To conclude our series celebrating Black History Month, USMI caught up with Alanna McCargo, Senior Advisor for Housing Finance at the Department of Housing and Urban Development (HUD). McCargo discusses her work and perspectives on the goal of increasing Black homeownership in America and other key topics in housing finance.

While homeownership has risen over the past few years, so has the growing recognition of the significant racial and economic disparities in mortgage lending and access to affordable mortgage credit, especially in the wake of the COVID-19 pandemic. Of the 2.6 million homeowners that are currently past due on their mortgages, as reported by the Mortgage Bankers Association, over half of them are people of color, according to Census Bureau Household Pulse Survey data from January 20 to February 1, 2021. This situation presents an opportunity for policymakers to correct inequities and better support minority homebuyers.

For more than 60 years, the private mortgage insurance (MI) industry has enabled more than 33 million low- and moderate-income Americans to attain affordable and sustainable homeownership in the conventional market. In the past year alone, nearly 60 percent of borrowers who purchased their home using private MI were first-time homebuyers, and more than 40 percent had incomes of $75,000 or less. It is a goal of the MI industry to work with regulators and lawmakers to increase minority lending within the conventional mortgage market, and Black History Month is a perfect time to advance this conversation.

(1) How does Black History Month intersect with the issue of homeownership?

Black history is American history and deepening the collective knowledge of the nation about the truths of our history shapes who we are as a nation, demonstrates our resilience, strengthens our democracy, and reminds us of the work still ahead. The nation is in the midst of three major national tragedies — a public health crisis, an economic recession with deep unemployment, and a reckoning with racism — all of which have caused disproportionate harm to households and communities of color. Many of these disparities can be directly traced to a long history of racial discrimination that America still reckons with today. When we examine the persistent income inequality and racial wealth gap, and reflect on the legacy of federal, state, and local policies and practices like redlining, exclusionary zoning, and the segregated, disinvested, and devalued communities we have across the country, we are reminded of the hard work that still needs to be done at the intersection of race and housing. Homeownership is a central part of a painful history that has thwarted Black economic progress and we continue to have a racial homeownership gap today that is larger now than it was over 50 years ago at the passage of the Fair Housing Act in 1968. We must continue to work toward strengthening Fair Housing and Fair Lending laws, dismantling discriminatory practices, and building toward better outcomes that recognize the history of inequity and works to restore opportunities to build wealth through homeownership.

(2) What are the top two or three 2021 priorities that lawmakers and the new Administration should focus on related to housing finance?

We began 2021 in a housing crisis that has been exacerbated by the pandemic. In addition to unprecedented illness and loss of life, millions of Americans are experiencing long-term financial hardship and loss of income and are at risk of losing their homes through no fault of their own. In response, the top priority for the federal government is to get relief to homeowners and renters, including housing assistance, forbearance, and foreclosure prevention measures until the effects of the pandemic subside and recovery can begin. Just last week, the Biden Administration announced coordinated policy actions for homeowners with government insured loans to provide forbearance and foreclosure relief. These actions will provide homeowners with urgently needed relief and address the disproportionate impact Black households face from the pandemic. Other priorities for the Administration are the production and preservation of affordable housing to help renters who want to be homeowners find housing inventory that they can afford to buy and expanding access to credit by removing structural barriers that historically disadvantage Blacks when it comes to fully participating in the housing finance system. Foundational to all these 2021 priorities are the goals of improving equity, dismantling discriminatory practices, and reducing the racial homeownership gap.

(3) Can greater homeownership racial equity be achieved in the next 5 to 10 years in America, and what must happen to increase the rate of Black homeownership?

Yes, with intentional policy choices and focus, there can be progress made in increasing the rate of Black homeownership and closing the Black/white homeownership gap. At a minimum, the following three things are important:

• remove the barriers to homeownership that keep creditworthy Black households from becoming first time home buyers – supporting down payment and savings, reforming and expanding credit.
• promote new construction and production of affordable housing types for homeownership (condo’s, townhomes, factory-built, etc.) and repair of existing affordable housing to support the next generation of buyers.
• prioritize homeowner sustainability and ensure existing homeowners know their options for keeping their homes and their equity and where to get help during the coronavirus national emergency.

During the last housing crisis, Black homeownership saw enormous losses and Black households did not recover as rapidly as other racial/ethnic groups. We cannot let this devastating history repeat itself.

To accomplish this, we’ll need enhanced mechanisms to support down payment for households that do not have generational wealth to rely on. In addition, steps that move toward reducing costs of ownership, rationalizing pricing, enforcing fair housing, removing bias from credit scoring and appraisal systems, and ensuring Black households have equitable access to mortgages, housing counseling, and related services that help to create sustainable homeownership opportunities that build wealth.

Alanna McCargo’s Biography

Alanna McCargo recently joined the Biden Administration as Senior Advisor for Housing Finance to the Secretary of U.S. Department of Housing and Urban Development. She was previously Vice President for the Housing Finance Policy Center at the Urban Institute, where she led development of research programming and strategy with a focus on reducing racial homeownership gaps, removing barriers to homeownership, and building wealth equity. She held previous leadership roles with JP Morgan Chase, CoreLogic Government Solutions, and Fannie Mae and worked alongside the U.S. Treasury Department to implement housing recovery programs and policy during the Great Recession. She has a BA in communications from the University of Houston and an MBA from the University of Maryland.

In our series celebrating Black History Month, USMI had the honor to speak with Congressman Emanuel Cleaver (D-MO), a member of the U.S. House of Representatives since 2005 who serves on the House Financial Services Committee and chairs the Subcommittee on Housing, Community Development, and Insurance. Congressman Cleaver shared with USMI his thoughts on increasing Black homeownership in the United States and other topics related to the mortgage finance sector in 2021 and beyond.  

While homeownership has risen over the past few years, so has the growing recognition of the significant racial and economic disparities in mortgage lending and access to affordable mortgage credit, especially in the wake of the COVID-19 pandemic. Of the 2.6 million homeowners that are currently past due on their mortgages, as reported by the Mortgage Bankers Association, over half of them are people of color, according to Census Bureau Household Pulse Survey data from January 20 to February 1, 2021. This situation presents an opportunity for policymakers to correct inequities and better support minority homebuyers. 

For more than 60 years, the private mortgage insurance (MI) industry has enabled more than 33 million low- and moderate-income Americans to attain affordable and sustainable homeownership in the conventional market. In the past year alone, nearly 60 percent of borrowers who purchased their home using private MI were first-time homebuyers, and more than 40 percent had incomes of $75,000 or less. It is a goal of the MI industry to work with regulators and lawmakers to increase minority lending within the conventional mortgage market, and Black History Month is a perfect time to advance this conversation.  

The below Q&A with Congressman Cleaver is part of a USMI series during the month of February to highlight prominent Black leaders in the housing finance and mortgage industries to discuss their work and perspectives on the goal of increasing Black homeownership in America and other key topics in housing finance.

(1) How does Black History Month intersect with the issue of homeownership? 

Black History Month is a time for the nation to celebrate and reflect on the legacy of African Americans — our contributions to American culture and how far we’ve come as a community. So when I think of the intersection between homeownership and Black History Month, I think about just how much work we still have to do as a society. In 1960, the Black homeownership rate in the United States was 38 percent and white homeownership was 65 percent. In 2015, less than 38 percent of Black families in Kansas City owned a home and the racial homeownership gap has only widened across the country. While we look back and celebrate the contributions of the Black community during Black History Month, we also must look forward and take action on the remaining challenges in front of us. Closing the racial homeownership gap is certainly one of the biggest mountains we still have to climb. 

(2)What are the top two or three 2021 priorities that lawmakers and the new Administration should focus on related to housing finance? 

I know President Biden has looked at this issue with the seriousness it deserves because I’ve spoken with him about it directly. If you look at the Administration’s plans, it will help strengthen underserved communities by investing in them through housing — and a major component of that is through housing finance. Lawmakers must move with urgency to end modern day redlining by strengthening the Community Reinvestment Act. We cannot allow lenders to discriminate against individuals based on where they live, and we must ensure that fintechs and other non-bank lenders are held to as strong of standard. The administration must also make it a high priority to hold discriminatory financial institutions accountable. Not only must the administration vigorously investigate discriminatory lending from financial institutions big and small, but when allegations of discrimination or unfair lending practices are found, they must take substantive action to rectify them. 

(3) Can greater homeownership racial equity be achieved in the next 5 to 10 years in America, and what must happen to increase the rate of Black homeownership?  

There is no question that we can achieve greater racial equity in terms of homeownership, but elected officials—from the President to Congress to Governors to Mayors—must make a concerted effort to address the inequity that still plagues our nation. Homeownership has long been considered the gateway to the middle class, which is why I believe it is where we should focus our attention if we are seeking to make our economy more equitable. There are a lot of policy actions that can get the ball rolling, such as reforms to the housing finance system, enforcement of fair housing laws, and increasing the supply of affordable housing stock, but one great place to start would be increasing funding and access to governmental down payment assistance programs. Because communities of color simply haven’t been afforded the same opportunities to build up generational wealth, it makes it difficult to afford the down payment on a house that opens the door to the middle class.  

Congressman Cleaver’s Biography 

Emanuel Cleaver, II is now serving his ninth term representing Missouri’s Fifth Congressional District, the home district of President Harry Truman. He is a member of the House Committee on Financial Services; Chair of the Subcommittee on Housing, Community Development, and Insurance; member of the Subcommittee on Oversight and Investigations; member of Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets; member of the House Committee on Homeland Security; and member of the Subcommittee on Border Security, Facilitation, and Operations.  

Having served for twelve years on the city council of Missouri’s largest municipality, Kansas City, Cleaver was elected as the city’s first African American Mayor in 1991. 

During his eight-year stint in the Office of the Mayor, Cleaver distinguished himself as an economic development activist and an unapologetic redevelopment craftsman. He and the City Council brought a number of major corporations to the city, including TransAmerica, Harley Davidson, and Citi Corp. Cleaver also led the effort, after a forty-year delay, to build the South Midtown Roadway. Upon completion of this major thoroughfare, he proposed a new name: The Bruce R. Watkins Roadway. Additionally, his municipal stewardship includes the 18th and Vine Redevelopment, a new American Royal, the establishment of a Family Division of the Municipal Court, and the reconstruction and beautification of Brush Creek. 

Cleaver has received five honorary Doctoral Degrees augmented by a bachelor’s degree from Prairie View A&M, and a master’s from St. Paul’s School of Theology of Kansas City. 

In 2009, Cleaver, with a multitude of accomplishments both locally and Congressionally, introduced the most ambitious project of his political career—the creation of a Green Impact Zone. This zone, consisting of 150 blocks of declining urban core, has received approximately $125 million dollars in American Recovery and Reinvestment funds. The Green Impact Zone is aimed at making this high crime area the environmentally greenest piece of urban geography in the world. This project includes rebuilding Troost Avenue, rehabbing bridges, curbs and sidewalks, home weatherization, smart grid technology in hundreds of homes, and most importantly, hundreds of badly needed jobs for Green Zone residents. 

During the 112th Congress, Cleaver was unanimously elected the 20th chair of the Congressional Black Caucus. 

In 2016, as Ranking Member of the Housing and Insurance Subcommittee, Cleaver successfully co-authored the largest sweeping reform bill on housing programs in 20 years, the Housing Opportunity Through Modernization Act, a bipartisan comprehensive housing bill that passed into law with a unanimous vote. 

In 2018, Congressman Cleaver received the Harry S. Truman Good Neighbor Award, the highest honor bestowed by the Harry S. Truman Good Neighbor Award Foundation. Past honorees include President Bill Clinton, the late Senator John McCain, and Justice Sandra Day O’Connor. 

Cleaver, a native of Texas, is married to the former Dianne Donaldson. They have made Kansas City home for themselves and their four children, and grandchildren. 

In our ongoing celebration of Black History Month, USMI reached out to prominent leaders in the housing finance and mortgage industries to discuss their work and perspectives on the goal of increasing Black homeownership in America. While homeownership has risen over the past few years, so has the growing recognition of the significant racial and economic disparities in mortgage lending and access to affordable mortgage credit, especially in the wake of the COVID-19 pandemic. Of the 2.6 million homeowners that are currently past due on their mortgages, as reported by the Mortgage Bankers Association, over half of them are people of color, according to Census Bureau Household Pulse Survey data for the period of January 20 to February 1, 2021. This situation presents an opportunity for policymakers to correct inequities and better support minority homebuyers.

For more than 60 years, the private mortgage insurance (MI) industry has enabled more than 33 million low- and moderate-income Americans to attain affordable and sustainable homeownership in the conventional market. In the past year alone, nearly 60 percent of borrowers who purchased their home using private MI were first-time homebuyers, and more than 40 percent had incomes of $75,000 or less. It is a goal of the MI industry to work with regulators and lawmakers to increase minority lending within the conventional mortgage market, and Black History Month is a perfect time to advance this conversation.

Lisa Rice, President and CEO of the National Fair Housing Alliance (NFHA), recently shared with USMI her thoughts on these issues and others, relating to the mortgage finance sector in 2021 and beyond

(1) How does Black History Month intersect with the issue of homeownership?

Race and homeownership are inextricably linked. Due to government-sanctioned discriminatory policies and practices that have been in place since the birth of this country, Black Americans have been systematically excluded from wealth-building opportunities such as homeownership. Redlining, which persists in various forms today, real estate sales discrimination, appraisal bias, lending discrimination, and tech bias are significant barriers that keep the dream of homeownership from becoming a reality for many Black Americans.

Moreover, structural barriers such as the dual credit market, segregation, and restrictive zoning ordinances create systemic impediments which significantly prohibit the ability of people of color to access fair housing and lending opportunities and perpetuates the racial wealth and homeownership gaps.

In fact, the homeownership rate for Black Americans is still where it was when the Fair Housing Act was passed in 1968; White homeownership is 73.4 percent; Hispanic homeownership is 47.8 percent; and Black homeownership is 42.7 percent. This translates to a homeownership gap between Blacks and Whites that is as wide now as it was in 1890. Black History Month is a key opportunity to shine a light on these issues, and we must work to address them year-round.

(2) What are the top two or three 2021 priorities that lawmakers and the new Administration should focus on related to housing finance?

We hope the new Congress and Administration will make the following policy goals a top priority:

• Eliminating the dual credit market and creating access to sustainable and affordable credit for all;
• Compelling federal agencies and local jurisdictions to remove barriers to housing inequality by Affirmatively Furthering Fair Housing and ensure that every neighborhood has the resources and amenities people need to thrive;
• Putting in place a comprehensive infrastructure program to improve roads, bridges, housing, water access facilities, and other systems in an equitable manner;
• Strengthening the nation’s fair housing and fair lending enforcement infrastructure; and
• Creating greater fairness in the housing and financial services industries – this must include developing policies that promote more effective oversight for Artificial Intelligence (AI) tools.

(3) Can greater homeownership racial equity be achieved in the next 5 to 10 years in America, and what must happen to increase the rate of Black homeownership?

Groups like NFHA have spent years crafting policy recommendations and developing tools to help make homeownership racial equity a reality, so it’s certainly an achievable goal but our lawmakers and policymakers must have the will to translate ideas into reality. We are working with a broad range of stakeholders – including the Urban Institute, National Housing Conference, Center for Responsible Lending, National Association of REALTORS®, National Association of Real Estate Brokers, National Association of Hispanic Real Estate Professionals, and many others – through our Keys Unlock Dreams Initiative to add 3 million net new Black homeowners by 2030 and to achieve a 50 percent Latino homeownership rate by 2024. Through our Tech Equity Initiative, we are working to remove bias from all technologies used in the housing and financial services space.

We are optimistic, and we look forward to working with Congress and the new Administration to make this happen. In light of COVID-19, one of the first steps we will need to take is ensuring an even recovery from the pandemic and economic crisis – this means supporting small businesses in communities of color, passing a robust relief package with significant assistance for the hardest hit renters and homeowners who are facing eviction or foreclosure, and ensuring health care gets to those who need it. But beyond that, we will need to go back and fix the centuries-old structures that continue to cause uneven economic recoveries along racial lines every time our country faces a crisis.

Lisa Rice’s Biography

As President and CEO of the NFHA, Lisa Rice leads efforts by NFHA and its partners to advance fair housing principles and to preserve and broaden fair housing protections, expanding equal housing opportunities for millions of Americans.

Ms. Rice played a major role in crafting sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act and in establishing the Office of Fair Lending within the Consumer Financial Protection Bureau.

Prior to becoming President and CEO, she served as NFHA’s Executive Vice President and managed the organization’s resource development, public policy, communications, and enforcement divisions.

Ms. Rice is a member of the Leadership Conference on Civil and Human Rights Board of Directors, Center for Responsible Lending Board of Directors, JPMorgan Chase Consumer Advisory Council, Mortgage Bankers Association’s Consumer Advisory Council, Freddie Mac Affordable Housing Advisory Council, Urban Institute’s Mortgage Servicing Collaborative, and Quicken Loans Consumer Advisory Forum.

As we celebrate Black History Month, USMI reached out to prominent leaders in the housing finance and mortgage industries to discuss their work and perspectives on the goal of increasing Black homeownership in America. While homeownership has risen over the past few years, so has the growing recognition of the significant racial and economic disparities in mortgage lending and access to affordable mortgage credit, especially in the wake of the COVID-19 pandemic. Of the 2.6 million homeowners that are currently past due on their mortgages, as reported by the Mortgage Bankers Association, over half of them are people of color, according to Census Bureau Household Pulse Survey data for the period of January 16-18, 2021. This situation presents an opportunity for policymakers to correct inequities and better support minority homebuyers.

For more than 60 years, the private mortgage insurance (MI) industry has enabled more than 33 million low- and moderate-income Americans to attain affordable and sustainable homeownership in the conventional market. In the past year alone, nearly 60 percent of borrowers who purchased their home using private MI were first-time homebuyers, and more than 40 percent had incomes of $75,000 or less. It is a goal of the MI industry to work with regulators and lawmakers to increase minority lending within the conventional mortgage market, and Black History Month is a perfect time to advance this conversation.

(1) How does Black History Month intersect with the issue of homeownership?

I think it is important to remind ourselves that while we focus on Black history during the month of February, Black history is America’s history and homeownership is very much a part of the American story. The intersection of Black History Month and homeownership is most meaningful  when we do the following: (i) reflect on the current state of Black homeownership with its existing disparities across race and neighborhood; (ii) deepen our collective understanding of how past government policies fostered neighborhood racial segregation; and (iii) strengthen our resolve to create an equitable path forward.

Black History Month is also a time to remember the positives of Black homeownership and historically Black neighborhoods. While the legacy of racial segregation has certainly contributed to some of the inequities we still see today, there is also a rich history of neighborhoods—including the U Street Corridor in my hometown of Washington, DC—which were the center of African American homeownership, business and culture. Other examples that come to mind are Oak Cliff in Dallas where I lived briefly in the 1980s, and of course Harlem in New York. As these neighborhoods change with revitalization and gentrification, this history of thriving Black neighborhoods and homeowners should not be lost or relegated just to February.

(2) What are the top two or three 2021 priorities that lawmakers and the new Administration should focus on related to housing finance?

Increasing the supply of affordable housing in high opportunity neighborhoods has to be a key part of any housing finance program. Absent an increase in supply, many well-intentioned programs, such as down payment assistance or widening credit box, will increase demand and put further upward pressure on price. Increasing supply will require a strong partnership between the Biden Administration and city/state governments as housing forces are local. There are some metropolitan areas, such as Nashville, where Black homeownership rates are actually rising, and it is important to understand and learn what those cities are doing right.

A second housing priority for the new Administration should be to strengthen and support the existing government mortgage finance programs, such as the ones offered by the Federal Housing Administration (FHA) and the Department of Veteran Affairs, which play a major role in Black homeownership, and to commit to comprehensive housing finance reform including the reform of the government sponsored enterprises (GSEs). Today FHA is about 12 percent of the mortgage market, but it represents over 30 percent of minority home purchase activity. Housing finance reform should address those issues that keep the system strong without unnecessarily raising the overall cost of mortgages—further exacerbating the cost of homeownership.

While not a homeownership finance policy, I hope the new Administration will also break down the silos between homeownership and rental housing policies—both to consider ways to help more renters become homeowners and to expand tools, such as the Low Income Housing Credit, that support the supply of affordable rental construction and preservation. Strong and vibrant communities have a mix of housing stock and policies should look at ways to replicate this in other communities.

(3) Can greater homeownership racial equity be achieved in the next 5 to 10 years in America, and what must happen to increase the rate of Black homeownership?

I am an optimist at heart and believe we as a society can make greater progress toward racial equity over the next 5 to 10 years. I am also a housing policy geek and have bookmarked or saved every “five point plan” or “first 100 day plan” submitted from the many groups in the housing industry. Rather than choose from many good policy ideas, I am sharing the themes that resonate.

First, the economic response to the COVID-19 pandemic must address inequities particularly in education and employment that contribute to homeowner readiness. Second, we have to rebuild trust in the homeownership ecosystem—realtors, mortgage lenders, appraisers, among others to ensure Black prospective homeowners believe they are being treated fairly and respectfully. This can happen through increased attention to racial and ethnic diversity in our industry but also calling out biases when we see them such as the recent negative press on differing home values based on the race of the owner or flaws in a credit scoring model. Finally, we need a bias toward action. It is easy to get consumed by the politics of housing and homeownership and the search for the best outcome. We are at a moment or reckoning and the most important thing is to look at what is working and take action now.

Phyllis R. Caldwell’s Biography

Phyllis Caldwell is an independent financial service professional and founder and sole member of Wroxton Civic Ventures, LLC., which offers advisory services and impact investments to small and emerging social enterprises. She currently also chairs the Board of Directors of Ocwen Financial Corporation (NYSE: OCN) and is on the boards of Enterprise Community Partners and City First Bank of DC. 

Phyllis has over 25 years of experience in housing and community development finance in the corporate, government and nonprofit sectors. She served at the U.S. Department of Treasury under President Barack Obama where her team was responsible for implementing the Home Affordable Modification Program (HAMP), and other foreclosure prevention initiatives established through the Troubled Asset Relief Program (TARP) during the recovery from the 2008 Great Recession. Previously, Phyllis was president and CEO of Washington Area Women’s Foundation. She retired from Bank of America in 2007 where she held various executive roles including President of Community Development Banking and leading a national team in tax credit investing, community development lending, investments in Community Development Financial Institutions and small business venture funds.

Over the course of her career, Phyllis has served on several nonprofit boards including Low Income Investment Fund (LIIF), Community Preservation and Development Corporation (CPDC), and Center for International Forestry Research in Bogor, Indonesia. In addition, she was a member of the Community Development Advisory Committee for the Federal Reserve Bank of Richmond.

Phyllis received her MBA from the Robert H. Smith School of Business at the University of Maryland, College Park and is an Executive-in-Residence at the Smith School. She holds a bachelor’s in sociology and urban planning, also from the University of Maryland, College Park. 

By Brendan Kihn, Government Relations Director of U.S. Mortgage Insurers (USMI)

With the New Year came both a new Administration and a new Senate majority. Having held the House, winning back the White House, and securing the January elections in Georgia to flip the Senate, the Democrats have a trifecta in D.C. for the first time since January 2011. For Democrats, the electoral wins present an opportunity to push forward a much more complete policy agenda. However, given the narrow majorities in both chambers of Congress, Democrats will still have limits on what is attainable, as they will need every Democratic vote, and possibly a few Republican votes to pass key legislation.

Full Steam Ahead on COVID Relief and Financial Equity

Rep. Maxine Waters (D-CA) became the chair of the House Financial Services Committee (HFSC) in January 2019, making history as the first woman and African American to hold the position. Chairwoman Waters used her gavel to conduct extensive oversight of the various agencies under her jurisdiction, including the Consumer Financial Protection Bureau (CFPB), Federal Housing Finance Agency (FHFA), U.S. Department of Housing and Urban Development (HUD), and the National Credit Union Administration (NCUA). Chairwoman Waters embarked on an ambitious agenda, which quickly became consumed by the need to respond to the COVID-19 pandemic in early 2020.

Fast forward to 2021, Chairwoman Waters has made it clear that she intends for HFSC to continue its important focus on COVID-19 related financial services issues and COVID-19 relief, as well as advancing policies that promote economic fairness, advance financial inclusion, and hold oversight of financial institutions and their regulators. Congressional Democrats and President Biden are in alignment with policies that advance equity – not merely “equality” – as evidenced by the Administration’s January 26 memo to HUD that recognized the ongoing legacies of systemic racism, and stated that the “Federal Government shall work with communities to end housing discrimination, to provide redress to those who have experienced housing discrimination, to eliminate racial bias and other forms of discrimination in all stages of home-buying and renting, to lift barriers that restrict housing and neighborhood choice, to promote diverse and inclusive communities, to ensure sufficient physically accessible housing, and to secure equal access to housing opportunity for all.”

What does this mean for housing? As the primary way that American families attain financial stability and build long term generation wealth, homeownership will be a critical component of the Democratic push toward addressing the persisting racial wealth gap. Specifically, look for HFSC to act on policies that:

• Increase access to affordable mortgage credit via first-time homebuyer tax credits (in conjunction with the House Committee on Ways and Means), targeted down payment assistance (DPA) programs, and 529-like down payment savings accounts.
• Increase homeownership rates among minority communities and close the racial homeownership gap.
• Ensure fair lending through robust oversight of lenders and support of reinstating the Obama-era Affirmatively Furthering Fair Housing rule.
• Include the construction of affordable housing as part of an infrastructure package and as outlined in Chairwoman Waters’ bill, “Housing is Infrastructure Act of 2020.”

While the agenda will remain focused on these issues facing millions of Americans, the committee will also leverage its oversight responsibility of major financial institutions, markets and regulators. Already, the committee has turned to address the GameStop-Robinhood-Reddit events that rattled the markets last month and triggered bipartisan disapproval of both companies’ practices and regulators’ responses. 

New Chairman for Senate Banking Committee

In the 116^th Congress, the HFSC reported out 62 bills with the majority going to the Senate “graveyard” where they saw neither consideration by the Senate Banking Committee (SBC) nor a floor vote. With the Democrats now in control of both chambers, however, Chairwoman Waters finds herself with a willing partner in Sen. Sherrod Brown (D-OH), the new chairman of the Committee on Banking, Housing and Urban Affairs. Sen. Brown’s policies are driven by his commitment to the “dignity of work,” and he has voiced support for housing finance reforms that increase mortgage affordability. He has long called for a “housing system built on a mission to serve borrowers and renters, no matter who they are, what kind of work they do, or where they live.” Considering Fannie Mae and Freddie Mac – the government sponsored enterprises (GSEs) – have been in conservatorship for over 12 years, Sen. Brown is keenly aware that housing finance reform is the last unfinished piece of reform from the 2008 financial and housing crisis. Potential action on GSE reform will undoubtedly be guided by principles that enjoy broad support among policymakers and stakeholders, including:

• Providing regulation of the GSEs similar to public utilities with regulated rates of return.
• Protecting access to affordable 30-year fixed-rate mortgages.
• Requirements to serve a broad, national market.
• Equitable access to the secondary mortgage market for lenders of all types and sizes.
• Maintaining affordable housing goals and metrics.
• Providing a form of paid-for government guarantee.

New Faces in the Capitol

Every two years D.C. bids farewell to some members of Congress while saying hello to freshmen members in the House and Senate. Whether due to retirements, unsuccessful reelections, or moving committees, the HFSC will lose nearly 10 members, including Rep. Katie Porter (D-CA) and former Rep. Lacy Clay (D-MO). However, the committee is getting three Democratic freshmen: Rep. Ritchie Torres of New York; Rep. Jake Auchincloss of Massachusetts; and Rep. Nikema Williams of Georgia. 

• Following his victory last November, Rep. Torres had been hoping for a spot on HFSC, saying in an interview that “[t]he committees that most interest me are Financial Services because it has jurisdiction over housing and housing is my greatest passion, and Oversight, because I have experience with Oversight and Investigations.”
• Prior to representing Massachusetts’ 4^th Congressional District, Rep. Auchincloss served on the Newton City Council and has focused on housing, transportation and healthcare – the three areas he thinks are key to economic mobility.
• Rep. Nikema Williams previously served as a Georgia State Senator and the Chair of the Georgia Democratic Party, and he is committed to “[t]ackling the COVID crisis, including housing assistance and making sure the financial system works [for the people].”

In the upper chamber, Majority Leader Chuck Schumer (D-NY) announced on February 2 that Georgia Senators Jon Ossoff and Raphael Warnock would join the SBC for the 117^th Congress. The financial services industry is an important component of Georgia’s economy and in recent years Atlanta has emerged as a financial technology (fintech) hub. On several occasions, Sen. Ossoff has stated the need to solve “deep inequities in our financial system,” and his desire to boost resources for affordable housing as part of an infrastructure bill. The two freshmen Democrats campaigned as a team for the January 2021 runoff election and focused on COVID-19 relief, including for renters and homeowners. 

On the Republican side, Sen. Steve Daines (R-MT) will be joining the SBC, as well as freshmen Senators Cynthia Lummis (R-WY) and Bill Hagerty (R-TN). Sen. Daines will be an important voice on policies concerning home building and housing supply constraints that are driving up the costs for homebuyers. He has long recognized that affordable housing is critical for a thriving economy in Montana and throughout the country, and has received the Defender of Housing Award from the Montana Building Industry Association. Both freshmen senators are fiscal conservatives and proponents of low taxes and a thriving private sector. 

“Reconciliation” – The Word on Everyone’s Lips

On January 5, Georgia voters took to the polls in a runoff election that flipped both Senate seats to the Democrats and created a 50-50 split in the upper chamber. Upon being sworn in as Vice President on January 20, Kamala Harris gave Democrats majority control in the Senate as the tiebreak vote.  Committee gavels switched to the Democrats on February 3, which will quicken the confirmation process for several of President Biden’s cabinet nominees and put Democrats in control of hearing topics and scheduling.

While Senate Democrats have a 51 majority with the Vice President, the legislative filibuster will remain in place (for now) due to a block of moderate Democrats – most notably Senators Joe Manchin (D-WV), Kyrsten Sinema (D-AZ), and Jon Tester (D-MT) – who do not support eliminating the 60-vote rule. As such, the primary vehicle in the Senate will be reconciliation, which allows for the passage of bills with 51 votes, but with restrictions concerning what can and cannot be included. The use of reconciliation to pass additional COVID-19 relief, enact changes to the tax code, and fund infrastructure projects will require every single Democrat vote, a reality that gives the moderate bloc immense negotiating power.

In 2021, we find ourselves with a new power structure in D.C. – a Democratic trifecta that will often be torn between big bold policies and seeking bipartisan compromises with the Republican minority. 

Since Fannie Mae and Freddie Mac (the “GSEs”) entered conservatorship in 2008, federal policymakers and industry professionals have debated their future role in the housing finance system, as well as what reforms are appropriate and necessary to put the GSEs on stable footing for the long term.

Twelve years later, the Federal Housing Finance Agency (FHFA) is taking steps to release the GSEs from conservatorship. To that end, FHFA has proposed an Enterprise Regulatory Capital Framework (ERCF) intended to prevent future failures by requiring the GSEs to hold much more capital. In fact, the re-proposed ERCF would require the GSEs to hold about 10 times their current capital levels ($243 billion versus $28 billion, respectively, as of Q2 2020) and roughly five times their projected losses under the most severe economic downturn.

Importantly, the proposed framework supposes that the GSEs will return to their pre-conservatorship status in the housing finance system—quasi-government companies—with congressional charters, missions, and mandates, yet private companies with profit objectives. FHFA’s re-proposed capital framework is intended to help the GSEs avoid taxpayer bailouts by building and maintaining large enough capital reserves to withstand future downturns.

USMI agrees that a robust and appropriately tailored capital standard for the GSEs is necessary and should strike the right balance to ensure consumers maintain access to affordable mortgage credit while also protecting taxpayers. The best way to achieve these objectives is to have a standard that reflects the business models of the GSEs, whose primary business is a guaranty business, and that is akin to an insurance framework. Further, the capital framework should be objectively risk-based, and the quantity and quality of capital requirements should be completely transparent and analytically justified.

In its comment letter to FHFA on its 2020 proposed rule, USMI identified key issues with the re-proposed ERCF and provided recommendations for ensuring greater balance between the two aforementioned objectives. (An executive summary of USMI’s observations and recommendations is available here).  While actions taken during conservatorship have strengthened the GSEs, it is clear that additional reforms are necessary to improve the GSEs’ operations in advance of their exit from conservatorship. USMI strongly urges FHFA to turn its attention to critical reforms that incentivize the prudent management of mortgage credit risk and ensure access to affordable and sustainable mortgages for home-ready consumers.

INCREASE, NOT DECREASE THE USE OF PRIVATE CAPITAL

Proposed Capital Rule Disincentivizes Critical Loss Protection and Beneficial Risk Transfer

While we support strong GSE balance sheets to best serve borrowers and protect taxpayers from mortgage credit risk, certain elements of the re-proposed rule would promote risk consolidation at the GSEs and disincentivize the distribution of risk.  The ERCF should incentivize the increased transfer of mortgage credit risk to private capital where possible. Unfortunately, as many stated in their comment letters to the proposed ERCF, the reduced capital benefit for private mortgage insurance (MI), punitive treatment of credit risk transfers (CRT), and proposed floors on mortgage exposures would likely reduce the GSEs’ ability or willingness to transfer risk to other sources of private capital.

Until Congress enacts comprehensive housing finance reform and/or gives FHFA the authority to charter additional GSEs, it is imperative that the concentration of mortgage credit risk at Fannie Mae and Freddie Mac be transferred to highly regulated counterparties to appropriately underwrite, actively manage and hold capital against.  One way FHFA can accomplish this objective is to provide the appropriate capital benefit to the GSEs for transferring risk—based on an historical analysis of the capital credit that should be given to any such counterparty or risk transfer. To ensure that credit risk is transferred to strong counterparties, FHFA—rather than the GSEs—should establish and update robust operational and capital requirements for GSE counterparties, as necessary. Transparent and objective standards will promote a level playing field and ensure that private market participants can perform an important role in de-risking the GSEs.  Private MI and the GSEs’ CRT programs are important tools to bring private capital into the housing finance system and any final rule on GSE capital requirements should recognize their risk-reducing benefits.

However, it seems that in addressing some of the structural weaknesses of CRT, the proverbial “baby was thrown out with the bathwater” by the current proposed rule. Instead, to fully assess the weaknesses and determine the appropriate capital relief that the GSEs should receive for different forms of CRT, FHFA should publish a transparent model that capital markets executions and reinsurance transactions can be modeled against.  This will ensure that weaknesses are properly addressed but will also maintain integrity and increase transparency and consistency in FHFA and the private market’s assessment of and capital benefit for CRT and will better ensure a viable CRT market going forward.

Balance Capital Requirements with Access to Sustainable Mortgage Finance Credit

Importantly, the re-proposed rule, if implemented in its current form, could push homeownership out of reach for many Americans –particularly minority and first-time homebuyers –or it could leave many borrowers with the lone option of obtaining a mortgage backed by the Federal Housing Administration (FHA). According to the Urban Institute[1] and the GSEs themselves,[2] the capital proposal would result in higher costs for borrowers and less mortgage credit availability, as higher capital requirements would necessitate higher profits to support the capital.  For the GSEs, this will mean higher Guarantee Fees (G-Fees), raising the cost of homeownership for millions, with a disproportionate negative impact on lower wealth and traditionally underserved borrowers.  In light of these increased costs, many of these borrowers, would migrate to the FHA market.

The proposed ERCF has a number of overly conservative elements, as well as numerous examples of non-risk aspects.  Instead, FHFA should reduce or eliminate non-risk based elements and establish the capital rule around an insurance framework, given the GSEs’ core guaranty business is to ensure the adequate capital for the risks taken by the GSEs, but not an arbitrarily high level of capital that puts homeownership out of reach for many American families.

THE NEXT STEPS FOR STRENGTHENING THE HOUSING FINANCE SYSTEM

FHFA’s work on a post-conservatorship capital framework is a welcome development. However, it is important to recognize that capital alone is not comprehensive GSE reform

In order to put the housing finance system on a more sustainable path and to best serve consumers and taxpayers, it is imperative that FHFA implement reforms beyond increasing capital before the GSEs exit conservatorship. In September, FHFA released its “Strategic Plan: Fiscal Years 2021-2024,”outlining goals to fulfill its statutory duties as both regulator and conservator of the GSEs. While a primary goal of the plan is to take actions to support the GSEs’ recapitalization and exit from conservatorship, FHFA invited comments on the “mile markers,” or additional reforms or thresholds to be met by the GSEs and/or FHFA prior to the GSEs’ exit from conservatorship.  

It is imperative that FHFA take steps to further reduce the GSEs’ risk exposure, level the playing field, and increase transparency around the GSEs’ pricing and business operations. As recommended in USMI’s comment letter on the Strategic Plan to FHFA, the agency should take the following actions to strengthen the housing finance system prior to the GSEs’ release from conservatorship:

[1] The Urban Institute estimates that mortgage rates would increase 15-20 bps while in conservatorship and 30-35 bps if they are released. J. Parrott, B. Ryan, and M. Zandi, “FHFA’s Capital Rule Is A Step Backward” (July 2020). Available at https://www.urban.org/sites/default/files/publication/102595/fhfa-capital-rule-is-a-step-backward_0.pdf.

[2] Fannie Mae and Freddie Mac’s comments to the FHFA on the proposed Enterprise Regulatory Capital Framework noted that the capital requirements could increase guarantee fees by 20 bps and 15-35 bps, respectively. Available at https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15605 and https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15606.

One of the main drivers of the 2008 financial crisis was lending to borrowers with inadequate ability to repay their mortgage loans. In response, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau (CFPB) and established an ability-to-repay/qualified mortgage (ATR/QM) standard. Dodd-Frank went beyond previous federal regulations and consumer protections, including the Home Ownership and Equity Protection Act (HOEPA) that had previously defined a class of higher priced mortgage loans (HPMLs).

Going beyond HPML to address some of the underwriting concerns in the marketplace, Dodd-Frank created specific mortgage product restrictions and required the CFPB to promulgate a rule defining Qualified Mortgage based on specific underwriting criteria. As promulgated in the 2013 final rule, QM and safe harbor were measuring two separate things so different standards made a certain amount of sense. The QM standard was based on product and underwriting requirements, while safe harbor was based on loan pricing specifically assessing whether the loan was a HPML.

The CFPB is now seeking to update the regulation. In late June, the Bureau issued Notices of Proposed Rulemaking (NPRM) on the general QM definition under the Truth in Lending Act (Regulation Z) and the GSE Patch. The CFPB proposes to change the current QM standard in favor of a pricing threshold based on the difference between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction. The proposed rule would define a QM as a mortgage loan which is priced not more than 200 basis points (bps) above the APOR.

Unlike the 2013 final rule, the QM standard and safe harbor are measured using the same price metric under the new proposed rule. Having two different pricing thresholds to determine QM and safe harbor loan status creates an unlevel playing field that will arbitrarily shift borrowers to mortgages backed by the Federal Housing Administration (FHA) and leave consumers with less access to mortgage finance credit—all based on an arbitrary line.[1]

While USMI will comment on other aspects of the proposed rule, we think that one of the most significant issues within the proposal is the safe harbor pricing threshold. Based on our analysis of mortgage originations, loan performance, market dynamics, and the need to ensure consumer access to affordable mortgage finance, we recommend that this threshold should be pegged to the same threshold as the QM status, which the NPR suggests should be 200 bps. USMI made this recommendation to the CFPB in a September 2019 comment letter in response the CFPB’s Advance NPRM.

In the 2020 proposed rule, the Bureau justifies recommending QM status be based on a pricing threshold to 200 bps using early delinquency data as an indicator of determining a borrower’s ATR, stating in the NPRM:

“…the Bureau tentatively concludes that this threshold would strike an appropriate balance between ensuring that loans receiving QM status may be presumed to comply with the ATR provisions and ensuring that access to responsible, affordable mortgage credit remains available to consumers.”[2]

Should the CFPB move forward to replace the current QM definition with one based on a pricing threshold, then the Bureau can and should increase the spread that is used to delineate safe harbor loans from 150 to 200 bps over APOR to be consistent with the threshold that the Bureau recommends for QM status in its NPRM.

Why moving the safe harbor threshold to 200 bps matters:

• Lenders don’t lend above the safe harbor line in the conventional market.The distinction between safe harbor and rebuttable presumption matters. Market data makes it clear that many lenders avoid making rebuttable presumption QM loans to avoid any risk of legal liability. This is evidenced by the fact that less than five percent of all the conventional market financing in 2019 was done above the safe harbor line. For all intents and purposes, the safe harbor line effectively defines the conventional market and changes to how the Bureau defines QM safe harbor will impact who the conventional market will serve going forward.

• Current recommended threshold disproportionately impacts Black and Latinx borrowers who are twice as likely as White borrowers to have conventional low down payment purchase loans outside a safe harbor of 150 bps. Under the proposed rule, many of the borrowers who are above the 150 bps threshold will be left only with the option of a FHA loan, which means they have vastly different competitive choices in terms of product offerings and loan terms—as demonstrated by the fact that there were approximately 3,200 HMDA reporting lenders for conventional purchase loans versus only about 1,200 for FHA purchase loans. This arbitrary line affects these borrowers’ credit options and leaves them with significantly fewer competitive options in the marketplace.[3]

• Creates an unlevel playing field. While the percentage of the conventional market above 150 bps is small on a percentage basis, this is not to suggest that there are not good quality loans above this threshold being done. FHA is five times more likely to have loans above the 150 bps simply because FHA calculates the APOR cap and APR calculation differently. HUD defines safe harbor as 115 bps plus the mortgage insurance premium, which is closer to FHA having a safe harbor threshold of approximately 200 bps, or even higher. Due to the discrepancies for how this threshold is calculated between the conventional and FHA markets, leaving the safe harbor threshold for conventional loans at 150 bps will arbitrarily distort the market and shift borrowers to FHA. This will give these borrowers fewer choices and shift borrowers from a market backed by private capital to the 100 percent taxpayer-backed market.

The Solution:

The solution is to increase the safe harbor pricing threshold to 200 bps to be consistent with the proposed QM pricing threshold. This will result not only in a more level playing field, but most importantly, by changing the threshold, the impact to borrowers can be mitigated. The volume of loans that would otherwise be left out of the conventional safe harbor market is reduced by almost 60 percent for the high-LTV market and reduced by over 50 percent for the entire conventional market.[4]

Increasing the safe harbor threshold to 200 bps above APOR will best ensure that we strike an appropriate balance between prudent underwriting, credit risk management, and consumers’ access to sustainable and affordable mortgage credit.

[1] 85 Fed. Reg. 41716 (July 10, 2020).

[2] 85 Fed. Reg. 41735 (July 10, 2020). Underlying and emphasis added.

[3] 2019 HMDA Data.

[4] 2019 HMDA Data.