For 2018-2020, Freddie Mac and Fannie Mae have set a goal of 24 percent for the number of mortgages they must purchase from low-income borrowers, defined as those earning less than 80 percent of the median income for a given metropolitan statistical area (MSA). Six percent must come from very low-income borrowers earning half the median income. With both Freddie and Fannie recently having taken financial hits in Q4 2017 and required a draw of funds from the Treasury, discussion of GSE reform has heated up once again.
With the Senate Banking Committee currently discussing a bipartisan bill that proposes a multi-guarantor system aimed at providing more access and affordability to low- and moderate-income (LMI) households and allowing private capital to get more access to the secondary mortgage market, a new Zillow study attempts to break down how current GSE affordable housing goals affect different markets, and what changes to the current system could mean for those communities.
As Zillow points out, expensive coastal markets are already short on affordable housing in the first place, so they have less potential to be affected by any changes to the current GSE system. In Los Angeles County, for example, 80 percent of median income threshold translates to $51,000. As Zillow explains, “... for a conventional loan to be purchased by the GSEs, low-income borrowers with good credit would likely need to put down at least 5 percent and spend no more than 36 percent of their income each month on the debt payments. The average rate quoted for a 30-year fixed-rate mortgage in January for borrowers with low down payments was 3.82 percent.” Working from those assumptions, a low-income borrower in L.A. could theoretically buy a home worth up to $347,000. However, only 7.5 percent of Los Angeles homes are valued below that amount. As such, Fannie and Freddie’s affordable housing goals should have relatively little impact on the L.A. market.
Compare that to Knox County, Tennessee, where 80 percent of median income also works out to be around $51,000. However, “[u]nder the same assumptions, households with that income could potentially buy a home worth up to $345,000 and their mortgage could still qualify to be purchased eventually by Fannie or Freddie,” explains Zillow, adding that nearly 88 percent of homes are valued below this threshold in Knox County.
Sure enough, in 2016 California was one of the states with the fewest low-income loans purchased by Fannie and Freddie, alongside New York and Hawaii—both notoriously expensive housing markets. On the other end of the spectrum, Utah, Minnesota, and Idaho topped the list of states with the most low-income loans purchased by the GSEs.
In 2016, low-income borrowers made up 22.9 percent of Fannie’s mortgage purchases, which was below their 24 percent benchmark but more or less consistent with the overall market rate of 22.87 percent of mortgages being made to low-income households. On the Freddie side, 23.8 percent of its loans went to low-income households in 2016—also below the benchmark. Fannie also missed its goal with very low-income borrowers, coming in below both its 6 percent goal and market level (5.4 percent).
You can read the full Zillow report by clicking here.