mae and Freddie Mac to support lending for housing for low-income families in three underserved segments of the housing finance market: manufactured housing, affordable housing preservation, and rural areas. To facilitate these activities, the GSEs are obligated to submit to FHFA once every three years an Underserved Market Plan outlining how they to intend help support housing for very low-, low-, and moderate-income families (those earning 100 percent of area median income or below) in the specified markets.
FHFA is soliciting public comments on the draft Evaluation Guidance through May 12. NCSHA intends to submit comments on behalf of all HFAs. If you have any input you would like NCSHA to consider when drafting its comments, please send it to Greg Zagorski by Friday, April 14.
Development and Structure of Underserved Market Plans
Fannie Mae and Freddie Mac are currently in the process of drafting their first Underserved Market plans, which they must submit to FHFA by April 13, 2017. After the plans are submitted, they will be open for public comment for 60 days. FHFA will consider public comments when determining whether to approve each firm’s plan. The first plans will take effect on January 1, 2018, provided FHFA has approved them by December 1, 2017.
The Evaluation Guidance would require the GSEs’ Underserved Market Plans to contain different sections for the three underserved market segments (manufactured housing, affordable housing preservation, and rural housing) identified in the Duty to Serve Rule. Each section would have to include a strategic priorities statement summarizing the GSEs’ strategy for helping the undeserved market and also describe the activities the firm intends to undertake to increase its support for the underserved market. If those activities include loan purchases and/or investments, the plans will have to include measureable targets for future investments and a baseline representing their recent performance in the area.
Once the Underserved Market Plans are in effect, Fannie Mae and Freddie Mac will be able to modify their plans, subject to FHFA approval. Such modification requests may be subject to public comment at FHFA’s discretion. FHFA may also require the GSEs to modify their Underserved Market Plans to reflect new market developments or concerns about the GSEs’ financial health.
Evaluating GSE Performance
Fannie Mae and Freddie Mac will both be required to report quarterly to FHFA on their progress towards meeting the objectives outlined in their Underserved Market Plans. At the end of each year, FHFA will use a three-step process to evaluate the GSEs’ performance in each of the three underserved markets, and award one of five ratings: failing, minimally passing, low satisfactory, high satisfactory, and exceeds.
In the first step of the evaluation process, FHFA will quantitatively measure whether each GSE has fulfilled the goals for each activity area it outlined in its Underserved Market Plans. For each activity, the GSEs will be given a score between 0 and 10, with a score of 10 given when a GSE meets or exceeds their target for that activity. When the GSE does not meet their target, they will be given a lower score based on how their support for certain activities compares to previous years. To receive a passing rating, the average score for all activity areas must be at least 7. If a GSE scores below 7, it automatically receives a failing rating.
Next, FHFA will conduct a qualitative analysis to measure the impact and effectiveness of each GSE’s Duty to Serve activities. As part of this process, FHFA will establish for each activity a "concept score," which will measure the impact that each activity is expected to have if the GSE achieves its objective. Each activity will be given a concept score of between 30 and 50, with 50 representing those activities the GSEs expect to be most impactful. The GSEs will not be able to receive a score for any activity that exceeds that activity’s concept score.
FHFA will then evaluate the GSEs’ performance in each activity area and assign a score between 1 and 50. The scores will then be aggregated through a weighted formula to produce a total score for each underserved market area.
The GSEs will next be assigned extra credit for performing certain duties FHFA has determined are particularly challenging, such as supporting economic diversity, implementing a pilot program for supporting manufactured housing loans titled as chattel, and housing for high-needs rural populations (Native Americans and agricultural workers). This extra credit could increase Fannie Mae’s or Freddie Mac’s composite score for an underserved market by up to 15 percent. The final score will then determine each of the GSEs’ final ratings for each underserved market segment.
Use of State High-Opportunity Area Definitions
Under the Duty to Serve rule, the GSEs are eligible to receive additional credit toward meeting their duties for activities that lessen the economic isolation of very-low, low-, and moderate-income families, such as activities supporting mixed-income housing or housing for lower income families in high opportunity areas. Such activities are not mandatory.
The primary definition used to determine whether housing is located in a "high-opportunity area" will be whether it is located in a "Difficult to Develop Area" (DDA), as designated by HUD for Housing Credit program administration. At the urging of NCSHA and others, the final Duty to Serve rule also allows the GSEs to utilize the definition of "high-opportunity" used by states in their Housing Credit Qualified Allocation Plans (QAPs), as long as the QAPs meet certain standards. The proposed Evaluation Guidance would allow credit for activities in QAP-defined areas as long as a definition is clearly intended to describe areas that provide strong opportunities for residents in housing funded through the QAP, and the QAP includes a map of such areas or provides enough detailed information that such areas can be accurately mapped. High-opportunity areas that have a poverty rate above 10 percent in metropolitan areas and above 15 percent in non-metropolitan areas will not qualify.
FHFA asks interested parties to submit specific state or local definitions of high-opportunity areas that meet FHFA’s criteria. FHFA intends to rely heavily on these submissions when developing its own list of qualifying state and local high-opportunity area definitions, which will be included in the final Evaluation Guidance, which FHFA intends to publish in August. NCSHA intends to compile qualifying definitions used by state HFAs and submit them as part of their comments.