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The skyrocketing real estate markets across the U.S. may be terrific news to homeowners, but not so much for many prospective buyers. Truth be told, those who don’t have a generous pre-approval letter from a lender in their pocket might just find themselves out of luck when they go house hunting.
That’s why some of the biggest players in housing finance are making new efforts to open up housing options for low- and middle-income buyers.
Government-sponsored enterprises Fannie Mae and Freddie Mac are boosting support this year for three lower-cost housing options: rural homes, manufactured housing (such as trailers), and the very limited, existing stock of affordable homes.
Fannie and Freddie buy mortgages from lenders, which gives the lenders cash to make more loans. Under the three-year Duty to Serve program, they will purchase more loans in certain low-income areas. The theory is that the private sector will be more incentivized to make such loans if they know they’re not taking on risk.
Fannie will buy up to about 5,000 additional new rural, single-family loans, while Freddie will purchase roughly 3,360 more new loans annually by the third year of the program.
“It’s unclear the impact it will have just yet. It’s new to the market, still unproven,” says Gerron Levi, director of policy and government affairs at the National Community Reinvestment Coalition, an umbrella group of affordable and fair housing groups and lending organizations. But “when Fannie and Freddie enter the market and tell lenders, ‘if you make the loan we will purchase it,’ it will facilitate access to credit to those markets. [Private] lenders will be more willing to make loans.”
It’s important to note that the increase in the number of loans that Fannie and Freddie will be purchasing over the next three years are modest at best. But the need for affordable housing, particularly in areas where it’s harder to get home loans, is crystal-clear.
Looking for a cheaper home? Move to the country…
More than 23% of Americans live in rural areas, where median incomes are below national levels, according to the U.S. Census Bureau. But it’s often difficult to obtain mortgages in these areas, as there are fewer banks. The lack of broadband internet access in some parts also makes it harder to get mortgages online.
But rural areas historically haven’t attracted a lot of attention from mortgage lenders, or Fannie or Freddie, because these aren’t places where anyone’s going to make any big profits on making, selling, and buying loans. Home prices tend to be lower and there are generally fewer mortgages made in less-populated areas.
Fannie and Freddie are still private companies, after all, even though they’re sponsored by the U.S. government.
The high-need, rural parts of the country targeted for this program are middle Appalachia, Native American areas, and the Lower Mississippi Delta.
“These are challenging areas, but they’re definitely in dire need of investment,” says Lance George, director of research and information at the nonprofit Housing Assistance Council in Washington, DC. “This [Fannie/Freddie program] could be an important resource.”
Every little bit helps, says Levi. But “it’s a pretty modest [increase].”
… or buy a manufactured home…
Pushing the perceived stigma aside, more than 17 million Americans live in manufactured homes, according to Census data.
And the median household incomes of those living in manufactured homes, typically trailers made in a factory, are about $30,000 a year, according to the Manufactured Housing Institute. That’s about half of the 2016 national median of $59,039, according to the U.S. Census Bureau.
Manufactured homes are significantly cheaper than stick-built homes, which construction workers put up on lots outside. For example, they cost a median $73,800—about a quarter of the $269,500 median cost of new homes nationally, according to the latest U.S. Census Bureau and realtor.com® data available.
Freddie Mac calls them “a critical source of affordable housing.” Indeed, they make up a good portion of the occupied homes in some of the poorest parts of the country, accounting for more than 20% in middle Appalachia and 17% in the Lower Mississippi Delta.
That may help to explain why sales are on the rise. Shipments of newly manufactured homes rose from 64,000 in 2014 to 93,000 in 2017, according to Census data.
“It’s an affordable way to construct homes,” says Douglas Robinson, a spokesman for NeighborWorks America, which strives to help create more affordable housing throughout the country. “But right now financing for manufactured housing isn’t as smooth and easy as stick-built housing.”
So Fannie Mae plans to purchase an additional 4,540 to 5,540 manufactured housing loans over three years under the plan. This will pump an extra $500 million-plus into the market. Freddie Mac will buy up to an additional 1,000 more loans, about 25% more than it currently does, by the third year of the program.
Financing for manufactured homes can be tricky, because many homes are held as personal property, rather than “real” property, and mortgage lenders avoid making loans on them because they’re considered more risky. As a result, loans on those homes tend to have higher interest rates and fewer consumer protections, according to the U.S. Consumer Financial Protection Bureau.
Freddie and Fannie plan to study this market and test out buying loans on homes held as personal property, with the aim of making it easier for low- and moderate-income buyers to get into these homes.
… or find an affordable rental home
In an effort to preserve what few affordable housing units are left, Fannie and Freddie will resume investing in low-income housing tax credits, which they had stopped doing during the recession. The credits are tax incentives designed to encourage developers to build affordable housing.
The credits are the main sources of affordable housing construction in the nation, providing about 100,000 new units each year, according to the National Housing Law Project.
They will also increase support for developers creating Section 8 housing.
In addition, Fannie and Freddie will create loans folks can use to renovate aging, rural homes in need of repair. And they plan to buy mortgage loans for those purchasing multifamily buildings, typically rental buildings with five or more units. The theory is that the more rentals that are on the market, the more prices will fall.
“It is definitely a step in the right direction,” says NeighborWork’s Robinson. “We think the results will show that their investment is a wise investment and other investors will follow suit. [But] how much they will follow is really anyone’s guess.”
The agencies will be graded annually by the Federal Housing Finance Agency on how well they’re meeting their Duty to Serve goals.
“It’s been a long time coming,” says Ken Chilton, a public administration professor at the Tennessee State University in Nashville.
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