Fannie Mae argues for additional loan demographics
One of At Fannie Mae’s missions is to facilitate equitable and sustainable access to home ownership and quality affordable rental housing across the country, which provides a stronger and more efficient housing system for all. But as a major source of mortgage financing in the United States, the Government Sponsored Enterprise (GSE) must be at the forefront of affordable housing, as it helps facilitate the flow of capital to the housing market by issuing and by guaranteeing mortgage-backed securities that are purchased by investors around the world.
But lately, investors have expressed interest in socially responsible investment options that allocate capital to support affordable housing and access to credit for the underserved. But as investors seek more to guide their investment decisions, this additional data breaches privacy by allowing enough vectors for someone to infer the very identity of specific borrowers.
“As one of the largest issuers of mortgage-backed securities (MBS) in the United States, Fannie Mae plays a delicate role, one that seeks to support the mortgage consumer, the mortgage investor, and the efficient operation of the MBS market,” Fannie Mae said in a recent blog post. “Balancing investors’ desire for information with the need to protect mortgage consumer privacy requires creative solutions that consider both sets of stakeholders.
Knowing this, the GSE presents a proposed methodology for single-family social disclosure data. It aims to provide investors with insight into social purpose lending in new ways designed to help preserve the privacy of mortgage consumers’ personal information.
A single-family social index
At the heart of the design are three key outcomes that we seek to achieve with the Individual Families Social Index (Social Index).
- Prioritize the borrower. A key objective is to protect borrower information while seeking to meet the needs of MBS investors.
- Allow investors to identify pools with a high concentration of loans meeting certain social criteria. This proposal is based on the concept that social disclosures should facilitate the identification of MBS pools containing loans made to borrowers meeting certain social criteria, so that market participants are empowered to invest in support of these lending activities. Although a correlation with loan performance is likely, the proposal considers that it is not essential that social disclosures optimize performance information. At the same time, we recognize that analysis of historical performance is necessary to support investor decision-making.
- Provide a solution for the industry, not just for Fannie Mae. Create a methodology that other agency and non-agency residential MBS issuers may wish to adopt, which we hope will lead to greater normalization of social investment in residential MBS and amplify impact of these activities, thereby strengthening support for mortgage consumers.
The Social Index is considered a rating system comprised of three dimensions that socially minded investors have expressed interest in: income, borrower and ownership characteristics. We then define these dimensions using eight objective criteria that reflect Fannie Mae’s mission-driven activities, the same criteria we use to influence our lending partners to extend homeownership to these people in these markets. These eight criteria (Exhibit 1) would be assessed for each loan pooled in the majority of our single-family MBS. Any loan meeting one or more of the eight criteria would be deemed to be socially oriented for the purposes of this disclosure.
In addition, each loan would be assigned a score between zero (0) and three (3), reflecting the number of the three dimensions whose criteria are met by that loan. The social index is flexible and the underlying criteria can be adjusted according to market reactions and changes in the orientation of single-family social loans.
To achieve the borrower privacy objectives described above, neither loan-level social scores, nor the borrower and geographic attributes used to generate them, would be made public at the loan or pool level. This mitigates the risk that additional disclosure elements may facilitate further identification of the borrower from our disclosures or a combination of our disclosure with other third-party sources and helps avoid exposing this borrower information. .
Click here to learn more about Fannie Mae’s “Social Index” score.