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Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and
low-income consumers, theFannie Mae Corporation is easing the credit
requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15
markets -- including the New York metropolitan region -- will encourage those
banks to extend home mortgages to individuals whose credit is generally not
good enough to qualify for conventional loans. Fannie Mae officials say they
hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage loans
among low and moderate income people and felt pressure from stock holders to
maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings are not
good enough to qualify for conventional loans, can only get loans from finance
companies that charge much higher interest rates -- anywhere from three to four
percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's
by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's
chairman and chief executive officer. ''Yet there remain too many borrowers
whose credit is just a notch below what our underwriting has required who have
been relegated to paying significantly higher mortgage rates in the so-called
subprime market.''
Demographic information on these borrowers is sketchy. But at least one study
indicates that 18 percent of the loans in the subprime market went to black
borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is
taking on significantly more risk, which may not pose any difficulties during
flush economic times. But the government-subsidized corporation may run into
trouble in an economic downturn, prompting a government rescuesimilar to that
of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift
industry growing up around us,'' said Peter Wallison a resident fellow at the
American Enterprise Institute. ''If they fail, the government will have to step
up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage
with an interest rate one percentage point above that of a conventional,
30-year fixed rate mortgage of less than $240,000 -- a rate that currently
averages about 7.76 per cent. If the borrower makes his or her monthly payments
on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend
money directly to consumers. Instead, it purchases loans that banks make on
what is called the secondary market. By expanding the type of loans that it
will buy, Fannie Mae is hoping to spur banks to make more loans to people with
less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all
potential borrowers who can qualify for a mortgage. But they add that the move
is intended in part to increase the number of minority and low income home
owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom
of the 1990's. The number of mortgages extended to Hispanic applicants jumped
by 87.2 per cent from 1993 to 1998, according to Harvard University 's Joint
Center for Housing Studies. During that same period the number of African
Americans who got mortgages to buy a home increased by 71.9 per cent and the
number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes
increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind
non-Hispanic whites, in part because blacks and Hispanics in particular tend to
have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the
year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of
loans to low and moderate-income borrowers. Last year, 44 percent of the loans
Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating
allegations of racial discrimination in the automated underwriting systems used
by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit
applicants.
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