Freddie Mac Gives Shared Equity Ownership a Closer Look

Freddie Mac made two announcements this week.  The first is a long expected administrative change to requirements for private mortgage insurance (PMI) which will go into effect on March 31, 2019.  The company updated these requirements under a mandate from its regulator the Federal Housing Finance Agency (FHFA), incorporating changes related to its assessment of credit and counterparty risk. The new financial requirements include revisions to the risk-based asset requirements, enhancements to the treatment of approved risk transfer transactions, and adjustments to risk transfer credit arising from counterparty risk associated with reinsurance transactions.  PMI is required for mortgages where the borrower is making less than a 20 percent down payment.

Gina Healy, vice president of credit risk transfer of Freddie Mac's Single-Family Business said, "In order to better manage the counterparty risk underlying the important role that mortgage insurers play in high-LTV lending, the eligibility requirements are designed to cover minimum financial and operational requirements for private mortgage insurers approved to do business with Freddie Mac and selected by lenders."

Healy said many of the changes have been previously announced via the PMIERs Guidance. FAQs about the changes are available here.

The second announcement is programmatic and may have larger ramifications. The company is expanding its support for shared equity homeownership programs.  Share equity is a concept that has been around for generations under a variety of names, but with the growing lack of housing affordability, it may be ready for more attention. 

The Encyclopedia of Housing defines shared equity housing as "A generic term for various forms of resale-restricted, owner-occupied housing in which the rights, responsibilities, risks, and rewards of ownership are shared between an income-eligible household who buys a home at a below-market price and an organizational steward who protects the affordability, quality, and security of that home long after it is purchased."  Or, more simply, a form of homeownership in which homeowners claim only the equity they created through their own dollars or labors.  When the owners of shared-equity housing resell their homes, they typically recoup their investment, augmented by a modest return. They depart with more wealth than they had when entering the home, but they do not pocket all of the equity contributed or created by the larger community. Most of this community wealth remains in the property, keeping it affordable for the next generation of low- or moderate income homebuyers.

One of the common types of umbrella ownership of these properties is a Community Land Trust, and Freddie Mac has now developed a mortgage specific to these entities. The company says, "This offering makes it easier for lenders to do business in the shared equity homeownership field by increasing communication and collaboration between the Servicer and the Community Land Trust organization."            

"In developing the Community Land Trust Mortgage offering we were able to take a fresh look at existing mortgage products in this space, listen to the needs in the housing industry and collaborate with leading organizations to bring this innovative offering to market," said Mike Dawson, vice president of affordable strategy and policy at Freddie Mac's Single-Family Business. "Our offering and flexibilities aim to balance transactional ease for lenders with underwriting that promotes sustainable homeownership for borrowers. These combined efforts will facilitate the preservation of more affordable housing units over time for shared equity homeownership program providers."

To create this offering, Freddie Mac said it has built strategic alliances with national, state and local community organizations with experience in the field, such as the Grounded Solutions Network, City First Enterprises and the Florida Housing Coalition, among others.

"Offerings that bolster shared equity homeownership in hot real estate markets like Washington, DC are essential to preserving the ability for its residents to remain and flourish," said Ginger Rumph, executive director, Douglass Community Land Trust /City First Enterprises. "Our collaboration with Freddie Mac to develop a product in support of a community land trust in the Historic Anacostia neighborhood, and Wards 7 and 8 in Washington, DC, will pave the way for a model that can be replicated in similar geographic areas across the country."

Freddie Mac said its new servicing requirements for Community Land Trust Mortgages are unique in providing shared equity homeownership with more opportunities and additional time to help borrowers who have missed their mortgage payments. This approach will help prevent foreclosures and help Community Land Trust organizations exercise their right of first refusal in extreme circumstances to preserve property affordability.

The Freddie Mac Community Land Trust Mortgage, which will be available starting on November 5, is part of Freddie Mac's Duty to Serve Plan. Both Freddie Mac's and a similar plan from Fannie Mae are mandated by FHFA.