Community lenders can expand homeownership beyond mortgage rates

The Federal Home Loan Banks’ Mortgage Partnership Finance® (MPF®) Program is designed to enhance access to homeownership by fostering collaboration across the housing sector. The program emphasizes that increasing housing construction must be complemented by targeted borrower assistance, consistent liquidity for community lenders, and financing solutions that align with current market conditions and buyer behaviors.

While higher mortgage rates compared to the pandemic era are a factor, the core affordability crisis stems from a combination of rates, prices, supply deficits, and household financial constraints. A decade-long underbuilding of homes following the financial crisis has led to demand outpacing supply, particularly affecting entry-level and workforce housing.

Increased home prices have consequently raised down payment and closing cost requirements. Competing financial demands, such as student loans and other consumer debt, can hinder borrowers' ability to save for these upfront costs, even if they can manage monthly mortgage payments. The widening wealth gap further exacerbates this, with existing homeowners benefiting from asset appreciation while prospective buyers without generational wealth face competition from cash offers.

Patrick Sullivan, Executive Vice President, Group Head, MPF Program at FHLBank Chicago, highlighted that housing supply is the most significant long-term challenge, especially for entry-level and workforce housing. Financial education and awareness of existing programs like down payment assistance, closing cost support, and government-backed financing are crucial for borrowers.

Community banks and credit unions traditionally play a vital role in expanding homeownership, leveraging local market knowledge and relationship-based approaches, particularly in rural and underserved areas. However, increased regulatory compliance, technology investments, and capital demands have made mortgage lending more difficult for these institutions, leading some to reduce or exit the business, thereby limiting local mortgage options.

Sullivan emphasized the importance of preserving these community lenders for maintaining broad access to mortgage credit due to their local knowledge and market understanding.

The mortgage rate lock-in effect, where homeowners with low rates are disincentivized from selling, further constrains housing supply. To counteract this, lenders and investors are exploring solutions such as construction-to-permanent financing to expand supply and renovation loans for existing homeowners. Balance sheet lenders are also developing flexible structures to facilitate moves for current borrowers.

Partnerships are seen as a key strategy to address both affordability and supply issues. The MPF® Habitat for Humanity® program, a collaboration between FHLBank Chicago and Habitat for Humanity, offers below-market mortgage financing for eligible homebuyers. This program involves Habitat affiliates in construction and rehabilitation, participating lenders in mortgage origination, and the MPF Program in purchasing eligible loans to manage lender capital and support further projects.

Down payment and closing cost assistance programs are critical for first-time and lower-income buyers. Through the Federal Home Loan Bank system, member institutions can access housing programs that provide direct financial assistance, often in the form of grants, to eligible households for home purchases or rehabilitation.

Rate relief initiatives offered by some FHLBanks participating in the MPF Program also help borrowers qualify for mortgages by reducing interest rates to meet debt-to-income requirements. These programs have seen strong lender participation and full utilization of allocated funds.

Sullivan stated that there is no single solution to housing affordability, but these collaborative programs demonstrate the potential of nonprofits, lenders, and secondary market investors working together.

For smaller institutions, access to the secondary market is essential for the sustainability of their mortgage lending operations. The MPF Program provides consistent mortgage liquidity across market cycles, enabling community lenders to continue originating loans during economic uncertainty, reduce balance sheet pressure, and manage risk prudently. It also allows them to retain mortgage servicing and borrower relationships.

Expanding homeownership requires a comprehensive approach involving increased housing supply, greater program awareness, sustained assistance, and a lending system that accommodates institutions of all sizes. Community banks and credit unions remain a crucial link between the housing finance system and local communities, and with reliable liquidity, modern technology, and coordinated partnerships, they can continue to assist borrowers in navigating the current market characterized by high prices and limited inventory.