Three Strategies for Embedding Equity in the Federal Housing Finance System

The central tenet of Fannie Mae and Freddie Mac’s missions is to make housing affordable to families with low and moderate incomes and other underserved people. In its latest effort to fulfill this mission, the Federal Housing Finance Agency (FHFA), which regulates the two government-sponsored enterprises (GSEs), established a new Equitable Housing Finance Plan (EHFP) requirement. It stipulates the GSEs must identify and address barriers to sustainable housing opportunities, with a focus on reducing racial homeownership gaps and underinvestment in formerly redlined areas.  

This requirement was developed in response to the long history of racism in access to mortgage credit, including on the part of the federal government, that has led to sizeable disparities in homeownership, investment, and home valuation between white households and households of color.  

Rooting out systemic racism and reducing racial disparities will require a sustained commitment to equity. But if equity isn’t embedded into all the GSEs’ policies and practices—in what Urban Institute researchers call an equity overlay—the EHFP risks becoming just one additional GSE planning requirement among many.  

Here are three strategies for the GSEs to effectively implement an equity overlay, based on the Urban Institute’s response to the FHFA’s request for input. They are grounded in research and evidence on reducing racial homeownership and wealth gaps and uprooting institutional racism. Though the strategies are specific to the GSEs, the underlying framework can be a model for other housing finance stakeholders to advance racial equity within their own organizations. 

1. Establish a clear vision and goal for “equitable housing finance” 

The first step in prioritizing equity is to clearly define what an equitable housing finance system would look like. Policymakers setting their desired racial equity outcomes can consider the following guiding questions: 

• Are the outcomes focused? 
• Are the outcomes measurable? 
• Do the outcomes directly address legacies of race- and place-based housing discrimination? 
• Do the outcomes align with the organization’s role in the housing finance system, with their statutory purposes, and with their business and policy motivations? 

So far, the FHFA has set two outcomes as the key goals of an equitable housing finance system: reducing the racial or ethnic homeownership gap and reducing underinvestment or undervaluation in formerly redlined areas that remain underserved or undervalued. We recommend it considers adding a third objective: improving the equitable supply of high-quality affordable rental housing for historically excluded households and areas. Renters are more likely to be people of color, so ensuring renters have quality, affordable options that allow them to save is another key step to achieving racial equity in housing.  

2. Operationalize equitable housing finance with clear and quantifiable goals 

After setting their equity objectives, the GSEs will need to grapple with what the overarching objectives will entail for business and regulatory practices. 

Take, for instance, the GSEs’ mortgage underwriting standards. Expanding equitable access to mortgage lending would be a subgoal, under the overarching objective of reducing the racial or ethnic homeownership gap. With that goal in mind, the GSEs can determine changes needed in underwriting practices to reduce homeownership disparities. Possible examples include the following: 

• safely expanding the amount of credit risk they are willing to take on, given that current lending standards are currently tight based on historic standards 
• facilitating lender use of special purpose credit programs, which allow for targeted credit assistance to historically disadvantaged or excluded groups 
• using their mortgage denial data to scrutinize their current underwriting criteria for racial inequality and updating the criteria where possible 
• within their retained mortgage portfolios, lifting prohibitions on the purchase and holding of nonconforming mortgages so they may be used for equity-enhancing purposes under carefully designed and monitored pilot programs  

Under the EHFPs, all areas of operations should be evaluated based on the equity framework.  

3. Move the housing finance system toward a shared vision of equity 

Finally, to make true progress toward more equitable housing finance, the GSEs can look beyond their own practices, leverage their dominant role in the housing finance system, and align their equity plans with other ongoing racial equity efforts.  

Under the Fair Housing Act, all federal agencies with authority over financial institutions, including the FHFA, are required to administer their housing-related programs and activities in a manner that affirmatively furthers fair housing (AFFH). By law, the US Department of Housing and Urban Development (HUD) is responsible for implementing and enforcing AFFH, but the GSEs can work with HUD, the US Department of the Treasury, the US Department of Veterans Affairs, and other agencies that administer housing programs to align their AFFH definitions and develop a coordinated approach to equity. 

Additionally, because they serve as a gateway to the secondary market for thousands of mortgage lenders, the GSEs can set equitable practice standards for the entire housing finance system. As part of the EHFPs, the FHFA can both invest in new data collection tools and build industry transparency by sharing the data they have on racial disparities. The FHFA could release more public data on denial rates and loan-level price adjustments to examine them for equity-improving insights. And to highlight the importance of equity to their business practices, the FHFA could link executive compensation to the GSEs’ ability to meet their EHFP obligations.  

Implementing these recommendations could serve the GSEs well in fulfilling their equity mission and expanding homeownership and wealth-building opportunities to historically excluded households. A long history of purposeful exclusion and disinvestment from communities of color has led us to the current position of racial inequality in housing. Only an equally strong and purposeful commitment to undoing that legacy will result in truly equitable outcomes for all Americans.