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What the duty-to-serve concept in mortgage finance really means

I’ve had several conversations with Senate staffers recently about the concept of a “duty to serve” in mortgage finance. Often, the idea gets conflated with numerical goals, which misses the fundamental issue: only government can get the intertwined primary and secondary markets to serve a broad range of housing need.

Primary market lenders originate loans and so are the first gatekeepers of access to credit. However, their ability to lend is constrained by the liquidity supplied by the secondary market. Without a capital supply, the primary market cannot originate large volumes of loans. The secondary market, in contrast, focuses on efficiency, using high volumes of homogeneous loans to achieve economies of scale and attract capital. Packaging easily-standardized, lower-risk loans into securities has great benefits, but the business is necessarily constrained to work with the loans that the primary market originates. It therefore becomes difficult for either the primary market or the secondary market to cause the other to broaden its parameters for what loans to provide, since neither can act without the support of the other.

Government is uniquely placed to align the primary and secondary markets to serve as broadly as possible. To the extent that the primary market is serving low-income areas, rural areas, communities of color, small rental properties, subsidized rental housing, manufactured housing, and other underserved market segments, the secondary market should also. That’s what the “duty-to-serve” embodied in the Housing and Economic Recovery Act of 2008 (HERA) was aiming at, and it’s something we need to include in the next iteration of mortgage finance. To read more about this issue and others, see my recent testimony to the Senate Banking Committee.

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