HUD may enlist Fannie, Freddie as bias enforcers.

WASHINGTON -- Sparking sharp protest from mortgage lenders. the government is preparing to turn Fannie Mae and Freddie Mac into enforcers of fair-lending laws.

The Department of Housing and Urban Development has drafted regulations that would require the secondary market agencies to play an active role in stamping out racial bias by lenders selling loans.

Though details are still being worked out. lenders fear that the plan will force a big shift in their relations with the agencies, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Until now. mortgage lenders have viewed the two titans primarily as business partners.

"Suddenly you sit with Fannie Mae and Freddie Mac and you wonder what son of information they are gathering behind your back." said Warren Lasko. executive vice president of the Mortgage Bankers Association of America. "It makes you gun-shy."

He said regulatory enforcement is an inappropriate role for Fannie and Freddie. which are chartered by Congress but are owned by private stockholders.

"I don't believe the government should be able to direct a private party to serve as its policeman," Mr. Lasko said.

As the largest players in the home loan market, Fannie and Freddie wield enormous market power. Last year, they bought or securitized some $543 billion in mortgages written by banks, thrifts, and mortgage companies, more than half of the booming $1 trillion market.

Under a draft regulation circulated in the industry in recent days, HUD would require Fannie and Freddie to search for patterns of discrimination by lenders that sell loans to the agencies. The agencies would be required to report any such patterns to the government, or face legal action themselves.

The draft rules, dated Aug. 15, would give HUD "broad discretion" to bar the agencies from doing business with lenders that violate the Fair Housing Act and the Equal Credit Opportunity Act.

Some sources say that HUD, the primary regulator of the agencies, already has watered down the plan somewhat, but the changes are unknown, and the mortgage industry remains very anxious.

Freddie Mac is forcefully voicing opposition to the plans.

"We are certainly not a regulator or an industry's policeman," said Freddie chairman Leland Brendsel recently. "That is the role of government with appropriate authority, as well as with appropriate constraints."

Fannie Mae spokesman David Jeffers said his agency will not comment on regulations that have not been issued.

Mortgage lenders are especially worried about the prospect of the agencies shutting off lenders that show patterns of bias.

"It is a very heavy stick," said the CEO of one bank-owned mortgage company. "The closure of access to Fannie Mae or Freddie Mac has the potential to put a company out of business."

But observers said the government is unlikely to ask the agencies to suspend business with lenders too often, because of the catastrophic effect it would have on the affected lenders.

Still "the threat is an attitude-adjuster," said Brian P. Smith, director of policy development at the Savings & Community Bankers of America. "It's like having H-bombs in your arsenal. Whether you use them or not, it changes behavior," Mr. Smith said.

He said his group would support the sanction for "bad actors" who refuse to change their ways, as long as the government follows due process.

Under the draft regulations, Fannie and Freddie also would be required to give the government data about the lending patterns of lenders under investigation, as well as records showing how that pattern compares to others in the area.

In addition, the government proposes to turn over to the agencies information about lender violations of federal, state, and local fair lending laws to trigger independent action under the agencies' procedures.

The regulations would implement a landmark 1992 law in which Congress created a framework of goals and policies to push the secondary market agencies to help finance more housing for underserved borrowers.

HUD is planning to jack up the level of financing the agencies provide for housing to low- and moderate-income borrowers -- from 30% this year to 44% by 1998.

Loans to low- and moderate-income borrowers is expected to make up 40% of all units financed by Fannie this year, and 35% of those financed by Freddie.

The government also is planning to require the agencies to make an increasing portion of their purchases in "underserved areas," which are defined as minority census tracts with median incomes at or below 120% of area median income, and as census tracts where median income is 80% or less than the area's median income.

In 1995, 18% of units financed by the agencies would have to lie in such areas; by 1998, 23%

The Office of Management and Budget is expected to complete its review of the regulation sometime next month. The public will then be invited to comment on the proposal.

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