[Gathnet] 1999 NY Times on Clinton's affirmative action lending

[Stuart D. Gathman]

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

              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 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.

-- 
	      Stuart D. Gathman <stuart at bmsi.com>
    Business Management Systems Inc.  Phone: 703 591-0911 Fax: 703 591-6154
"Confutatis maledictis, flammis acribus addictis" - background song for
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