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The Importance of the Housing Finance System to America’s Low-Income Families

Julia Gordon and David Sanchez, Center for American Progress - Posted March 10, 2014


Conversations about housing finance reform sometimes get mired in technical talk about securitization, capital markets, and regulatory requirements. Yet this jargon obscures a crucial fact: the way our nation funds its housing market drives whether families have access to affordable, quality housing. With Congress considering legislative changes to the outdated housing finance system, it’s critical that those who care about the challenges facing low-income families and communities make their voices heard.

Many people mistakenly believe that Fannie Mae and Freddie Mac have no importance to those with lower incomes – especially renters – because the federal government only supports low-income housing through direct subsidies or the Federal Housing Administration mortgage program.

In truth, while these programs are essential for millions of low-income Americans, Fannie and Freddie also play a critical role in ensuring affordable housing for low- and moderate-income families. These institutions directly support the construction and preservation of affordable rental housing, and they run programs that help lower-income families and communities access mortgage credit. Consequently, any reforms to these housing finance companies will directly impact low-income families.

Providing increased access to affordable rental housing remains an urgent need. Over half of all renters are “cost burdened,” or spending more than 30 percent of their income on housing, and 28 percent spend more than half their income—both sharp increases over the past decade. These cost burdens disproportionately fall on households of color. Three-quarters of households with cost burdens or inadequate housing do not receive rental assistance. And there is a severe shortage of housing that is affordable to the lowest-income households.



Fannie and Freddie work to address this problem by buying and securitizing long-term, fixed-rate mortgages on rental properties, focusing in particular on units that are affordable to low- and moderate-income households. These so-called “multifamily housing” business lines are safe and profitable, performing well even throughout the recent financial crisis.

Yet this important function is threatened now, both by Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), which under previous leadership announced it would require Fannie and Freddie to pull back on this market, and by those who do not believe the government should provide a government guarantee to stand behind these loans. To support access to affordable rental housing, it is important for the government to continue to support multifamily securitization, especially for properties that serve low-income Americans.

Fannie and Freddie also are supposed to capitalize the National Housing Trust Fund, which assists states in meeting the housing needs of very-low-income families, and the Capital Magnet Fund, which helps community development financial institutions provide such housing. Yet the FHFA has forbidden the companies to provide this funding, even as they are returning record profits to the U.S. Treasury. It is imperative that FHFA change this policy soon. If Congress reforms these companies, it will be critical to ensure that the new system provides support for these funds.

Similar challenges exist with regard to homeownership. A significant number of low-income households actually own their home, and home equity is the main source of wealth for lower-income families. But between the devastating impact of the foreclosure crisis, the disproportionately small share of mortgages that low-income communities receive, and the tightened lending standards that have made it difficult for all but the most pristine borrowers to access credit, it is clear that our mortgage market is not working for low-income families who are able and wish to buy a home.

The truth is that, left to its own devices, the mortgage market tends to deliver the best loans where it is easiest to do so and to channel higher-cost loans where borrowers are easier to exploit and have fewer options. That is why minorities with good credit scores were significantly more likely than comparable non-minorities to receive high-risk loans during the housing bubble. While the Dodd-Frank Act banned certain types of predatory lending, avoiding a repeat of the past requires us to ensure the secondary market equitably serves all communities and borrowers. 

Additionally, Congress needs to ensure that the system supports financing for affordable rental housing and the National Housing Trust Fund and Capital Magnet Fund. We also should create a “Market Access Fund” to provide funding for research and development or other support for loan products that meet the specific housing and credit needs of low-income households.

The housing finance decisions we make now – either through legislative reform or by the actions of FHFA  – will determine not only the sustainability of a robust housing market, but also future economic opportunities for millions of families. Low-income families and their advocates have a significant stake in the outcome. Now is the time to join the conversation about the future of housing finance in America.

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Julia Gordon is the Director of Housing Finance and Policy and David Sanchez is a Research Assistant at the Center for American Progress.

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