A Proposed Methodology for Single-Family Social Disclosure
Fannie Mae's mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. We are committed to promoting a stronger and more efficient housing system for all, which appropriately entails reducing housing inequities for underserved individuals and underserved markets. As a leading source of mortgage financing in the United States at the forefront of affordable housing, we purchase mortgages from lenders and help facilitate the flow of capital into the housing market by issuing and guaranteeing mortgage-related securities that are purchased by investors across the globe.
In recent years, socially conscious investors have expressed an increased interest to allocate capital in support of affordable housing and to provide access to credit for underserved individuals. And, as part of their analysis, investors seek additional information to guide their investment decisions. However, mortgage-related disclosures may present data privacy concerns; specifically, a potential risk that certain disclosed information may be combined with other publicly available data leading to the ability to identify individuals – in our case, individual 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 functioning of the MBS market. Balancing investors' desire for information with the need to protect the privacy of the mortgage consumer requires creative solutions that consider both sets of stakeholders.
With this Perspectives article, we are introducing a proposed methodology for single-family social disclosure. It aims to provide investors with insights into socially oriented lending in a creative and unique way that is designed to help preserve the confidentiality of the mortgage consumer's personal information. This methodology was designed with investors' needs in mind. We encourage feedback and are excited to engage with market stakeholders in refining the methodology's design.
A Single-Family Social Index
At the core of the design are three key outcomes we seek to achieve with the Single-Family Social Index (Social Index).
- Prioritize the borrower. A key objective is to work to protect borrower information while seeking to meet the needs of MBS investors.
- Allow investors to identify pools with high concentrations of loans that meet certain social criteria. Underpinning this proposal is the concept that social disclosures should facilitate the identification of MBS pools containing loans made to borrowers meeting certain social criteria such that market participants are empowered to invest in support of these lending activities. While a correlation with loan performance is likely, the proposal contemplates that it is not essential for social disclosures to optimize performance insights. At the same time, we recognize that historical performance analysis is necessary to support investor decision-making.
- Propose a solution for the industry, not just for Fannie Mae. Create a methodology that other Agency and non-Agency residential MBS issuers may desire to adopt, which in turn we hope will drive greater standardization for social investment in residential MBS and amplify the impact of these activities, furthering support for mortgage consumers.
The Social Index is contemplated as a scoring system comprised of three dimensions for which socially minded investors have expressed interest: income, borrower, and property characteristics. We then further define these dimensions using eight objective criteria that reflect Fannie Mae mission-focused activities, the same criteria we use to engage our lender partners to expand homeownership to these individuals in these markets. These eight criteria (Exhibit 1) would be evaluated for each loan pooled in a majority of our Single-Family MBS. Any loan meeting one or more of the eight criteria would be deemed socially oriented for the purpose of this disclosure.
Additionally, each loan would be assigned a score between zero (0) and three (3), reflecting the count of the three dimensions whose criteria are met by that loan. The Social Index is flexible, and the underlying criteria can be adjusted based on market feedback and as the focus of single-family social lending evolves.
To achieve the borrower privacy goals outlined above, neither the loan-level social scores, nor the borrower and geographical attributes used to generate them, would be made publicly available at the loan or pool-level. This mitigates the risk that additional disclosure elements might facilitate increased borrower identification from our disclosures or a combination of our disclosure with other third-party sources and helps avoid exposing this borrower information.
Rather, the loan-level social scores would be used to compute two pool-level values that measure the underlying mortgage loan collateral based on these criteria, while helping protect borrower privacy and meeting investors' needs to identify pools with high concentrations of loans with such criteria. The two pool-level values envisioned are:
- Social Criteria Share (SCS): a number reflecting the share of the pool (by loan count) meeting any of the social criteria.
- Social Density Score (SDS): an aggregate average of the loan-level scores, capturing layering of social attributes and, thus, concentration of socially oriented lending activities.
Let us walk through an example. The table below illustrates a hypothetical pool of 10 loans. Nine loans meet one or more of the social criteria and are thus deemed loans that are socially oriented in this construct. This yields a 90% SCS. When grouped among the three dimensions, these same social criteria result in loan-level social scores between 0 and 3. The average for these 10 loans is 1.5, which is the SDS for the pool.
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Cornerstones of the Design
Prioritize the Borrower
Fannie Mae is required by law to disclose to potential investors information related to the mortgage securities that it issues to the public. Since our first MBS issuance in 1981 and our first credit risk transfer (CRT) issuance in 2013, the amount of information that Fannie Mae makes available to the public with respect to the underlying mortgage loans backing these securities has steadily increased. At the same time, mortgage-related disclosures may present data privacy concerns; specifically, a potential risk that certain disclosed information may be combined with other publicly available data, potentially enabling third parties to identify the specific individuals — in our case, individual borrowers. We describe these unique challenges in more detail in Disclosure and Privacy: A Delicate Balance.
Allow investors to identify pools with high concentrations of loans that meet certain social criteria
By publishing insights at an index level, we seek to ensure consistency with the spirit of social investing, creating an investment vehicle that enables investors to express a preference for supporting socially oriented lending activities, rather than providing loan-level social disclosures that prioritize potential performance insights.
We do recognize the importance of understanding historical performance correlations with the proposed scores. Along with providing this disclosure on newly issued pools, we would plan to release this disclosure on historical pools to support the market in its analysis of historical performance relationships with the SCS and SDS.
Propose a solution for the industry
We seek to develop a solution that encourages more socially oriented lending across the mortgage industry. We have aimed to design the dimensions and criteria in the Social Index to encourage adoption by other Agency and non-Agency residential mortgage-backed securities issuers should they choose. We hope that broad industry adoption of this framework would create greater standardization for social investment in RMBS, amplify the impact of socially oriented lending, and further support mortgage consumers. While we envision beginning implementation with MBS, similar disclosure could be considered for CRT securities in the future.
In addition to supporting investors in determining which pools may meet their socially minded investment criteria, the Social Index could provide a thoughtful roadmap for issuers to bring labeled Single-Family Social Bonds to market with an approach that protects borrower privacy while seeking to meet investors' desire for expanded social disclosure.
Our desire with this proposed solution is to develop the most responsible way to provide investors with insights while reducing the potential impacts on the privacy of the mortgage consumer, and to ensure industry alignment. Helpful conversations with investors and other market participants have influenced the proposed design of the Single-Family Social Index. With the release of this Perspective and Social Index methodology we aim to engage with investors and other MBS issuers to solicit feedback over the coming months prior to implementation and will work with FHFA to address investor and issuer feedback ahead of and pending FHFA approval.