As President Biden enters his second year in office, one his most crucial nominees – Federal Housing Finance Agency (FHFA) Director Sandra Thompson – has yet to be confirmed by the Senate. As head of the FHFA, Thompson would oversee a variety of housing finance programs vital to fulfilling Biden’s campaign promises to expand affordable housing.
This blog serves as an overview of Thompson, the FHFA’s core powers and programs, and what a full-time FHFA Director under Biden could accomplish. It will be periodically updated with more information on reform proposals for the agency.
Who is Sandra Thompson?
Sandra Thompson is a career government official and longtime expert in financial regulation and consumer protection issues. From 2013 to 2021, she served as Deputy Director of the FHFA’s Division of Housing Mission and Goals (DHMG), overseeing various aspects of the agency’s housing, fair lending, and GSE mission activity work. Prior to joining the FHFA, Thompson spent 23 years in various leadership positions at the Federal Deposit Insurance Corporation (FDIC), where she most notably led consumer confidence outreach initiatives and risk management enforcement programs during the 2008 financial crisis.
Thompson was named Acting Director of FHFA on June 23, 2021, following a major Supreme Court ruling that allowed Biden to fire Trump holdover FHFA Director Mark Calabria. She was subsequently nominated to serve as the agency’s full-time Director this past December, with her nomination quickly being processed by the Senate Banking Committee and a confirmation hearing taking place on January 13th.
Thompson’s nomination has garnered support from industry players like the Mortgage Bankers Association and from housing reform advocates like Americans for Financial Reform, the National Fair Housing Alliance, and the National Community Reinvestment Coalition.
What is the FHFA and what are its main housing powers?
FHFA, the agency that Thompson would head full-time if confirmed by the Senate, is one of the most important parts of the federal housing policy ecosystem.
Established by the Housing and Economic Recovery Act of 2008 (HERA), the FHFA oversees three government-sponsored enterprises (GSEs) involved in the $7.2 trillion secondary mortgage and housing finance markets: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 11 Federal Home Loan Banks (FHLBanks). Fannie and Freddie, which have been held in conservatorship by the FHFA since 2009, buy and insure mortgages made by banks and other lending institutions. The FHLBanks, on the other hand, provide direct loans to other banks and specialized grants and loans for affordable housing.
FHFA is also a member agency of the Financial Stability Oversight Council (FSOC), a cross-agency government body created by the Dodd-Frank Act to identify systemic risks to the financial system.
Below is an overview of the FHFA’s most important housing powers and programs with respect to the GSEs it oversees. These powers include direct regulatory actions – such as loan purchase caps and limits – imposed by the agency on the Enterprises. They also include the agency’s agenda-setting role for key Enterprise programs – like the Duty-To-Serve and Equitable Housing Finance Plans – and the issuance of its annual Enterprise scorecard:
- Fannie & Freddie Multi-Family Loan Purchase Caps: As mentioned above, both Fannie and Freddie provide liquidity to the secondary mortgage market. They do by purchasing mortgages from other lenders to either hold or pool together as mortgage-backed securities (MBS), which in turn are sold to institutions such asinsurance companies and investment banks. Under its conservatorship powers, the FHFA can influence the scope of Fannie and Freddie’s annual multifamily loan purchases by setting the exact amount that each Enterprise can purchase in a given year. The 2022 caps, issued by the FHFA last October, are $78 billion per enterprise.
- Fannie & Freddie Single-Family Conforming Loan Limits: FHFA can set an annual dollar cap (“conforming loan limit”, or CLL) on the size of a mortgage that Fannie or Freddie can purchase and guarantee. Under HERA, the agency is required to adjust its baseline CLL annually to reflect changes in average U.S. house prices, based on data collected by the agency (the baseline CLL for 2022 is $647,200). For specific geographic regions specified in HERA (Alaska, Hawaii, Guam, and the U.S. Virgin Islands) or areas in which 115 percent of the local median home value exceeds the baseline CLL, the agency can also set a higher loan limit ($970,800 for 2022).
- Enterprise Duty To Serve (DTS): Under HERA, both Fannie and Freddie must set a plan every three years – subject to FHFA approval – detailing how the Enterprises will fulfill their legal duty to invest resources in three traditionally underserved mortgage markets: manufactured housing, affordable housing preservation, and rural housing. While the FHFA is prohibited by law from establishing specific quantitative loan purchase targets for Enterprise DTS plans, it can communicate general priorities to the Enterprises during internal formulation of the plans and make subsequent regulatory changes to help Fannie and Freddie fulfill their goals.The first DTS plans were rolled out in 2017 and led to measurable increases in Enterprise loan purchases on manufactured housing and rural single- and multifamily housing, as well as the adoption of tenant “pad lease protections” in many manufactured housing communities. The anticipated second set of DTS plans slated for 2022-2024 are still in development following the FHFA’s rejection of draft proposals from Fannie & Freddie last month.
- Fannie/Freddie DTS Equity Investments: The FHFA, through its conservatorship powers, has prohibited the Enterprises from making targeted equity investments in DTS markets. A 2021 working paper from the Lincoln Institute criticized the agency’s “dubious legal interpretation” that the Enterprises lack the authority to make targeted equity investments, noting that even “small equity investments by the Enterprises can have an outsized impact on improving liquidity in DTS markets in underserved communities”. A 2016 letter from the NCST and other affordable housing advocates similarly argued that equity investment programs could “ provide housing at affordable prices” and “help to counter price escalation in gentrifying communities”.
- Fannie/Freddie Pilot Programs: Under a temporary 2009 regulatory rule, Fannie and Freddie are required obtain prior approval from the FHFA Director before providing new products. Public interest groups like the Center for Responsible Lending (CRL) have criticized this requirement for constraining the Enterprises’ abilities to pursue pilot programs for underserved markets. A proposed rule introduced by Calabria in 2020 would finalize the 2009 rule and make the prior approval requirement permanent.
- Equitable Housing Finance Plan: Akin to DTS, the FHFA can also order Fannie and Freddie to “prepare and implement three-year Equitable Housing Finance Plans that describe each Enterprise’s planned efforts to advance equity in housing finance” for communities of color long denied opportunities to build wealth through homeownership. According to agency guidelines, EHFPs must include an identification and summary of barriers to sustainable housing opportunity, objectives and specific measurable goals for actions to address these barriers (for example, reducing racial disparities in automated underwritings or tenant screenings), and a plan for meaningful actions in a three-year period to address these barriers. From September 7th to October 25th of 2021, the FHFA accepted public input from advocacy organizations on the 2022-2024 EHFPs. As of February 2022, the FHFA was said to be reviewing draft EHFPs submitted by the GSEs last year and preparing to make them public as soon as possible.
- Mission-Driven Business Requirements: Under its conservatorship powers, the FHFA can impose conditions on the loans purchased by Fannie and Freddie that adhere to the agency’s mission-driven goals of supporting sustainable homeownership and affordable rental housing. For example, the FHFA can set minimum requirements for the percentage of Enterprise multifamily business to be geared towards affordable housing (50 percent in 2022) or affordable to residents at or below 60 percent of area median income (25 percent in 2022).
- Mission-Driven Housing Goals: Likewise, the FHFA can set mission-driven goals for the Enterprises to meet in order to promote equitable access to affordable housing over a given period of time. For example, the agency has proposed that at least 28% of single-family purchases made by Fannie and Freddie from 2022 to 2024 should be for low-income families. Similar goals have been laid out by the agency for loans geared towards very low-income families, minority communities, rural areas, and multifamily properties with rental units affordable to low- and very-low income families.
- FHLBank Affordable Housing Program (AHP): Under federal law, each FHLBank runs an Affordable Housing Program (AHP), used to finance the purchase, construction, or rehabilitation of residential housing for low- or moderate-income household, or rehabilitate rental housing where at least 20 percent of the units are affordable for and occupied by very low-income households. Financial institution members of the FHLBanks can receive AHP funds either through a competitive application process or through set-aside grants made by the FHLBanks. Through its oversight authority over the FHLBanks, the FHFA can issue regulations and rules governing the AHP’s use of funds, allocation process and monitoring requirements.
- Enterprise Regulatory Capital Framework: Under former Director Calabria, the FHFA introduced the Enterprise Regulatory Capital Framework (ERCF) rule, which imposed lofty capital requirements on the Enterprises as part of Calabria’s bid to expedite the end of the FHFA’s conservatorship. Under acting director Thompson, the agency has partly rolled back these requirements.
- Annual Enterprise Scorecard: The FHFA releases annual public scorecard reports for Fannie and Freddie, which communicate the agency’s expectations and evaluative criteria for assessing how the Enterprises’ actions “fulfilling their core mission requirements”. The 2022 scorecard issued by acting director Thompson established climate risk, equity, and “affordable homeownership and rental opportunities” as top priorities for the GSEs.
What A Thompson-Led FHFA Could Do
As Thompson’s nomination moves through the Senate (a process that should be expedited by changing the Senate’s rules), affordable housing and equity advocates are urging the Biden administration to take bold action on housing. Central to these advocates’ vision is the FHFA, which – now freed from the grip of Calabria – could utilize its vast powers to promote affordable housing, housing equity, and stability in the housing finance market.
Below are some actions that advocates hope to see a Thompson-led FHFA pursue:
- Demand strong and transparent DTS plans from the Enterprises: The Underserved Mortgage Markets Coalition (UMMC), a group of 20 affordable housing organizations that includes the Lincoln Institute of Land Policy and National Community Stabilization Trust (NCST), has repeatedly urged the FHFA to only approve enterprise DTS plans that best serve the most vulnerable. UMMC urged FHFA in October 2021 to reject the Enterprises’ Trump-era draft DTS plans, noting they abandoned a pilot project to purchase chattel loans on manufactured homes (a type of loan where the home is considered personal property) and slashed loan purchase targets for all three underserved markets. The coalition subsequently applauded Thompson’s decision in January 2022 to reject the DTS drafts. For the final 2022-2024 DTS plans, the UMMC has urged the Enterprises to adopt a policy blueprint that includes increasing the raw number of affordable and manufactured housing loan purchases, restarting chattel pilots, and developing better loan products for rural communities. Reformers also hope to see greater enforcement of pad lease protections for manufactured housing tenants and greater transparency in how the plans are written and how progress is measured.
- Permit the Enterprises to make equity investments: The UMMC has urged the FHFA to reverse its legal interpretation prohibiting the Enterprises from making targeted equity investments, noting that “regulations should encourage, not discourage, new program pilots to reach underserved markets.”
- Establish a new rule encouraging pilot programs: In response to the Calabria-era efforts to finalize FHFA’s rule on Prior Approval for Enterprise Products, both the NCST and CRL urged the agency to instead create a new rule that would encourage Enterprise pilot programs designed to fulfill DTS guidelines. In a public comment on the Calabria rule, CRL called for the agency to create a separate streamlined approval process for the GSEs to seek approval for new activities without burdensome or extensively detailed requirements.
- Demand strong EHFPs that promote racial equity from the Enterprises: Like DTS, affordable housing advocates are hoping that Thompson’s FHFA will only approve Fannie and Freddie’s forthcoming EHFPs if they meet robust reform standards that promote racial and ethnic equity in homeownership. In an October 2021 letter, the National Housing Conference – a member of the UMMC – urged the FHFA to integrate and align the development of the EHFPs with DTS. The coalition has also urged the agency to take specific actions to set the EHFPs up to succeed, such as allowing the Enterprises to adopt pilot programs, suspending the ban on grantmaking for the Enterprises, and incentivizing the purchase of small-dollar mortgages (whose lack of availability is a major driver of the racial homeownership gap). Likewise, the NCST urged the agency in an October 2021 letter to fulfill the intent of the EHFP program by reforming the Enterprises’ bias-prone Automated Underwriting System and risk-based loan pricing policies.
- Revise Capital Policies: UMMC member groups like NCST have called on the FHFA under Thompson to go further in rolling back former Director Calabria’s capital requirements for the Enterprises, observing that “the Enterprises [are] still required to hold more capital than is necessary, […] a significant barrier to achieving FHFA’s desired equity goals”.
- Work To Address Limited English Proficiency (LEP) And Language Access Issues: Major civil rights and housing reform groups like the National Urban League and National Consumer Law Center have called on the FHFA to improve language access in mortgage origination and servicing for Limited English Proficient (LEP) borrowers by instructing the GSEs to require lenders to collect language preference data and create tools to make FHFA multilingual resources more readily available. Reformers have also urged the FHFA to directly require lenders and servicers to create Language Access Plans.