20 February 2023

A deeper look at Fannie Mae's mission supporting US housing

Meg Parker Young and Devang Doshi outline the thinking behind Fannie Mae's first annual ESG Report and the new Single-Family Social Index

Environmental Finance: What steps is Fannie Mae taking to help create more equitable and sustainable access to homeownership and affordable rental housing?

Meg Parker Young: As one of the nation's leading sources of mortgage finance, Fannie Mae helps support the creation of housing with the properties we finance. We prudently enable access to affordable housing for households of modest means and for underserved communities, with a strong focus on driving equitable and sustainable outcomes across the housing finance lifecycle.

Meg Parker YoungWe know consumers of different backgrounds face various obstacles at different points in their housing journeys, from early financial education, to renting or preparing to buy a home, as well as a household's capacity to stay in their home for the long run. We are focused on improving equitable outcomes and accessibility at each of these points along the way.

Some examples of this work include products and programmes designed to assist first-time homebuyers and very low- to moderate-income borrowers, such as through our flagship HomeReady® product which has a number of benefits, including the flexibility of a low down payment, decreased mortgage insurance coverage costs, and lower costs of borrowing.

In the US, on-time rental payments are not consistently included in a borrower's credit score, which can impede access to homeownership. To combat this obstacle, we launched the use of positive rent payment history in the underwriting assessment process to help borrowers who have limited credit histories access homeownership.

We look at ways to help prevent foreclosures, including maintaining sustainable credit standards and educating consumers on renting and stable homeownership, especially during economic downturns.

EF: Could you outline the work you have done on your Single-Family Social Index? What do you hope to achieve with it?

Devang Doshi: As an issuer of mortgage-backed securities (MBS), we take the 'G' in ESG very seriously. In this context, borrower privacy is a key component of our governance considerations.

Devang DoshiIn many securitised product sectors, the loans comprising a security are made to individual borrowers. This dynamic presents a unique challenge, as information desired by investors to evaluate their investment can be combined with other publicly available data and tied to a specific individual. This is also the case for single-family residential mortgages.

By contrast, in multifamily residential financing, a lender underwrites a rental property. Any insights about tenants are aggregated at the building level, and not specific to the individuals in the units.

The Social Index aims to balance providing investors insights from the data behind our single-family residential MBS issued while still maintaining the privacy of the borrower in the underlying mortgage pool. Social investing can consider many sensitive data elements, such as income, race, ethnicity, and property location, that should not be explicitly disclosed in an environment where borrower re-identification is a reasonable risk.

Through the Social Index (and other planned disclosures), we hope to be able to give investors comfort that their MBS purchases are exerting a positive aggregate influence on access to credit and the economic circumstances of all borrowers meeting the Social Index criteria. This is achieved by influencing lenders to focus on all borrowers who meet these criteria.

With the Single-Family Social Index, we have designed a solution that helps protect borrower privacy, while championing socially oriented lending and giving investors salient data insights in a marketable, consumable fashion.

EF: How can investors use your Single-Family Social Index?

DD: In alignment with our mission, we included eight criteria which reflect socially oriented lending activities that support affordable housing and access to credit. These criteria also reflect the interest we've received from investors seeking social investment opportunities.

We provide two disclosure measures per pool to provide investors with information regarding how many loans meet the socially oriented lending criteria defined in the index, and how many of those loans may meet multiple criteria.

The Social Criteria Share (SCS) is the share of loans within the pool that meet any of the eight social criteria. If it meets one or more criteria, the loan is considered socially oriented
for purposes of this disclosure.

The Social Density Score (SDS) is the average loan-level score within the pool, which indicates concentrations of socially oriented lending activities by acknowledging some loans meet multiple criteria across the three dimensions of income, borrower, and property-type.

While these disclosures are intended to provide further transparency into socially oriented lending consistent with Fannie Mae's mission, they also provide insights into how loans may prepay, which is the largest measure of securities performance in Agency MBS.

The SCS and SDS scores are now displayed on the main Bloomberg screen for all conventional MBS pools – we hope this indicates that these scores will become industry standard measures of social concentrations within MBS pools as investors contemplate social impact as a routine component of security evaluation in this market segment.

It's important to note that while these pool-level disclosures may support investors in determining which pools may meet their socially minded investment criteria, we are not labelling any pools as Single-Family Social Bonds. We continue to consider feedback from investors, second-party opinion providers, and other market participants to determine how to approach potential labelled issuance.

Source: Fannie Mae. Enlarge to view

EF: What informed your decision making?

DD: First and foremost, our objective was to balance investors' desire for incrementally more information to guide investment decisions, while considering the risk of exposing non-public (and potentially sensitive) information of borrowers in the mortgages underlying our securities.

Second, we felt responsible for the pivotal role Fannie Mae plays in US housing. We recognise that our disclosures often set standards in the market, and we want to ensure that our approach is enduring and solves the objectives we're seeking. That outcome, over time, is to increase access to mortgage credit for underserved households and individuals.

While it is early days, we're hopeful that we've introduced a responsible solution that meets these criteria.

EF: What has been the market reception so far?

DD: Fannie Mae has received a great deal of positive feedback for being courageous enough to take the first step to propose a solution. Beyond affordability, there is no consensus on what 'social' looks like for the mortgage market – and little standardisation for securitised products more broadly beyond the MBS market.

When we first introduced these data disclosures, we went back and scored nearly every Single-Family MBS since January 2010. Immediately, we generated an abundance of data that could be made available for socially oriented investors. In every subsequent auction of newly securitised pools with a high percentage of mission-oriented lending, we have seen an increase in investor participation. We believe we are demonstrating that there is considerable private, socially driven capital available to the mortgage market in the US.

We appreciate that the Social Index may not provide the granularity that some investors may seek. However, the trading and execution of these securities is suggesting that the approach is working: the market is voting with its dollars.

We also continue to seek ways to further support market adoption, including potentially providing additional reporting and insights into socially oriented lending using the Social

EF: What has been Fannie Mae's approach to ESG reporting?

MPY: This is an exciting time at Fannie Mae when it comes to reporting. Our ESG report builds on Fannie Mae's ongoing commitment to transparency and data-driven disclosures.

Our 2021 report was the first that explicitly demonstrated how our mission drives the way that we prioritise and execute on environmental, social, and governance issues – and how it relates to our stakeholders – while providing robust data that align to global and international frameworks where possible.

We report in alignment with SASB [Sustainability Accounting Standards Board] standards and the Task Force on Climate-Related Financial Disclosures (TCFD) framework, and we look forward to continuing to innovate in our reporting to drive a deeper understanding of Fannie Mae's mission and impacts over time.

EF: How has your impact reporting approach evolved?

MPY: We were proud to be an early mover and a big innovator in the green bond space and we've been disclosing projected impacts from Fannie Mae green bonds that date back to 2012.

We provide transparency into the estimated environmental, social and economic benefits of those green bonds.

We have seen increasing interest from investors to understand the impacts for our Multifamily Social Bonds – labelled bonds we first launched in 2021. And, through the disclosure of the Social Index correlated data, we're looking forward to being able to give increasing visibility on Social Index parameters on the single-family side as well.

For Fannie Mae, social impact is our bread and butter. We will continue our work to increase visibility into the social impacts of our work and hope to spark greater industry conversation and understanding of the consumers and their housing journeys across the US that this work supports.

EF: What are your plans for 2023?

DD: We remain focused on how to ensure that the Index or labelled Single-Family Social Bonds can improve borrowing costs and liquidity for underserved borrowers. We've also had requests from investors to provide a 'fairness score' for our mortgages. They want to know if loans were made on equitable terms and if the mortgage rate is consistent with the market prevailing rate. We are working on how to bring in that dimension.

MPY: We have taken the time to really understand the issues that are of the highest importance to Fannie Mae, our stakeholders, and the broader housing marketplace - and how we can drive impact through those. So, this year is all about execution. In particular, we are digging into the intersecting issues of housing stability, racial equity, climate risk, and other factors affecting housing and the environment, and the specific role that we can play to create efficient and effective market conditions that support equitable outcomes.

These issues cross geographies, generations, and socioeconomic status, and will require ongoing engagement, partnership and transparency of objectives and outcomes. We are excited to continue moving forward in this important work.

Meg Parker Young is vice president, ESG strategy, and Devang Doshi is senior vice president, capital markets – Single-Family Products at Fannie Mae.

For more information, see: www.fanniemae.com/about-us/esg

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