Way to Go, Bill!
By STEVEN A. HOLMES
Wall Street Journal
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 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.
Several sources have informed 
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