FHFA Proposes Rule on Fannie Mae’s & Freddie Mac’s Duty to Serve Underserved Markets

Bradley Arant Boult Cummings LLP

Pursuant to the Housing and Economic Recovery Act of 2008, which amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, federal law requires the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to facilitate a secondary market for mortgages on housing for very low-, low-, and moderate-income families in three underserved markets–manufactured housing, affordable housing preservation, and rural housing. On December 15, 2015, the Federal Housing Finance Agency (FHFA) issued a proposed rule and is now seeking comments on a proposed method for evaluating and rating Fannie Mae and Freddie Mac’s compliance with the duty to serve underserved markets (the “Duty to Serve”).

The proposed rule creates certain eligible activities that would earn Duty to Serve credits. Under the proposed rule, Fannie Mae and Freddie Mac would be required to submit to the FHFA an Underserved Market Plan covering a three-year period, subject to public review and comment.  Each Underserved Market Plan must include activities delineated under one of the following categories:

  • Statutory Activities – Activities that assist affordable housing projects as part of the specifically enumerated programs under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, or any comparable state law;
  • Regulatory Activities – Certain activities specific to the three underserved markets provided under the proposed rule; and
  • Additional Activities – Any other activities proposed by Fannie Mae and Freddie Mac and determined by the FHFA to serve an underserved market.

The extent to which Fannie Mae and Freddie Mac comply with the respective activities under their Underserved Market Plan would form the basis for FHFA’s evaluation of their Duty to Serve performance.

For the manufactured housing market, Duty to Serve credits would be provided if Fannie Mae and Freddie Mac create a secondary market for mortgages of manufactured homes secured as real property. According to the FHFA, chattel loans are not currently included in the proposed rule, given their lower performance levels, faster depreciation, higher default rates, and weaker consumer protections related to the financing. However, the proposed rule seeks public comment on whether the final rule should authorize Duty to Serve credits for the purchase of chattel loans secured as personal property.

In addition, Fannie Mae and Freddie Mac will receive Duty to Serve credits for the purchase of blanket mortgages on manufactured housing communities provided that: (i) the community has 150 pads or less; (ii) the community is government, nonprofit, or resident owned; or (iii) the community has certain minimum specified pad lease protections for tenants. In order to obtain certain financing, manufactured housing park owners would have to adhere to certain pad lease protections, including minimum lease terms of one-year, advance notice of planned sale or closure of the community, grace periods for rent payments, and defaulted rent protections.

The proposed rules, if adopted, should have a positive impact on the manufactured housing market. We will continue to monitor the proposed rule and any changes made to the rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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