Profile
Photos
Comments
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, the Fannie 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 rescue similar 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 per cent of Fannie Mae's
and Freddie Mac's portfolio be made up of loans to low and moderate-income
borrowers. Last year, 44 per cent 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.
