Finishing what Dodd-Frank started: Why housing finance reform still matters

Megan Haberle, The Opportunity Agenda

While the subprime mortgage rupture and the foreclosure crisis have been making headlines for several years now, steep and unequal barriers to sustainable lending have characterized the housing landscape for decades.  Minority and low-income communities were targeted by predatory lenders against the backdrop of a dual credit market in which affordable, sustainable loans were out of reach for many qualified prospective homeowners.  In the wake of the subprime collapse, the details of those predatory practices finally came into public view.  With the support of civil rights advocates, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, aiming in part to reform lending practices.  Despite the important consumer protections advanced by Dodd-Frank, however, the movement towards fair and sustainable credit remains incomplete: the legislation created a framework for more robust, focused consumer protections and restraints on lenders, but did not address fundamental issues in the secondary market.  The window of debate over a successor structure to the government-sponsored enterprises, Fannie Mae and Freddie Mac (known as the GSEs) provides an opportunity for policymakers to ensure that all Americans can participate in the market on fair terms.

The Dodd-Frank legislation contributed valuable reforms to the mortgage market, by barring many deceptive and predatory lending practices, reforming mortgage industry practices and products that encouraged abuses, and bolstering oversight.  In addition to creating a framework for more robust, coordinated regulatory enforcement, Dodd-Frank prohibited the steering of consumers into predatory or unwarrantedly disadvantageous loans, and specified that “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender, or age” were also prohibited.

Despite these much-needed advances, Dodd-Frank left much work yet to be done, particularly in two areas: 1) developing affirmative practices to encourage an inclusive market that does not leave historically underserved communities out in the cold; and 2) addressing the ongoing need for affordable rental housing.  These aspects of housing finance need to be addressed to provide borrowers and renters with stable, affordable housing options.  This need is acute not only for individual borrowers, but for entire communities still reeling from the impacts of unfair lending practices, with declines in property values and tax revenue accompanying high foreclosure rates.

Secondary market reform proposals such as the Administration’s, which fails to offer affirmative support for an inclusive market, fall short of providing the stable, fair, and accessible mortgage market that America needs.  Dodd-Frank took aim at fraudulent, discriminatory lending practices, as well as the hazardous investment practices that fueled them. However, there is a remaining need to actively provide for equitable access to housing loans, and to ensure those loans are adequately financed through the secondary market.  Without sufficient government support, the credit vacuum that left many communities vulnerable to predatory lending in the first place will go unaddressed, restricting housing choice and market participation for many qualified borrowers. This will impair the stability and wealth-building opportunities that homeownership endows, and that benefit individuals, neighborhoods, and the nation as a whole.

Additionally, secondary mortgage market reform will impact people across the housing spectrum, including millions of renters.  Market-rate rental housing is beyond the reach of many Americans, an issue that may be exacerbated by future increases in demand, and that indicates the need for policymakers to incentivize the development of affordable rental units.  This is an issue of particular relevance to low-income and minority households, each of which are disproportionately renters.  The GSEs’ successor regime in housing finance will need to ensure liquidity and stability for multifamily, as well as single-family, loans.  In addition to contemplating how the secondary market can best support multifamily development, policymakers should give targeted consideration to affordable housing in particular.  This includes examining how to guide the development of affordable housing to high-opportunity areas and promote integration.

The financial crisis has shown the importance of strong regulation and oversight, as well as the destructive results of unfair lending.  While robust primary market enforcement is essential to ensure fair lending, it must be complemented by oversight of civil rights compliance in the secondary market.  The secondary market can incentivize responsible lending, and should be structured to actively do so.  While Dodd-Frank attempts to govern which loans are permissible, it is the securitization standards that determine which loans are marketable, and therefore are likely to be generated.  Additionally, individual mortgage originators may not consciously intend to discriminate or be aware of their role in contributing to a larger pattern, as they respond to underwriting criteria.  It falls to secondary market regulation to incentivize fair lending and guard against discrimination through those criteria.

Government agencies will need to coordinate their efforts to ensure effective enforcement of anti-discrimination laws in the secondary, as well as primary, mortgage market.  This entails focusing resources, and issuing strong regulations and guidance, to effectively implement Title VI of the Civil Rights Act of 1964, Title VIII of the Civil Rights Act of 1968 (the Fair Housing Act), and other laws specifically in application to the secondary market.  Federal agencies are responsible both for ensuring nondiscrimination and for the duty to affirmatively further fair housing, and must attend to the impacts of mortgage securitization policies and practices on civil rights.  Critical regulatory gaps – such as Treasury’s lack of regulations implementing Title VI or the duty to affirmatively further fair housing, as well as HUD’s need for prompt implementation of a clear disparate impact regulation under the Fair Housing Act – need to be addressed, and regulations and guidance need to speak specifically to mortgage securitization.

These reforms should be a priority in crafting a new housing finance system that, far from replicating the mistakes of the past, would serve all Americans fairly and sustainably.