It has been nearly 60 years since President Kennedy said “We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.”
President Kennedy could very well have been describing the mortgage industry’s launch of Special Purpose Credit Programs (SPCP’s). It has been hard for banks and IMB’s to be able to develop programs despite significant support from the prudential regulators in the form of an interagency statement which encourages lenders to use SPCP’s [1] and HUD guidance that SPCP’s do not violate the Fair Housing Act[2].
So why is it hard to implement SPCP’s? I think there are three basic challenges:
- You don’t know what you don’t know – In order to set up a SPCP, a creditor must determine that the program will “extend credit to a class of persons who would otherwise be denied credit or would receive it on less favorable terms.” How does a lender do the research to determine that the program is meeting the needs of communities that have historically been left out of homeownership? Is HMDA denial analysis enough or are there other potential applicants for mortgages who have never applied for a loan? Do you look only at conventional loans or government loans as well?
- Operationally, there will be challenges – Many lenders aim for best execution when they set up their origination strategy. SPCP’s may only be available for portfolio or for sale to one investor. The GSE’s in their public equitable housing plans committed to SPCP’s, but it is unclear whether they will be targeting the same communities with the same terms and conditions. While SPCP’s are generally thought of as origination activities, they may present operational issues in the servicing space. Do you service SPCP loans differently? Will there be SPCP’s designed solely for housing preservation of historically underserved communities?
- It is a tough mortgage market – Housing affordability is at its lowest level in more than 15 years.[3] There have been numerous layoffs announced. On the one hand, any new market will have appeal. On the other, there is no consensus on the size of the market and the opportunity for SPCP’s.
After the death of George Floyd in 2020, many banks and mortgage companies announced commitments to social justice and addressing the persistent homeownership gaps in this country. SPCP’s, despite the challenges, can be an effective tool for addressing the gap.
At Housing Finance Strategies, we are focused on addressing the three basic challenges to launching successful Special Purpose Credit Programs. We intend to promote the concepts suggested by the regulators and assist lenders as they assess a path forward for credit worthy home buyers. As President Kennedy said, we must accept the challenge and organize and measure to the best of our abilities.
By Jeff Jaffee, Senior Advisor
Housing Finance Strategies
[1] https://www.fdic.gov/news/financial-institution-letters/2022/fil22008a.pdf
[2] https://www.hud.gov/sites/dfiles/GC/documents/Special_Purpose_Credit_Program_OGC_guidance_12-6-2021.pdf
[3] https://www.wsj.com/articles/housing-affordability-index-drops-to-lowest-level-since-2006-11657288800